Capital Structure Case Essay

At first, WACC and CAPM was attempted to be used as a source of cost of capital. However, for WACC, there is no available proportion of debt and cost of debt for MW. For CAPM, no available data seems to support the acceptable

The company's weighted average cost of capital was calculated in three steps: first, the expected future target proportions of debt and equity in the company's capital structure were estimated; second, costs were assigned to each of these capital components; third, a weighted average cost of capital was calculated on the basis of these proportions and costs (see Table A).

E. Cindy and Rob estimate that the market value of the common equity in the venture is $900,000 at the end of 2010. The market values of interest-bearing debt are judged to be the same as the recorded book values at the end of 2010. Estimate the market value-based weighted average cost of capital for Castillo Products.

b) If Olin issues $40 mm in debt to repurchase 2 million shares of equity (i.e. they replace $40 mm of equity with $40 mm of debt in their capital structure), and the interest rate on the debt is 10%, what will be the expected EPS next year?

16. How would you assess the overall risk structure of the company in terms of its operating risks and financial risk (debt to capitalization ratio)?

9. What is the Cost of Equity? (provide method/approach of calculating, provide equation, all data inputs and product.)

In estimating the weighted average cost of capital, we used the cost of equity of 11.63% and the cost of debt of 2.25%. We calculated the weight of debt to be 2% and the weight of equity to be 98%. For the weight of debt we divided debt by the sum of debt and equity, and for the weight of equity we divided equity by the sum of debt and equity. Our estimated Company’s cost of capital is 11.44%, or 12%. The calculations for the cost of capital are shown in Appendix E.

The mixture of debt-equity mix is important so as to maximize the stock price of the Costco. However, it will be significant to consider the Weighted Average Cost of Capital (WACC) as well so that it can evaluate the company targeted capital structure. Cost of capital (OC) may be used by the companies as for long term decision making, so industries that faced to take the important of Cost of capital seriously may not make the right choice by choosing the right project(Gitman’s, ).

5. What is the capital structure of the company?: Short term portion of Long Term Debt, Long Term Debt, Preferred Stock (if any), and market value of Common Stock issued and outstanding?

We use Capital Asset Pricing Model (CAPM) approach to calculate the cost of equity. The formula of CAPM is re = rf + β × (E[RMkt] – rf).

Please refer to Appendix 2 for other considerations for cost of equity calculations. Most firms use the Capital Asset Pricing Model (CAPM) to determine the cost of equity. The components that make up the CAPM include: the risk free rate, the beta of the security, and the expected market return of the stock. These values are all based on forward-looking data. The model dictates that shareholders require a return equal to the return from a risk-free investment plus an equity risk premium for bearing extra risk. Refer to Appendix 1 for a full breakdown of the CAPM formula.

=Weight of debt * Cost of debt + Weight of equity * Cost of equity.

Weights of Debt and equity are 8.3 and 91.7%. Now, plugging all the values in, we can derive company’s Weighted Average Cost of Capital.

The highly levered capital structure had a significant effect on the findings of sections B and C. First of all, the ranges which resulted from the new calculation of the break points caused the weighted average cost of capital (WACC) at all range levels to drop. The WACC is calculated by multiplying the weights of the capital structure by the costs of

1. What is the weighted average cost of capital for Marriot Corporation? Briefly outline the key assumptions that you made in computing the WACC. 2. What is the cost of capital for the lodging and restaurant divisions of Marriot Corporation? Briefly outline the key assumptions that you made in computing the cost of capital and outline any limitations that are presented by your analysis. 3. If Marriot uses a single company-wide cost of capital for evaluating investment opportunities in each of its line of business, what do you think will happen to the company over time? 4. Briefly describe how each of the following events will likely impact Marriot’s cost of capital: (a) An increase in the long-term T-Bond rate by 2%. (b) Increased