Walmart Case Answers.Final

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Companies borrow from various institutions in the capital market to finance their businesses for short and long term periods. The concept of a weighted cost of capital may be new to some of you, but if you were a financial manager why would the weighted cost of capital be important to you as you examine the cost of borrowing on behalf of your firm? Why or why not?

what comment can be made on this or what can be added to it? The weighted average cost of capital is a calculation that can be done by a business to determine how much it will cost to borrow money to generate capital (WACC, n.d.). The result of this calculation will help business determine if financing a project is an investment that will yield positive returns (WACC, n.d.). The WACC takes into account the cost of equity and the cost of debt to figure out whether an investment is worth taking on (WACC, n.d.).

The market values and​ after-tax costs of various sources of capital used by Ridge Tool are shown in the following​ table attached:     a. Calculate the​ firm's weighted average cost of capital. b.Explain how the firm can use this cost in the investment​ decision-making process.

How should the capital structure weights used to calculate the WACC be determined? Suppose a firm estimates its WACC to be 10%. Should the WACC be used to evaluate all of its potential projects, even if they vary in risk? If not, what might be “reasonable” costs of capital for average-, high-, and low-risk projects? If Congress increased the personal tax rate on interest, dividends, and capital gains but simultaneously reduced the rate on corporate income, what effect would this have on the average company’s capital structure? If a firm goes from zero debt to successively higher levels of debt, why would you expect its stock price to rise first, then hit a peak, and then begin to decline?

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B. True or False  When evaluating a project in which a firm might invest, the size but not the timing of the cash flows is important. Capital structure determines the level of current assets that is required to maintain the firm's operational level. Determining when a supplier should be paid is a capital structure decision. Determining the amount of money to borrow in order to finance a 10-year project is a capital structure decision. Deciding if a new project should be accepted is a working capital decision.

What is opportunity cost and why is it an important concept in the capital budgeting process? The opportunity cost concept applies to almost every financial decision we make as individuals. Can you give an example from your own experience? What is capital rationing from the perspective of capital budgeting?  Give an example of a strength and a weakness of the accounting rate of return approach.

Mastery Problem: Net Present Value and Internal Rate of Return Part One Companies use capital investment analysis to evaluate long-term investments. Capital investment evaluation methods that use present values are (1) Net present value method (NPV) and (2) Internal rate of return (IRR) method. Methods That Use Present Values Of the two capital investment evaluation methods, a defining characteristic NPV and IRR is that they     the time value of money. This means that money tomorrow is worth     money today. And, that cash invested today has the potential to earn income and     in value over time. True or False: When making an investment decision between two mutually exclusive projects, the project with the greatest return on investment should be chosen.       Feedback   Review the definition of Methods that use present value by rolling your mouse over the underlined item. Review the definition of Mutually Exclusive Projects by rolling your mouse over the underlined…

Read the following selected quotes from senior executives and explain the role of capital investment analysis for these companies. CEO, Worthington Industries (a high-technology steel company): “We try to find the best technology, stay ahead of the competition, and serve the customer. … We'll make any investment that will pay back quickly … but if it is something that we really see as a must down the road, payback is not going to be that important.” Chairman of Amgen Inc. (a biotech company): “You cannot really run the numbers, do net present value calculations, because the uncertainties are really gigantic. … You decide on a project you want to run, and then you run the numbers [as a reality check on your assumptions]. Success in a business like this is much more dependent on tracking rather than on predicting, much more dependent on seeing results over time, tracking and adjusting and readjusting, much more dynamic, much more flexible.” Chief financial officer of Merck & Co.,…

6. Solving for the WACC The WACC is used as the discount rate to evaluate various capital budgeting projects. However, it is important to realize that the WACC is an appropriate discount rate only for a project of average risk. Analyze the cost of capital situations of the following company cases, and answer the specific questions that finance professionals need to address. Consider the case of Turnbull Co. Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 14.7%. However, if it is necessary to raise new common equity, it will carry a cost of 16.8%. If its current tax rate is 25%, how much higher will Turnbull's weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of…

find the weighted average cost of capital for  Jack in the Box Inc. (JACK).                                            How is the WACC is calculated? Explain the WACC in the context of a hurdle rate, return on invested capital (ROIC), an optimal capital structure, and an optimal capital budget.

Please the question in its entirety!   3. Understanding the IRR and NPV The net present value (NPV) and internal rate of return (IRR) methods of investment analysis are interrelated and are sometimes used together to make capital budgeting decisions. Consider the case of Cold Goose Metal Works Inc.: Last Tuesday, Cold Goose Metal Works Inc. lost a portion of its planning and financial data when both its main and its backup servers crashed. The company’s CFO remembers that the internal rate of return (IRR) of Project Omicron is 13.8%, but he can’t recall how much Cold Goose originally invested in the project nor the project’s net present value (NPV). However, he found a note that detailed the annual net cash flows expected to be generated by Project Omicron. They are: Year Cash Flow Year 1 $2,400,000 Year 2 $4,500,000 Year 3 $4,500,000 Year 4 $4,500,000   The CFO has asked you to compute Project Omicron’s initial investment using the information currently…

You can come across different situations in your life where the concepts from capital budgeting will help you in evaluating the situation and making calculated decisions. Consider the following situation: The following table contains five definitions or concepts. Identify the term that best corresponds to the concept or definition given. Concept or Definition Term An example of externality that can have a negative effect on a firm      The cash flow at the end of the life of the project      Creates value for a company because it gives the company the right but not the obligation to take future action to increase its cash flows      The risk of a project without factoring in the impact of diversification      A risk analysis technique that measures changes in the internal rate of return (IRR) and net present value (NPV) as individual variables are changed        Marston Manufacturing Co. owns a warehouse that it is not currently using. It could sell…

Agree or disagree with post In essence, capital budgeting is the method used by businesses to determine if a significant project or investment is worthwhile.  This could include releasing a product, constructing a new facility, or purchasing new equipment.  With the use of methods like Net Present Value (NPV) or Internal Rate of Return (IRR), the objective is to anticipate future cash flows and determine whether the project will benefit the business. One really important factor to consider when doing capital budgeting is opportunity costs. Opportunity cost means the value of the next best alternative you give up when you choose to invest in a particular project. For example, if a company owns land that it could sell or rent out, but decides to use it for building a factory instead, the money it could have made from selling or renting that land is an opportunity cost. The project's cash flow analysis should account for this lost prospective income even though no money may be moving…