* 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).
These two segments are fundamentally different and do not have the same risks. By using a company wide hurdle rate the risks of these two segments are not taken into account. Looking at industry wide equity betas we can see that telecommunications services industries are less risky at an average of 1.04 while telecommunications equipment and computer equipment industries are riskier and have an average beta of 1.36. Investors should ask for a much higher return from the Products and Systems segment than from the Telecommunications segment. To calculate the separate hurdle rates the cost of equity for each segment must be determined first.
Cost of capital NPV: only accept projects with positive NPV Discount Rate: needed to calculate NPV ( normal internal use 15%; management suggest 8%-9%; external from Credit Swiss First Boston was 12%) From the results: relatively high cost of capital, so Ameritrade should only accept projects with potentially high rate of returns to cover the cost (but under similar risk levels) 2) How can the Capital Asset Pricing Model be used to estimate the cost of capital for a real (not financial) investment decision? Systematic Risk & Non-systematic Risk, Formula 3) What is the estimate of the risk-free rate and market risk premium that should be employed in calculating the cost of capital for Ameritrade? Risk-free Rate: assuming long term projects, so long term US government bond rates (Exhibit 3: 10 or 20 year bonds; 30 year bonds might be too long for technology industry) Risk Premium: difference between US Government Securities rate and historical Large Company Stocks annual returns (from Exhibit 3); use the 1950-1996 one because the unstable economy environment and political issues during 20s and 30s in US / or use the 1929-1996 one because enough time length and not possible to predict if there would no wars or any other crisis happen in future 4) In principle, what are the steps for computing the
Since PacifiCorp is not a publicly traded company, we must use valuation multiples from comparable firms to determine the value of the firm. As you can see in Exhibit 1, if we use the valuation multiples we arrive at an implied firm value of between $6,252 million (low end) and $9,289 million (high end). This means that our offer of $9.4 billion is right in line with the high end valuation of the company. We also used multiples to determine that the market value of equity was worth between $4,277 million and $5,904 million (see Exhibit 1). As stated earlier, we offered to pay $5.1 billion for the equity portion of the company.
Since the hurdle rate is usually the cost of capital, WACC for the company is calculated as below: Cost of debt 5.88% After tax 3.53% D/E 28.21% Company Beta 1.15 Cost of equity 10.95% WACC 9.3% It means that any project that will not return 9.3% will be rejected and anything above 9.3% has a good chance of being accepted. Actually the required rate of return and the systematic risk of cash flows for each project were not equal. Actually the projects with low return has a lower beta and would have a lower hurdle rate and projects with higher return have a higher beta and higher hurdle rate. The application of single hurdle rate will result in rejection of projects which return is higher than the actual hurdle rate and accept projects which return is lower than the actual hurdle rate. In other words, it would lead to false rejects for Telecom services while signaling false accepts for the Product and Systems group.
To verify the above conclusion, consider the 95 percent confidence interval for the difference between the two group means: (17 − 9 ) ± 1.96 × 2.5 2 + 2.5 2 which yields (1.09, 14.91). The interval does not contain zero, hence we reject the null hypothesis that the group means are the same. Generally, when comparing two parameter estimates, it is always true that if the confidence intervals do not overlap, then the statistics will be statistically significantly different. However, the converse is not true. That is, it is erroneous
In order to find an approximate result, it can be completed by the function F (x) = x/18 for 0 < x < 6 Therefore, the distribution function is F (x) = x-square divided by 36 for 0 < x < 6 If we set this equal to another random number r1 that is between 0 and then R1 = x-square divided by 36 which results to x = 6√ r1 3. In Excel, use a suitable method for simulating the lost revenue for each day the copier is out of service. Because the amount of copies sold each day is a uniform probability distribution between 2000 to 8000 copies, I designated r3 as a random number between 2000 to 8000. In order to find the amount of business lost on a certain day, I took r3 X (repair time), and the lost revenue
Per note 26, BA has £769 million of “sales in advance of carriage” as of March 31, 2009. Requirement 2 Under both U.S. GAAP and IFRS, liabilities associated with a past event are recorded when the obligation is probable and the amount of the obligation can be reliably estimated. However, IFRS defines “probable” as “more likely than not,” which is a lower threshold than is typically applied under U.S. GAAP, so BA is more likely to recognize a liability under IFRS than it would under U.S. GAAP. Also, under IFRS BA is more likely to discount the liability (recording it at present value) than it would under U.S. GAAP, so, given that a liability is recognized, the amount of liability that is recognized may be lower under IFRS than under U.S. GAAP. Per note 30, the total amount of “provisions for liabilities and charges” increased from £380 million to £438
Income Inequality, Is It a Problem? Rachael Johnson ECO100: Survey of Contemporary Economic Issues Lisa Turner July 26, 2010 Income Inequality, Is It a Problem? There is a in depth literature on the issue of income inequality, summed up by Milanovic (2006).“Since it is only through contact that recognition and tension are created, one could argue that the reduction of physical misery associated with low income and consumption levels permit an increase rather than a diminution of political tensions the political misery of the poor, the tension created by the observation of the much greater wealth of other communities may have only increased." In spite of the later damage of the reputation of his representation of income inequality
Examine the regression output. Answer the following questions: -What does the R-square tell you about the relationship? There is a modest relationship between carats and price (10% of the variance explained). -What does the regression coefficient for carats mean? The negative regression coefficient is surprising – perhaps higher carat diamonds are lower in price for some reason not considered in this regression.