your own WACC for Nike and be prepared to justify your assumptions. 3 Calculate the costs of equity using CAPM‚ the dividend discount model‚ and the earnings capitalization ratio. What are the advantages and disadvantages of each method? Introduction : Solution Question 1 : The WACC is the weighted average cost of capital for a firm. It is comprised of three components: cost of equity‚ cost of debt‚ and cost of preferred stock. The three are then added with the weights
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1. On one half a page review what does our traditional finance framework and the CAPM model‚ for example‚ have to say about risk? What is it? How is it approached? The traditional finance framework uses discounted expected future cash flow to determine the NPV of the project. The amount of the opportunity cost is based on a relation between the risk and return of some sort of investment. People are rational and adverse to risk and need incentive to accept risk. The incentive in finance comes in
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market line (CML). A line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios depending on the risk-free rate of return and the level of risk (standard deviation) for a particular portfolio. The CAPM is a model for pricing an individual security or a portfolio expected return = risk-free rate + portfolio beta* (the difference between the expected return on the market as a whole and the risk-free rate). Efficient frontier: Efficient frontier
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Chapter 8 The Cost of Capital 236 CHAPTER 8—THE COST OF CAPITAL TRUE/FALSE 1. Capital refers to items on the right-hand side of a firm’s balance sheet. 2. The component costs of capital are market-determined variables in as much as they are based on investors’ required returns. 3. The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt. 4. The cost of issuing preferred stock by a corporation must be adjusted to an after-tax
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18‚ 2008‚ determine the total market value of your company’s equity. $54.60 6. If the betas for your company that you found in Part 1 of the Course Project differ‚ then which beta will you use to determine your company’s cost of equity using the CAPM/SML‚ and why? There were three different betas from part 1 (0.6889‚ 0.77‚ 1.137). The highest value‚ 1.137‚ will be used to determine the company’s cost of equity because it will represent the worst case scenario for our calculations (i.e. a beta
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Risk Premium 8 Yield Curve 9 Importance of Yield Curve 9 C- Computation of Return of Company and Sector by CAPM 10 D- Comparison of Actual Return with CAPM Results 10 Critical Analysis of Efficient Markets‚ Portfolio Theory and CAPM 11 Usefulness of Efficient Markets 11 Critical Review 11 Usefulness of Portfolio Theory 12 Critical Review 12 Usefulness of Capital Assets Pricing Model (CAPM) 13 Critical Review 13 Reference List 14 Appendices 15 INTRODUCTION: Experian PLC is a leading global information
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into considerations cost of debt and cost of equity. As company’s value can grow by increasing its assets that could be financed either be debt or equity and cost of capital shows how much it costs to do that. Cost of capital is a very important component in financial management decision-making as it shows the rate of return investors require when they invest in the company. Cost of capital is widely used in capital budgeting as projects with IRR lower than WACC should be abandoned otherwise company
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1) Are the four components of Marriott’s financial strategy consistent with its growth objective? Manage rather than own hotel assets. Profiting from the sale of its hotel assets while still generating revenue from those assets‚ reduces risk increases ROA‚ profitability‚ and frees up cash for other positive NPV opportunities. This process is consistent with its strategy of growth. Invest in projects that increase shareholder value. As long as the company invests in projects with a positive
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the expected rate of return of an individual security as a function of systematic‚ non-diversifiable risk (itsbeta).[1] Investopedia explains Security Market Line (SML) The SML essentially graphs the results from the capital asset pricing model (CAPM) formula. The x-axis represents the risk (beta)‚ and the y-axis represents the expected return. The market risk premium is determined from the slope of the SML. The security market line is a useful tool in determining whether an asset being considered
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1) Why do you think Larry Stone wants to estimate the firm’s hurdle rate? Is it justifiable to use the firm’s weighted average cost of capital as the divisional cost of capital? Please explain. Larry Stone wants to calculate the firm’s hurdle rate because he wants to have a more reliable basis of information before accepting projects for the company. By determining the firm’s hurdle rate‚ their company will also be able to make prudent decisions using accurate data. He also thinks that they should
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