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
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7 Ways to Reduce Cost August 7‚ 2007 By Ron Pereira 4 Comments I finished the book Gemba Kaizen by Masaaki Imai. It was quite good and I highly recommend it. It is chalk full of excellent tips like 7 ways to reduce costs in gemba (as Mr. Imai phrases it). They are: 1. Improve Quality: Imai stresses how good quality is a prerequisite to making lean work. He even speaks about things like control charts which you don’t find mentioned in many lean books. 2. Improve Productivity: Productivity
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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 capitalization model (ECM)
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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 would be covenants put on their contracts requiring them to maintain a certain debt to equity ratio while their loan was outstanding. Ameritrade should use a 6.10% risk free rate when calculating its cost of capital. This is the average of the 20 year bond annualized yield to maturity (on August 31‚ 1997)
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Telus: The Cost of Capital Telus needs to calculate the cost of capital from the variety of data given. The cost of capital is determined mostly by how the funds are used rather than where they were obtained from. It relies on the risk of investments Telus involves in‚ therefore‚ depending on cost of both equity of debt as described below. Also note that‚ even though the preferred shares are not attractive to issuers and may not get issued again‚ it is still on the company’s balance sheet and affect
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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 balance
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Toyota Cost of Capital Case: General Methodology We used the following framework to do the calculations for all the companies. Afterwards we will discuss their implications: To estimate the cost of equity (RE) we used the following CAPM model: RE = RF + βE (RM-RF) whereby‚ Market Premium = RM – RF = 6% (Given in case) RM = Return for S & P 500 (a market return that takes into account systematic risk associated with the market place where our company is traded‚ NYSE) Risk Free Rate
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What is GM’s foreign exchange hedging policy? GM’s foreign exchange hedging policy has three primary objectives. Its first objective is to reduce cash flow and earnings volatility. Specifically‚ management hedges the company’s transaction exposures and consciously ignores any balance sheet exposures (translation exposures). Second‚ GM aims to minimize the management time and costs dedicated to global FX management. The company employs a passive FX management strategy since an internal study
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form in which a market or industry is dominated by a small number of sellers (oligopolists). Oligopolies can result from various forms of collusion which reduce competition and lead to higher costs for consumers. [1] With few sellers‚ each oligopolist is likely to be aware of the actions of the others. The decisions of one firm therefore influence and are influenced by the decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market
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NIKE‚ INC.: COST OF CAPITAL Book value vs. Market value While calculating the Nike’s cost of capital using both the book value (Exhibit 1.1) and the market value (Exhibit 1.2)‚ I could notice the mistake Cohen made finding the equity value. Cohen used the book value to reflect equity value. Although the book value is an accepted measure to estimate the debt value‚ the equity’s book value is an inaccurate measure of the value perceived by the shareholders. Since Nike is a publicly traded company
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