Question 1: How, if at all, would you change Cohen’s equity cost of capital calculation? Why? In this case, Cohen calculated the equity cost of capital by using CAPM: rE = rf +βi ( E[rmkt]-rf ) 10.5% = 5.74% + 0.80 * (5.9%) * Risk free rate: The rf should be kept consistent with the time horizon of the investment. Since Cohen did her estimate in 2001 and Nike’s bond will expire in 2021, it is reasonable to use the 20-year T-bond rate, 5.74% as the risk free rate. * Risk premium: Arithmetic mean is often used for one-year period valuation, while geometric mean is better for long-term period estimated expected returns.
a. b. What is the minimum level of synergies for Vodafone shareholders to at least break even on the deal? Estimate the market’s assessment on December 17, 1999 about the likelihood that the deal will succeed. To do so, construct a merger arbitrage position where you buy one Mannesmann share (at the price prevailing on December 17, 1999) and sell short 53.7 Vodafone shares. Assume that the deal finalizes in 3 months time and a risk—free interest rate of 5.5%.
The Weighted Average Cost of Capital (WACC) is an average representing the expected return on all of a company's securities. Each source of capital, such as stocks, bonds, and other debt, is assigned a required rate of return, and then these required rates of return are weighted in proportion to the share each source of capital contributes to the company's capital structure. The resulting rate is what the firm would use as a minimum for evaluating a capital project or investment. After studying Joanna Cohen’s analysis for Nike, Inc, we found some flaws and we believe that some of the assumptions that she made were incorrect and somewhat altered the outcome of the WACC calculation. i) Joanna used the total shareholders’ equity figure in 2001 from the balance sheet of Exhibit 3.
Dixita Patel Chapter 6 homework Managerial Finance July 31, 2012 Critical Thinking 6.6. Coupon rate: how does bond issuer decide on the appropriate coupon rate to set on its bonds? Explain the difference between the coupon rate and the required return on a bond price? Coupon rate is the annual coupon divided by the face value of a bond. In this case Bond Issuers look at outstanding bonds of comparable maturity and risk.
Operating leases B. Accounts receivable C. Inventory D. Accounts payable 16) Compute the payback period for a project with the following cash flows, if the company’s discount rate is 12%. Initial outlay = $450 Cash flows: Year 1 = $325 Year 2 = $65 Year 3 = $100 A. 3.43 years B. 3.17 years C. 2.88 years D. 2.6 years 17) For the NPV criteria, a project is acceptable if the NPV is __________, while for the profitability index, a project is acceptable if the profitability index is __________.
The repayment of the coupon bond will be the par value plus the last coupon payment times the number of bonds issued. So: Coupon bonds repayment = 30,000($1,000+40)) = $31,200,000 The repayment of the zero coupon bond will be the par value times the number of bonds issued, so:Zeroes: repayment = 315,589($1,000+0) = $315,588,822 3. Bond P is a premium bond with a 12 percent coupon. Bond D is a 6 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 9 percent, and have five years to maturity.
If a new issue is offered, flotation costs will be 12% of the current price of $150. e. A bond selling to yield 13% after flotation costs, but prior to adjusting for the marginal corporate tax rate of 34%. In other words, 13% is the rate that equates the net proceeds from the bond with the present value of the future cash flows (principal and interest). 11- 2A. (Individual or Component Costs of Capital) Compute the cost for the following sources of financing: a.
We use CAPM to estimate the cost of equity. According to the model, we have three factors to determine: risk free rate, equity beta and risk premium. Given the 30-year estimated operation period, we use the yield on 30-year Treasury bond, the number of which is 4.56%, as the risk free rate. In addition, we choose the historical risk premium of 5.6%, calculated from 1926 to 2003. The risk premium comes with a standard error, so we should go as far as we can to minimize the effect of standard error.
To make it matches with chosen Rf rate the appropriate measure of risk premium is Spread between S&P 500 Composite Returns and Long-term U.S . Government Bond Returns. The market risk premium is estimated as the difference between the arithmetic average of annual holding period returns on a market and the arithmetic average of annual holding returns on a portfolio of government securities. Thus, it will be 7.43%. β = Beta of the Asset: The case provides equity beta: 0.97.
| Case I, Case Studies in Finance case 14 | Cost of Capital | | | | # 8 | 1/1/2013 | | #8 Portfolio Manager Assistant 3321 Napoleon Avenue New Orleans, 70125 504-6718031 March 18, 2013 Kimi Ford Portfolio Manager at NorthPoint Group New York City Re: Case I, Case 14,Cost of Capital calculation using GAAP. As you requested I have calculated Nike’s cost of capital to then discount your forecasted free cash flows to Equity and calculate the value of Equity at time zero and then calculate the current price per share and determine whether Nike’s stock is undervalued. The current cost of capital is Nike’s Cost of Capital is 9.32%. Current Value of Equity is $15,643millions. Nike’s current Equity Value per share or current price per share is $57.62, which is 36% higher than the current price ($42.90).