Common variables include current share price and riskless long-term real yield that are observed in the market. Model-specific variables include two estimates – dividend growth rate and earnings - and one deterministic variable – the current dividend yield that is determined by a company’s dividend policy. Among all variables, we focus on the earnings estimate , an estimate of an I/B/E/S analyst, that enables corrections for idiosyncratic characteristics of the capital market and for problems of accounting treatment. Table 1 compares the decomposed models Table 1. Comparison of the two alternative methods Method I Golden Growth Model Method II Earnings Yield vs. Real Bond Yield Formula Common Variables : Current Share Price : 30-Year TIPS Yield : Current Share Price : 30-Year TIPS Yield Model- Specific
Everything being equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC means a decrease in valuation and a higher risk. A firms WACC is a very important both to the stock market for stock valuation purposes and to the company's management for capital budgeting purposes. In an analysis of a potential investment by the company, investment projects that have an expected return that is greater than the company's WACC will generate additional free cash flow and create positive NPV for stockholders. Since the WACC is the minimum rate of return required, the managers in the company should invest in the projects that generate returns in excess of the WACC. WACC is set by the investors (or markets), not by managers.
Why or why not? After reading this case study, I would buy a pair of eyeglasses (which I will eventually need) from Warby Parker online. Their mission is impressive and their idea of selling a quality pair of eyeglasses at an affordable price is untouched. If I needed a pair of eyeglasses but the price is a staggering $400 USD, count me out. The part that sells me is that the company sends customers five pairs of eyeglasses to their house free at charge, and all they have to do is choose the one the like, hold on to it, and send the rest back free at charge.
Look at the results in Table 1. In general, what is the order of risk for the four risky asset classes? What happens to the reward-to-risk ratio for the different asset classes as the holding period increases? Is this pattern consistent with the change in the optimal allocations for Small Stocks as the holding period increases (shown in Table 2)? Explain.
Hertz Corporation (A) Harvard Case Solution & Analysis | Recommend this | | Considering leveraged buyout Hertz in 2005, the complex, high-profile deals, and a good example of best practice in private equity. First of two parts, the Hertz LBO, taking the point of view of Clayton, Dubilier & Rice, the leader of the consortium of private trading shares to buy Hertz from Ford in the auction. Set in the final round of the auction, a pressing issue for the consortium is how to raise your previous bet. Reasonable rates should be based on how many of the private equity consortium could create by improving global operations Hertz, on the one hand, and a more efficient capital structure, on the other. Presents detailed descriptive information on both topics, but does not include detailed financial projections, to be formulated by students or supplied for the purposes of discussion, the teacher.
Dell’s Working Capital 1. How would you characterize Dell’s finance performance in recent year? 2. Describe Dell’s inventory management policy? What advantages and disadvantages do you see in this policy?
Dixita Patel Chapter 6 homework Managerial Finance July 31, 2012 Critical Thinking 6.6. Coupon rate: how does bond issuer decide on the appropriate coupon rate to set on its bonds? Explain the difference between the coupon rate and the required return on a bond price? Coupon rate is the annual coupon divided by the face value of a bond. In this case Bond Issuers look at outstanding bonds of comparable maturity and risk.
In particular, is Midland’s choice of market risk premium appropriate, and if not, what recommendations would you make and why? 3. Should Midland use a single corporate hurdle rate (i.e. a firm-wide WACC) for evaluating investment opportunities in all of its divisions? Why or why not?
The merger will create synergies which will make the combined entity more efficient than Norfolk. The operating ratio of Conrail was around 80% and that of CSX was 77 %. Norfolk had a better ratio of 73.5% * There was also a fear that if CSX does not acquire Conrail, Norfolk will go ahead and acquire it since Conrail was seen as a prized possession of the industry * The merger was estimated to generate an additional $370 million in annual operating income 2. Analyze the CSX’s structure for Conrail: a. Why did CSX make a two tiered offer?
Assume that as of 1997, the Nigerian Brady Bond spread is 6.8% and that Nigerian country risk is similar to Mozambique's. Then, apply this method to value the combined investment of equity and subordinated debt in the Mozal Project. What is the NPV then? Suppose you want to change the dividend+interest payment flows to the equity and sub debt investors from the project, so that under this required rate of