The Herrestad Company has a classic problem: two products that use fixed overhead disproportionately ("Activity based costing", n.d.). That is, according to the data given in Table A below, product A uses more production runs and more sales reps than product B. Also, there are far fewer units of Product A, meaning that each unit requires a great deal of overhead resources to support. Although the sales price of Product A is high, and therefore one might think that they are charging enough to carry all this extra overhead attention, but profitability analysis indicates otherwise. Table A Use of fixed overhead resources by product line Productionruns(not$) Numberofsalesreps(not$) Total 100 25 ProdA 65 15 ProdB 35 10 Profitability will be reviewed in two parts, first we will analyze the contribution margin, and then product line profitability overall, including fixed costs.
Brief Statement The constant hurdle rate has been taking some heat from investors and has been addressed by Victor Yossarian. As part of the company’s responsibility, we are moving forward and evaluating the firm in its current state. The analysis taking place will provide arguments for using a constant hurdle rate versus segment risk-adjusted hurdle rates. The goal of the evaluation is to use the method that will benefit the term in the long-run and provide a better project assessment for future forecasts. The Firm’s Current State Teletech has been using a single corporate-wide hurdle rate to assess projects, allocate funds, and as the discount rate.
Firm has only two long term debt, which are specifically the two bonds issued. To find the before tax cost of long term debt, there are two different way which can prove the same results. Let’s start by calculating each of them one by one: 1. A) before tax cost of debt for the first bond = 8.25% x $133 million = $10,972,500 B) After tax cost of debt: i x (1- tax*) = 8.25% x (1- 0.3879) = 0.050498 $133million x 0.050498 = $6,716,234 ―» before tax cost of debt: $6,716,234/ (1- 0.3879) = $10,972,445 or approximately $10,972,500 2. A) Before tax cost for the second bond = 9.375% x $100 million = $9,375,000 B) After tax cost of debt: 9.375% (1- 0.3879*) =0.05738 0.05738 x $100million = $5,738,000 ―» before tax cost of debt = $5,738,000/ (1- 0.3879) = $9,374,300 or approximately
What course of action should the firm take? The optimal capital structure is that combination, which minimizes the firm's cost of capital. In this case that occurs where debt is 20% of capital and the cost of capital is 11.2%. The balance sheet is Assets $100 Liabilities $20 Equity 80 Since the firm is currently using only 10% debt financing, it is not at its optimal capital structure and should substitute some debt for equity. C) As a firm initially substitutes debt for equity financing, what happens to the cost of capital, and why?
Consequently we should take the average of all three models, because every model has it´s pros and cons against the other and we can´t decide which model calculates the right price. Because for the DDM we have to estimate the Dividends, because a non-publicly traded company does not give out dividends. The price-ratio model needs to compare the ratios of each company to similar companies within the industry. This could be tricky if Citrus Glow has the biggest market shares. The Corporate Value Model, also known as Free Cash Flow model also has it´s limitation regarding to the spending today and not in the past.
9.the primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are: 10.The ____ is the ratio of ____ to the ____. 11.Sources of positive net present value projects include 12.Receiving $100 at the end of the next three years is worth more to me than receiving $260 right now, when my required interest rate is 10%. 13.The number of standard deviations z that a particular value of r is from the mean ȓ can be computed as z = (r - ȓ)/ Suppose that you work as a commission-only insurance agent earning $1,000 per week on average. Suppose that your standard deviation of weekly earnings is $500. What is the probability that you zero in a week?
It therefore proves that commute time is not effected, as we believed, by commute time. Therefore, our hypothesis cannot be proven soley with the data provided with the data sets we chose (page 9), and thus we refer to The Metropolitan Policy Program at Brookings and the Gallup poll published in 2007 that suggest our hypothesis was correct, ie., workers in higher income households are more likely to report having a longer round-trip commute to work than workers in lower income
Suppose that the price of labor is $10 per unit and the price of capital is $1 per unit. Find the cost-minimizing combination of labor and capital for an airframe manufacturer that wants to produce 121,000 airframes. The tangency condition implies [pic] Given that [pic] and [pic], this implies [pic] Returning to the production function and assuming [pic] yields [pic] Since [pic], [pic]. The cost minimizing quantities of capital and labor to produce 121,000 airframes is [pic] and [pic]. 2.
The constant hurdle rate results in a flat line and doesn’t correlate risk with return. With nearly $2 billion being invested in upcoming capital projects, the discount rate to be used within the firm needs to be more accurate, account for risk, and not destroy shareholder’s value. Currently the firm is not accurately assessing their future. Telecommunications Services is returning capital below the corporate hurdle rate and Products & Systems is above the rate, but the firm is not factoring in riskiness of the segments individually. Question 2 [pic] Use CAPM model to estimate their cost of equity.
Theoretically, the weights should be based on market values, but if a firm’s book value weights are reasonably close to its market value weights, book value weights can be used as a proxy for market value weights. Consequently, target market value weights should be used in the WACC equation. 12- In general, failing to adjust for differences in risk would lead the firm to accept too many risky projects and reject too many safe ones. Over time, the firm would become more risky, its WACC would increase, and its shareholder value would suffer. The cost of capital for average-risk projects would be the firm’s cost of capital, 10%.