Cost of Capital

Manage rather than own hotel assets In 1987, Marriott developed more than $1 billion worth of hotel properties, making it one of the 10 largest commercial real estate developers in the United States. With a fully integrated development process, Marriott identified markets, created development plans, designed projects, and evaluated potential profitability. After development, the company sold the hotel assets to limited partners while retaining operating control as the general partner under a long-term management contract. Management fees typically equaled 3% of revenues plus 20% of the profits before

Our estimated cost of capital, 20.81%, is lower than Ricketts’ expected return, 30%-50%, thus the investment is worthy. However, it’s higher than other pessimistic members’ expected return, 10%-15%, making the decision more complex and requiring further valuation。

* Implicit—This cost is implicit since it is not money out of the company’s pocket, but it is not applicable since the cost is not relevant.

a. the same amount of interest expense being recognized over the term of the bonds

d. How valid in an estimate of the cost of debt based on 15 year bonds if the corporation normally issue 30 year long term debt? The estimate is not exactly valid because coupon rates differ for 15- and 30-year bonds. Generally, the cost of debt is higher for bonds with longer time to maturity. It has to do with risk. The longer

c. Explain what other methods you could have used to find the cost of debt for AirJet Best Parts Inc.(10 pts)

AGL Energy is an Australian company providing energy products and services. It is involved in the generation and retailing of electricity and is the “largest ASX listed owner, operator and developer of renewable energy generation in the country” (AGL Energy Ltd., 2016).

(e) The total value of the firm is independent of the amount of debt it uses. (Points : 20)

1-a How can the CAPM be used to estimate the cost of capital for a real business investment decision?

Credit risk is the risk of financial loss arising from a customer or counterparty’s failure to meet its contractual obligations. GE faces credit risk in its lending and leasing activities and derivative financial instruments activities.

The Ameritrade case study analysis brought in this paper comes to estimate the final cost of capital that should be applied to Ameritrade’s technology and marketing investment project. Allegedly, the final purpose of every WACC calculation is in helping to estimate the NPV of a project in order to make a “go\no go” decision, whether it is done by an investor or a creditor. However such a decision requires also the computation of future cash flows. Since we are missing the information regarding Ameritrade’s future cash flows, this paper has one and only goal – to evaluate and discuss the main possible alternatives for

EnCana Corporation (EnCana) is one of North America’s leading natural gas producers. It is among the largest holders of natural gas and oil resource lands onshore North America and is a technical and cost leader in the in-situ recovery of oil sands bitumen. EnCana’s other operations include the transportation and marketing of crude oil, natural gas, and natural gas liquids; as well as the refining of crude oil and the marketing of refined petroleum products. Its operations are located in Canada, the US, Ecuador, and the UK.

Using the tax rate of 35% plus state taxes of 3%, cost of debt becomes 4.3%*(1-0.38) = 0.266 = 2.7%

Kimi Ford is a portfolio manager at NorthPoint Group, a mutual-fund management firm. She is evaluating Nike, Inc. (“Nike”) to potentially buy shares of their stock for the fund she manages, the NorthPoint Large-Cap Fund. This fund mostly invests in Fortune 500 companies, with an emphasis on value investing. This Fund has performed well over the last 18 months despite the decline in the stock market.

This case study focuses on where financial theory ends and practical application of the weighted average cost of capital (WACC) begins. It presents evidence on how some of the most financially complex companies and financial advisors estimated capital costs and focuses on the gaps found between theory and application. The approach taken in the paper differed from their predecessors in several various respects. Prior published information was solely based on written, closed-end surveys sent to a large number of firms, without a focused topic. The study set out to see if financial theory, specifically cost-of-capital, is truly ubiquitous in true business applications.