Wheels Industries Case

11. What is the Cost of Equity? ke = Risk Free Rate + (Beta X Risk Premium of 7.5% points). .03 + (.99 x .075) = 10.43%.

Stock option should be adjusted to reflect VEP effect. Employees are entitled to purchase 131.64mn common shares at an average price of $18.68.

What is your estimate of Ace’s cost of new common stock, ke? What are some potential weaknesses in the procedures used to obtain this estimate?

In the attached file, there are calculations of relevant cash flows and their different impacts on the expansion analysis. The capital expenditure of the first year comes out to be about $43,500 which is financed via a 6% loan with monthly payments. Amortization of $9,300 per year will be charged to depreciate the capital expenditure which yields a tax shield (20% tax) of $1,860 annually. The per month interest payment comes out to be $1,927.95 and the entire loan will be paid off in two years. As a result, the annual interest tax

Shareholder’s equity would be lower than that shown in 1982 ($318,000) because the company has to pay off interest and principal for many loans. There will be little money left for shareholder’s equity.

-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?

When new equity is to be raised, then there will be floatation cost. The net price will be $25-$2 the floatation cost = $23.

b) What will be the total equity value and equity price per share after the issuance is completed?

It is often questionable as to whether flotation costs are included in the calculation of a firms cost of debt. Flotation costs are the costs associated with the issuance of new securities. These costs should be included in this calculation. For debt, however, this value is usually ignored because it is very small and does not have a significant affect on the outcome of the calculation. Also, when

What is the net present value of this follow-up investment and the combined base and expansion investments?

The present value of the net incremental cash flows, totaling $5,740K, is added to the present value of the Capital Cost Allowance (CCA) tax shield, provided by the Plant and Equipment of $599K, to arrive at the project’s NPV of $6,339K. (Please refer to Exhibit 4 and 5 for assumptions and detailed NPV calculations.) This high positive NPV means that the project will add a significant amount of value to FMI. In addition, using the incremental cash flows (excluding CCA) generated by the NPV calculation, we calculated the project’s IRR to be 28%. This means that the project will generate a higher rate of return than the company’s cost of capital of 10.05%. This is also a positive indication that the company should undertake the project.

3. Calculate the cost of equity capital using the CAPM, assuming a market risk premium of 5%.

* Please choose either the CAPM estimate or the DDM estimate for cost of equity based on your answer to Question 3.

The subject organization to which the valuation model stands applied in this scenario, that of Berkshire Hathaway, has a measurable debt load of 61.8 billion dollars and a level of equity at, as of March 2012, 176 billion dollars (Morningstar, Inc., 2012). Given a continuation of the assessed results over the course of the example five year period, an investor would return a substantial profit from an investment in Berkshire Hathaway. A valuation as taken from a discounted cash flow analysis concerning the company, Berkshire Hathaway, returns an indication of profit, thereby validating the existing debt to equity ratio of 0.35% over the same covered period for March of 2012 (Morningstar, Inc., 2012).

Google accounts for property and equipment at cost less accumulated depreciation and amortization. They compute depreciation using the straight-line method over the estimated useful lives of the assets; usually two to five years and they depreciate buildings over periods up to 25 years. They amortize leasehold improvements over the shorter of the remaining lease term or the estimated useful lives of the assets. Construction in progress is related to the construction or development of property, including land and equipment that have not yet been placed in service for their intended use. Depreciation for