strong reported multiples are expected to decline as they revert to mean as more competitors join. b. Company’s strategy‚ including its financial strategy‚ which determines whether the company invests equity in positive valued projects that exceed the cost of capital‚ which will boost the equity value-to-book multiple. The effectiveness of the financial strategy can be evaluated by a number of factors including financial leverage. The company’s strategy also affects its perceived risk‚ which drives the
Premium Company Debt Finance
American Home Products Case Write-Up 1. A combination of business risk and financial risk shows the risk of an organization’s future return on equity. Business risk is related to make a firm’s operation without any debt whereas financial risk requires that the firm’s common stockholders make a decision to finance it with debt. Business risk can be evaluated volatility in earnings and profits (coefficient of variation of returns on assets and of operating profits). A measure of business risk
Premium Finance Stock Corporate finance
Sustainable Growth Model Step 1: Profitability and Earnings Retention At the end of each year the return that Costco realizes on equity capital can either be reinvested back into the business or paid out to investors as dividends and common stock repurchases. If no dividends or share repurchases were made and earnings were reinvested back into the business at the same incremental rate of return‚ the company’s return on equity would hold constant over time. In reality‚ most companies‚ including
Premium Investment Financial ratios Generally Accepted Accounting Principles
EXECUTIVE SUMMARY Project Summary Hurricane Apartments LLC is the proposed new construction of 280 rental apartments and 3 retail stores. The subject will consist of 150 one bedroom and 130 two bedroom units. In-unit amenities at the property include: central heat and air conditioning‚ a frost-free refrigerator with icemaker‚ a dishwasher‚ a self-cleaning oven/range‚ and a full-size washer/dryer set. Common amenities include: 24 hour doorman concierge‚ health and fitness center‚ children’s
Premium Renting Apartment Property
Company A Company B Equity Capital Rs 600‚000 Rs 3‚50‚000 12% Debentures Rs 4‚00‚000 Rs 6‚50‚000 Output (units) per annum 60‚000 15‚000 Selling price/unit Rs 30 Rs 250 Fixed Costs per annum Rs 7‚00‚000 Rs 14‚00‚000 Variable Cost per unit Rs 10 Rs 75 You are required to calculate the Operating leverage‚ financial leverage and Combined leverage of these two companies. Ans : Company A Company B Operating Leverage 2.4 2.14 Financial
Premium Net present value Stock Rate of return
Assuming all-equity financed. 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)
Premium Finance Capital structure Net present value
the debt should compromise of the already decided 60% level of thetotal funds. This recommendation I based on the following findings and reasons: 1. At 60% leverage the firm earns an IRR of 26% which gives it measurable gains when compared to the cost of equity of 21%. Hence giving a definite 5% benefits over equity investment. 2. At 60% leverage the DSCR for the initial years is around 2.06X and thereby increasing givingit enough margins to easily get an investment grade rating. 3. Also‚ at
Premium Finance Debt Leverage
Solution 1: (i) P0 = D1 Ke - g CA – IPC TEST CAPITAL STRUCTURE = 3.50 (1.06) 0.15 – 0.06 = `41.22 (ii) Ke = D1 + g P0 0.15 = 3.50 (1 + g) + g 50 7.50 = 3.50 + 3.50g + 50g g= 4 = 7.48% 53.5 Solution 2: (i) Determination of EPS at EBIT level of `22‚00‚000 Financing Plan (a) (b) Equity Shares (`) Debentures (`) Pref. EBIT 22‚00‚000 22‚00‚000 Less: Interest (16‚000) (1‚21‚000) Taxable Income 21‚84‚000 20‚79‚000 Less: Tax @ 30% (6‚55‚200) (6‚23‚700) EAT 15‚28‚800 14‚55‚300 Less: Dividend on Pref
Premium Stock Leverage Earnings before interest and taxes
maximizing after-tax returns. Tax-minimization does not aim to maximize after-tax returns‚ so it may be undesirable. Tax minimization can introduce significant costs along nontax dimensions. Tax minimization may not consider risks and costs‚ so may not catch the some profitable chances. But‚ effective tax planning always consider the risks‚ costs‚ benefits‚ and other stuff to make a good decision in order to maximize after-tax returns. Ex 1.1 Taxpayer A purchased $100‚000 of corporate bonds yielding
Premium Tax Taxation in the United States Rate of return
present discounted value of these incremental CF is the NPV of the project * CF = EBIT – Taxes + Depreciation – Capital Expenditures (CAPX) * EBIT (Earnings Before Interest & Taxes) = Revenues – Cost – Depreciation * EBIAT = EBIT * (1-TaxRate) * Taxes = CorpTaxRate * (Revenues – Costs – TaxShield) * FinalCF = SellingPrice – Taxes * NWC = Current Assets – Current Liabilities (change in NWC must = 0) * Projects of greater risk must have a higher discount rate as investors
Premium Discounted cash flow Net present value Corporate finance