...You might want to answer these questions on your way to WACC: a. What risk-free rate and risk premium did you use to calculate the cost of equity? The risk free rate used was a weighted average of the short-term treasury bills and long-term bond rates found in Exhibit 4. Using a weighted average based off the amount of revenue for each of the three divisions, long-term bond rate of 4.58% was used for the lodging, while the short-term Treasury bill rate of 3.54% was used for the contract services and restaurants. For the risk premium, a similar approach was used, using a weighted average from the spread rates found in Exhibit 5. The risk-free rate ended up with a blended average of 3.97% and a risk premium of 8.04%. b. How did you measure Marriott’s cost of debt? After calculating the risk-free rate and premium for Marriott as a whole, the beta of 1.11 found in exhibit 3 was used to calculate the cost of equity, which was calculated to be 12.89%. The cost of debt was then calculated by determining the proper government rate and debt rate premium. For the government rate, a weighted blended average was again used. The 30-year government interest rate was used for the lodging division, while an estimate of 7.5% (rate in between the 1-year and 10-year rate) was used for the contract services and restaurant division. This resulted in a government interest rate of 8.09%. Taking into account the debt rate premium of 1.30%, the cost of debt was calculated to be 9.39%. With the...
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...the company buying new shares. The company wonders about the value of such shares, that is why the company asks a consultant to provide an estimation. The business idea: To manufacture in Italy, thanks to the well-known reliable partners, in order to maintain high quality. This way the company will be the leader in the market. To create franchising shops, in order to develop the brand and the customers' loyalty. To let franchisee pay weekly only the final goods he has already sold. This way: The company knows the daily amount of sales and also the product mix. Moreover it becomes easier to modify the production and to minimize the stock. Cash-inflows get closer, while the working capital investment becomes lower with a lower customer credit risk. Financial forecast: The business plan has been developed looking at an exhaustive market analysis. Forecast data are reliable; they refer to the first five years. The target is to open 80 franchising shops within five years. Indeed, is that the optimal minimum number of shops in order to achieve the optimal minimal production output. The questions: 1) Which is the fair cost of capital for the company? 2) Which is the price to ask to the private equity company for 30% of shares of the company? 2 Considerations: We downloaded most of the data from the "stern1" website. The Financial...
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... E is the market value of the total equity V is the total market value of debt and equity = D + E T is the corporate tax rate rd is the appropriately calculated discount rate for debt (cost of debt) re is the appropriately calculated discount rate for equity (cost of equity) The cost of capital (rwacc) for the company can be calculated from the observable market values of debt (D), equity (E), & corporate tax rate (T) and calculated discount rate for debt (rd) & discount rate for equity (re). The market values of debt can be estimated from the company’s current amount of debt, their maturity levels, and credit rating and by utilizing the risk-free rate that can be observed in the market. The market value of equity can be estimated from multiplying the total number of outstanding shares and the company’s stock-price. The discount rate for debt can be calculated from on market value of debt and credit rating for the company’s debt, which includes adjustments for the company debt’s default risk. The discount rate for equity can be calculated from estimated values for the equity market risk premium (EMRP) and risk level (beta) for the company’s stock. The cost of capital (rwacc) for the division can be calculated similarly using the debt level used by the division, the overall company’s tax rate, and an estimated market value of the equity (E) for the division. The equity market value for the division is not directly observable via...
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...contract services. In order to decide which projects to take on in these divisions, each year a hurdle rate must be set which they use to discount a project’s cash flow to see if it will be profitable enough. We will conduct an analysis to calculate the hurdle rate for Marriott as a whole and for each division. We will use WACC as the hurdle rate. The results of our analysis show that Marriott’s WACC as a whole is 11,61 %. For lodging, 10,04% and for restaurants 13,03%. These should be the hurdle rates to use when valuating projects. The reason that these values differ is the difference in risk premiums and expected projects, and therefore financing and project lifetimes. We estimated a shorter project lifespan for restaurants than for lodging, since we believe lodging is a long term investment while restaurants and contract services are short term investments. The Marriott Corporation uses its estimate of the cost of capital to select investment projects which would increase the shareholders value by using the appropriate hurdle rates for each division. As is stated on page 2 of the case, a key element of their financial strategy is to invest only in projects that increase shareholders value. This practice makes sense as each division has a different level of risk associated with it and hence the cash flows involved should be discounted at the respective divisional hurdle rate and not at the firm‘s weighted average cost of capital. Marriott was also considering using its estimate...
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...possible place in the NorthPoint Large-Cap Fund, Ford needs to know Nike’s cost of capital. One of the most useful ways to measure the cost of capital is the weighted average cost of capital (WACC). Theoretically, the optimal capital structure in the mix of types of financing that produces the lowest WACC. WACC is calculated by multiplying the cost of each type of financing a company uses, be it debt or the many types of equity, by their respective weights. It is the rate of return that a company needs to earn in order to satisfy the returns they have to pay out to debtholders and stockholders. The respective weight of each type of financing is determined by their percentage of total capital. The WACC is extremely relevant to a company’s capital budgeting team and other capital finance department members. WACC is extremely useful in determining whether or not to accept a capital project. If a proposed capital project produces a rate of return higher than the company’s WACC, that project should be accepted. If the project’s rate of return is lower than the WACC, it should be...
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...shown below. WACC: (%debt)* (pretax cost of debt capital)*(1-marginal effective tax rate) + (%equity)*(cost of equity capital) In order to calculate Boeing’s debt percentage, it is assumed in this analysis that the capital structure remains the same and is unaffected by the current potential 7E7 project. The debt/equity ratio is .525, as listed in Exhibit 10 of the case. To calculate the total market value of debt, the market value of all of the bonds listed in Exhibit 11 must be summed. The market value is $5,023.28M. By dividing this value by .525, the market value of equity can be calculated at $9,568.15M. Dividing $5,023.28M by $14,591.43M (sum of market value of debt plus the market value of equity) and multiplying by 100 gives the percent debt of 34.43%. Please see Exhibit 1 for calculations. The pretax cost of debt capital will be the yield to maturity of a proxy bond. The bond that matures on 2/15/2013 will be used as a proxy for the entire cost of debt capital because of its relative size in relation to the entire company’s debt capital. Additionally, the maturity date most closely matches when the largest amount of cash inflows will be needed by Boeing. The yield to maturity of this bond is 4.657%. Though the marginal effective tax rate is listed as 35% in cash flow estimations from the case, this is seems like too aggressive of a number. Instead, the tax rate I will use in estimations will be 27.1%. The...
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...repairs, and automotive consultancy services, as well as vehicle design and assembly, component re-manufacturing, vehicle recovery, and towing services. In addition, it offers vehicle inspection and testing services comprising testing, calibration, inspection, consultancy, and training services to various industries, such as the aerospace, building and construction, electronics, petrochemical, pharmaceutical, engineering, chemical, and biotechnology. Further, the company operates ComfortDelGro driving centre, which provides driving instruction for motorcars, motorcycles, bus, and taxi vocational license, as well as corporate training services. Additionally, it offers insurance broking services for traditional insurance products and alternative risk financing instruments; and outdoor advertising services. The company operates a fleet of 46,200 vehicles. It operates in Singapore, the United Kingdom, Ireland, China, Australia, Vietnam, and Malaysia. The company was founded in 2003 and is headquartered in Singapore. 【History】 The Group was formed on 29 March 2003 through the merger of two land transport companies - Comfort Group and DelGro Corporation. Both had started out in the 1970s and had, by the time of the merger, grown to become successful listed land...
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...III. Statement of Situation Kimi Ford thought about investing in Nike. After reading the reports from Nike’s analyst meeting, she still was not sure whether to invest or not. Lehman Brothers determined Nike was a great investment; however, UBS Warburg and CSFB analysts disagreed. Since the reports did not help Kimi Ford out with her decision, she decided to develop her own discounted cash flow analysis. As shown in Exhibit 1, Kimi Ford projected her own discounted cash flow analysis with her assumptions. She assumed revenue would increase by 7.0% in 2002 then the percentage would start to decrease in subsequent years. To come up with the operating income, she multiplied revenue in 2001, $9,488.8 million, by the revenue growth percentage then added the growth amount to the revenue. The projected revenue for 2002 is $10,153 million. Then she multiplied cost of goods sold percentage of sales, 60.0%, and the selling and administrative percentage of sales, 28.0%, by the projected revenue of 2002. After subtracting the two amounts from the projected net income, the projected operating income for 2002 is $1,218.4 million. The net working capital equation is current assets minus current liabilities. To calculate the projected current assets and current liabilities accounts, Kimi Ford’s assumed percentages of 38.0% current assets and 11.5% current liabilities should each be multiplied by the projected revenue for 2002. When the current liabilities are subtracted from current assets...
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...general objective of this workshop is to determine an appropriate Cost of Capital for Marriott Corporation. To do so, we have based our assesment on the information and assumptions contained in the text of Dan Cohrs “Marriott Corporation: The Cost of Capital”. As stated in the lecture, Marriot Corporation is composed of three different divisions: lodging, restaurants and contract services. So, during this workshop we calculated a different cost of capital for each one of the three divisions. To determine the Cost of Capital for each division, we based our procedure in the Capital Assets Pricing Model and then in the Weight Average Cost of Capital, taking the risk free rate as the US Government Bond, the risk premium as the difference between the rmkt(based on S&P Index) and the rf, the tax rate as the average tax rate from 1978 to 1987, and the βU as a...
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...market value of the net debt E is the market value of the total equity V is the total market value of debt and equity = D + E T is the corporate tax rate rd is the appropriately calculated discount rate for debt (cost of debt) re is the appropriately calculated discount rate for equity (cost of equity) The cost of capital (rwacc) for the company can be calculated from the observable market values of debt (D), equity (E), & corporate tax rate (T) and calculated discount rate for debt (rd) & discount rate for equity (re). The market values of debt can be estimated from the company’s current amount of debt, their maturity levels, and credit rating and by utilizing the risk-free rate that can be observed in the market. The market value of equity can be estimated from multiplying the total number of outstanding shares and the company’s stock-price. The discount rate for debt can be calculated from on market value of debt and credit rating for the company’s debt, which includes adjustments for the company debt’s default risk. The discount rate for equity can be calculated from estimated values for the equity market risk premium (EMRP) and risk level (beta) for the company’s stock. The cost of capital (rwacc) for the division can be calculated similarly using the debt level used by the division, the overall company’s tax rate, and an estimated market value of the equity (E) for the division. The equity market value for the division is not directly observable via stock prices...
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...DCF model with reasonably estimated data based on the company’s historical performance. ◇Main growth driver: (1) the increasing needs of oil and gas.(2) exploitation and extension of existing producing fields.(3) acquisition. source: google finance Business Description General Information Apache Corporation, a Delaware corporation formed in 1954, is an independent energy company that explores for, develops, and produces natural gas, crude oil, and natural gas liquids. Apache currently have exploration and production interests in six countries: the U.S., Canada, Egypt, Australia, the U.K. North Sea (North Sea), and Argentina. The company's proved reserves at year-end 2012 totaled 2.85 billion barrels of oil equivalent, roughly half oil and half natural gas. Apache have also been significantly active in the acquisition market for the past two years, having identified several opportunities that met our criteria for risk, reward, rate of return, and growth potential. From April 2010 through the end of 2012, Apache announced several significant acquisitions, each of which fit well with their long-term growth strategy. These properties are strategically positioned with existing infrastructure and play to the strengths that come with operating experience. The significant acquisitions and other transactions since...
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...Coefficients | Standard Error | t Stat | P-value | Lower 95% | Upper 95% | Lower 95.0% | Upper 95.0% | Intercept | 0.0137 | 0.011 | 1.292 | 0.199 | -0.007 | 0.035 | -0.007 | 0.035 | X Variable 1 | 0.951 | 0.145 | 6.541 | 0.000 | 0.663 | 1.238 | 0.663 | 1.238 | Figure: Beta computation using trendline plot method Table: WACC Computation using CAPM method ------------------------------------------------- Average market return, Rm = 14.750% ------------------------------------------------- Risk free rate, Rf = 8.07% ------------------------------------------------- Cost of equity, Ke = Rf + Beta*(Rm – Rf) = 14.878% ------------------------------------------------- Cost of debt, Kd = 13.184% (Interest paid/Long term borrowings) ------------------------------------------------- Weight of debt, Wd = 24.732% ------------------------------------------------- Weight of equity, We = 75.268% ------------------------------------------------- Tax rate, T = (PAT/PBT –...
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...Table 1 Amazon Estimated Free Cash Flows to the Firm | Year | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007-after | | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | Revenue Growth Rate | 2981.41% | 300.00% | 200.00% | 160.00% | 125.00% | 100.00% | 50.00% | 30.00% | 20.00% | 10.00% | 6.00% | 6.00% | Revenues | 15,746 | 62,984 | 188,952 | 491,275 | 1,105,369 | 2,210,738 | 3,316,108 | 4,310,940 | 5,173,128 | 5,690,441 | 6,031,867 | 6,393,779 | Operation Margin | -37.97% | -14.67% | -2.03% | 3.87% | 6.88% | 8.24% | 9.20% | 9.59% | 9.78% | 9.90% | 9.90% | 10.00% | EBIT | -5,979 | -9,240 | -3,836 | 19,012 | 76,049 | 182,165 | 305,082 | 413,419 | 505,932 | 563,354 | 597,155 | 639,378 | Taxes Rate | 0.00% | 0.00% | 0.00% | 0.00% | 27.06% | 35.00% | 35.00% | 35.00% | 35.00% | 35.00% | 35.00% | 35.00% | Taxes | - | - | - | - | 20,582 | 63,758 | 106,779 | 144,697 | 177,076 | 197,174 | 209,004 | 223,782 | EBIT(1-t) | -5,979 | -9,240 | -3,836 | 19,012 | 55,467 | 118,407 | 198,303 | 268,722 | 328,856 | 366,180 | 388,151 | 415,596 | NINV=(NCS+ΔWC-D) | 5,078 | 26,081 | 77,838 | 218,335 | 491,253 | 818,756 | 818,756 | 736,880 | 638,629 | 383,178 | 252,897 | 268,071 | FCFF | -11,057 | -35,320 | -81,674 | -199,322 | -435,786 | -700,349 | -620,452 | -468,158 | -309,774 | -16,998 | 135,253 | 147,525 | ...
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...(NasdaqGS:AAPL) (USD in millions) ASSUMPTIONS BETA CALCULATION Tax Rate (5 Year Average) Risk-Free Rate of Return (Rf)(1) S&P 500 Index Market Return (Rm) - Yearly for Last 10 Years Size Premium AAPL D/(D+P+E) AAPL D/E AAPL P/E AAPL Cost of Debt (Rd) - Average of Last 5 Issued Bonds AAPL Cost of Preferred (Rp) AAPL Tax Rate Risk free rate Choose Then 25.4% 1.34% 7.2% 0.0% 7.9% 8.6% 0.0% 2.5% 0.0% 26.4% Levered Beta 1.560 1.547 1.489 0.508 1.522 0.899 Ticker Name NYSE:HPQ Hewlett-Packard Company NYSE:EMC EMC Corporation NasdaqGS:WDC Western Digital Corporation KOSE:A005930 Samsung Electronics Co. Ltd. NasdaqGS:NTAP NetApp, Inc. NasdaqGS:GOOGL Alphabet Inc. Average Total Debt 25,502.0 7,420.0 2,567.0 10,116.9 1,488.0 7,927.0 Mkt. Val. Equity 51,896.8 53,866.3 18,388.4 161,909.4 9,973.5 466,718.1 Pref Equity 0.0 0.0 0.0 0.0 0.0 0.0 Debt/ Equity 49.1% 13.8% 14.0% 6.2% 14.9% 1.7% Pref/ Equity 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Unlevered Beta(2) 1.141 1.403 1.349 0.485 1.370 0.888 1.254 1.106 Average Unlevered Beta for Comps AAPL D/E AAPL P/E AAPL Tax Rate -3 AAPL Levered Beta United States United States Treasury Constant Maturity - 5 Year 1.106 8.6% 0.0% 26.4% 1.176 WACC Market Risk Premium (Rm - Rf) Multiplied by: AAPL Levered Beta Adjusted Market Risk Premium Add: Risk-Free Rate of Return (Rf)(1) Add: Size Premium Cost of Equity Multiplied by:...
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...Norberto Ramos 9/7/15 Advanced Corporate Finance Professor Muhammad Chishty Case 15: Nike, Inc.: Cost of Capitol Worked with Xavier Robles As many people know, Nike is a sporting brand company with a large variety of products from clothing, shoes, to tech gear that is able to read your health when in use . But for this case at hand, on July 5th, 2001 Kimi Ford from NorthPoint Group, looked over analyst write-ups. Ford, and NorthPoint Group, invested in Fortune 500 companies with a central focus on value investing such as: General Motors and McDonalds. But at the start of the year, Nike’s share price had been declining at a rapid rate. Even while the surrounding market around NorthPoint was declining and the S&P 500 fell 10.1 percent in 2000, they earned a return of 20.7 percent, so they were doing extremely well during the hard time and in 2001, stayed positive at 6.4 percent while the S&P 500 stayed in the negatives. On June 28th, 2001, Nike held a meeting to communicate a strategy to revitalize the company. Nike had plateaued at $9 billion since the year 1997, and its net income had fallen over $200 million from $800 to $580. Its market share in athletic shoes had also fallen from 48 percent to 42 percent by 2000. This meeting introduced plans for top-line growth as well as to increase operating performance. On a revenue side, Nike decided to develop more mid level priced athletic shoes, a segment that had been overlooked. They also planned to push their...
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