Group should invest on Nike or not. The recommendation is based of Nike’s Cost of Capital. II. Analysis * Cost of Debt Joanna mistakenly used the historical data in estimating the cost of debt. She divided the interest expenses by the average balance of debt to get 4.3% of before tax cost of debt. We believed the cost of debt should be estimated by yield to maturity of bond. We can calculate it by using data provided in exhibit 4. Calculation Data input: PV = 95.60 FV = 100 n
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recessions. The beta on a levered firm reflects both business and financial risk. Thus‚ CAPM concludes that a stock’s risk premium is beta times the market risk premium. Adding the risk free rate will give us the cost of equity. The firm’s weighted average cost of capital is determined by taking the percentage of equity at market value
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return‚ and growth rate calculation of preferred stock price‚ rate of return for preferred stock given other variables (including flotation cost) calculation of cost of equity from retained earnings using CAPM APPROACH calculation of weighted average cost of capital (WACC) calculation of component cost of debt in WACC calculation of cost of equity from retained earnings using dcf apporach calculation of cost of equity by selling new common stock using dcf apporach Calculation
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Examining the components of economic profit and studying the finer points of its calculation require an understanding of its underlying principles. Here we look at how it matters as a performance measure - which is distinct from a wealth metric - and how it is closely related to market value added (MVA). Finally‚ in establishing an overall picture of economic profit‚ we help you undo any perceived complexity by showing how all of the calculations surrounding economic profit originate from three main
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2.0 2.13 11.67 Hatfield’s weaknesses appear to be in their inventory/sales which is 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
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CHAPTER 13 CAPITAL STRUCTURE AND LEVERAGE (Difficulty: E = Easy‚ M = Medium‚ and T = Tough) Multiple Choice: Conceptual Easy: Business risk Answer: c Diff: E [i]. A decrease in the debt ratio will generally have no effect on . a. Financial risk. b. Total risk. c. Business risk. d. Market risk. e. None of the above is correct. (It will affect each type of risk above.) Business risk Answer: d Diff: E [ii]. Business risk
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critical function‚ viz. assist in maximizing the Value of the Firm. Part of the weakening of the practice of corporate financial management has to do with recent distortions in the data normally used in making such fundamental calculations as Weighted Average Cost of Capital. Another cause is the lack of uniformity in following the processes involved in such measurements. But another cause of concern is the 1 tendency to either ignore the fundamental tenets of the profession‚ or to demonstrate
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to decide on a beta to use for Nike Inc. for use in the CAPM approach. The logical choice was to use the average (0.80) to account for the large fluctuations seen in Nike’s historic betas. We felt that the YTD beta was a reflection of current business practices‚ but the goal of Nike Inc. was to look forward and gain back market share and increase revenues. Consequently‚ we felt the average beta reflected the historical business practices of Nike Inc. better .From here‚ we calculated the cost of
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In addition to the estimation of the cost of equity‚ Star Appliance Company is also considering increasing their current debt ratio of 9.5% to the industry average of 19%. With a higher current debt ratio the WACC will be lower‚ at a rate of 8.24%. The cost of equity of each product was valued using the beta from the industry averages. The beta of the home appliance industry is 0.95‚ while the beta of the agricultural machinery industry is 0.88. Through the use of the CAPM model‚ these betas
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predetermined WACC value Calculating the discount factor based on the CAPM approach Considering sensitivity analysis 3 Understanding the WACC The Weighted Average Cost of Capital is the interest rate (minimal return) at which investor-supplied capital (equity and interest bearing loans) has been provided. Therefore‚ it is the weighted average minimum expectation‚ which shareholders and creditors require for their respective investments made with the company under consideration. The WACC reflects
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