The Venture Capital Division of Boeing has four projects on the table with three additional leverages of debt. As the financial analyst for the division I was given the task of evaluating the four capital budgeting projects. After evaluating each project I will recommend which project will bring the most value to shareholders and the firm. What is the cost of equity for each project at 0, 20%, and 50% leverage? From the information provided the cost of equity at 0, 20%, and 50% leverage was calculated for each project. For project A at 0% leverage has a 15.2% cost of equity, at 20% leverage the project has a 17.51% cost of equity, at 50% it leverage has 24.44% cost of equity. For project B at 0% leverage has a 15.2% cost of equity, at 20% leverage has a 17.51% cost of equity, at 50% leverage has 24.44% cost of equity.

Cost of Equity

Leverage
Project A
Project B
Project C
Project D
0%
15.2%
15.2%
16.4%
14%
20%
17.51%
17.51%
18.92%
16.1%
50%
24.44%
24.44%
26.48%
22.4%
Do you think the CAPM model is an appropriate way to calculate the cost of equity for these projects? Why or why not.
The CAMP model is an appropriate way to calculate the cost of equity for these projects because of the information provided. The information provided is the beta, the risk-free rate, and market risk premium Which, if any, of the projects are unacceptable and why? Include on ONE graph the NPV profile for each project.

Project D is unacceptable
Rank the projects that are acceptable, according to your criterion of choice.
According to my criterion I will rank the projects that are acceptable. As previously stated project D is unacceptable. Project B would be the number one choice, project C would follow, and project A would be the last choice. Rank

Projects
1
Project B
2
Project C
3
Project A
4 Unacceptable
Project D
Which project do you recommend and why? Explain why each of the projects not chosen was rejected.
After...

...
Midland Energy Resource Case Study
Introduction
Midland Energy Resources is a fairly successful global energy company which had been incorporated more than 120 years previously and in 2007 had more than 80,000 employees. It has three main operations, oil and gas exploration and production (E&P), refining and marketing (R&M), and petrochemicals. E&P is the most profitable segment of Midland and its net margin over the previous five years was among the highest in the industry. Its largest division is R&M with the Petrochemical division being the smallest. The capital spending in R&M would remain stable and in petrochemicals was expected to grow. The four primary goals of Midland’s financial strategy are to fund substantial overseas growth, invest in value-creating projects, optimize its capital structure, and repurchase undervalued shares.
Janet Mortensen, the senior vice president of project finance for Midland Energy Resources, has been involved in estimating the cost of capital of the company. She calculated the weighted average cost of capital (WACC) for the company as a whole, as well as each of its three divisions. The estimates are used for asset appraisals for capital budgeting and financial accounting, performance assessments; merger and acquisition proposals and stock repurchase decisions.
Financial Analysis
Cost of Capital: By definition, cost of capital refers to the opportunity cost of making a specific investment. It is the...

...calculations, the Midland’s firm-wide WACC we have got is 8.48%.First, we choose the rate of 30-year U.S. Treasury bonds in 2007 (4.98%) as the risk free rate we use in the 2007 WACC calculations. The reason is that majority of large firms and financial analysts report using long-term yields for bonds to determine the risk-free rate. Second, we begin to calculate the cost of debt, which is determined by adding the spread to Treasury of A+ to the rate of 30-year treasury bonds in 2007. That is, 4.98%+1.62%=6.60%, which is the cost of debt . Third, the cost of equity is next. The EMRP (5%) was taken out of the context of the case. The tax rate (39.73%) was from the average of amount of taxes paid between year 2004 to year 2006. We also need to calculate the unlevered beta through the formula, βu=(E/E+D)*βe+(D/E+D)*βd. βd=0 Because we cannot find the debt beta through the case. In this formula, we use recently found D/V ratio (59.30%) and multiplied it by equity beta (1.25) to come the unlevered beta (0.7847). To relever the βe, we use the formula, βe = βu +(D/E)*(βu-βd). And the “Target D/E” was found by taking “Target D/V” divided by “1-Target D/V”. So we get the new βe, 1.3576. Then to get cost of equity, we use the CAPM formula, Re=Rf+β(EMRP), 11.7679%. Since we have get the cost of equity and cost of debt, we can determined the WACC, which is equal to Equity/Value*Cost of Equity+Debt/Value*Cost of Debt*(1-tax rate). In the end ,we arrived at...

...trading, so its equity beta cannot be computed precisely using its own historical data. Exhibit 4 provides some choices for comparable firms. Which of these firms do you think are appropriate to use as comparables to determine the beta of Ameritrade’s planned advertising and technology investments? Why?
The comparable firm should exhibit similar business fundamentals in terms assets, business model, and risk. As such, we think that other major discount brokerages (Charles Schwab, Quick & Reilly, and Waterhouse) should be used as comparable firms to calculate equity and asset betas.
4) Using the stock price and return data in Exhibits 5 and 6, estimate the CAPM beta
The table below shows the equity betas for the firms presented in the case (using Jan-92 to Dec-96 equal weight NYSE/AMEX/NASDAQ as market portfolio):
After levering the equity beta, the asset beta of the firms are calculated. As mentioned we think that the three discount brokerages (highlighted in green) should be used as comparables for Ameritrade. The average asset beta of the three firms is 1.386. As a comparison the investment services firms have average asset beta of 0.603 and the one internet company (Mecklermedia) for which enough historical data is available has asset beta of 1.908. These values make intuitive sense since investment services companies are more diversified and stable and thus should have lower betas. On the other hand internet companies are perceived to be very risky...

...Final Finance Exam Notes
Definitions:
1. Capital Budgeting is the process of evaluating proposed large, long-term investment projects.
Capital budgeting is primarily concerned with evaluating investment alternatives.
The first step in the capital budgeting process is idea development.
A characteristic of capital budgeting is the internal rate of return must be greater than the cost of capital.
One of the simplest capital budgeting decision method is the payback method.
Capital budgeting techniques are usually used only for projects with large cash outlays.
2. Payback period is the number of time periods it will take before the cash inflows of a proposed project equal the amount of the initial project investment (a cash outflow). The payback period is calculated by counting the number of years it will take to recover the cash invested in a project.
3. Net present value is the dollar amount of the change in the value of the firm as a result of undertaking the project.
With non-mutually exclusive projects, the net present value and the internal rate of return methods will accept or reject the same project.
The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method assumes that cash flows are reinvested at the firm's weighted average cost of capital.
The net present value assumes returns are reinvested at the cost of capital.
If an...

...Boeing 777 Project: Summary for the Board of Directors
Boeing is currently operating with the majority market share of the commercial sector of aircraft manufacturing. Frank Shrontz, our CEO, has recently stated his goal to increase the company’s return on equity from its current average of 12%. The following summary will delve into the most appealing project for the future of this firm: the 777 aircraft. The purpose of this new product is to maintain our competitive advantage in commercial airline production by completing a family of Boeing airplanes. The following net present value analysis will be used to determine the potential profitability of the 777 project.
Our analysts concluded that a levered equity beta of 1.2939 was appropriate for the commercial division of Boeing. The levered equity beta was important to use due to its representation of the capital structure of Boeing and its value to the WACC calculation. This equity beta was calculated by removing the financial risk of four similar defense-oriented benchmark companies (over half of all revenues from their respective defense divisions). The Value Line betas of Lockheed, Northrop, Grumman, and McDonnell-Douglas were unlevered using the following formula U = (L) / (1+(1-t)(D/E)). The betas of these firms are important because by using the pure play approach, we can calculate an accurate equity beta for Boeing. Several adjustments must be made however, and those are discussed in the remainder of this...

...Finance 301
1. The NPV for the truck and the pulley are $2026.75 and $5586.05 respectively. Since these projects are independent, the company can choose either project. They both will give the company a return higher than 12% as well. (Math is on last page)
2. A. NPV for Alt A is $1892.17 while the payback is 2.86 years. NPV for Alt B is 2289.66 while the payback is 4.62 years. (Math on last page)
B. Since these projects are mutually exclusive only one can be chosen. Since NVP is a better way of estimating value and return, it should be used when picking between two projects. Therefore, the Smith Pie Company should go with alternative B. Even though Alt B has a longer payback period than Alt A, it will look better in the company assets longer and have a better return.
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.
4. A. 11% is the required return on the stock.
B. Beta is .9
C. The company’s cost of capital is 9.8 percent.
D. If the risk of the project is similar to the risk of the other assets, then the appropriate return is the cost of capital, which in this case is 9.8%
(Math is on last page)
5. The beta for the portfolio is .5 (Math is on last page)
6. The alpha for this portfolio is 1.79 while the beta...

...Group: Zhengtian “Darren” Ye, Bohan Li
Course: FINA 3301
Professor name: Eliot H. Sherman
Nike Cost of Capital Case Assignment
1. Calculate Nike’s Cost of Capital based on the book values presented in the case.
2. Calculate Nike’s Cost of Capital based on the Market Values presented in the case.
3. Evaluate Joanna’s calculation and identify and explain any differences between her calculation and yours.
4. Under what circumstances is using book values the most appropriate basis for calculating the cost of capital? (Your answer should not be focused on the Nike Case.)
5. Under what circumstances is using market values the most appropriate basis for calculating the cost of capital? (Your answer should not be focused on the Nike Case.)
6. Which method is most appropriate in this case? Why did you answer as you did?
7. What would be your recommendation to Kimi Ford?
1.
After tax cost of debt= Current yield to maturity*(1-Tax rate)
Based on information from Current Yield on Publicly Traded Nike Debt,
Number of payment periods (N) =25*2=50 years
Present value =$95.6
Pmt=-3.375
FV=-$100
Yield to maturity= 3.56% (semi-annually), 7.12 %( annually)
After tax cost of debt = 7.12%*(1-38%)= 4.84%
Cost of equity= Market risk free rate* Market risk premium*Beta
Based on information from Current Yields on U.S Treasuries,
20-year current yields should be used as market risk free rate since...

...Week 1
Capital Budgeting I
Tutorial: Chapter 1, 2
Chapter 1
Introduction to Corporate Finance
Question 3: Investment and financing decisions
Vocabulary test. Explain the differences between:
a. Real and financial assets.
b. Capital budgeting and financing decisions
c. Closely held and public corporations
d. Limited and unlimited liability.
Answer
a. Financial assets, such as stocks or bank loans, are claims held by
investors. Corporations sell financial assets to raise the cash to invest in real assets such as plant and equipment. Some real assets are intangible.
b. Capital budgeting means investment in real assets. Financing means
raising the cash for this investment.
c. The shares of public corporations are traded on stock exchanges and can
be purchased by a wide range of investors. The shares of closely held corporations are not publicly traded and are held by a small group of private investors.
d. Unlimited liability: Investors are responsible for all the firm’s debts. A sole
proprietor has unlimited liability. Investors in corporations have limited liability. They can lose their investment, but no more.
Chapter 2
How to calculate Present values
Question 6: Perpetuities
An investment costs $1,548 and pays $138 in perpetuity. If the interest rate is 9%, what is the NPV?
Answer
NPV = −1,548 + 138/.09 = −14.67 (cost today plus the present value of the
perpetuity).
Question 7: Growing...