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.
Capitalization ratios evaluate the financial leverage of a company. The ratios compare the funds using from short and long-term to funds obtained from shareholders. A high ratio of debt to capital increase interest expense and in worst scenarios it puts the company at risk when there are fluctuations in sales volume and cash flow. Objective The objective of this report is to evaluate the financial performance of Eaton Corporation for the three year period 2009, 2010 and 2011. And compare with the industry and its competitors average.
It will tell if the return will be above or below the needed amount to complete a project. The NPV fwill show differences of expected cash flow when comparing 2 projects. The acceptable benchmark includes all cash flows, cash coming in and being spent. A positive side is that the NPV is a statistic not a ratio, it is used to determine if a single project is worth doing as well as choosing between different projects. The downside is that it allows us to see the effect on the money needed to complete the projects as well.
The basic answer is that share repurchases are great when the share price is undervalued, and not-so-great when the share price is overvalued. To put it into a more useful context, if you would otherwise reinvest your dividends or invest new capital into the company at current stock prices, then share repurchases are useful to you because the company basically does it for you. The alternative is that the company could pay you a higher dividend, but you’d be taxed on that dividend and reinvest it into the company anyway. On the other hand, if you would not reinvest dividends or invest new capital into the company at current prices, then share repurchases are not in alignment with your current outlook, and it would be better for you to receive a higher dividend. Something else to be considered is that when a company uses money for share repurchases when it could be paying a higher dividend instead, the company’s management is limiting your control and increasing theirs.
What are the key assumptions that especially influence WACC? 5. What are the free cash flows of the packaging machine investment? Should Koh approve the investment? Management Summary Financial Health The financial health or strength of a company is measured by its ability to service its financial obligations senior to the common shareholders.
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?
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.
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.