Solutions to Chapter 12 The Cost of Capital 1. The yield to maturity for the bonds (since maturity is now 19 years) is the interest rate (r) that is the solution to the following equation: [$80 annuity factor(r‚ 19 years)] + [$1‚000/(1 + r)19] = $1‚050 Using a financial calculator‚ enter: n = 19‚ FV = 1000‚ PV = (-)1050‚ PMT = 90‚ and then compute i = 7.50% Therefore‚ the after-tax cost of debt is: 7.50% (1 – 0.35) = 4.88% 2. r = DIV/P0 = $4/$40 = 0.10 = 10% 3. = [0.3 7.50% (1
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Marriott cost of capital Objective: 1) Calculate the divisional and the company cost of capital and explain the calculation. 2) Evaluate Marriott’s use of company cost-of-capital rate for the individual divisions. Cost of Capital for Lodging Division can be expressed as CC = We*Ce + Wd*Cd. For the weights of debt and equity (We and Wd)‚ the 1988 target-schedule rates of debt-to-assets and debt-to-equity were used as the only measures available in the case. Cost of Equity
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UV0010 NIKE‚ INC.: COST OF CAPITAL On July 5‚ 2001‚ Kimi Ford‚ a portfolio manager at NorthPoint Group‚ a mutual-fund management firm‚ pored over analysts’ write-ups of Nike‚ Inc.‚ the athletic-shoe manufacturer. Nike’s share price had declined significantly from the beginning of the year. Ford was considering buying some shares for the fund she managed‚ the NorthPoint Large-Cap Fund‚ which invested mostly in Fortune 500 companies‚ with an emphasis on value investing. Its top holdings included ExxonMobil
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Cost of Capital at Ameritrade What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why? Mr. Ricketts believes that his role as CEO is to maximize shareholder value by accepting any project whose expected return on investment is greater than the cost of capital. Therefore‚ the main factors that Ameritrade management should consider are the expected return on investment for the project‚ and how this compares to the project’s
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Case Study of Cost of Capital at Ameritrade 1-a How can the CAPM be used to estimate the cost of capital for a real business investment decision? CAPM results can be compared to the best expected rate of return that investor can possibly earn in other investments with similar risks‚ which is the cost of capital. Under the CAPM‚ the market portfolio is a well-diversified‚ efficient portfolio representing the non-diversifiable risk in the economy. Therefore‚ investments have similar risk if they
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Corporate Finance: The Core (Berk/DeMarzo) Chapter 7 - Fundamentals of Capital Budgeting 1) Which of the following statements is false? A) Because value is lost when a resource is used by another project‚ we should include the opportunity cost as an incremental cost of the project. B) Sunk costs are incremental with respect to the current decision regarding the project and should be included in its analysis. C) Overhead expenses are associated with activities that are not directly attributable to a single business
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shareholders’ value: the discounted cash flow techniques to evaluate potential investments allow the company to invest only in profitable projects. Therefore‚ it can maximize the use of its cash flow to gain profits. Optimize the use of debt in the capital structure: because firms with lower percentage of debt have higher value‚ Marriott uses this strategy to increase its value and thereby increase it profitability. Repurchase undervalued shares: By buying back its undervalued shares‚ Marriott can
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Multinational Cost of Capital Capital Structure‚ Risk and the Cost of Capital for Multinational Companies (1713 words) 2015 Table of Contents Introduction 2 Literature Review 2 Capital Structure‚ Risk and the Cost of Capital for Multinational Companies 2 Criticism to the work and the upstream-downstream hypothesis 2 Conclusion 2 References 2 Introduction “Theoretically‚ MNEs should be in a better position than their domestic counterparts to support higher debt ratios because their cash flows
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Graduate School of Business Administration University Version 2.0 of Virginia UVA-F-1353 Version 2.0 Nike‚ Inc.: Cost of Capital On July 5‚ 2001‚ Kimi Ford‚ a portfolio manager at NorthPoint Group‚ a mutual fund management firm‚ pored over analyst write-ups of Nike‚ Inc.‚ the athletic shoe manufacturer. Nike’s share price had declined significantly from the start of the year. Kimi was considering buying some shares for the fund she managed‚ the NorthPoint Large-Cap Fund‚ which invested mostly in
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brokerage sector. In march 1997‚ Ameritrade raised $22.5 million in an initial public offering. Management at Ameritrade is considering substantial investments in technology and advertising‚ but is unsure of the appropriate cost of capital. Estimating the cost of capital 1. Since we do not have the beta for Ameritrade‚ we need to find comparable firms for which we could compute the betas. There are several candidates in the case. Discuss which firms are most appropriate. Thus‚ the proportion
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