How to estimate the WACC? Is there anything else the board of directors should consider in assessing the financial appeal of this project? Why might the board vote ’yes’ on the 7E7‚ when the cost of capital estimate is greater than the IRR? Why might the board vote ’no’ if the cost of capital is less than the IRR? What should the board do? Introduction Ultimately Boeing needs to determine if the project will be profitable and if it will have positive cash flows in accordance with business
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never paid a dividend. Its current free cash flow of $400‚000 is expected to grow at a constant rate of 5%. The weighted average cost of capital is WACC = 12%. Calculate EMC’s value of operations. (13-3) Horizon Value Current and projected free cash flows for Radell Global Operations are shown below. Growth is expected to be constant after 2012‚ and the weighted average cost of capital is 11%. What is the horizon (continuing) value at 2012? | Actual | Projected | | 2010 | 2011 | 2012
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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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Company also more commonly known as John Deere‚ along with its subsidiaries‚ operates in three segments: agriculture and turf segment‚ construction and forestry segment and financial services segment. The John Deere agriculture and turf segment manufactures and distributes a full line of agricultural and turf equipment and related service parts. John Deere construction‚ earthmoving‚ material handling and forestry equipment includes a broad range of backhoe loaders‚ crawler dozers and loaders‚ four-wheel-drive
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Marriott Corporation: The Cost of Capital April 2012 Executive Summary Determining the appropriate cost of capital for new investment projects for a diversified company like the Marriott Corporation is not an easy endeavor. However‚ it is an important exercise because the more effective the process‚ the better it can help to support the company’s growth objective with its financial strategy. The four components of the financial strategy are: manage rather than own hotel
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minimizing costs‚ and gaining and effectively using financial leverage to grow its business‚ while also aligning its goals and value-driven strategies to maximize share holder wealth‚ and achieve its short- and long-term objectives through delivering the value and services that the marketplace requires. The following discussion presents an in-depth analysis of Marriott’s financial position (through 1987) according to the Harvard Business Review Case‚ Marriott Corporation: The Cost of Capital (9-298-101)
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Marriot Case Marriot use the Weighted Average Cost of Capital to estimate the cost of capital for the corporation as a whole and for each division‚ and the hurdle rate is updated annually.(WACC = (1-Tc) * (D/A) * R[D] + (E/A) * R[E]) Marriot’s Tax Bracket = 175.9/398.9 = 44% Division’s asset weight to the corporation: Lodging = 2777.4/4582.7 = 0.59 Contract = 1237.7/4582.7 = 0.28 Restaurant = 567.6/4582.7 = 0.13 Risk free rate is 30 years T-Bond = 8.95% (Lodging use long-term debt)
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single firm-wide discount rate because the operations of the three divisions differ drastically. However‚ the company has to ensure that the company uses an appropriate discount rate for each division. Therefore‚ we calculate the appropriate cost of capital for Marriott as well as for each of the three divisions. A detailed analysis is presented about the appropriate calculation inputs for each of the three divisions and various assumptions‚ made while performing the calculations‚ are justified.
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1. How would you evaluate the capital budgeting method used historically by AES? What’s good and bad about it? “When AES undertook primarily domestic contract generation projects where the risk of changes to input and output prices was minimal‚ a project finance framework was employed.” Usually‚ project finance framework is used when the project has predictable cash flows‚ which can easily represent operating targets through explicit contract. When cash flows are certainty‚ the company can have
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experienced sharp increases in both sales and earnings. Because of this recent growth‚ Kaka‚ the company`s treasurer‚ wants to make sure that available funds are being used to their fullest. Management policy is to maintain the current capital structure proportions of 30% long-term debt‚ 10% preferred stock‚ and 60% common stock equity for at least the next 3 years. The firm is in the 40% tax bracket. Ace`s division and product managers have presented
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