Contents 1.0 OVERVIEW OF COST OF CAPITAL 2 2.0 COST OF LONG-TERM DEBT 3 2.1 How to Calculate Before Tax Cost of Debt and After-tax cost of debt. 4 3.0 COMMON STOCK 6 4.0 COST OF PREFERRED STOCK 8 4.1 Characteristic of preferred stock 8 5.0 WEIGHTED AVERAGE COST OF CAPITAL 11 6.0 CONCLUSION 14 1.0 OVERVIEW OF COST OF CAPITAL Cost of capital is the rate of return when a firm earn on the projects invest to maintain the market value of its stock. The cost of capital depends on the how the
research of Pepsico, I have calculated the cost of capital. A firm's cost of capital is imperative because it represents the funds used to finance the firm's assets and operations. First you have to estimate the cost of capital in order to minimize it. In estimating the cost of capital, you first have to find the cost of each capital component and then combine the component costs to find the weighted average cost of capital. First, I calculated the cost of debt. Pepsico's bond consisted of 7 5/8
help explain the capital costs generated by corporations when raising funds to support company growth and future market share. These costs incurred are known as capital costs which can be estimated through cost of equity by using the dividend growth model approach or the security line approach. Each method will be discussed including their advantages and disadvantages. This paper will also explain the cost of debt, cost of preferred stock, and the weighted average cost of capital with tax adjustments
Cost of Capital for Marriott Mentioned Tables Not Included Objective: 1) Calculate the divisional and the company cost of capital and explain the calculation. 2) Evaluate Marriott's use of company cost-of-capital rate for the individual divisions. Cost of Capital for Lodging Division can be expressed as CC = We*Ce + Wd*Cd. For the weights of debt and equity (We and Wd), the 1988 target-schedule rates of debt-to-assets and debt-to-equity were used as the only measures available in
Starbucks, Inc. (SBUX) Introduction The weighted average cost of capital (WACC) refers to the cost a company would incur to raise each new or marginal dollar of capital (Pandey, 2015). It does not refer to the average cost of dollars raised in the past. In the calculation of WACC, the main concern is with the capital that has to be availed by investors, that is, preferred stock, interest-bearing debt, and common equity. Usually, each firm has an optimal capital structure, which is defined as the mix
really worth it. The weighted average cost of capital (WACC) is a percentage of income that a company is liable to pay as a cost of debt and equity of fund the assets of the company usually annually. This means that the company must earn at least that much money every year to be able to pay for the usage of their assets and have disposable income in addition to that as profit. WACC is calculated by multiplying the relative weights of each component of the capital structure – the cost of debt and equity
Marriott's corporation: the cost of capital What is the weighted average cost of capital for Marriott Corporation? Are the four components of Marriott's financial strategy consistent with its growth objective? Marriott Corporation is an international company who's the growth over the year has been more than satisfactory. In 1987, Marriott's sales grew up by 24% and its return on equity stood at 22%. Moreover the sales and earnings pr share has doubled over the previous year. The company
from http://www.investopedia.com/university/dcf/dcf3.asp Put option. (2011, May 22). In Wikipedia, The Free Encyclopedia. Retrieved 02:44, May 25, 2011, from http://en.wikipedia.org/w/index.php?title=Put_option&oldid=430306749 Weighted average cost of capital. (2011, April 2). In Wikipedia, The Free Encyclopedia. Retrieved 00:28, May 25, 2011, from http://en.wikipedia.org/w/index.php?title=Weighted_average_cost_of_capital&oldid=422017854
Another important component of the corporate tax system is the treatment of losses. A corporation that loses money in a particular year experiences what is known as a net operating loss (NOL). No corporate tax is due when a company has a NOL because they do not have profits (e.g., total income less expenses is negative). In addition, a NOL can be “carried back” and deducted from up to two prior years’ taxable income. The corporation is then eligible for a refund equal to the difference between previously
Remco de Waard Financial Management Case: Nike Inc.: Cost of Capital HULT International Business School March 2, 2014 1. Introduction Miss Ford is a portfolio manager for Northpoint Group, a mutual-fund management firm. Kimi is considering buying shares of Nike Inc. for the NorthPoint Large-Cap Fund she is managing. A week before starting the research, Nike had presented the fiscal year 2001 results in an analysts meeting. Main purpose of this meeting was to communicate the new strategy to revitalize
As for the cost side to be considered, Nike planned to exert more effort on expense control. The company executives forecasted that their long-term revenue-growth targets of 8% to 10% and earnings-growth targets of above 15%. In order to decide on an investment decision regarding the mutual fund she managed, Ford decided to develop her own discounted cash flow forecast. Since Ford was not sure whether to buy stocks, she asked Cohen to estimate Nike’s weighted average cost of capital. Obviously,
would set them apart from Airbus, their main competitor and market leader. Boeing’s vision for the 7E7 was a cost efficient plane that used less fuel, had cheaper operating costs, and flexibility for short or long haul routes. The new plane would be made with cheaper composite parts which would reduce the production time from 20 days to 3 days. The new project faced some concerns. The cost efficiency relied on the use of composite materials that had not gained regulators’ confidence. Also, Boeing
In 1987, Marriott was focused on its cost of capital. The corporation was split into three divisions. The divisions were lodging, restaurants, and contract services. Marriott was also interested in focusing on four main points of business. They decided to focus on managing instead of owning hotel assets, invest in projects that increased shareholder value, optimize the use of debt in the capital structure and repurchase undervalued shares. They measured these new strategies and how they would affect
Working Capital Analysis of Wal-Mart Every business decision is associated in one way or another with the financial condition of the organization. The results of a working capital analysis will assist in the determination of organization¡¦s ability to remain in a particular line of business. The primary focus of Team C¡¦s analysis of Wal-Mart, Inc is its current and future financial condition. The most imperative areas that are found in the Capital Structure Analysis Report fall into the following
rates at Marriott would have a significant impact on the firm's financial and operating strategies. As a rule of thumb, increasing the hurdle rate by 1%(for example, from 12% t0 12.12%) decreased the present value of project inflows by l%. Because costs remained roughly fixed, these changes in the value of inflows translated into changes in the net present value of projects. Figure A shows the substantial impact of hurdle rates on the anticipated net present value of projects. If hurdle rates increased
from other countries pose a serious threat to Walgreens as well. Advances in pharmaceuticals have greatly transformed health care over the years, and although pharmacies have introduced some low cost alternatives, the cost of prescription drugs continues to rise. Rising pharmaceutical and prescription costs have led consumers to shop for drugs online and in other countries. In Canada, Mexico and other countries,
years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program that had been proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis’s cost of capital. Jones has provided you with the following data, which she believes
total cost of the operating capital. EVA is simply the after-tax operating profit minus the total annual cost of capital. Using EVA has advantages as well as disadvantages. Advantages · EVA sends the message than managers should invest only if the increase in earnings is enough to cover cost of capital · EVA allows a good way for companies to set a reward system that is not overly expensive to implement because is not too difficult for top management to monitor. · EVA makes the cost of capital
Question 2 (a) According to Investopedia, agency theory explains the relationship between principals and agents in business. The theory is based on two elements, the principals and the agents of principals. Principals are parties such as shareholders and agents of principals are parties such as company executives. Agency theory is mainly about resolving the problems that could occur in agency relationships. There are two problems that agency theory points out; they are 1.) Problems occurred when
used by financial theorists and valuation consultants to the assessment of cost of capital in order to apply it as a present value discount rate in a traditional present value model. The main structure of business valuation is cost of capital. Key statement states “Value today always equals future cash flow discounted at the opportunity cost of capital (google.com)”. When defining Cost of capital “refers to the opportunity cost of making a specific investment. It is the rate of return that could have