Debt to total assets, also known as simply debt ratio, is calculated by taking the total liabilities for the company divided by the total assets for the company; this information is found on the company’s balance sheet. This ratio determines the portion of debts a company has that are paid and financed through its debt. For Huffman Trucking the calculation would look like this for 2011: ($90,283+$71,365)/$267,265 = $161,648/$267,265 = 0.6048 or 60.48% (Huffman Trucking, 2013). Time interest earned, also known as interest coverage ratio, is calculated by taking the earnings before interest and tax and dividing it by interest expense; this information is found on the company’s income statement. This ratio determines the rate and ability in which the company is able to pay its debts off.
The total value of the project is the total free cash flows on the project which is $2,728,485. 2. Value the project using the Adjusted Present Value (APV) approach assuming the firm raises $750 thousand of debt to fund the project and keeps the level of debt constant in perpetuity. As the cost of debt capital for the project is given as 6.8% before taxes and the tax rate is 40%, the after tax cost of debt capital should be (1-Tc)rB = (1 - .40)6.8% = 4.08%. With the assumption that the firm will raise the fund of $750 thousand on debt and the level of the debt will remain unchanged.
FINANCE CASE STUDY “Wonder Bars” Important information * Interest bearing debt of the company in 1994 ― $ 76,132,000 with a weighted average interest rate of 8.2% 8.25% sinking fund, n=12 years, $133 million * Coupon interest = 9.375%, $100 million WB had two long term bond outstanding Common stock, 75 million shares * Class B stock, $10 million shares The firm has 2 classes of common stocks Both stock have a price of 35$ / share and the beta of the company is 0.95 * Treasury bill = 5% * S&P 500 index = 12% in 10 years * Federal and state income tax = 40% * Sonzoni Food beta = 0.9 SOLUTION Question 1: What is WB’s capital structure? Capital structure is a way to determine
MARRIOTT CORPORATION: THE COST OF CAPITAL Lodging Division Cost of Debt From Table A, * Fraction of Debt at Floating: 50% * Fraction of Debt at Fixed: 50% Using credit risk premium to calculate cost of debt, the equation is as follows: Cost of Debt = Low risk rate+Risk premium Floating Rate -- Assume the interest rate of floating rate debt changes every year so we use 1-year rate U.S. Government interest rate, which is 6.90% (from Table B). Therefore, the cost of floating rate debt equals 6.9% plus the 1.1% risk premium, which totaled to 8%. Fixed Rate -- As lodging assets have long useful lives, we use the long-term debt rate, i.e. 30-year U.S. Government interest rate, which is 8.95% (from Table B). Therefore, the cost of fixed rate debt equals 8.95% plus 1.1% risk premium, which totaled to 10.5% Cost of Debt = (0.5 x 0.08) + (0.5 x 0.105) = 0.095 = 9.25% [since floating rate and fixed rate debt both weigh 50%, we use the weighted average approach to calculate the total cost of debt rate] Based on historical data analysis below, we get an average income tax rate of 42%.
years. | | The step-by-step calculation is: P | = | S(1 + rt)-1 | | | = | 400,000(1 + 0.0892 x 0.24657534...)-1 | | | = | 400,000 x 0.97847883... | | | = | $391,391.53 | Rounded as last step | b)You are correct. When the first bill matures at time 90 days, the investor purchases a second bill. We must find the purchase price of the second bill. This can be displayed on a time line: | | | | | $P | $400,000 | | | | | | 0 | 90 | 180 | 270 | | | | | | | | | P | = | price | = | unknown | | S | = | Maturity value | = | $400,000 | | r | = | Simple interest rate (decimal) | = | 9.16 | 100 | | = | 0.0916 | | t | = | Time period (years) | = | 90 | 365 | | = | 0.24657534... years.
The best price to consume the maximum consumer surplus and get the highest revenue is to charge a total of $8,000 for a both dorm room and meal plan. Chapter 9 2. Problem #5, p. 221 in text. Total cost = 200 + 50 q Market demand: P = 290 –(1/3) Q Number of firms in market: n=14 The output level that maximizes profit: q = (a – c) / [(n+1)*b] q
What is the expected dividend yield and expected capital gains yield? Explain the difference in the required return estimates from the ValueLine (see question 1a) to the WSJ price data. The company’s return on common stock using the constant growth model is 7.72%. The expected dividend yield is [pic]. The expected capital gains yield is the difference of the total yield, 7.72%, and the dividend yield of 2.22%, which give us 5.5% for the
They then develop target leverage ratios and use the WACC to determine the cost of capital for the whole corporation as well as each of the three divisions. 1. What is the weighted average cost of capital (WACC) for Marriott Corporation (2 points)? 2 Cost of Debt = risk free weight + debt rate premium above gov’t = 8.95% + 1.30% = 10.25% Levered Beta βE = βU * [1 + (1-tax rate)(target leverage / (1 - target leverage))] = 0.80 * [1 + (1-0.44)(0.60 / (1 – 0.60))] = 1.472 Cost of Equity = risk-free rate + βE(risk premium) = 0.0895 + 1.472(.0743) = 0.2079 rME = 8.95% + 1.472 * 7.43% = 19.89% WACC = (1-T) * pretax cost
Questions 1. a. Discuss the specific items of capital that should be included in the WACC. The capital that should be included in the WACC is the common stock, preferred stock, bonds and any other long-term debt b. The comptroller currently finds the weights for the weighted average cost of capital (WACC) from information from the balance sheet shown in Table 2. Compute the book value weights that the comptroller currently uses for the company’s capital structure.
The mathematical formula for I X(N+ 1 calculating the denominator is N 1). The numerator will be the number of payments remaining, including the present payment. Thus, the borrower would accrue 30/465 (or 6.45%) of the total interest in the first year, 29/465 (6.24%) in the second year, and so on until the 30th year, when 1/465 (.22%o) of the total interest would be accrued. See, e.g., SEN. COMM. PRINT, supra note 7, at 251 n.7 (example of Rule of 78s); H.R.