When cost of capital is used a discount rate it serves as a screening device to advise the company on accepting or discarding the new venture. For the project to be accepted the required rate of return used should be at least as high as the cost of capital. The company might also use the weighted average cost of capital; which is the average rate of return for the company to pay its long-term creditors and shareholder for the use of their funds.…
3. expected volatility in terms of revenue growth; MCI revenue is expected to increase more rapidly immediately following the advent of “equal access” but eventually slow down…
c. Will this firm likely continue operating in the long run? Briefly explain your answer.…
3. CAPM is equal to the cost of capital, which provides a usable measure of risk for the investor and their investment. It let’s investors know if they will get the return they deserve prior to making any decisions. Also, the higher the risk the higher a return could be.…
Higher leverage is very likely to create value for a firm considering capital structure change by exerting financial discipline and more efficient corporate strategy changes.…
C. Will this firm likely continue operating in the long run? Briefly explain your answer.…
3. As a general rule, in order to maximize earnings, companies invest in data management technologies that increase:…
7. Company can expand and diversify with help of IT also known as breaking business barrier.…
1-a How can the CAPM be used to estimate the cost of capital for a real business investment decision?…
(1) Impact on earnings per share evaluates how the project is going to affect shareholders’ wealth of the company.…
What is the risk-free rate that should be used in calculating the cost of capital using the CAPM? Explain.…
By assuming the project is all-equity financed, the cost of equity (un-levered cost of capital) should be used as the discount rate in order to calculate the NPV of the project, because the cost of the asset will equal to the cost of equity in regardless of the capital structure. Given the information on comparable firm asset betas, a risk free rate and a market risk premium, the cost of capital is calculated as 15.8% based on the CAPM method.( rA = rE = rf + β*r(MP), rA = rE =5.0% + 1.50(7.2%) = 15.8%) Based on all the results and assumptions, the NPV of the project assuming all-equity financed turned out to be $1,228.49 (in thousands of dollars), as is calculated below in Exhibit 2.…
Schwab strategy has evolved into a customer focused strategy with emphasis on thorough resource and cost allocation and encourages ongoing analysis of profitability of products, segments, and channels. At Schwab’s conception, the initial focus was to make stock-trading services accessible to the average person, as explained in the case (made fees affordable such as brokerage service fees which were competitive). Under Pottruck’s direction, the company suffered financial set-backs when they did not lower prices in the highly competitive market instead deciding to focus on expanding the business to include institutional trading and research, dropping individual investors on their list of priorities. The strategy again shifted to their initial strategy, focusing on the company’s long-term relationship with individual investors, providing competitive service fees, and careful allocation of resources under the reestablished management of Mr. Schwab’s. Customer retention, customer attainment, establishing long-lasting customer relationships, and building upon a structure that supports effective business decision are also key parts of the strategy.…
(10 points) Suppose CAPM holds, and the beta of the equity of your company is 2.00. The expected market risk premium (the difference between the expected market return and the risk-free rate) is 4.5% and the risk-free rate is 3.00%. Suppose the debt-to-equity ratio of your company is 20% and the market believes that the beta of your debt is 0.20. What is return on assets of your business? (No more than two decimals in the percentage interest rate, but do not enter the % sign.)…
b. Transparency: As ETBS are listed on the bourse, investors will have access to real-time prices and volumes, just like shares. This will enable investors to continuously monitor their investments and receive up-to-date information.…