Modigliani-Miller capital structure irrelevance propositions and the concept of debt tax shields. With the background of a pizza company‚ the case provides an engaging context to discuss the “pizza graphs” that are commonly used in corporate finance curriculum to illustrate the wealth effects of capital structure decisions. Objectives: * Introduce the Modigliani-Miller intuition of capital structure irrelevance; * Establish how the cost of equity is affected by capital structure decisions
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higher than the industry average this could mean that they are holding onto inventory too long. Their payables are higher than the industry average which suggests that they are carrying a high amount of debt. The receivables are also higher than the industry average which could mean the period between getting paid for their services and the time they provided them are too far apart or they are not getting paid at all. The operating costs are also high so Hatfield’s may
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6 Ratio Analysis 7 Profitability Ratios 7 Growth Ratios 7 Efficiency Ratios 7 Financial Strength Ratios 8 Dividend Ratios 8 Management Effectiveness Ratios 8 Discounted Cash Flow Valuation 9 Calculation of Weighted Average Cost of Capital 9 Cost of Equity Calculation 9 Pro Forma Financial Statements 10 Pro forma Profit and Loss Statement 10 Pro forma Balance Sheet 11 Proforma Cash Flow Statement 11 DCF using FCFF 11 Sensitivity Analysis 12 Results
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we would like to figure out assumption 2 is correct or not‚ we should do the flowing data Analysis. If WACC < IRR‚ then we can launch this project. Of NPV is bigger than zero‚ we could launch this project as well. Analysis 1: WACC( Weighted average cost of capital) : E=10825 million‚ total value= 48978 million Re= Rf+β(Rm-Rf) Rf=3.52 Rm=10.23 β=1.16 (http://www.abg-analytics.com/stock-betas.shtml#.Uu65aLS2zDM) Re= 11.3 D=38153 tax rate = 34.00% Rd=6.6 WACC =11.84 Analysis 2:
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the expansion option‚ and in combination. Sterling must ultimately decide whether to pursue the acquisition either with or without the option‚ retract its offer‚ or renegotiate the terms. Discussion Weighted Average Cost of Capital (WACC) Calculation Cost of Equity (COE) Cost of Debt (COD) The
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What is the present value of these payments? (Round to the nearest dollar.) $2‚815‚885 10. Ajax Corp. is expecting the following cash flows—$79‚000‚ $112‚000‚ $164‚000‚ $84‚000‚ and $242‚000—over the next five years. If the company’s opportunity cost is 15 percent‚ what is the present value of these cash flows? (Round to the nearest dollar.) $429‚560 11. Jayadev Athreya has started on his first job. He plans to start saving for retirement early. He will invest $5‚000 at the end of
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attorneys with identifying and supporting experts with specialized expertise in a wide variety of matters. Dr. Turki has published articles on the use of options to value new ventures and on the risk-return tradeoff in projects backed by venture capital. He was on the faculty of Stanford University‚ Purdue University‚ and the University of Maryland. Gordon Phillips is a chaired professor at the Marshall School of Business at the University of Southern California (USC). He received his Ph.D. from
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been rejected by the board of directors for economic reasons on three previous occasions‚ most recently in 1999. This time‚ given the size of the proposed expenditure of about (euros) €1 million‚ Cerini was seeking a careful estimate of the projects costs and benefits and ultimately a recommendation of whether to proceed with the investment. Table 1. information from the case Old Machine Price of old machine € 415.807 Cumulative Depreciation € 130.682 Annual Depreciation €
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Case Study 3: Estimating the Cost of Capital 1. Currently Teletech Corporation (TC) uses a single hurdle rate for both their Telecommunications Services (TS) and Products and Services (P&S) divisions. This hurdle rate obtained by an estimate of TC Weighted Average Cost of Capital (WACC)‚ which is calculated at 9.3%. When analyzing critically at this point‚ TS is underperforming with a return on capital (ROC) of 9.1%‚ whereas‚ P&S segment is well over the required rate of return as it is gaining
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million to acquire ATC by LBO with 5.5% of an annual interest rate payable monthly over and over 10 years. But at the end of year 5‚ it will make a bullet payment to repay all remaining debtor‚ in order to render ATC’s D/E ratio closer to the industry average. Which is good for ATC due to the deceasing debt then decreased the financial risk. Therefore‚ in the period of 2008 to 2012‚ ATC’s debt level is predetermined so that APV valuation method is suitable for this period. Because of the interest tax shield
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