In this case Bond Issuers look at outstanding bonds of comparable maturity and risk. The yields on such bonds are used to create the coupon rate essential for an exacting issue to initially sell at par. Bond issuers also basically ask possible purchasers what coupon rate would be necessary to attract them. The required return is what investors actually demand on the issue, and it will change through time. The difference between coupon rate and required return are equal only if the bond sells for exactly par.
The firm has a ( of 0.75 but this project is twice as risky as the firm’s normal operations. The expected return on the market is 10% and the risk free rate is 6%. Should the firm undertake this project? The first stage of deciding whether the firm should undertake the project is to calculate the required rate of return for the project using CAPM. As the project is twice as risky as the firm’s normal operations, it beta will be equal to 2 x 0.75 = 1.5: [pic] We will now use this required rate of return to calculate the NPV of the project: [pic] As the project has a positive NPV, it should be accepted.
They then develop target leverage ratios and use the WACC to determine the cost of capital for the whole corporation as well as each of the three divisions. 1. What is the weighted average cost of capital (WACC) for Marriott Corporation (2 points)? 2 Cost of Debt = risk free weight + debt rate premium above gov’t = 8.95% + 1.30% = 10.25% Levered Beta βE = βU * [1 + (1-tax rate)(target leverage / (1 - target leverage))] = 0.80 * [1 + (1-0.44)(0.60 / (1 – 0.60))] = 1.472 Cost of Equity = risk-free rate + βE(risk premium) = 0.0895 + 1.472(.0743) = 0.2079 rME = 8.95% + 1.472 * 7.43% = 19.89% WACC = (1-T) * pretax cost
ACCT600 MAFM CAPSTONE Week 6 Professor Doris Lombard Summary of Financial Analysis with Exhibits Krispy Kreme Acquisition Gale Norman Table of Contents Introduction……………………………………………………………………………….… 3 Optimal Target Capital Structure……………..……………………………………….…12 Weighted Average Cost of Capital (Dunkin’ /Donuts)……….…………………..……13 References………………………………………………………………………………..17 Introduction As we review potential acquisition of Krispy Kreme, it is important we consider financing. This paper will review different sources of financing, which will include the two types, debt and equity financing. In addition we will review the optimal target capital structure of Krispy Kreme. The importance of our weighted average cost of capital (WACC) and payment plans for acquisition. Finally we conclude with the strategic growth plan post acquisition.
Recently, I was asked to provide detailed estimates of Midland’s corporate WACC, as well as estimated calculations of the cost of capital of each of the company’s divisions: Exploration & Production, Refining & Marketing, and Petrochemical. The first calculation performed was the company’s corporate WACC, which based on detailed computations, was 8.54%. This was accomplished by using the rate of 30-year U.S. Treasury bonds in 2007, which was 4.98%, as the risk free rate, because it was assumed that using long-term yields for bonds to determine this rate was the best course of action for all calculations. The cost of debt is then determined by adding the spread to Treasury of A+ rated companies to the rate of 30-year treasury bonds in 2007. Finally, the cost of equity was determined.
Your first job will be to price this acquisition using a WACC method. Once that is done, it will be useful to also find the value of CPP with and without the acquisition. The next part concerns ascertaining the prudence of the two financing methods. This will require creation of a pro forma balance sheet, which will aid in the calculation of solvency ratios. Debt servicing will need to be examined in detail to discover if one, both, or neither of these financing decisions will force the firm into bankruptcy.
Executive Summary – HBS Case Deutsche Bank: Discussing the Equity Risk Premium Sunwoo Hwang Case Summary Situation Jamil Baz, a global head of fixed income research at Deutsche Bank, and George Cooper, a global strategist of the same division, is putting together a presentation for a client on the asset side with a theme of equity risk premium (ERP). Identified Problem Cooper estimated ERP using two alternative methods. The first one is using a dividend discount model, the so-called Gordon Growth Model, and the second one is using the P/E ratio, a novel one the research group has elaborated. But it turned out that the estimated values of ERP were quite different as different methods were applied. Key Questions Which of the two methods should Baz emphasize in the client meetings?
More specifically, Caladonia’s financial personnel should determine the payback period of each project, the internal rate of return (IRR), the new present value (NPV), if any ranking conflict exists, and then decide which project should be accepted and why. Additionally, Caladonia’s financial personnel should also gather information about leasing versus buying the assets. Team C will address all the above questions that Caladonia’s financial personnel should ask prior making any decisions. What is each project’s payback period? Project A: 100,000/32,000 = 3.125 years Project B: 100,000/200,000 = .5 years What is each project’s net present value?
Forecasting Financial Statements of Apple Inc. Natalia Andruszkiewicz International American University FIN 500: Financial Management Abstract In this paper will show the Forecasting Financial Statements of Apple Inc. we will be able to see why Forecasting Financial Statements are important for the company and investors. Key words: financial statement, forecasting statement, Apple Inc., investors. The use of historic data to focus the heading of future trends. Forecasting is utilized by organizations to decide how to allot their financial plans for a forthcoming time of time. This is regularly taking into account interest for the merchandise and administrations it offers, contrasted with the expense of creating them.
This study is based on how the portfolio turnover ratio affects the returns of the mutual funds. Portfolio turnover is a valuable tool to analyze the investment strategies of a Fund Manager, fund cost structure and tax exposure. It helps in measuring how actively the Fund manager manages the portfolio investment. The rate of trading activity in a fund’s portfolio is the lesser of purchases or sales of the portfolio securities for a financial year divided by the average value of portfolio securities during the year. If a fund has 100 percent turnover rate that means the fund manager, in theory has sold every single stock position once.