Hill Country Snack Foods is a company which produce variety of snacks. Their operating strategy is a combination of good products, efficient and low-cost operation, and singular management. * Good products are not only about high quality, but also about to satisfy different type’s customers by producing many kinds of snacks. Customers are satisfied by companies’ quick react to their requirements or preferences and reinvent and expand its products. For example, the company has also tried to change the recipe to meet students’ nutrition requirements. * An efficient and low-cost operation is achieved by strong control of budgets and costs. Then, operating and capital budget can be lean and aggressive. * A singular management is …show more content…
And the value of firm=Present Value of (after Tax) Cash Flow to Firm, discounted back at WACC. If cash flows to firms are held constant, and cost of capital is minimized, value of firm will be maximised. Thus, as debt increases, the WACC will decrease, and the value of firm increases.
Furthermore, debt financing can add discipline to management. In contrast to equity financing, the entrepreneurs are able to make key strategic decisions and also to keep and reinvest more company profit.
According to the long-term bonds interest rate in early 2012, market yield on 10-year bonds were under 2%, and a public traded 10-yrs bonds issued by “A” rated corporations were trading at 3.8% yield to maturity, that means debt financing was much cheaper than equity financing as Hill Country’s dividends payout ratio is almost 30%. (In Exhibits 3)
In exhibit 2, financial information is compared between Hill Country and its competitors. The Giant, PepsiCo had a debt-to-capital ratio of 49.6%, though its ROA is a bit lower than Hill Country’s, its ROE of 30.8% is much higher than 12.5%. this may demonstrate that the raise of debt can increase return of equity.
So, which capital structure is more optimal for Hill Country in Exhibit 4. We need to calculate the WACC for each capital structures.
Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each
Free Cash Flow = Sales Revenues – Operating Costs and Taxes – Required Investments in Operating Capital. Weighted Average Cost of Capital (WACC) is affected by market interest rates, market risk aversion, cost of debt, cost of equity, firm’s debt/equity mix, and firm’s business risk. Therefore, free cash flows and the weighted average cost of capital interact to determine a firm’s value by the following equation:
Ross, S. A., Westerfield, R. W., & Jordan, B. D. (Eds.). (2011). Essentials of corporate finance (7th ed., Rev.). New York, NY: McGraw-Hill Irwin.
22. Suppose that Hanna Nails, Inc capital structure features 45 percent equity, 55 percent debt, and that it’s before tax cost of debt is 5%, while its cost of equity is 9 percent. If the appropriate weighted average tax rate is 40 percent, What will be Hanna Nails’ WACC?
10. What is the correct capital structure and weighted average cost of capital for discounting the investment’s free cash flow. Assume a 35% tax rate. A correct response requires that you define capital structure and Weighted Average Cost of Capital (WACC) with a formula. When defining a term with a formula be sure that all the variables are also defined.
The comptroller currently finds the weights for the weighted average cost of capital (WACC) from information from the balance sheet shown in Table 2. Compute the book value weights that the comptroller currently uses for the company’s capital structure.
* We compared our past and projected ratios to the industry benchmarks to analyze the effects of taking on different levels of debt.
1. What specific items of capital should be included in the SIVMED’s WACC? Should before-tax or after-tax values be included? Should historical or new values be used? Why?
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, ).
In order to find the WACC, we need to find the cost of the components of the capital structure and their proportion in the total capital.
Moreover, let’s calculate the Weighted Average Cost of Capital (WACC). And in order to calculate it we need to know the capital structure of the company. Knowing the capital structure of the
• Compute a separate cost of capital (WACC) for the lodging business, contract services business and restaurant business.
Target Corporation is having a very stable financial policy and dividend policy. From the historical financial data, Target had debt $11,044M, $11,202M, $10,599M, $17,471M, and $19,882M in the year of 2005,2006,2007,2008, and 2009 respectively. The long-term debt/equity ratio rises from 69.34% to 108%.
For this reason, new, or marginal, costs are used in its calculation. WACC is calculated by multiplying the cost of each capital component by its proportional weight and then summing then together. The capital components included in this calculation are a firms after-tax costs of debt, preferred stock, and common stock.
company’s securities, both debt and equity. The WACC is important to calculate because it is a necessary
1. Please define Weighted Average Cost of Capital (WACC). Write down the WACC formula, and discuss its components.