1.ASSESS THE IMPACT ON THE WEIGHTED AVERAGE OF COST OF CAPITAL (WACC) ,EPS . Chandler knew that the maximum value of the firm was achieved when the weighted average cost of capital was minimized. Thus she intended to estimate what the cost of equity and the wacc might be if wrigley pursued this capital structure change. The projected cost of debt would depend on her assessement of wrigley’s debt rating after recapitalization and on current capital market rates. WACC before recapitalization Wrigley’s pre recapitalization WACC is 10.9%, the cost of equity assumes a risk free rate of 5.65% for 20 years US treasuries in the case exhibit 7; a risk premium is assumed 7% (or 5%), and uses Wrigley’s current beta of 0.75 (case Exhibit 5). …show more content…
The company is manifestly riskier in financial terms. Why doesn’t the estimate of WACC reflect this? Basically, the tax benefit of using more debt is virtually offset by the higher cost of equity, but most importantly, the estimate of the levered beta post recapitalization fails to reflect costs of financial distress. Effect of recapitalization on reported earnings per share Case Exhibit 8 gives a template for your analysis. This compares the status quo EPS (assuming no recapitalization) with an EPS after the addition of $3 billion in debt and draws on data in case Exhibits 2 and 3. The focal point for this analysis is the operating income of $514 million, which is the value for the year 2001 (see case Exhibit 2). The pro forma interest expense assumes $390 million at an interest rate of 13%. No adjustment is made for any possible amortization of the debt. The key issue is what will be the expected EBIT next year and thereafter. If one assumes $514 million, the issuance of $3 billion in debt reduces the expected EPS from $1.33 to $0.41 with repurchase, or $0.32 with dividend. This results simply from increased interest expense and the variation in the number of shares outstanding. Clearly, shareholders should brace for much worse EPS results after the recapitalization. At EBIT values of $514 million and
* She is considering the cash flow paid to all the equity or debt holders. So she cannot use the equity cost of capital.
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 purpose of this memo is to provide Target Corp. senior management with an evaluation of the company’s weighted average cost of capital (WACC). Since the 2010 financial information is not yet to be finalized, the analysis will use the most currently published financial data to evaluate each component of the WACC, including the company financial structure, cost of debt, and cost of equity.
b) If Olin issues $40 mm in debt to repurchase 2 million shares of equity (i.e. they replace $40 mm of equity with $40 mm of debt in their capital structure), and the interest rate on the debt is 10%, what will be the expected EPS next year?
I used WACC as the discount factor, we expect the rate of return to be higher than it, the same at least. The WACC reflects the average risk and overall capital structure of the entire firm [2]. It’s the required return and it presents how much the company pays for the capital it finances. In this case, the cost of equity is 10.33%, the cost of debt is 6.50%. I calculated WACC using those numbers and got a result of 8.49%.
If BBBY were to use $400 million in excess cash and $636.3 million in borrowed funds to repurchase it's shares they would increase their basic earnings per share from 1.35 to 1.41 and their diluted earnings per share from 1.31 to 1.37. If BBBY were to use $400 million in excess cash, and borrow $1.27 billion to repurchase their shares, the increase of the basic earnings per share would only be 0.3 while the difference from zero debt to
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.
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, ).
1. Determine the Weighted Average Cost of Capital (WACC) based on using retained earnings in the capital structure.
Discounted cash flow analysis in Exhibit 12 We do not know the beta for Interco’s equity. Therefore, it is not possible for us to estimate the weighted average cost of capital (WACC) for Interco. Note that here WACC method is appropriate because Interco is not
7. What is the cost of capital for Marriott’s contract services division? How can you estimate its equity costs without
At first, WACC and CAPM was attempted to be used as a source of cost of capital. However, for WACC, there is no available proportion of debt and cost of debt for MW. For CAPM, no available data seems to support the acceptable
The Coca-Cola Company is a beverage company which owns more than 500 nonalcoholic brands. Its product is known by customers all over the world. The company has market capitalization of $185.88 billion (Google finance, Oct 2015). In addition to equity capital, the company also issues corporate bonds to finance its operation. Both stocks and bonds of the company is traded in The New York Stock Exchange (NYSE). To calculate WACC of The Coca-Cola Company, we need to obtain some information about its debt
1.a) To value Spyder Active Sports Inc., we decided to use the WACC method since we can easily value its cost of assets with the data immediately available to us in the case. We first unlevered the beta’s of 7 comparable companies and took the average to get a comparable unlevered beta for Spyder (Exhibit 1). Since we are assuming Spyder is entirely equity financed, its unlevered asset beta is equal to the beta of its assets. We now have a rough estimate of Spyder’s asset beta, we can
With all the above aspects considered, Adecco arrived at a debt portion of WACC equal to .96% and an equity portion of 9.31% resulting in an overall WACC of 10.27%. This was calculated utilizing a beta of equity considering a beta of debt and assets of 0.2 and 0.48 respectively. Utilizing the free cash