Cost of capital

9-204-109 REV: OCTOBER 23, 2006 MIHIR DESAI Globalizing the Cost of Capital and Capital Budgeting at AES In June 2003, Rob Venerus, director of the newly created Corporate Analysis & Planning group at The AES Corporation, thumbed through the five-inch stack of financial results from subsidiaries and considered the breadth and scale of AES. In the 12 years since it had gone public, AES had become a leading independent supplier of electricity in the world with more than $33 billion in assets

Analyzing Capital Structures and Costs of Capital TESCO Tesco is a British retail magnate trading at the London Securities Exchange. The company had several capital and quasi-capital transactions with providers of finance during the fiscal year 2008; had the effect of altering their capital structure and changing their Weighted Average Cost of Capital. During this financial year, Tesco was financed by retained profits, long and medium-term debts, capital market issues, commercial papers, bank borrowings

brokerage sector. In march 1997, Ameritrade raised $22.5 million in an initial public offering. Management at Ameritrade is considering substantial investments in technology and advertising, but is unsure of the appropriate cost of capital. Estimating the cost of capital 1. Since we do not have the beta for Ameritrade, we need to find comparable firms for which we could compute the betas. There are several candidates in the case. Discuss which firms are most appropriate. Thus, the proportion

about the risk free rate one must decide whether or not they will use a long or short term rate. The difference between realized returns on the 90 day T-bill and the ten year T-bond has averaged 150 basis points which can make a difference on the cost of equity and the WACC. Even though the short term risk free rate is more consistent with the CAPM the long term bond more closely reflect the default holding period returns available on long lived investments and this more closely reflects the types

1. Which of the following would increase the likelihood that a company would increase its debt ratio in its capital structure? a. An increase in costs incurred when filing for bankruptcy. b. An increase in the corporate tax rate. c. An increase in the personal tax rate. d. None of the statements above is correct. ANSWER: B An increase in the corporate tax rate would mean that firms would get larger tax breaks for interest payments. Therefore, firms have an incentive to increase interest payments

Telus: The Cost of Capital Telus needs to calculate the cost of capital from the variety of data given. The cost of capital is determined mostly by how the funds are used rather than where they were obtained from. It relies on the risk of investments Telus involves in, therefore, depending on cost of both equity of debt as described below. Also note that, even though the preferred shares are not attractive to issuers and may not get issued again, it is still on the company’s balance sheet and affect

a wide assortment of low-cost products, and offer expert advice and exceptional customer service. As an innovator of the home improvement industry, Home Depot has expanded into Canada, Mexico, Argentina, Chile, and Puerto Rico. Currently there are 1,459 stores including fifty EXPO Design Centers, one Floor Store, and three Home Depot Landscape

sale of the investment may exceed the investment’s cost basis in terms of the actual dollars received, although a large portion of the gain being realized may be due to inflation as opposed to a true increase in the value of the investment (Jones & Sommerfeld, 1995). Indexing the tax basis of all assets to reflect changes in the value of a dollar has been examined as a solution to the problem. Indexing involves increasing the cost basis of a capital asset to account for inflation. This idea hasn’t

Revenue expenditure is defined as “a cost that is charged to expense as soon as the cost is incurred. By doing so, a business is using the matching principle to link the expense incurred to revenues generated in the same accounting period. This yields the most accurate income statement results,” (Revenue Expenditure, n.d). On the other hand, capital expenditures are defined as “the funds or assumption of a liability in order to obtain physical assets that are to be used for productive purposes

Cost of Equity: For the risk-free rate, we decided to use the 30-year old Treasury yield, which is currently 4.6%. We believe it is important to match the time horizon when comparing financial assets. Given that stocks have essentially an endless time horizon, the 30-year Treasury seems a more reasonable asset by which to compare stocks. 1-month Treasury Bills, for instance, are comparable to safety-deposit boxes, which are completely safe, but cannot ever yield a return. It’s highly likely that