Show clearly the steps to arrive at the following estimates in Exhibit 10: Enterprise Value as Multiple of: Revenue EBIT EBITDA Net Income 6,252 8,775 9,023 7,596 6,584 9,289 9,076 7,553 MV Equity as Multiple of: EPS Book Value 4,277 5,904 4,308 5,678 Median Mean If you need to use a discount rate to discount cash flows then an appropriate discount rate estimate for PacifiCorp is approximately 9%. 3. Bid assessment: How do you assess the bid for PacifiCorp by Berkshire Hathaway? How much does Buffett pay for PacifiCorp for its equity and as a whole? How do these values compare with the firm’s intrinsic values estimated above?
Analysis of stockholders' equity Star Corporation issued both common and preferred stock during 20X6. The stockholders' equity sections of the company's balance sheets at the end of 20X6 and 20X5 follow: 20X6 20X5 Preferred stock, $100 par value, 10% $580,000 $500,000 Common stock, $10 par value 2,350,000 1,750,000 Paid-in capital in excess of par value Preferred 24,000 — Common 4,620,000 3,600,000 Retained earnings 8,470,000 6,920,000 Total stockholders' equity $16,044,000 $12,770,000 a. Compute the number of preferred shares that were issued during 20X6. 100 b. Calculate the average issue price of the common stock sold in 20X6. $27 c. By what amount did the company's paid-in capital increase during 20X6?
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.
How does this compare to the 6 percent prime interest rate loan total dollar cost? $11,111,111 (Amount of money you have)-10,000,000 (Money you owe through the compensating balance loan agreement) =$1,111,111 (Compensating balances) X 4% (Interest Rates) =$44,444 (Return on Compensating Balances) $611,111 (Interest cost on loan with compensating balance requirement)-44,444 (Return on Compensating Balances) =$566,667 (Net dollar interest cost of the compensating loan requirement) Result: The compensating balance loan would be less expensive than the 6% prime interest
A1 of 3 Formulas involved on the WACC calculations Corporate Finance - MBA 2009 Note written by Prof. Carles Vergara-Alert & Prof. Pedro Safﬁ 1 Objective This note tries to clarify the different assumptions and formulas used to calculate the Weighted Average Cost Of Capital (WACC) that you will ﬁnd in different textbooks and articles. 2 The WACC formula The WACC formula is a weigthed average of the cost of equity and the after-tax cost of debt: W ACC = E D+E RE + D D+E (1 − τ )RD (1) being RE the cost of equity, RD the cost of debt, τ the corporate tax, E the market value of the ﬁrm’s equity, and D the market value of the ﬁrm’s debt. Note that sometimes we call V to the sum of D and E, therefore, V = D + E. Sometimes, not all the ﬁnancing is provided by debt and equity. As an example, let us assume that some ﬁnancing is provided by preferred stock as well as equity and debt. The WACC formula has to be modiﬁed to include the main sources of long-term ﬁnancing of the ﬁrm such as preferred stock: W ACC = E D P RE + (1 − τ )RD + RP D+E+P D+E+P D+E+P where RP is the cost of preferred stock and P is the market value of the ﬁrm’s preferred stock.
(Individual or Component Costs of Capital) Compute the cost for the following sources of financing: a. A bond selling to yield 9% after flotation costs, but prior to adjusting for the marginal corporate tax rate of 34%. In other words, 9% is the rate that equates the net proceeds from the bond with the present value of the future flows (principal and interest). b. A new common stock issue that
Gross domestic product, adjusted for inflation, also known as "real GDP", can tell economists whether an economy is growing or contracting from year to year or from quarter to quarter, a key determinant in deciphering whether the economy is expanding or in a recession. Internationally, gross domestic product adjusted for some benchmark, usually the US dollar, is a good indication of whether a nation's economic output is increasing or shrinking relative to other nations of the world. To exactly know if GDP is a good enough indicator of understanding an economy, it should be compared to an equivalent form of indicator. This is where we come across GNP which is quite similar to GDP. So let us understand what GNP is in order to compare these two entities.
Answers to End-of-Chapter Questions 8-1 The opportunity cost is the rate of interest one could earn on an alternative investment with a risk equal to the risk of the investment in question. This is the value of I in the TVM equations, and it is shown on the top of a time line, between the first and second tick marks. It is not a single rate—the opportunity cost rate varies depending on the riskiness and maturity of an investment, and it also varies from year to year depending on inflationary expectations (see Chapter 6). 8-2 True. The second series is an uneven cash flow stream, but it contains an annuity of $400 for 8 years.
(2) What would be your estimate of intrinsic value if you believed that the stock was riskier, with a beta of 1.7? [40%] (b) CBD stock has an expected ROE of 15% per year, expected earnings per share of $6, and expected dividend of $4 per share. The beta of CBD stock is 1.3, the risk-free rate is 2%, and the market risk premium is 7%. What are its expected growth rate, its price, and its P/E ratio? [40%] (c) Discuss why P/E multiples are in general negatively correlated with risk and positively correlated with growth.
$35,000 0.8 1st Investment, 40,000 1.4 2nd Investment Total $75,000 ($35,000/$75,000)(0.8) + ($40,000/$75,000)(1.4) = 1.12 6-2 Required Rate of Return Assume that the risk-free rate is 6% and that the expected return on the market is 13%. What is the required rate of return on a stock that has a beta of 0.7? rRF = 6%; rM = 13%; b = 0.7; Solve for : rs = ? rs = rRF + (rM - rRF)b = 6% + (13% - 6%)0.7 = 10.9% 6-7 Required Rate of Return Suppose rRF = 9%, rM = 14%, and bi = 1.3. a. What is ri, the required rate of return on Stock i?