Joanna used the current yield on the 20-year Treasury bond as her risk-free rate. According to exhibit #4, this was at 5.74%. We felt that this was too aggressive and believe that a more conservative estimate was in order. We did some searching on the Internet and found that a 90-Day Treasury Bill is most often used. “ Risk-free Return: The risk-free rate is a theoretical interest rate at which an investment may earn interest without incurring any risk.
2. a. Critique Ace Repair’s current method of estimating its before-tax cost of debt. b. Is the earnings yield (E/P) an appropriate measure of the firm’s cost of equity? 3. a.
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.
We calculated cost of equity using the CAPM method, where re = rf + B(EMRP) The case stated that the BBB+ rated bonds have an interest rate of 5.5%, or 125 bps over the current yield on 10 year US treasury bonds. Given that this is the only information in the case about any rate of return on treasuries, we used 5.5% - 1.25% = 4.25% for the risk free rate. The equity market risk premium is given as 5% To calculate beta, we took the equity betas given for comparable companies in exhibit 7 and unlevered them using their respective net debt to equity ratios and a tax rate of 40%. We took the average of those un-levered betas and re-levered them under the assumption of zero debt financing (essentially just leaving them unlevered as debt/equity is 0/1). Note - we excluded Agile Connections from our comparable set as it had negative net income and thus do not reflect the risk profile and operations of our company.
A.cash B.unsecured loans C.time deposits D.U.S. government securities Question 12 of 20 5.0 Points Identify and describe the factors, in addition to supply and demand, that determine interest rates. Question 13 of 20 5.0 Points You need $8,000 four years from now for a down payment on your future house. How much money must you deposit today if your credit union pays 5% interest compounded annually? Pick the closest answer.
The result is this one: 0.082 (1-0.3879) = 0.05019. The other after tax costs are 0.050498 and 0.05738, respectively for $133 million bond and $100million bond. From the information taken above we conclude that the Cost of total debt = (0.05738 + 0.050498 + 0.05019) / 3 = 0.0526 (5.26%) Cost of the equity, we calculated on question nr 3, and it is 17.6525 %. To sum up, the cost of the capital is nothing more than the sum of the cost of equity and cost of debt, the calculation is this: Cost of capital = 17.6525 % + 5.26% = 22.91 % QUESTION 5: If Wonder Bar uses book value rather than market value to determine its capital structure, what is the impact of the cost of capital on its budgeting decisions? Market value is simply the amount of money that people are willing to pay for a stock.
e. If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price. Answer: a 3. Amram Inc. can issue a 20-year bond with a 6% annual coupon at par. This bond is not convertible, not callable, and has no sinking fund. Alternatively, Amram could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund.
Memorandum To: Kimi Ford From: xxxxx Date: 6 July, 2001 Subject: Nike’s cost of capital The firm’s cost of capital is the opportunity cost of an investment, which provides a benchmark of firm uses of capital against the capital market alternatives. It is important to estimate a firm’s cost of capital because there will be no economic value created for the investors if the firm earn below its cost of capital. In another word, cost of capital is the minimum required rate of return set by the investors. WACC, as a common practice of expressing a firm’s coast of capital, calculates the weighted average of the cost of individual sources of capital employed. My evaluation of Nike’s share price is based on Joanna Cohen’s analysis.
Uncertainty and protection The first mortgage loans generate interest earnings which are not much affected by interest rate fluctuations. These loans were financed by consumer deposits, which consist largely of 3 month fixed rate savings certificates. Due to the short duration and the increasing interest rates in the past, the deposits are highly sensitive the interest rate changes. Therefore, the mismatch between interest payable and interest receivable had to be solved. As showed in the table below the interest rates as well as the nominal value diverge from another.
Using product offered by Continental Bank would require a higher cost for J&L, and illiquid compared with NYMEX. However, they won’t need to post a margin at the beginning of the contract. The use of a monthly average price a net would be an advantage to J&L. 3. Using the estimate of 4.5 million gallons per month, how would you construct a futures hedge for the next 12 months?