Executive Summary and Introduction In May 2001, portfolio manager Kimi Ford was considering whether Nike, Inc. would be a good investment option. With an emphasis on value investing, Ford estimated that Nike was undervalued at discount rates below 11.17%. Her assistant Joanna Cohen’s did further calculations and estimated that Nike’s cost of capital was 8.4%. Ford manages a well-diversified portfolio and she has the focus on value investing. Therefore, we assume she would be interested in quality stocks with are fairly priced.
* Cost of Equity: * Beta: she used the average beta of the last 5 years, which is also acceptable. However, we decide to use the Bayesian beta calculated with the firm’s present beta as a measure of the future beta assessing for future risk. * Risk-free rate: from the investor’s perspective, we conclude that a 10-year holding period would be more realistic estimate than 20-year. Therefore, we decide to use 10-year U.S. Treasury yield as our risk-free rate in this case. * Risk premium: using the geometric mean from 1926 to 1999 might be problematic, since the risk premium of recent decades is obviously lower than earlier (stated in the lecture).
In 2000, both manufacturers believed that Asia would register the world’s highest growth rate over the next 20 years. This is a big part of the reason why Airbus decided to develop the A380. The Boeing’s competitive response against the A3XX will affect the sales of the plane. Initial sales of plane – Financial success depended on getting enough early sales to drive down costs through learning curve effects. The basic idea was that unit costs, such as direct labor, declined as a function of cumulative output.
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.
Using the criteria above, we have chosen the best method of production for each requirement in order to help us make our final decision. Income - Level Production Based on income, level production is the best choice. Level production will eliminate overtime costs of $225K and direct labor costs of $265K, reducing the percentage of COGS from 70% to 65.1% of sales. A portion of these savings would be offset by higher storage costs of $115K, which will increase operating costs each month. However, even with these additional costs, net profit under level production is projected to be $520K, which is a 48% increase over the seasonal production estimate of $351K.
Diageo was formed from the merger of Grand Metropolitan plc and Guinness plc. Before the merge, both companies used little debt (based on the book D/E ratio and net debt to total capital in the table below) to finance themselves which helped them gain and maintain high credit rating (A and AA respectively). After the merge, Diageo wanted to take the same path by maintaining the interest coverage between 5 and 8 (through actions such as new debt issuance, share repurchase programs shown in figure 1) and having EBITDA/Total Debt between 30 and 35 % to avoid potential downgrade. Its market gearing is 25%. Furthermore, its debt's pay-back period (Debt/EBITDA) shows its ability to pay off its incurred debt in a relatively short period of time.
This follows a 60% success chance of the Vodafone-Mannesmann merger. [pic] In the above table we assume a very strict and low fair value Mannesmann share price of 145,35€, in case the merger would fail. This is the October 21 share price that occurred straight after announcement of the acquisition of Orange. Because the share price dropped considerably for some days subsequent to this announcement, it is a very conservative and low valuation of Mannesmann’s share price. This, in turn, leaves us with a high offer premium of 62.723 million euro’s.
It is because of the reason that, 17.5 million gallons are being just an expected amount of fuel and in future the perfect hedge cannot be achieved. J&L should accurately estimate the future demand as the demand is decreasing due to the reason that in 2008 there was a recession that affects the fuel prices and it soften the demand.The percentage of the 210 million gallon would be hedged as J&L go for the future contracts with the suppliers at the fixed rate and the percentage they should hedge for the fuel prices should be around 25% it is because of the reason that for the first quarter of the year they should store the inventory for the future demand. This percentage is lower because of the lower demand. Question 2. What are the pros and cons of using NYMEX contracts versus using the risk management products offered by KCNB?
The firm is currently having problems cost effectively meeting run length requirements as well as meeting quality standards. The general manager has proposed the purchase of one of two large six-color presses designed for long, high-quality runs. The purchase of a new press would enable LI to reduce its cost of labor and therefore the price to the client, putting the firm in a more competitive position. The key financial characteristics of the old press and the two new presses are summarized in what follows. Old press – Originally purchased 3 years ago at an installed cost of $400,000, it is being depreciated under MACRS using a 5-year recovery period.
Her calculations gave a WACC of 8.4%. Assumptions * To determine the risk-free rate, current yield of 5.74% on 20 year U.S. Treasuries was used. This was chosen as 20 year period is closest data available to the period under study which is 25 years (1996 to 2001) * For Equity Risk Premium geometric mean was used which gave risk premium of 5.90%. This was selected because geometric mean is a better indicator than average mean for longer life valuations * For calculating Beta, average value of historic beta was used * Current portion of long-term debt was not used to calculate cost of debt. This was because the ratio of this as a portion of total debt raised is very less, especially as compared to notes payable and long-term debt * For calculating Cost of Capital, WACC method was used instead of Dividend Discount Model as DDM requires substantial dividend payout by the company which Nike does not Calculating Cost of Capital Debt as a proportion of total capital makes up 10.15% and equity is 89.95%.