A 1)Working capital requirement = Accounts receivable + Inventories + Prepaid expenses – Accounts payable – Accrued expenses 2) Managerial balance sheets What is the relationship between these ratios and Sentec’s return on equity
(ROE) over the three-year period?
Operating margin = EBIT/Sales
Invested capital turnover = Sales/Invested capital
Return on invested capital = EBIT/Invested capital
Financial multiplier = (EBT/EBIT) Å~ (Invested capital/Owners’ equity)
Tax effect = EAT/EBT
Return on equity = EAT/Owners’ equity
2008
Operating margin = $650/$22,100 = 2.94%
Invested capital turnover = $22,100/$5,730 = 3.86
Return on invested capital = $650/$5,730 = 11.34%
Financial multiplier = ($540/$650) *($5,730/$4,130)
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is currently $1 per share and is supposed to grow at 10% a year forever. Its share price is $30. What is your best estimate of Divo’s cost of equity? According to the dividend discount model with constant growth expectations: Po=
Therefore, the return expected by the company shareholders, kE, is: Ke=
DIV1 = $1.10 is the dividend expected for next year [$1.00* (1 + 0.10) = $1.10, where 0.10 or 10 percent is the expected growth rate of dividends], P0 = $30 is the current share price, and g = 0.10 is the expected dividends’ growth rate.
Thus: Ke=1.3/30+ 0.1= 0.0366+0.10=0.1366=13.66 percent
D The firm is asking the finance department of FarWest for an estimate of its cost of capital. FarWest can borrow long term at 7%; its corporate tax rate is 40%. Its beta coefficient is 1.05. The rate of interest on government bonds is currently 5.2%, and the market risk premium is 4%. How would you estimate the firm’s weighted average cost of capital (WACC) if its target debt-to-equity ratio is 1.20?
Step 1: Estimate the firm’s after-tax cost of debt. The firm’s after-tax cost of debt, Kd (1 – TC), where Kd is the pretax cost of debt and TC is the corporate tax rate, is KD (1 – TC) = 7%(1 – 0.40) = 4.2%
Step 2: Estimate the firm’s cost of equity based on the data. According to the capital asset pricing model (CAPM), we have: kE = RF + β * (RM – RF) where RF = 5.2 percent is the
The cost equity was determined using the CAPM approach. Looking at the last 78 years, the historical S&P market returns would suggest using a 10.5% to 11.0% rate to project future returns. The average industry revenue growth rate in footwear is 10%. However, to be more conservative, a market return rate of 8% was used. The risk free rate was determined to be 4.69% using the 10 year US Treasury Bills yield given in the case footnotes on page 7 of the case. This results in a market risk premium of 3.31%. The cost of equity was determined to be 12.80% (Risk free rate + Beta x Market Risk Premium) (See Exhibit 1).
To relever the βe, we use the formula, βe = βu +(D/E)*(βu-βd). And the “Target D/E” was found by taking “Target D/V” divided by “1-Target D/V”. So we get the new βe, 1.3576. Then to get cost of equity, we use the CAPM formula, Re=Rf+β(EMRP), 11.7679%. Since we have get the cost of equity and cost of debt, we can determined the WACC, which is equal to Equity/Value*Cost of Equity+Debt/Value*Cost of Debt*(1-tax rate). In the end ,we arrived at 8.48%.
A correct response requires that you find an appropriate industry beta and measure for levered/unlevered betas and requires that you define cost of equity capital and free cash flow (FCF) – you may need a formula for FCF.
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).
-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?
c. Is your estimate of Lex’s cost of equity appropriate as a discount rate for Lex’s total operating cash flows? Why or why not?
Jack 's Construction Co. has 80,000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 8.5%. The company also has 4 million shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is yielding 4% and the market risk premium is 8%. Jack 's tax rate is 35%. What is Jack 's weighted average cost of capital?
We must then calculate the CAPM for the cost of equity (see Excel sheet for details):
14. WACC – Table 19.4 shows a simplified balance sheet for Rensselaer Felt. Calculate this company’s weighted-average cost of capital. The debt has just been refinanced at an interest rate of 6% (short term) and 8% (long term). The expected rate of return on the company’s shares is 15%. There are 7.46 million shares outstanding, and the shares are trading at $46. The tax rate is 35%.
The final model used to compute the cost of capital was the earning capitalization model. The problem with this model is that it does not take into consideration the growth of the company. Therefore we chose to reject this calculation. The earnings capitalization model calculations were found this way:
3. Calculate the cost of equity capital using the CAPM, assuming a market risk premium of 5%.
Since the unlevered beta is known as 0.84, we can use debt-to-equity ratio of the project to find the levered beta for this investment, which would give us the return on equity of the project (11.6%). By looking up historical data on the Internet, we find the yield on long-term corporate bonds (rating A) in June 2000 is 7.9%. Using these numbers, we calculate the WACC to be 10.56%.
with interest rate of 5%. There are 500 shares of equity outstanding for DBT Corp. After the interest expense,
Let us assume that a firm has an EBIT level of $50,000, cost of debt 10%, the total value of debt $200,000 and the WACC is 12.5%. Let us find out the total value of the firm and the cost of equity capital (the equity capitalization rate).