The discount rate above should only be used to discount unlevered cash flows. The discount rate to use on the terminal value needs to take into account the capital structure of the levered firm, thus we use WACC instead of just re. Question 2: A. The long-term growth rate that should be used for estimates of AirThread’s terminal value is 2.16%. This is equal to the return on capital
My evaluation of Nike’s share price is based on Joanna Cohen’s analysis. In the following paragraphs I am going to point out the mistakes that Joanna has made and also give my suggestions in the WACC calculation First of all, for as much as over 95% of Nike’s revenue comes from sports-related business, I do agree with Joanna’s assumption of single costs of capital. Although cost of capital of non-Nike branded product may different from its main sport business, it has a minor effect on the cost of capital of the company as a whole. However, I found that she has made a few mistakes in calculating debt and equity weights and cost of debt. Debt and Equity Weights The first mistake in Joanna’s calculation is that the weights of Nike’s debt and equity should be based on the market value rather than book value mixes of Nike’s debt and equity.
Page 484 has formulas!! 6. When the firms maintains a target leverage ratio, we compute its levered value V^L as the present value of its free cash flows using the WACC, whereas its unlevered value V^U is the present value of its free cash flows using its unlevered cost of capital or pretax WACC. 15.3 Recapitalizing to Capture the Tax Shield 1. when securities are fairly priced, the original shareholders of a firm capture the full benefit of the interest tax shield from an increase in leverage 15.4 Personal
Smith, Harmelink & Hasselback. Federal Taxation: Comprehensive Topics. CCH, 2013. Pg 14-18-19 states that the corporation should issue long-term debt because debt has certain advantages over equity. Interest payments on the debt are deductible by the corporation while dividends are not deductible.
Financiering 6012B0217 Financiering Case 2012/2013 Vraag 1 a) Excel regression (ongecorrigeerde beta) equity beta van ING: 1.972874 ASML: 1,002967 Ahold: 0,395736 b) We know that there is a linear relationship between the stock beta and its expected return. So, if there is fewer stock the security market line will be steeper so, the beta will be smaller. Vraag 2 ßu = ßa= (E/(D+E)) x ße Net debt: Interest Bearing Debt – Cash and Cash Equivalents ING: 47284/(1234038+47284) x 1,972874 = 0,07280 Debt: 1247110-13072=1234038 ASML: 2773908/(1456616+2773908) x 1,002967 = 0,65763 Debt: 3406450-1949834=1456616 Ahold: 5910/(6215+5910) x 0,395736 = 0,192891 Debt: 8815-2600=6215 Vraag 3 a) ASML has a higher asset beta because it participates in an market which develops faster, so it has a higher systematic risk. Ahold has a lot of more diversity on his business. Ahold can better spread his risk.
Inversely, when a share repurchase is seen as treasury stock, the cost of the treasury stock is naturally disclosed as a decrease in total shareholders’ equity. Alcoa would report the purchase of the treasury stock by debiting treasury stock and crediting cash for the charge of the purchase. The treasury stock ought to be disclosed independently in the shareholders' equity area of Alcoa’s balance sheet as an unallocated cut of shareholders' equity. These shares are treated as issued although not part of common stock outstanding. If subsequently resold for a sum larger than the cost, Alcoa should report for the sale of the treasury stock by debiting cash for the sale cost, crediting treasury stock for cost, and crediting additional paid-in capital from repurchased stock for the excess of the selling price over the cost.
2. a. Critique Ace Repair’s current method of estimating its before-tax cost of debt. b. Is the earnings yield (E/P) an appropriate measure of the firm’s cost of equity? 3. a.
Debit - Duty or obligation to pay money, deliver goods, or render service under an express or implied agreement. Use of debt in a firm's financial structure creates financial leverage that can multiply yield on investment provided returns generated by debt exceed its cost. Because the interest paid on debt can be written off as an expense, debt is normally the cheapest type of long-term financing. 11. Yield - Annual income earned from an investment, expressed usually as a percentage of the money invested.
Which of the following choices regarding the proprietary fund financial statements is true? A. The Statement of Net Assets (Balance Sheet) reflects equity as contributed equity and retained earnings. B. Normally, a reconciliation is required between the proprietary fund financial statements and the business-type activities column in the government-wide financial statements.
Total risk can be measured by company’s Return on Equity (ROE). When a company only uses equity financing, its ROE is lower than when company uses both debt financing and equity financing. In the case of debt financing there are interest expenses that lower the net income so ROE is higher. c. The market risk framework consists of investors’ required return for business risk and the required return for financial risk. The risk is measured by beta.