ACCT 7340 Fall 2013 Professor Lin Solution to Individual Assignment 8 (1) The cost of equity is calculated as follows. Whirlpool: ........................... IBM: ..................................... Target Stores: ...................... 3.5% + (2.27 x 5.0%) = 14.85% 3.5% + (0.78 x 5.0%) = 7.40% 3.5% + (1.20 x 5.0%) = 9.50% (2) We use the book value of the debt and the market value of the equity as the proxies for the intrinsic values of debt and equity, respectively. Whirlpool 2,597 46
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Number 2 Winter 2010 29 Using Microsoft Corporation to Demonstrate the Optimal Capital Structure Trade-off Theory John C. Gardner, Carl B. McGowan Jr., and Susan E. Moeller1 ABSTRACT In this paper, we apply the trade-off theory of capital structure to Microsoft. We use data for bond ratings, bond risk premiums, and levered CAPM betas to compute the cost of equity and the weighted average cost of capital for Microsoft at different debt levels. This study shows the impact of increasing financial
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Midland Energy Resource Case Analysis 1. Describe Midland, its capital planning model and Janet Mortensen's role in the case. Midland Energy Resource, Inc. has three major divisions: Exploration & Production (E&P), Refining and Market (R&M), and Petrochemicals. E&P division provides the most profit for Midland. R&M is the largest division in Midland by revenue. Petrochemicals is the smallest division in Midland. Midland’s financial strategy in 2007 consisted of four principals:
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Week Four Discussion Questions 1.What is the cost of capital? How do you calculate the cost of capital? Why is it important in capital budgeting decisions. (due by midnight on Thursday) Cost of capital is the required return or the opportunity cost for a project in order to increase the value of the firm in the market place. It helps managers evaluate if an investment is worthwhile by setting a benchmark for the minimum rate of return. Cost of capital may be used as the measuring road for adopting
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Financial Management Weighted Average Cost of Capital 1 Weighted Average Cost of Capital (WACC) • This lecture answers the following questions: - What is the “opportunity” cost of funds for a firm, and thus the firm’s discount rate used in NPV calculations? - What is a firm’s Asset Beta & how do we lever Asset Betas and unlever Equity Betas? - Link to previous lectures - No longer use a “given” discount rate. We will calculate the correct discount rate for our NPV calculations. WACC - 1
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was Midland’s largest business, and Petrochemical was Midland’s smallest yet still substantial business. In 2007, Midland’s financial strategy will mainly focuses on four aspects: 1) Fund Overseas Growth; 2) Value-creating Investments; 3) Optimize Capital Structure; 4) Repurchase undervalued stocks. Fund Overseas Growth: Due to the exploited domestic resources in the domestic market, overseas investment will be the main sources for economic growth in Midland as a form of specialized financial and contractual
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decrease tied capital that results of just holding each hotel as an asset. Invest in projects that increase shareholders values This objective secures the goal of investing properly. The company used discounted cash flow techniques to evaluate the effectiveness of an investment. Projects which would increase shareholder value can be formed with benchmark hurdle rates to ensure a return on projects which results in profitable and competitive advantage. Optimize the use of debt in the capital structure
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| |Cost of Capital | Concepts Covered Cost of Equity: Cost of Equity is the minimum rate of return a firm must offer to the shareholders. This is necessary as the shareholders who have taken a risk in investing would be waiting for returns. The formula for Cost of Equity is given by: Cost of Equity =
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Working Capital -∆Fixed Assets) which was evaluated at $21,240, $26,727, $ 22,097, $25,473 and $29,545 for the years 2007, 2008, 2009, 2010 and 2011 respectively. The Cost of Debt and the Cost of Equity The next step was to determine the coast of debt, using the assumptions made by Mr. Liedtke which outlines a tax rate of 40%, the cost of debt of 6% for a leverage of 20% debt. The after-tax cost of debt (RD) was determined to be 3.6% [using RD =(R*(1-Tax Rate), where RD =after rate cost of debt
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University of Wollongong Year Computing the divisional cost of capital using the pure play method H. W. Collier∗ S. Haslitt‡ T. Grai† C. B. McGowan∗∗ of Wollongong, collier@uow.edu.au University, USA ‡ Oakland University, USA ∗∗ Norfolk State University, USA † Oakland ∗ University This is a preprint of an article accepted for publication as Collier, HW, Grai, T, Haslitt, S and McGowan, CB, Computing the divisional cost of capital using the pure play method, Applied Financial Economics
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