Mortensen 's Estimates Of Midlands 's Cost Of Capital

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Mortensen’s estimates of Midlands’s cost of capital are. The Mortensen’s estimates are used for Asset appraisals for capital budgeting and accounting, assessment of performance analysis, merger and acquisition possible proposals, and possible stock repurchasing/issuing decisions or dividends and retained earnings. The Cost of capital is an essential component in WACC calculations.

Mortensen computed the cost of debt for each division by adding a premium, or spread, over the U.S Treasury’s securities of a similar maturities. To find rD we use the interest rate that we currently pay on the new loans, instead of using CAPM. The consolidated spread to the treasury was given on table at 1.62%. Therefore rD is equal to the 30-year yields plus the overall consolidated spread. rD=4.98%+1.62% or 6.60%. The tax rate is then calculated based on exhibit 1 of the average of 2004-2006. The calculation is the income tax divided by the income before taxes, which equals 39.73%

EMRP is based on the Exhibit 6, the traditional data showed approximately 6.0% EMRP, and the surveys showed lower EMRP (2.5% - 4.7%), a research over the industry with help from outsiders, who has broader industry knowledge, would result a better and up-to-date EMRP for Midland. The industry agreed on the current estimate of 5.0%. Midland used 5.0% as its Equity Market Risk Premium. The corporate beta is publicly available, and as it represents corporate level beta, we’ll use 1.25 as it is for Overall

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