Finance and Question Essay

3. Calculate the cost of equity capital using the CAPM, assuming a market risk premium of 5%.

1. The financial choices we make impact our economy. Think of a recent item you purchased. What factors influenced your decision in making this purchase? Did this purchase impact your local economy? Explain why or why not.

Horizontal analysis allows side by side comparisons on a year to year basis to determine the performance from one year to the next. The company decides on standards to compare the results of the analysis. Standards are researched by checking competitors, internet research of general industry guidelines or standards created from past experience in the company.

What type of financial investments would you invest in if you were given 10,000 dollars, what made you choose these investments, as well as; how did your choices affect your decision as to tracking these financial investments through the usage of financial strategies and trends. While finding the right pecuniary investment to finance in is never an easy decision, one must first do their research as to what type of financial resources are available on the market to invest in; then apply those financial decisions and strategies to their financial market plan. Let’s begin with what a financial market does, “financial markets perform a vital function: they transfer funds from savers (individuals and organizations willing to defer using some

9. You want to purchase a business with the following cash flows. How much would you pay for this business today assuming you needed a 14% return to make this deal?

-Martin Industries just paid an annual dividend of $1.30 a share. The market price of the stock is $36.80 and the growth rate is 6.0 percent. What is the firm's cost of equity?

Finally, in order to complete a more accurate comparison between the two projects, we utilized the EANPV as the deciding factor. Under current accepted financial practice, NPV is generally considered the most accurate method of predicting the performance of a potential project. The duration of the projects is different, one lasts four years and one lasts six years. To account for the variation in time frames for the projects and to further refine our selection we calculated the EANPV to compare performance on a yearly basis.

Life insurance is meant to provide funds to replace a breadwinner's to protect and support dependents. Chad and Haley are dependents, not income providers. Therefore, the purchase of life insurance is unnecessary and not recommended. The Dumonts should use the money they would spend on policies for the children to increase their own coverage.

The cost of equity is the theoretical return that equity investors expect or receive from the company for investing their funds in the company. The risk free rate that is the Government Treasury bill rate is 3.1%, the market risk premium is 7% and the beta has been calculated as

Solutions to Valuation Questions 1. Assume you expect a company’s net income to remain stable at $1,100 for all future years, and you expect all earnings to be distributed to stockholders at the end of each year, so that common equity also remains stable for all future years (assumes clean surplus). Also, assume the company’s β = 1.5, the market risk premium is 4% and the 20-30 year yield on risk free treasury bonds is 5%. Finally, assume the company has 1,000 shares of common stock outstanding. a. Use the CAPM to estimate the company’s equity cost of capital. • re = RF + β * (RM – RF) = 0.05 + 1.5 * 0.04 = 11% b. Compute the expected net distributions to stockholders for each future year. • D = NI – ΔCE = $1,100 – 0 = $1,100 c. Use the

(Note: retained earnings information is irrelevant here) Part b. Total market value = debt + pref. equity + Common equity = 1,147,200 + 1,250,000 + 2,500,000 = $4,897,200

We are providing below the assumptions and other calculations we used while computing the WACC and the cash flows.

Using the WACC method, we first derived UST’s return on assets (rA). Since we are given the firm’s market capitalization, debt and cash, we calculated the current Enterprive Value of UST. We were then able to derive the return on asset as a function of UST’s market value. Specifically, we followed the below steps:

1a. Please use the capital asset pricing model to estimate the cost of equity. At the date of the case, the 74 over T-bonds. Which beta, risk-free rate, and risk premium did you use? Why? Financing Components Debt Equity Market Values Weight Cost of Capital (After Tax) $ 6,823,736,197 0.85 3.72% $ 1,176,263,803 0.15 28.18% Total: $ 8,000,000,000 1.00 WACC WACC Inputs: Beta: Risk-Free Rate: Market Risk Premium: Pre-tax Cost of Debt: Income Tax Rate:

(10 points) Mango, Inc. has had debt with market value of $1 million that has paid a 6% coupon and has had an expiration date that is far, far away. The expected annual earnings before interest and taxes for the firm are $2 million and the firm has not grown, nor does it have plans for any growth. The firm however has just raised more equity to retire all its debt. If the required rate of return to equity-holders (after the capital structure change) is now 20%, what is the market value of the firm? Assume there are no taxes. (Enter just the number without the $ sign or a comma; round to the nearest whole dollar.)