Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows Richard S. Ruback* This paper presents the Capital Cash Flow (CCF) method for valuing risky cash flows. I show that the CCF method is equivalent to discounting Free Cash Flows (FCF) by the weighted average cost of capital. Because the interest tax shields are included in the cash flows‚ the CCF approach is easier to apply whenever debt is forecasted in levels instead of as a percent of total enterprise value. The CCF method retains
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Chapter 6: Discussion Question #4 (p. 223) 4. Why is it usually easier to forecast sales for seasoned firms in contrast with early-stage ventures? Typically‚ it is easier to forecast a seasoned firm’s sales to that of an early-stage venture because the seasoned firm will have an operational history. Basing current sales on historical data is easier to do than trying to estimate sales based on little to no historical data to benchmark from. If you are a start-up / early-stage venture and
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Pedal Pusher will also glow in the dark and will provide a musical sound as the bicycle is pedaled. Phil is seeking some financial help in developing working prototypes. Since the venture is still in the idea stage and searching for prototype capital‚ the venture would be classified in the development stage. While in this stage‚ the venture will be making efforts to obtain seed financing‚ which typically comes from the entrepreneur’s assets or from family and friends. B. Petal Providers
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determined that the project’s unlevered cash flows will be $2.6 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment: Issuing 10-year bonds or issuing common stock. NEC’s pretax cost of debt is 7.2 percent‚ and its cost of equity is 11.4 percent. The company’s target debt-to-value ratio is 80 percent. The project has the same risk as NEC’s existing businesses‚ and it will support the same amount of debt. NEC is in the 34 percent tax bracket. Required:
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These are models with construction and way of using well known to professional public‚ therefore the aim of this article is to focus on model called EVA – Economic Value Added‚ which is recently highly used by investors coming from developed market economies. A basic construction of EVA measure is clear from the following formula: EVAt = NOPATt – Ct x WACCt where NOPATt is Net Operating Profit After Tax‚ Ct is long term capital‚ WACC is Weighted Average Cost of Capital. If EVA > 0 than we can
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Question 1 1. Jack ’s Construction Co. has 80‚000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 8.5%. The company also has 4 million shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is yielding 4% and the market risk premium is 8%. Jack ’s tax rate is 35%. What is Jack ’s weighted average cost of capital? Answer | | 7.10% | | | 7.39% | | | 10.38% | | |
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Valuation and Capital Budgeting for the Levered Firm Adjusted Present Value 17.1 Honda and GM are competing to sell a fleet of 25 cars to Hertz. Hertz fully depreciates all of its rental cars over five years using the straight-line method. The firm expects the fleet of 25 cars to generate $100‚000 per year in earnings before taxes and depreciation for five years. Hertz is an all-equity firm in the 34-percent tax bracket. The required return on the firm’s unlevered equity is 10 percent‚ and
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NIKE‚ INC.: COST OF CAPITAL Professor Meiberger By Sebastian Gomez Team 5 Cohort: Front The portfolio manager for NorthPoint Group‚ Kimi Ford was deciding if she should pitch in and draw Nike within NorthPoint Large-Cap Fund. Nike‚ which did not have the strongest fiscal year results in 2001‚ was implementing new strategies to heighten its revenue and income. Kimi Ford‚ after having carefully read reports by analyst‚ and their input within this publicly traded company decided to emphasize
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than the current average risk level of the company. Therefore‚ adopting what kind of discount rate in evaluating a new project will be the key of whether or not to proceed with the project. The most recent studies on the combination of MM theory and CAPM model are based on the formula of cost of capital‚ which could get a beta equation of levered firm and unlevered firm. However‚ when we treat a company as an asset portfolio‚ the risk factor of the asset is the weighted average risk of equity and
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Chapter 14 Cost of Capital Multiple Choice Questions 1. A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith‚ Inc. What is the return that these individuals require on this investment called? A. dividend yield B. cost of equity C. capital gains yield D. cost of capital E. income return 2. Textile Mills borrows money at a rate of 13.5 percent. This interest rate is referred to as the: A. compound rate. B. current yield. C. cost of debt
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