Essays Tagged: "Cost of equity"
Case Study about a merger between Kennecott and Carborundum.
eturn related to the investment was not high enough to justify a purchase of the company. Peabody's cost of debt was .038. This was calculated by assuming a 40% tax rate and .095 rate on debt (Exhibit ... efore, we assumed the rate of debt at the time of purchase would have been similar. Also, Peabody's cost of equity was .1397. This was calculated by using a risk-free rate of .055, which was the rate ...
Subjects: Businesss Research Papers > Case Studies
Solution of the Menko case (finance)
ects" due to leverage. These side effects often include the tax shield of debt, expected bankruptcy costs, and agency costs. In symbols, APV is calculated as:Where NPV is the value of an all-equity fi ... all-equity firm (base-case), calculated using the cash flows to unlevered equity and the unlevered cost of equity, and NPFV is the NPV of the effects of financing such as the tax shield benefits of d ...
Subjects: Businesss Research Papers
Nike, Inc.
under the recent leadership of industry veteran Mindy Grossman had performed extremely well. On the cost side, Nike would exert more effort on expense control. Finally, company executives reiterated t ... ent. In order to build clear guidance to reveal their strategies, Joanna Cohen must estimate Nike's cost of capital. The problem is Joanna Cohen was mistaken in calculating the cost of debt using hist ...
Subjects: Businesss Research Papers > Case Studies > Clothing, Footwear and Cosmetics
Explain the relationship between the cost of capital, bond ratings, and the capital budgeting decision-making process
AbstractThe purpose of this essay is to explain the relationship between the cost of capital, bond ratings, and the capital budgeting decision-making process.Cost of CapitalComp ... ng debt (borrowing from a bank is equivalent for this purpose), and reinvesting prior earnings. The cost of capital for a firm is a weighted sum of the cost of equity and the cost of debt. Re-invested ... a weighted sum of the cost of equity and the cost of debt. Re-invested money is also charged at the cost of equity, since if the money is not reinvested is will normally be returned to shareholders. I ...
Subjects: Businesss Research Papers > Accounting
Nike Inc.: Cost of Capital
Executive summaryIn this report we focus on Nike's Inc. Cost of Capital and its financial importance for the company and future investors. The management of ... ment 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 th ... 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 s ...
Subjects: Businesss Research Papers > Case Studies > Clothing, Footwear and Cosmetics
Cost of Capital
The cost of capital and bond rating are very important in the capital budgeting process. “Capital b ... classic rule which is to take on only projects with positive Net Present Value (NPV). The project's cost of capital is the rate investors require to undertake the investment, and should discount all f ... hould discount all future cash flows at this rate key input to the capital budgeting process is the cost of capital. The cost of capital for a company is based on the cost of equity and the cost of de ...
Subjects: Businesss Research Papers > Management
Financial Theories
imperfections they admit are corporate taxes (Modigliani and Miller, 1963). M and M states that the cost of equity depends on three things: the required rate of return on a firm's assets, the cost of ... s the debt / equity ratio, the increase in leverage raises the risk of the equity and therefore the cost (RE) (Ross, 2001). [Excellent] The risk of the equity depends on two things: business risk (i.e ...
Subjects: Businesss Research Papers > Accounting
Marriott Corporation: The Cost of Capital
nificant impact on the firm's financial and operating strategies. Marriott measures the opportunity cost of capital for investments of similar risk using the Weighted Average Cost of Capital ("WACC"). ... the divisions and for Marriott:1) We used the Capital Asset Pricing Model ("CAPM") to calculate the cost of equity.2) The cost of debt was determined by adjusting the pre-tax return on debt capital fo ...
Subjects: Businesss Research Papers > Case Studies
Dividend Growth Model, Capital Asset Pricing Model, Modern Portfolio Theory, Estimation of Untraded Stocks
han that of the economy and have an established and stable dividend payout.In order to estimate the cost of equity using the Dividend Growth Model, we simply adjust the model's equation for estimating ... we get the following:P(r - g) = D1r - g = D1 / Pr = (D1 / P) + gTherefore in order to estimate the cost of equity through the Dividend Growth Model, we simply add the constant growth rate and the pro ...
Subjects: Businesss Research Papers > Management
Capital structure (D/E) differs substantially from one company/industry to another. Can theories of capital structure shed light on this?
ity capital (D/E ratio). An efficient mixture of capital reduces the price of capital. Lowering the cost of capital increases net economic returns, which, ultimately, increases firm value. There are a ... heory assumes that the market is in a perfect capital market status as no transaction or bankruptcy costs, asymmetric information flow, firms and individuals can borrow at the same interest rate, no t ...
Subjects: Businesss Research Papers > Markets & Exchanges