WEEK 3 Homework * * * What is the relationship between a firm’s life cycle stage and its ability to accurately forecast sales? Why is this the case, and how do capital suppliers respond? Why is so much emphasis placed on forecasting sales and cash balances in building proformas and projections? * * * Professor, class, * * There is a tight relationship between a firm's life cycle stage and its ability to accurately forecast sales. The earlier a venture is at its
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instruments to hedge against risk, and offer advice and recommendations as required by the scenario in the question. It is also equally important that students understand why corporations manage risk in theory and in practice, because risk management costs money but does it actually add more value to a corporation? This article explores the circumstances where the management of risk may lead to an increase in the value of a corporation. Risk, in this context, refers to the volatility of returns (both
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M&M Proposition 1 The Modigliani-Miller theorem forms the basis of modern thinking on capital structure. The theorem states that under a certain market price process, in the absence of taxes, bankruptcy cists, agency costs and asymmetric information, an in an efficient market, the value of a firm is unaffected by how the firm is financed. Whether the firm’s capital is raised by issuing stock or selling debt does not affect the value of the firm. This theory is also referred to as the capital
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October 10, 2012 i. Risk-Free Rate Risk-free rates will depend on when the cash flow is expected to occur and depend upon the period over which investors want the return to be guaranteed. Consequently, we need to take the time horizon into consideration to find out the most suitable risk-free rate. Midland Energy Resources is a well-established company with 120-year history. It is not a company which relies on seeking special opportunity to earn instant profit so that 1-Year T-bond rate is obviously
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665 million shares outstanding with a share price of $74.77, and $25 billion in debt. If in three years, Caterpillar has 700 million shares outstanding trading for $83 per share, how much debt will Caterpillar have if it maintains a constant debt-equity ratio? E = 665 million × $74.77 = $49.7 billion, D = $25 billion, D/E = 25/49.722 = 0.503. E = 700 million × $83.00 = $58.1 billion. Constant D/E implies D = 58.1
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Review Guide 1) Operating Leverage vs. financial leverage: Laurence A high degree of Operating Leverage means that a relatively low change in sales will result in large change in EBIT. If all things are held constant, the higher the firm’s fixed cost the greater its Operating Leverage. In Jacque’s words, this has to do with volatility of the top line. Those firms are usually highly automated, capital intensive, hire highly skilled individuals (read pay them huge salaries), and engage into costly
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HSA 525-Health Financial Management Assignment # 4 – Medical Associates November 27, 2011 Medical Associates: Equity cost of capital, DCF, CAPM, risk, capital budgeting Medical Associates is a large for-profit group practice. Its dividends are expected to grow at a constant rate of 7% per year into the foreseeable future. The firm's last dividend (D0) was $2, and its current stock price is $23. The firm's beta coefficient is 1.6; the rate of return on 20-year T-bonds currently is 9%; the
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Nike Cost of Capital I. Single of Multiple Costs of Capital Since Nike has multiple business segments it is appropriate to question whether to use single or multiple costs of capital for the analysis. Kimi’s assistant Joanna went ahead and chose to use one cost of capital for Nike. We agree with her decision because Nike’s different segments are all generally sports related and are susceptible to the same market risks. For example, Nike’s footwear and apparel lines, which make up a combined 92%
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DCF analysis The value of a company today, based on how much money it’s going to make in the future Dividend discount model (DDM) Free cash flow to equity – determine the fair value of companies One must consider * Future sales growth, profit margins * Discount rate – depends on a risk-free interest rate 1. Forecast period & forecasting revenue growth * How far we should project cash flows * Excessive return period * One can guess based on the company’s competitive
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Chapter 13 What is operating leverage, and how does it affect a firm’s business risk? Operating leverage is the use of fixed costs rather than variable costs. If most costs are fixed, hence do not decline when demand falls, then the firm has high operating leverage. Effect of operating leverage More operating leverage leads to more business risk, for then a small sales decline causes a big profit decline Typical situation: Can use operating leverage to get higher EBIT or operating
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