Weighted average cost of capital Essays & Research Papers

Extra Credit Assignment: Yeats Valves and Controls Inc. Completed as a Group with the Following Individuals: (in alphabetical order by last name) Adetunji Adeniyi Tung F. Cheng Gregory Chiu Rashmin Patel WenHao Zhang Course Title: Accounting and Finance Course No./Section: MG6093 Instructor: Frank X. Apicella November 28, 2012 Yeats Valves Question The following are questions which should focus...

WACC Weighted Average Cost of Capital Formula The WACC Weighted Average Cost of Capital formula is complex, and can be broken into several components. The individual component costs are provided in the following sections. WACC Weighted Average Cost of Capital Variables V=Firm Total Value (Debt + Preferred Shares + Common Equity + Retained Earnings) Md=Market Value of Debt Mp=Market Value of Preferred Shares Mc=Market Value of Common Equity Mr=Market Value of Retained Earnings...

Ryerson University CFIN 401 Section 610 Midterm Exam Version A Fall 2010 ------------------------------------------------- There are 2.0 hours in this exam. ------------------------------------------------- Student Name ____________________________ (Please Print) Student Number _________________________________ Notes: 1. This is a closed book exam. You may only have pens, pencils , a calculator and one cheat sheet double sided on 8 ½ by 11 paper at your desk....

2. TELETECH CORPORATION 1. How does Teletech Corporation currently use the hurdle rate? Currently Teletech uses a single hurdle rate for both their Telecommunications Services and Products and Services divisions. The hurdle rate is the cost of capital based on an estimate of the corporation’s WACC. 2. Please estimate the segment WACCs for Teletech (see the worksheet in case Exhibit 1). As you do this, carefully note the points of judgment in the calculation. Corporate...

International Finance Uncle Jim 2011 Brief Case: Flash Memory, Inc. Presentation: By teams of 6 Format: Teams will present a written report and deliver a verbal presentation supported by PowerPoint. Time: Initial introduction October 19 Working groups October 24-November 2 In Class Review November 7 In Class Presentation November 9 Each presentation will be not longer than 15 minutes. Discussion questions to be completed in writing showing all calculations,...

Executive Summary: Midland Energy Resources, Inc. is a global energy company with a broad array of products and services. The company operates within three different operations including oil and gas exploration and production (E&P), refining and marketing (R&M), and petrochemicals. Midland has proven to be a very profitable company, with reported operating revenue of $248.5 billion and operating income of $42.2 billion. The company has been in business for over 120 years and employed more than...

2 Gentry Motors Inc., a producer of turbine generators, is in this situation: EBIT _ $4 million; tax rate (T) is 35%; debt outstanding (D) $2 million; kd 10%; ke 15%; shares of stock outstanding (N0) 600,000; and book value per share $10. Since Gentry’s product market is stable and the company expects no growth, all earnings are paid out as dividends. The debt consists of perpetual bonds. a. What are Gentry’s earnings per share (EPS) and its price per share (P0)? b. What is Gentry’s...

CHAPTER 9 THE COST OF CAPITAL (Difficulty: E = Easy, M = Medium, and T = Tough) Multiple Choice: Problems Easy: Cost of common stock Answer: d Diff: E [i]. Bouchard Company's stock sells for $20 per share, its last dividend (D0) was $1.00, and its growth rate is a constant 6 percent. What is its cost of common stock, rs? a. 5.0% b. 5.3% c. 11.0% d. 11.3% e. 11.6% Cost of common stock Answer: b Diff: E [ii]. Your company's...

Sampa Video, Inc You have to prepare a presentation to the management of the firm. The presentation should have; analysis of the project, your valuation of the investment and your investment recommendation. You have to be clear and brief and explain the main assumptions and methodologies used in the analysis. The quality of the presentation will be considered in the grading. You have to hand in a handout of the presentation and an executive summary of no more than 2 pages. Guideline...

Butler Lumber Company 1. Why does Mr. Butler have to borrow so much money to support this profitable business? 2. Do you agree with his estimate of the company’s loan requirements? How much will he need to borrow to finance his expected expansion in sales (assume a 1991 sales volume of $3.6 million) 3. As Mr. Butler’s financial adviser, would you urge him to go ahead with, or to reconsider, his anticipated expansion and his plans for additional debt financing? As the banker, would...

Q1: The Target Capital structure for Kaynat Manufacting is 50% common stock, 15% preferred stock, and 35% debt. If the cost of common equity for the firm is 19.6%, the cost of preferred stock is 12.9% and the before tax cost of debt is 9.5% what is the weighted average cost of capital? The firm's tax rate is 35%. Answer: WACC = (50% x 19.6%) + (15% x 12.9%) + ( 35% x 9.5% x 65% = Q2: The following are the information of a company: |Type of capital |Book value (Tk)...

Teletech Corporation The first procedure we took in evaluating the financial position of Teletech was to estimate the Weighted Average Cost of Capital (WACC) for both its Telecommunications segment and its Products and Systems segment and then compare that to the firms corporate WACC. The WACC assesses the amount the risk that an average capital project undertaken by the firm contains. It is also the required rate of return the firm must end up paying in order to later generate funds, which...

1) How does Teletech currently compute its hurdle rate and how does it evaluate risky projects? What is wrong with this method? Teletech computes it’s hurdle rate by averaging the past 10 years annual weighted average cost of capital (WACC) rates, and then “massaging” the result into a round percentage. This is not an ideal way to calculate the hurdle rate as it reflects rates of financing from the past when borrowing rates were in different ranges. Teletech evaluates risky projects by...

Cost of Capital questions and practice problems Questions 1. What does the WACC measure? 2. Which is easier to calculate directly, the expected rate of return on the assets of a firm or the expected rate of return on the firm’s debt and equity? Assume you are an outsider to the firm. 3. Why are market-based weights important? 4. Why is the coupon rate of existing debt irrelevant for finding the cost of debt capital? 5. Under what assumptions can the WACC...

Dr. Sudhakar Raju FN 6100 QUESTIONS ON CHAPTER 15 (COST OF CAPITAL) 1.) The Wind Rider Company has just issued a dividend of $2.10 per share on its common stock. The company is expected to maintain a constant 7% growth rate on its dividends indefinitely. If the stock sells for $40 a share, what is the company’s cost of equity? 2.) The Ball Corporation’s common stock has a beta of 1.15. If the risk free rate is 5% and the expected return on the market is 12%, what is Ball...

INTRODUCTION The long-term investments that make today will determine the value of business tomorrow. In order to make long-term investments in new product lines, new equipment and other assets, managers must know the cost of obtaining funds to acquire these assets. The cost associated with different sources of funds is called the cost of capital. . If the business earns more than its cost of capital, the market value of the business will increase. Likewise, if returns on long-term investments...

What is cost of capital? The cost of capital is the cost of obtaining funds, through debt or equity, in order to finance an investment. It is used to evaluate new projects of a company, as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet. Importance The concept of cost of capital is a major standard for comparison used in finance decisions. Acceptance or rejection of an investment project depends on...

Answers to Warm-Up Exercises E9-1. Answer: Weighted average cost of capital N 10, PV $20,000 (1 0.02) $19,600, PMT Solve for I 8.30% 0.08 $20,000 $1,600, FV $20,000 E9-2. Cost of preferred stock Answer: The cost of preferred stock is the ratio of the preferred stock dividend to the firm’s net proceeds from the sale of the preferred stock. rp Dp Np rp (0.15 $35) ($35 $3) rp $5.25 $32 16.4% E9-3. Cost of common stock equity Answer: The cost of common stock equity can be found by dividing the...

The Cost of Capital for Goff Computer, Inc. Rahul Parikh BUS650: Managerial Finance (MAH1209A) Dr Charles Smith March 18, 2012. The Cost of Capital for Goff Computer, Inc.: 1. Most publicly traded corporations are required to submit 10Q (quarterly) and 10K (annual) reports to the SEC detailing their financial operations over the previous quarter or year, respectively. These corporate fillings are available on the SEC Web site at www.sec.gov. Go to the SEC Web site, follow the “Search...

Cost of Capital Theory of cost of capital Bottom of Form Cost of capitaltheory attempts to explain whether a company's mix of equity and debt affects its stock price. Two types of cost of capitaltheory can be distinguished: the net operating income theory and the net income theory. In the net operating income theory, the mixture of debt and equity does not directly influence a company's financial value. Under the net income theory, the manner in which a corporation structures its...

Chapter 8 The Cost of Capital 236 CHAPTER 8—THE COST OF CAPITAL TRUE/FALSE 1. Capital refers to items on the right-hand side of a firm's balance sheet. 2. The component costs of capital are market-determined variables in as much as they are based on investors' required returns. 3. The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt. 4. The cost of issuing preferred stock by a corporation must be adjusted to an...

WEIGHTED AVERAGE COST OF CAPITAL FOR DELL COMPUTER 1) From the SEC website, the balance sheet of Dell Computer reveals a Book value of debt = $3,394,000,000 and Book value of equity = $4,625,000,000 The same balance shows the breakdown of the long-term debt (book values) in table 1. Table 1 Coupon Rate (%) Maturity Book Value (Face Value in million $) 3.38 06/15/2012 400 4.70 04/15/2013 599 5.63 04/15/2014 500 5.65 04/15/2018 499 5.88 06/15/2019 600 7.10 04/15/2028 396...

ogCost of capital First of all I would like to say the I wanted to calculate the cost of debt and cost of equity but the information given in the statements are missing the items needed to calculate the cost of debt and the cost of equity but I would like to analyze the information related to this part The market capitalization already increased in year 2010to 7,016 million from the previous year which was 3,805 million in year2009.also we can see the share price started year2010 with equal...

Cost of Capital Definition: cost of capital is the rate of return that a company must earn on its project investments to maintain its market value and attract funds. The cost of capital to a company is the minimum rate of return that is must earn on its investments in order to satisfy the various categories of investors, who have made investments in the form of shares , debentures and loans. The cost of capital in operational terms refers to the discount rate that would be used in determining...

Case Questions Case #5 – Marriott Corporation: The Cost of Capital 1. Are the four components of Marriott’s financial strategy consistent with its growth objective? 2. How does Marriott use its estimate of its cost of capital? Does this make sense? 3. What is the weighted average cost of capital for Marriott Corporation? a. What risk free rate and risk premium did you use to calculate the cost of equity? b. How did you measure Marriott’s cost of debt? 4. If Marriott used a single...

Cost of Capital Firms need to make capital investment i.e., purchasing fixed assets such as factories, machineries, equipment, etc. After deciding what capital investments to make, they need to decide on the financing – sources of capital. The sources: Long-Term Debt, Common Stock, Preferred Stock and Retained Earnings. Then they need to find the cost of obtaining each source of financing today (not historical). Cost of Capital - The rate of return that a firm must earn on its investment...

 The Cost of Capital in Multinational Firms Monique N. Mixon University of Maryland University College FIN 630, 04 November 2012 Turnitin.com=_________ ABSTRACT This paper examines the cost of capital for multinational firms and determines that the multinational firm should use the weighted average cost of capital (WACC) to evaluate international and domestic investment decisions and to magistrate the enactment of subsidiaries domestically and internationally....

HBR Case #1 Marriott Corporation: The Cost of Capital Group 16—Tutorial Mon 11:30am Group members LIU Ying, Chloe | 1155019350 | LUO Yingying, Irika | 1155020931 | TIAN Tian, Sarah | 1155019114 | WU Jiajie, Jesse | 1155019061 | 17 September 2012 Executive Summary By 1987, Marriott Corporation had grown into a large multi-dimensional company with over $5 billion assets in lodging, contract services and restaurants. The company enjoyed fast growth in both sales and assets at...

I. Introduction Kimi Ford, a portfolio manager for the mutual-fund management group NorthPoint, was reviewing the financials of Nike Inc. to consider buying shares for the NorthPoint Large-Cap Fund that she managed. A week prior, Nike Inc. held an analysts’ meeting to share their 2001 fiscal results and develop a strategy to revitalize the company. II. Background of Firm Nike’s revenues since 1997 had grown from $9 billion, while net income had fallen $220 million. A study written by...

UV0010 NIKE, INC.: COST OF CAPITAL On July 5, 2001, Kimi Ford, a portfolio manager at NorthPoint Group, a mutual-fund management firm, pored over analysts’ write-ups of Nike, Inc., the athletic-shoe manufacturer. Nike’s share price had declined significantly from the beginning of the year. Ford was considering buying some shares for the fund she managed, the NorthPoint Large-Cap Fund, which invested mostly in Fortune 500 companies, with an emphasis on value investing. Its top holdings included...

Question 6 What is the cost of capital for the lodging and restaurant divisions of Marriott? Answer: The cost of capital for lodging is 9.2% and the cost of capital for restaurants is 13.1% Calculation: WACC = (1-t) * rd * (D/V) + re* (E/V) Where: D= market value of DEBT re = aftertax cost of equity E = market value of EQUITY V = D+E rd = pretax cost of debt t = tax rate To calculate the formula above, we need to determine each component Tax rate (t) 56% --> calculated before...

Case #3 “Marriott Corporation” The Cost of Capital” What is the weighted average cost of capital for the Marriott Corporation and cost of capital for each of its divisions? – What risk-free rate and risk premium did you use to calculate the cost of equity? – How did you measure the cost of debt? – How did you measure the beta for each division? Solution What risk-free rate and risk premium did you use to calculate the cost of equity? – Risk-free rate proxy The...

[pic] EnCana Corporation -Cost of Capital Nabil Naouli Yong Peng Ahmed Alenazi Raj Kancharapu Table of Contents 1. Introduction 2 2. History 2 a. Top Competitors 4 b. Major Product and Services 5 c. SWOT Analysis 5 3. Calculating Cost of Capital 6 a. Calculating Cost of Equity 7 i. Risk free rate 7 ii. Market Risk Premium 8 iii. Beta 8 b. Calculating Cost of Debt 9 c. Weighted Average Cost of Capital ( WACC ) 10 d. WACC- EnCana Corp. 2010 12 4....

Marriott Corporation: The Cost of Capital (Abridged) Are the four components of Marriot's financial strategy consistent with its growth objective? Since its foundation in 1927 Marriott Corporation grew into one of the leading lodging and food services in the US. With three major business lines: lodging, contract services and related business, Marriott has the intention to remain a premier growth company. To achieve this goal the corporation’s strategy is to develop aggressively appropriate...

Introduction and Background Kimi Ford is a portfolio manager at NorthPoint Group, a mutual-fund management firm. In July 2001, Ford considered buying shares of Nike, Inc., the well-known athletic shoe manufacturer. It would be prudent of Ford to base her assessment on Nike’s financial reports for 2001. Around the same time, Nike held an analysts’ meeting to disclose those financial results. They also addressed ways to revitalize the company, since share price was beginning to decline and...

Introduction Kimi Ford is a portfolio manager at NorthPoint Group, a mutual-fund management firm. She is evaluating Nike, Inc. (“Nike”) to potentially buy shares of their stock for the fund she manages, the NorthPoint Large-Cap Fund. This fund mostly invests in Fortune 500 companies, with an emphasis on value investing. This Fund has performed well over the last 18 months despite the decline in the stock market. Ford has done a significant amount of research through analysts’...

1. What is the weighted average cost of capital for Marriot Corporation? Briefly outline the key assumptions that you made in computing the WACC. 2. What is the cost of capital for the lodging and restaurant divisions of Marriot Corporation? Briefly outline the key assumptions that you made in computing the cost of capital and outline any limitations that are presented by your analysis. 3. If Marriot uses a single company-wide cost of capital for evaluating investment opportunities in each of...

Marriott Corporation: The Cost of Capital Introduction Dan Cohrs of Marriott Corporation has the important task of determining correct hurdle rates for the entire corporation as well as each individual business segment. These rates are instrumental in determining which future projects to pursue and thus fundamentally important for Marriott’s growth trajectory. This case analysis seeks to examine Marriott’s financial strategy in comparison with its growth goals as well as evaluate a...

 The Cost of Capital Benedict Amanor, Yolanda Brown-McCutchen, Edith Compean, Angel Longino and Melissa Shea-Brooks FIN/571 May 18, 2015 William Stokes The Cost of Capital In our fifth week of understanding the practices of Corporate Finance, we reviewed the Cost of Capital video. This video provided information on Pfizer, a researched based pharmaceutical company that makes products to help face health care challenges. Our goal is to highlight the cost of capital as...

Nike Cost of Capital Analysis October 22, 2010 1 I. Introduction In this case analysis Kimi Ford, a portfolio manager for a large cap value mutual fund, NorthPointGroup is considering adding shares of Nike, Inc., an athletic shoe manufacturer as a new position in her fund. On July 5, 2001, Nike's share price had declined significantly since the beginning of the year....

1) Executive Summary Marriott needs to calculate hurdle rates which will be used in its investment project selection. The company chooses to use cost of capital as its hurdle rate. Since the company has three business divisions and the cost of capital in each division varies and differs from that of Marriott as a whole, each division needs to have its own hurdle rate. The reason behind this practice is the company's strategy which focuses on growth. Using a single hurdle rate for the whole...

Solutions to Chapter 12 The Cost of Capital 1. The yield to maturity for the bonds (since maturity is now 19 years) is the interest rate (r) that is the solution to the following equation: [$80  annuity factor(r, 19 years)] + [$1,000/(1 + r)19] = $1,050 Using a financial calculator, enter: n = 19, FV = 1000, PV = (-)1050, PMT = 90, and then compute i = 7.50% Therefore, the after-tax cost of debt is: 7.50%  (1 – 0.35) = 4.88% 2. r = DIV/P0 = $4/$40 = 0.10 = 10% 3. = [0.3  7.50% ...

Ameritrade's management should consider the net present value of the proposed advertising program and technology upgrades. They need to make sure that the future cash inflows due to this project outweigh its future cash outflows. Additionally, the riskiness of the project would have to be determined. Ameritrade's managers should also consider what taking on these programs would do to its capital structure. They might have a certain debt to equity ratio they wish to maintain, or perhaps there...

Introduction and background We are conducting an analysis of Marriott Corporation for calculating the hurdle rates at each of the firm's three divisions--lodging division, restaurant division and contract service division. Marriott uses Weighted Average Cost of Capital (WACC) as the hurdle rate, and use it to discount the appropriate cash flows when evaluate an investment project. Our goal is to determine the WACC at every division base on the information that the case has provided. First...

To : President, Marriott Corporation From : FLO299 Subject : Marriott Corporation – The Cost of Capital Date : April 6, 2010 The Importance of the Cost of Capital The cost of capital is important as it forms the basis for Marriott’s investing and financial decisions. By understanding and knowing the cost of capital, Marriott is able to select relevant investment projects for the company, determine incentive compensation, and repurchase undervalued shares when needed. The...

1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? WACC- The weighted average cost of capital is the rate (percentage) that a company has to pay to its creditors and shareholders to finance assets. It is the “cost” of their worth. Companies raise money from many different types of securities and loans and the various required returns are what make up the cost of capital. WACC is used to decide if...

Nike, Inc.: Cost of Capital Case 15 Financial Administration FINC 5713-180 Team 1 Fall 2013. October 8, 2013. Introduction Kimi Ford a portfolio manager at NorthPoint Group which is a mutual-fund management firm, is considering to buy some shares from Nike, inc even if it’s share price had declined from the beginning of the year, for the Northpoint Large-cap fund she managed which invested mostly in Fortune 500 companies and it was doing well despite the...

Marriott cost of capital Objective: 1) Calculate the divisional and the company cost of capital and explain the calculation. 2) Evaluate Marriott's use of company cost-of-capital rate for the individual divisions. Cost of Capital for Lodging Division can be expressed as CC = We*Ce + Wd*Cd. For the weights of debt and equity (We and Wd), the 1988 target-schedule rates of debt-to-assets and debt-to-equity were used as the only measures available in the case. Cost...

CHAPTER 14 The Cost of Capital for Foreign Investments EASY (definitional) 14.1 The ________ for a given investment is the minimum risk-adjusted return required by the shareholders of the firm for undertaking that investment. a) cost of equity capital b) systematic risk c) all-equity beta d) weighted average cost of capital Ans: a Section: The cost of equity capital Level: Easy 14.2 One function of the cost of capital is to _______ for the firm. a) determine the debt to equity...

Case Analysis of Nike, Inc.: Cost of Capital Apparently, the issue of Nike’s case is to control and check the calculation cost of capital done by Joanna Cohen who is the assistant of a portfolio manager at NorthPoint Group. But I am willing to tell you that it can be a complex case in which we can doubt about sensitivity analysis done by Kimi Ford (portfolio manager) because her assumptions such as Revenue Growth Rate, COGS / Sales, S &A / Sales, Current Assets / Sales, and Current...

Executive summary In this report we focus on Nike's Inc. Cost of Capital and its financial importance for the company and future investors. The management of Nike Inc. addresses issues both on top-line growth and operating performance. The company's cost of capital is a critical element in such decisions and it is important to estimate precisely the weighted average cost of capital (WACC). In our analysis, we examine why WACC is important in decision making and we show how WACC for Nike Inc....

LECTURE 10 COST OF CAPITAL CLASS QUESTIONS 1. Roland Corporation’s last dividend (D0), which was paid yesterday, was $2.50. The firm has a constant growth of 18.8%. The firm’s beta coefficient is 1.2. The required return on an average stock in the market is 13 percent, and the risk-free rate is 7 percent. Roland’s A-rated bonds are yielding 10 percent, its risk premium is 4% and its current stock price is $30. Which of the following values is the most reasonable estimate of Roland’s cost...

MASTER IN MANAGEMENT – FINANCIAL MANAGEMENT LECTURE 6 – FINANCIAL ARCHITECTURE The problems to estimate the cost of capital Before starting to describe the problems associated to the estimation of the cost of capital, it is extremely relevant to describe its meaning: according to Investopedia, it is “the cost of funds used for financing a business”. In order to carry out this process, the companies can only be financed through equity; only through debt; or using a “combination of debt...

International Capital Structure and the Cost of Capital Agenda 1 2 3 4 5 International Capital Structure and the Cost of Capital Analyzing Cost of Capital among Countries Cross Border Listing of Stocks International Asset Pricing Model (IAPM) The Financial Structure of Subsidiaries Case Analysis - AES Corporation 6 International Capital Structure and the Cost of Capital Your Logo International Capital Structure and the Cost of Capital • Firms are becoming multinational...

Executive Summary The case, Marriott Corporation: The Cost of Capital (Abridged), concentrates on making decisions based on capital asset pricing model (CAPM) and the weighted average cost of capital (WACC) to measure the opportunity cost for investments. Dan Cohrs, the Vice President of Finance of Marriott Corporation, had to deal with making recommendations for the hurdle rates at Marriott Corporation and its three divisions which are lodging, restaurant and contract services. In calculating...

Graduate School of Business Administration University Version 2.0 of Virginia UVA-F-1353 Version 2.0 Nike, Inc.: Cost of Capital On July 5, 2001, Kimi Ford, a portfolio manager at NorthPoint Group, a mutual fund management firm, pored over analyst write-ups of Nike, Inc., the athletic shoe manufacturer. Nike’s share price had declined significantly from the start of the year. Kimi was considering buying some shares for the fund she managed, the NorthPoint Large-Cap Fund, which invested mostly...

1. Weighted Average Cost of Capital (WACC) is used to determine the average cost of financing a company. Companies are funded using both debt and equity and both require varying rates of return. WACC allows you to put a “weight” on the different types of financing and their differing rates to get a total cost of capital. Team 12 does not agree with Joanna Cohen’s WACC calculation because we feel she took some liberties in her numbers, the most notable being that of equity. Ms. Cohen used...

Case: Lex Service Plc-Cost of Capital Objective: Lex service Plc sold its various subsidiaries and other assets in between 1991 and 1993 which provides more than £340 million of funds. To reinvest this huge amount of funds it evaluates many investment options and acquisitions. To evaluate the worth of new investments, Lex uses discounted cash flow analysis. In order to employ DCF analysis method, discount rate or cost of capital required. Now the question is arises ‘what should be real cost of...

FIN – 502, dR. GEORGE gALLINGER | Case Analysis – Marriott | Detailed - Individual Assignment | | Ankur Sharma | Evening Accelerated MBA - T/Th – Class of 2011 | W P Carey School of Business, Arizona State University | The following case analysis portraits the use of capital asset pricing model to compute the weighted average cost of capital for Marriott and each of its divisions. The flow of events below is following a string of different evaluations, each of which is...

Chapter 10 The Cost of Capital LEARNING OBJECTIVES After reading this chapter, students should be able to: • Explain what is meant by a firm’s weighted average cost of capital. • Define and calculate the component costs of debt and preferred stock. • Explain why retained earnings are not free and use three approaches to estimate the component cost of retained earnings. • Briefly explain why the cost of new equity is higher than the cost of retained earnings, calculate...

1. How does Marriott use its estimate of its cost of capital? Does this make sense? Marriott has defined a clear financial strategy containing four elements. To determine the cost of capital, which also acted as hurdle rate for investment decision, cost of capital estimates were generated from each of the three business divisions; lodging, contract services and restaurants. Each division estimates its cost of capital based on: Debt Capacity Cost of Debt Cost of Equity All of the above...

Executive Summary Wanting to add Nike’s share to her portfolio, Kimi Ford asked her new assistant, Joanna Cohen, to estimate Nike’s cost of capital. Cohen, later, came up with the cost of capital of 8.4% that was contradicted to Ford’s cost of capital of 12%. This report points out flaws of Cohen’s assumption and recalculates the WACC to obtain the most accurate cost of capital. In the cost of equity calculation, we will use CAPM, the dividend discount model (DDM), and the earnings...

Contents INTRODUCTION 1 I. Cost of Capital 3 1. Definition 3 2. Major components of cost of capital 3 2.1. Cost of debt 3 2.2. Cost of equity 4 2.3. Cost of preferred stock 4 2.4. Cost of retained earning 4 2.5. Cost of Newly Issued Stock 5 II. Motivations and caculations 5 1. Motivations 5 2. Calculations 5 2.1. Cost of debt 5 2.2. Cost of equity 6 III. Weighted average cost of capital (WACC) 7 1. Caculations 7 2. Usefulness and implications of...

Nike, Inc Cost of Capital NorthPoint Large Cap Fund was considering whether to buy Nike’s stock or not. Nike was experiencing declines in sales growth, declines in profits and market share. However, Nike decided it would increase exposure in mid-price footwear and apparel lines, and it also commits to cut down expenses. The market responded with mixed signals to Nike’s changes. Kimi Ford, the portfolio manager at NorthPoint, did a cash flow estimation, and ask her assistant, Joanna Cohen to...

Report On: Cost of capital and Bangladesh perspective Prepared for: Shabbir Ahmed Professor Department of Finance University of Dhaka Course Name: Financial Management (F-206) Prepared by: Group No: 1 UNIVERSITY OF DHAKA TRANSMITTAL LETTER To Shabbir Ahmed Professor Department of Finance University of Dhaka Subject: Submission of Term Paper on “Cost of capital and Bangladesh Perspective”...

Lex Service PLC--- Cost of Capital In 1928 Lex Garages Limited, at the time of public incorporation, had single garage in London.After 60 years, Lex Service PLC became a leading company in automotive distribution and leasing in the United Kingdom. In late 1950, Lex obtained from Volvo Car Corporation the exclusive franchise to import and distribute Volvo cars in the United Kingdom that ended in1992 four years before the scheduled termination date. This news dropped the share price of Lexto 30%....

Case Solution Cost of Capital at Ameritrade | | • Executive summary: Formed in 1971 and listed in March 1997, Ameritrade has been one of the most successful players in the deep- discount brokerage sector. Ameritrade’s two major sources of revenue, Transaction income (brokerage commissions, clearing fees, and payment for order flow) and Net interest revenues that were generated from net...

The Cost of Capital 1 Background As investors desire to obtain the best/highest return on their investments in securities such as shares (Equity) and loans to companies such as debentures (Debt), these returns are costs to the companies paying these Dividends (on equity) and Interest (on Debts)! It all depends on the perspective from which we chose to view the calculation (are we Earning or Paying?) Companies MUST consider the cost of financing they receive in the form of equity or debt if they...

We recommend a buy for Nike's stock on July 6, 2001. Our analysis consists of a discounted cash flows model. We projected unlevered free cash flows over the next 10 years and discounted them according to our derivation of Nike's weighted average cost of capital. Our analysis suggests the stock is significantly undervalued, given our expectation it will deliver earnings in the future. Below we have analyzed Joanna Cohen's WACC calculation and her projection of cash flows. We then calculate our...

Harvard Business School 9-298-101 Rev. March 18, 1998 Marriott Corporation: The Cost of Capital In April 1988, Dan Cohrs, vice president of project finance at the Marriott Corporation, was preparing his annual recommendations for the hurdle rates at each of the firm's three divisions. Investment projects at Marriott were selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division. In 1987, Marriott's sales grew by 24% and its return on equity stood...

Our objective was to find the hurdle rates for Marriott’s three divisions and for the firm as a whole. Marriott should find the hurdle rates for its divisions separately because its divisions operate in separate industries and therefore face different business risks. Marriott’s vice president says that increasing the hurdle rate by 1% would decrease the present value of project inflows by 1%. Since finding appropriate hurdle rates is critical to accepting or rejecting projects, Marriott should...

Nike, Inc.: Cost of Capital 1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? The WACC of a firm is the overall required return on the firm as whole. It is the discount rate to use for cash flows with risk that is similar to the overall firm. The WACC lets you see how much interest the company has to pay for every dollar it finances. The WACC of a firm increases at the Beta and rate of return on...

Finance Seminar 12.12.2011 Case Study #2 Ameritrade Company Cost of Capital Evaluation Executive Summary The Ameritrade case study analysis brought in this paper comes to estimate the final cost of capital that should be applied to Ameritrade’s technology and marketing investment project. Allegedly, the final purpose of every WACC calculation is in helping to estimate the NPV of a project in order to make a “go\no go” decision, whether it is done by an investor or a creditor....

1. Marriott uses its' cost of capital estimates to create a hurdle rate to effectively run operations. Marriott uses these estimates to operate its four financial strategies. These are managing rather then owning hotel assets, investing in projects that increase shareholder value, optimizing the use of debt in the capital structure and repurchasing undervalued shares. If the company uses its overall WACC it may have divisions accept projects with returns below their respective WACC which will...

Cost of Equity: For the risk-free rate, we decided to use the 30-year old Treasury yield, which is currently 4.6%. We believe it is important to match the time horizon when comparing financial assets. Given that stocks have essentially an endless time horizon, the 30-year Treasury seems a more reasonable asset by which to compare stocks. 1-month Treasury Bills, for instance, are comparable to safety-deposit boxes, which are completely safe, but cannot ever yield a return. It’s highly likely...

Nike Inc.: Cost of Capital The Weighted Average Cost of Capital (WACC) is the overall required rate of return on a firm as a whole. It is important to calculate a firm’s cost of capital in order to determine the feasibility of a particular investment for a firm. I do not agree with Joanna Cohen’s WACC calculation. She calculated value of equity, value of debt, cost of equity, and cost of debt all incorrectly. For value of equity, Joanna simply used the number stated on the balance sheet...

FINAN 6121 – Corporate Finance Cost of Capital – The Walt Disney Company Team Titans B (Doug Horne, Shaun Hoggan, James Thackeray, Jeff Burg) The purpose of this project is to determine the weighted-average cost of capital (WACC) for The Walt Disney Company. According to The Walt Disney Company’s Form 10-K filing for the fiscal year ended September 29, 2012, “The Walt Disney Company, together with its subsidiaries, is a diversified worldwide entertainment company with operations in five...

Marriott Corporation: The Cost of Capital 1. Marriott’s financial strategy includes managing rather than own hotel assets; investing on projects that increase shareholder value; optimizing the use of debt in the capital structure and repurchasing undervalued shares. Optimizing use of debt in Marriott’s capital structure affects company’s value; especially when the company wants to maximize shareholder’s value by having leveraged investment, borrowing money can be one of the ways. However, huge...

April 11, 2012 Marriot Corporation: The Cost of Capital Background: Marriot Corporation began in 1927 with J. Willard Marriot’s root beer stand. Over the next 60 years, the company grew into one of the leading lodging and food service companies in the United States. Marriot has three major lines of business: lodging, contract services, and restaurants. Lodging operations included 361 hotels, with over 100,000 rooms that generated 41% of sales in 1987 and 51% of profits. Contract...

Executive Summary Marriott Corporation which is one of the large corporations in managing hotels and other support services such as restaurants and contract services has business goals to remain a significant growth in the company by setting consistent business strategies which are consistent with its goals and developing appropriate investment opportunities in different business sections. To support Marriott's growth objectives of making profit to the company, preferring employers, and...

Pfizer Inc.’S Cost of Capital and Capital structure - Xiaoyue Shi The costs of capital and capital structures for Pfizer Inc. and its two competitors Merck & Co. Inc. and Johnson & Johnson in the pharmaceutical industry are analyzed in this memo. When calculating the cost of common stock for the three companies, three different approaches including Capital Asset Pricing Model (CAPM), Discounted Cash Flow (DCF) and the bond yield plus risk premium are applied (Appendix A). For CAPM...

9-204-109 REV: OCTOBER 23, 2006 MIHIR DESAI Globalizing the Cost of Capital and Capital Budgeting at AES In June 2003, Rob Venerus, director of the newly created Corporate Analysis & Planning group at The AES Corporation, thumbed through the five-inch stack of financial results from subsidiaries and considered the breadth and scale of AES. In the 12 years since it had gone public, AES had become a leading independent supplier of electricity in the world with more than $33 billion in...

 Using the publicly available data, we estimated the weighted average cost of capital of the AMD and Duke Energy. For the AMD, the WACC is 10.83%. For Duck Energy, the WACC is 2.76% When we calculate those number, we need to know the equity and debt of the company which can easily find on yahoo finance. The cost of debt and the corporate tax rate that we calculated are also based on the data from yahoo finance. We made Beta for the companies with 10 year ranges and use it to calculate...

1. Introduction MARRIOTT INTERNATIONAL, INC. is a leading worldwide hospitality company, with operating units in the United States and 53 other countries and territories. Major businesses include hotels operated and franchised under the Marriott and other International brands, restaurants, and food service distribution. The company headquarters are in Washington, D. C. The vice president of project finance at Marriott Corporation, prepares recommendations annually for the hurdle rates at...

DEPARTMENT OF BUSINESS ADMINISTRATION A TERM PAPER ON – IMPACT OF FINANCIAL LEVERAGE ON COST OF CAPITAL AND VALUATION OF FIRM: A STUDY OF CEMENT INDUSTRY NAME- DIPANNITA GHOSH DEPT- MBA ROLL- 11 INTRODUCTION In corporate finance, financing decisions has greater importance because the optimal capital structure can be created trough proper mix of finance. Corporate managers generally prefer borrowings over other means of financing. Management of a company has to be very careful...

SOUTHEASTERN HOMECARE Cost of Capital Background Southeastern Homecare was initially a taxable partnership owned organization run by three partners, but later due to lack of capital and the rapid growth of the organization, the company was incorporated and the stocks were sold to the public. The company has two operating divisions: the Healthcare Services Division and the Information Systems Division. Both these divisions provide different services and operate individually. The Information...

Midland Energy Resources, Cost of Capital The case is about how Janet Mortensen, senior vice president of project finance for Midland Energy Resources, prepare her annual cost of capital estimates for midland and each of its three divisions for her company. Midland was a global energy company with operations in oil and gas exploration and production (E&P), refining and marketing(R&M), and petrochemicals. Estimates of cost of capital prepared by Mortensen were used in many analyses...

Best Practices in Estimating the Cost of Capital: Survey and Synthesis Robert F. Bruner, Kenneth M. Eades, Robert S. Harris, and Robert C. Higgins This paper pn ^ents ihns, Wn Itujjlini; finunaal advtsi-i's. lUic -M-ven, best selling texlho(>k.\ and trade hooks. The re.sulls show close aligninvn! ainuu-^:, all lh< M S, y'i'jps an ihc use of common theoreliva! frameworks and on many aspects of estimation. We Jin a ''an.>( •arunhtn. however, for the joint choices oflhe nsk-free rate. heia....

Introduction: Midland Energy Resources, Inc. is a global energy company with its operations in three divisions – Oil and gas exploration, Refining and Marketing and Petrochemicals. The company has been there for 120 years and in 2007 had more than 80,000 employees. It has been a very profitable company with reported operating revenue of $248.5 billion and operating income of $42.2 billion in 2006. The primary goals of Midland’s financial strategy are to fund overseas growth, invest in...

 1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? Answer: The cost of capital refers to the maximum rate of return a firm must earn on its investment so that the market value of company's equity shares will not drop. This is a consonance with the overall firm's objective of wealth maximization. WACC is a calculation of a firm's cost of capital in which each category of capital is...

Marriott Corporation: The Cost of Capital (Abridged) Executive Summary: The case &quot;Marriott Corporation: The Cost of Capital (Abridged)&quot; focuses on an ideal opportunity to review the capital asset pricing model and the weighted average cost of capital through calculation of the cost of capital for Marriott as a whole. Dan Cohrs is faced with making recommendations for the hurdle rates at Marriott Corporation and its three divisions utilizing CAPM and WACC. This case illustrates...

The Oceanic Corporation (Determining the Cost of Capital) Larry Stone wants to estimate the firm’s hurdle rate because it is a benchmark for how well the company needs to do on a project in order to at least break even. The higher the hurdle rate, the riskier the project will have to be and the lower the hurdle rate is, the safer the project will be for a company. A company should strive for a financing mix that minimizes the hurdle rate and matches the assets being financed. If there...

Nike, Inc.: Cost of Capital Case 14 A Case Brief Submitted to Submitted by In Partial Fulfillment of the Requirements for Date Submitted September 28, 2011 Summary This case highlights Kimi Ford, a portfolio manager with NorthPoint Group, a mutual-fund management firm. She managed the NorthPoint Large-Cap Fund, and in July of 2001, was looking at the possibility of taking a position in Nike for her fund. Nike stock had declined significantly over the previous year, and it...

Graham Reilly FIN 3717 Section 3 27 October 2014 Nike, Inc. Cost of Capital Executive Summary In this case, we were asked to compare Kimi Ford’s new assistant, Joanna Cohen’s calculation of Nike Inc.’s WACC to our calculation and find where Ms. Cohen made her errors. This case was very tough, mainly deriving the weights of debt and equity in the WACC formula. To start, Cohen used a single cost of capital, which we agree with. We understand that Nike is such a large company and it would...

P8-1 a) Expected Rate of Return $ $ $ Y 55,000 6,800 55,000 X Previous Market Value Cash Flow Current Market Value X 20,000 $ 1,500 $ 21,000 $ Y 12.50% 12.36% X: rt = (Ct + P rt = ($1,50 rt = 0.125 = b) Both investments are equally risky. Keel should recommend Investment X because it has a Pt - Pt-1) / (Pt-1) Y: rt = (Ct + Pt - Pt-1) / (Pt-1) 0 + $21,000 - $20,000) / ($20,000) rt = ($6,800 + $55,000 - $55,000) / ($55,00 = 12.5%...

Financial Decision Analysis~Marriott Corporation Case Study Executive Summary – Q5 – Hurdle Rate Analysis Hurdle rates, the weighted cost of capital that projected cash flows must exceed for initiatives to be considered, vary within Marriott Corporations due to their unique industry risk levels and capital structures. They use this number to determine which projects to accept, to adjust the rate at which the firm grows and as a measure for compensation within each business area, and as...