Interco Case Study

From the big picture, they could have avoided the crisis in several ways. First is

(2) This is After tax operating profit for after 2006, taken the WACC and growth in consideration, so 967,85/(0,1362-0,04)

1. Determine the Weighted Average Cost of Capital (WACC) based on using retained earnings in the capital structure.

3. Wasserstein, Perella & Co. established a valuation range of $68-$80 per common share for Interco. Show that this valuation range can follow from the assumptions described in the discounted cash flow analysis section of Exhibit 12. As a member of Interco’s board, which assumptions would you have questioned? Why?

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

Our WACC is almost constantly these years – around 5.50% -- via from 5.04% to 5.82%. We also use the scenario analysis for how the WACC and growth rate affect enterprise value and equity value.

Refer to Appendix B for the Wasserstein, Perella & Co valuation. As with any discounted cash flow analysis, some of the underlying assumptions made could be questioned. The projected sales growth rates and the terminal growth rate used in the analysis could be considered to be low, as Interco is known to be a growing company. The assumption that sales would only grow 7.2% over the projected timeline was a little conservative, considering that sales growth was 13.4% in 1988, even though retailers were facing a slump at the time. A 14 multiple with a 10% discount rate provides a 2.66% growth rate in

As long-term valuation is assumed, risk free rate is set as 30-year treasury rate, 5.73%. Cost of debt is 6.72% reflecting Amoco’s credit level. Cost of equity is calculated as 10.63%, leading to final WACC at 8.85% (Chart 1).

Wasserstein, Perella & Co. established a valuation range of $68-$80 per share for Interco. Show that this

What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not?

17-1 An MNC has total assets of $100 million and debt of $20 million. The firm’s before-tax cost of debt is 12 percent, and its cost of financing with equity is 15 percent. The MNC has a corporate tax rate of 40 percent. What is this firm’s weighted average cost of capital?

Here is one optimistic and one pessimistic scenario. With the pessimistic scenario we took WACC with +3, 5 % and it give us a discounted cash flow value of 1,6 billion pounds which indicates a major drop in real value of the company. With the optimistic scenario we took WACC with - 4,5% and it gave us an increase of value to 2.38 billion pounds which indicates that with a little bit better adjusting and a good marketing campaign the optimistic scenario will give us an optimistic scenario of 590 million

The cost of capital for average-risk projects would be the firm’s cost of capital, 10 percent. A somewhat higher cost would be used for more risky projects, and a lower cost would be used for less risky ones. For example, we might use 12 percent for more risky projects and 9 percent for less risky projects. These choices are arbitrary.

Integrative—WACC, WMCC, and IOS. Cartwell Products has compiled the data shown in the following table for the current costs of its three basic sources of capital—long-term debt, preferred stock, and common stock equity—for various ranges of new financing.

b) Calculate the break-even point for the two years and explain why the break-even point has changed. Comment on the margin of safety in both years.