and technology upgrades? Why? - They should see how revenues have changed after adopting the new ad program and technology upgrades - They need to see ROI for their investments over time 2. How can the Capital Asset Pricing Model be used to estimate the cost of capital (required return) for calculating the net present value of a project 's cash flows? - it will help us determine the Cost of capital or discount rate which we can use to calculate NPV, in other terms the numerator will never change
method is applied for Marriott as a whole and its three divisions (lodging, contract services and restaurants). Marriott uses their WACC’s to discount appropriate cash flows by the appropriate and related divisional hurdle rate. This allows them to calculate the Net
determine the WACC at every division base on the information that the case has provided. First of all, we will determine the cost of debt, cost of equity and the capital structure for the whole company. Then we will compute for the tax rate, and calculate the WACC for the whole company. After this, we will determine the Risk-free Rates,
Case Study of Cost of Capital at Ameritrade 1-a How can the CAPM be used to estimate the cost of capital for a real business investment decision? CAPM results can be compared to the best expected rate of return that investor can possibly earn in other investments with similar risks, which is the cost of capital. Under the CAPM, the market portfolio is a well-diversified, efficient portfolio representing the non-diversifiable risk in the economy. Therefore, investments have similar risk if they
risk-free security plus a risk premium. The formula is: R = Rf + *(E(Rm)-Rf) Rf = Risk free rate of return, usually U.S. treasury bonds ( ) β = Beta for a company E(Rm) = Expected return of the market (commercial airlines market) E(Rm)-Rf = Sometimes
Calculate the missing CV’s, and fill in the blanks in the row for CV in the table. Does the CV produce the same risk rankings as the standard deviation? CV = standard deviation / expected return Alta Industries = CV = 20%/17.4% = 1.15 2-Stock Portfolio
interested in obtaining the asset beta for Collinsville investment. Here from the reading material, we find there were altogether 6 chemical companies that produce sodium chlorates. They are Hooker, Pennwalt, American, Kerr-McGee, Brunswick and Southern. However, since we are evaluating the addition of a sodium chlorate plant, the two firms (Brunswick and Southern) who specialize in producing sodium chlorate are likely the best “twins”. To determine the asset betas of each company, we
report is to provide an evaluation on the risk and return of Coca-Cola Amatil Ltd, using methods to calculate its share price and other financial figures. Firstly, the report will analyse and evaluate the stock’s beta (β), which according to Investopedia, “A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole”. The data used to evaluate beta is based on past trends and data from a Coca-Cola Amatil annual report. The report will also use
c. expected capital gains yield for the firm. d. portfolio beta for the firm. e. weighted average cost of capital (WACC). Difficulty level: Easy CAPM b 2. If the CAPM is used to estimate the cost of equity capital, the expected excess market return is equal to the: a. return on the stock minus the risk-free rate. b. difference between the return on the market and the risk-free rate. c. beta
depends on each division. In fact the evaluation of the WACC is an appropriate tool to calculate the cost of capital for the corporation as a whole and for each division. The cost of equity One of the two major component of WACC is the cost of equity. The cost of equity model takes into account three values which we must calculate - a risk-free rate (rf), risk premium rate (expected market return - rf), and Beta Value. Before doing the calculations, we will justify our choices. We based it on