1. What is WACC and why is it so important to estimate a firm’s cost? The weighted average cost of capital (WACC) is the interest rate (minimal return, at which the firm is able to raise investment for current and the future projects. The WACC is an average cost because it is a weighted average of the firm's component costs of capital. This includes the cost of debt to debt holders and cost of equity (including preferred stock and common stocks) to shareholders.
Deposits, Short-term Borrowings, Long Term Debt and Equity are part of a bank’s capital structure: “Other liabilities are not”; c. An aggregate debt beta of 0.1 is a reasonable estimate of the average beta of debt that supports the assets that give rise to the merger’s synergies; d. The equity betas reported in Exhibit 2 may be used as estimates for the betas of the equity that supports the assets that give rise to the synergies: and e. The market risk premium is 6.2% Ans: Refer to spreadsheet. 2. How much confidence do you have in your estimate of synergies? Ans: In this case we are allocating the cost savings to both the entities separately in terms of the extra EPS in case of synergies for each and then valuing them with their respective WACCs. We are assuming the cost savings would be utilized in their respective companies.
Which of the following statements is CORRECT? a. Dividends paid reduce the net income that is reported on a company’s income statement. b. If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet.
Which of the following accounts has a normal credit balance? a. Purchases b. Sales Returns and Allowances c. Freight-in d. Discount received D is correct. Section “Recording inventory transactions” – Discount Received is a revenue account whose normal balance is a credit.
The practice of business valuation The first method of business valuation, discounted cash flow (the "DCF"), is based on the idea that the economic value of the asset is equal to the amount of future cash flow Company updated to reflect its risk. The discount rate used is the weighted average cost of capital. Is calculated as follows: • cash flows discounted at the explicit forecast horizon (visibility of the company); • the terminal value from estimating a growth rate to infinity; • the value of equity is the difference between the asset value and the resulting economic value of the bank debt and net financial and possibly other elements. The second evaluation method, the method of multiple analog approach is compared with other companies in the same sector. In this approach, the economic value of the assets of a company is the result of a multiple of its earnings: operating profit multiple or multiple of EBITDA.
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.
Which yield is used for Treasury bill quotes? a. The bond equivalent yield is the rate used to calculate the present value of and investment, and a discount yield is the return on securities results from the purchase of the security at a discount from its face value and the receipt of face value at maturity. b. They use bond equivalent yields.
a.What is Alcatel-Lucent’s WACC?  b. If Alcatel-Lucent maintains a constant debt-equity ratio, what is the value of a project with average risk and the following expected free cash flows? (Using the WACC method)  Given a cost of 100 to initiate, the project’s NPV is 185.86 – 100 = 85.86. c. If Alcatel-Lucent maintains its debt-equity ratio, what is the debt capacity of the project in part b? The project’s debt capacity is equal to d times the levered value of its remaining cash flows at each date.
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?
2) Which of the following best describes the goal of the firm? A. The maximization of the total market value of the firm's common stock] B. Profit maximization C. Risk minimization D. None of the above 3) Which of the following categories of owners have limited liability? A.