An additional debt has an effect on WACC and FCF: On WACC: -debt increase the cost of stock rs as the stockholders require a higher return due to the risk associated with additional debt -debt reduce the tax paid by the company as the interest is tax deductible -debt increase the risk of bankruptcy so debtholders will require a higher promised return rd ***low taxes Vs high cost of equity,high cost of debt => uncertain effect on WACC
Words: 1008 - Pages: 5
Emerging Market Mutual Fund Performance and the State of the Economy∗ Ayelen Banegas November 2010 Abstract Following the financial liberalization of many Asian, European, and Latin American countries emerging markets have become a central player in the global economy. As a result the universe of equity funds investing in these developing economies has been in continuous expansion. In this paper we propose a set of asset class specific predictive variables for emerging markets and exploit
Words: 13697 - Pages: 55
------------------------------------------------- If the company were to recapitalize, debt would be issued, and the funds received would be used to repurchase stock. PizzaPalace is in the 40 percent state-plus-federal corporate tax bracket, its beta is 1.0, the risk-free rate is 6 percent, and the market risk premium is 6 percent. ------------------------------------------------- a. Provide a brief overview of
Words: 3188 - Pages: 13
Lecture 2: The nature of financial intermediation: The issue of why financial intermediaries exist is a puzzle for the “complete markets” paradigm of Arrow and Debreu. As we describe in this lecture, the reasons why intermediaries such as banks exist is related to the various market failures which vitiate the complete markets paradigm. In particular, there is the key issue of imperfect information which makes financial institutions such as banks key channels for intermediating between savers and
Words: 1369 - Pages: 6
operating leverage. It is: DOL = % change in EBIT/% change in sales. Financial leverage is the use of fixed financial costs to magnify the effects of changes in earnings before interest and taxes on the firm’s earnings per share. The degree of financial leverage (DFL) is a numerical measure of the firm’s financial leverage. DFL: % change in EPS/% change in EBIT Total leverage is the use of fixed costs, both operating and financial, to magnify the effects of changes in sales on the firm’s earnings
Words: 433 - Pages: 2
------------------------------------------------- If the company were to recapitalize, debt would be issued, and the funds received would be used to repurchase stock. PizzaPalace is in the 40 percent state-plus-federal corporate tax bracket, its beta is 1.0, the risk-free rate is 6 percent, and the market risk premium is 6 percent. ------------------------------------------------- a.
Words: 3189 - Pages: 13
Investment Management and Financial Innovations, Volume 7, Issue 2, 2010 Faris Nasif Al-Shubiri (Jordan) Analysis of the relationship between working capital policy and operating risk: an empirical study on Jordanian industrial companies Abstract The study analyzes the working capital management practices and their impact on profitability and risk of industrial Jordanian firms for the period of 2004 to 2007. The total sample of the study consists of 59 industrial firms listed on Amman Stock Exchange
Words: 7133 - Pages: 29
that formula in excel, NPV = $169482 As it is positive, the company should enter the investment. It would be like having an extra $170K in their cash today. b. By how much must the cost of capital estimate deviate to change the decision? (Hint: financial calculator to calculate IRR.) As the cost of capital change, the profitability of the investment varies. We need to calculate the IRR (internal rate of return) which is when the NPV = 0. Plotting the values in excel and using the IRR formula:
Words: 1865 - Pages: 8
Then, the report clarifies how we make assumptions and calculate the “optimal leverage”. Finally, the pathway each company could achieve its optimal is given. * Reasons to Choose D/E as Firm Leverage The debt-equity ratio we use is calculated by dividing Net Debt by Market Value of Equity. Net debt is the total debt minus cash. It is used to achieve a more relevant measure of leverage because the cash could reduce the risk of leverage. Market value of equity is considered in this ratio as it
Words: 3497 - Pages: 14
different groups of bank stakeholders, by discussing two papers. The first paper is a descriptive paper written by Berger, Herring, and Szego (2005), called “The Role of Capital in Financial Institutions”. The second paper, “Caught in Between Scylla and Charybdis? Regulating Bank Leverage When There Is Rent Seeking and Risk Shifting”, is a theoretical paper by Acharya, Mehran and Thakor (2013). Both articles examine agency conflicts between different bank stakeholders and how capital could be used to
Words: 5370 - Pages: 22
