c. Money market securities must have an original maturity of one year or less. Given that price movements resulting from interest rate changes are smaller for short-term securities, the short-term maturity of money market instruments helps lower the risk that interest rate changes will significantly affect the security’s market value and price. 2. What is the difference between a discount yield and a bond equivalent yield? Which yield is used for Treasury bill quotes?
The Weighted Average Cost of Capital is the average of the costs of a company's sources of financing-debt and equity, each of which is weighted by its respective use in the given situation. By taking a weighted average, it shows how much interest the company has to pay for every marginal dollar it finances. A firm's WACC is the overall required return on the firm as a whole and, it is often used internally by company directors to determine the economic feasibility of expansionary opportunities and mergers. Also, WACC is the appropriate discount rate to use in stock valuation. No, I don’t agree with Cohen’s WACC calculation.
| | |WACC for PepsiCo | | | | | The weighted average cost of capital (WACC) for a firm is the after tax cost of each type of financing (debt and equity) times the percentage of each type of financings. The calculation can be stated as: [pic] Formula 1 Where: Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V = E + D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Source: http://www.investopedia.com/terms/w/wacc.asp, 7/24/11. In order to calculate the WACC, we need to determine the cost of debt, cost of equity and the market value percentage of each Cost of Equity. The cost of equity will be calculated using a simple average of the CAPM from Case 6, 7.82% and the Discounted Dividend Model (DDM). The formula for DDM is: R= (Div/P) +G Where P= Share Price, Div= Next Year’s Dividend, G=Constant annual dividend growth rate.
2. What was your estimate of WACC? What mistakes did Joanna Cohen make in her analysis? Which method is best for calculating the cost of equity? cost of equity =I used the 20 year at 5.74%+Geometric mean=5.9%x most recent beta .69=9.81% Cost of Debt I used Yield to maturity to find cost of debt From Exhibit 4 PV= 95.60 N=40 (20years x 2) since its paid semiannually Pmt=-3.375 (6.75/2) FV=-100 Comp I = 3.58% (semiannual) 7.16% (annual) After tax cost of debt = 7.16%(1-38%) = 4.44% E = market value of the firm's equity To find Market value of Equity you multiply share price by amount of shares $42.09x273.3= 11503.
2. Given the following Euro to $ Exchange rate of 1.46, what is the information contained in this quote? If the Purchasing Power Parity Theory is correct, what is true about the relationship between the US dollar and the Euro at this exchange rate? 3. A US multinational company is required to report its financial results in US dollars.
c. The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital. d. The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock. e. The statement of cash flows shows how much the firm’s cash--the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)--increased or decreased during a given year. 3. Which of the following statements is CORRECT?
2) Earnings management might help credibly convey private information about the long-term earnings potential of the firm. 3) Earnings management is used to block communication from insiders to outside investors. 4) Earnings management is undertaken by manipulating discretionary accruals. c. Jones (1991) found that a sample of U.S. firms reported negative discretionary accruals in the year of their application for U.S. government subsidies for victims of unfair foreign competition. Which of the following positive accounting theory (PAT) hypotheses is this finding consistent with?
c. Purchase stocks of Brown Group, Inc. only. Solution: 1. Calculate the Standard Deviation and Covariance of the Vanguard index, California R.E.I.T., & Brown Group, Inc. * Standard Deviation - In finance, standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility. Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility. In short, it measures the risk in each set of stocks.
1) A company changes from percentage-of-completion to completed-contract, which is the method used for tax purposes. The entry to record this change should include a A company changes from percentage of completion to completed contract, which is the method used for tax purposes. The entry to record this change should include a B. debit to Retained Earnings in the amount of the difference on prior years, net of tax 2) Which of the following is accounted for as a change in accounting principle? d. A change in inventory valuation from average cost to FIFO. 3) A company changes from straight-line to an accelerated method of calculating depreciation, which will be similar to the method used for tax purposes.