This inevitably raised its leverage, allowing the company to take risks and outperform the market and its competitors. 3. What does Marriott estimate their equity beta to be? Using this estimate and other details reported in the case, what do you predict the equity beta of Marriott would be if they had no debt in their capital structure? Marriott estimates its equity beta to be 1.11.
In each case, what is the value to MCI shareholders? 3. Merger arbitrage (or risk arbitrage) funds speculate on the completion of stock and cash mergers, typically buying the target and hedging the risk of the acquirer’s shares accordingly to exchange ratio in stock mergers. What positions would risk arbitragers take in this deal? How would their positions change if the board appears to favour Quest offer?
This choice does, however, affect how individual shareholders’ accounts are reported in the balance sheet. Formally retiring shares restores the balances in both the common stock account and paid-in capital - excess of par to how those balances would have looked if the shares never had been issued. Any net increase in assets produced from the sale and ensuing repurchase is reflected as Paid-in capital—share repurchase. On the other hand, any net decrease in assets resulting from the sale and subsequent repurchase is repeated as a subtraction of retained earnings. Inversely, when a share repurchase is seen as treasury stock, the cost of the treasury stock is naturally disclosed as a decrease in total shareholders’ equity.
However buyback includes discretion at the end of managers and can be used to create false demand in market. This false demand will increase the share price even if company is not meeting expectations and lacking future projects. Managers can also use buyback of shares to increase their compensation if the compensation if related income per share. In other words, false demand or repurchasing will decrease the number of shares and increase income per share, so also increased managers’ compensation. Hurdle Rate based evaluations Hurdle Rate calculation involves beta, risk premium and riskless interest rate, and all these three factors are external to organization system.
Compute the book value weights that the comptroller currently uses for the company’s capital structure. Common stock weight 28.6% Preferred stock weight 14.3% Long-term debt 57.1% c. Based on the suggestion that the focus should be on market values, compute the weights of debt, preferred stock, and common stock. MV debt weight 19.4% MV preferred weight 4.2% MV common stock weight 76.3% d. Are book value or market value weights better for calculating the firm’s weighted average cost of capital? Market value weights are better for calculating the firms WACC because market value is the worth today and is more like the current situation and it can change daily. 2. a.
Another argument in favour of hedging is that the company is able to focus on their core business instead of focusing on the market movements of the underlying asset. In our case the interest rate plunged and the future was not favourable. On the contrary, if the interest rate had increased, the upside risk would have been limited. 2. Uncertainty and protection The first mortgage loans generate interest earnings which are not much affected by interest rate fluctuations.
This calculates how much of the business is financed through private investors; it is also expressed in percentage form. Generally speaking, as a firm's debt-to-equity ratio increases, it becomes more risky because if it becomes unable to meet its debt obligations, it will be forced into bankruptcy. (Glakas) Of the three companies, Wal-Mart has the lowest total debt ratio (.62) as well as the lowest overall debt to equity ratio (1.65). Target finds itself with similar footing at .65 and 1.89 respectively, however Kroger has over 80% of its operations (.81) financed with debt and has the worst three year average when it comes to debt to equity with 4.40 times.
The stock valuation model, P0 = D1/ (i - g), can be used for firms which have negative growth rates. 4. Company J and Company K each recently reported the same earnings per share (EPS). Company J’s stock, however, trades at a higher price. Which of the following statements is most correct?
W1 Application Problems (Questions 1,2,3,4,5 and Brief Exercises 1-2, 1-3, 1-4, and 1-5) W2-7 Application Problems Final Exam What is the difference between financial accounting and managerial accounting? Explain the two reasons why the shorter the payback period the more attractive the investment is when the payback technique is used? Distinguish between a master budget and a sales forecast. Explain the nature and importance of a job cost sheet. Distinguish among operating, investing, and financing activities.
It turns out that, while debt reduces a company’s tax liability because interest payments are deductible expenses, increasing amounts of debt raise both the cost of equity capital and the interest rate on debt because of the increasing probability of bankruptcy. In other words, higher amounts of debt raise the financial risk of a company, and this risk is reflected on the cost of all the types of capital the company uses. As such, the relationship between financial leverage and WACC is not a straight line, but more of a U-shaped curve, with a minimum WACC between the extremes of debt utilization. Apart from the risk associated with a firm’s fundamental