Computing The Divisional Cost Of Capital

  • Cost of Capital

    Jeremy Masem FIN 685 10/21/12 Cost of Capital paper The relationship between the method and assumptions made with respect to placing a value on a financial instrument and determining the capital cost for each of these instruments is intertwined. Similar factors are involved in both calculations. Issues surrounding estimating the future cost of capital and placing a value on a financial instrument are similar too. A WACC formula makes it clear that the problem of discount rate determination

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  • Cost of Capital

    Cost of Capital- Coffee Industry Group No. 4 Submitted to- Group Members- Prof. Sarath Babu Himakshi Mallik Vitash Sharma Rahul Rishav

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  • Cost of Capital

    approximate, annual, after-tax cost of debt for a 15-year, 12 percent, $1,000 par value bond, selling at $950? Flotation costs are 1% of face value. The interest payments are semi-annual. PV = 950 – (1000*.01) = 940, FV = -1000, PMT = 120/2 = -60, N = 15 x 2 = 30, I = ? Before tax cost of debt = 6.46 x 2 = 12.92% After-tax cost of debt = 12.92(1-.4) = 7.75% 2. A firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost of issuing and selling the stock

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  • Cost of Capital

    Managerial Finance – Problem Review Set – Cost of Capital – with solutions 1) |If a firm's marginal tax rate is increased, this would, other things held constant, lower the cost of debt used to calculate its WACC. | | | |

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  • Mariott: Cost of Capital

    Marriott Corporation: The Cost of Capital Executive Summary J. Willard Marriott started Marriott Corporation in 1927 with a root beer stand, expanding it into a leading lodging and food service company with sales of over $6 billion by 1987. At the time, Marriott had three main lines of business, lodging, contract services and restaurants, with lodging generating about 51% of company’s profits. The four key elements of Marriott’s financial strategy were managing hotel assets rather than owning

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  • Nike Cost of Capital

    NIKE, INC. COST OF CAPITAL Context: Estimating Cost of Equity with different methods. Compute WACC Nike’s current price per share= $ 42.09 Question: Is it undervalued or overvalued to make buy /sell decision? Forecasts for Cash flows, Dividend growth, EPS estimates for NIKE are given. Interest rate #’s, Betas, Book values on debt and equity are given. Also historical performance #s are given. At 12% WACC Nike is overvalued and hence sell decision; At 11.17% correct valuation; WACC

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  • Global Cost of Capital

    Global Cost of Capital Prerared by: Azizhon Isayev. Master of International Finance (XM-3) Tashkent Financial Institute. Global cost of capital is a financial term that is loosely defined and arrived at, but basically represents what the minimum expected rate of return can be for an investment in a foreign market that is sufficient to draw funds into that market. This is seen as an opportunity cost because it means that, when investors take risks in a particular foreign market, they are forgoing

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  • Capital Cost

    THE COST OF CAPITAL The investor-supplied items- debt, preferred stock, and common equity- are called capital components. Increases in assets must be financed by increases in these capital components. The cost of each component is called its component cost. For example, Allied can borrow money at 10%, so its component cost of debt is 10%. These costs are then combined to form a weighted average cost of capital, which is used in the capital budgeting process. rd interest rate on the firm’s

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  • Cost of Capital

    ILLUSTRATION 1 COMPUTE THE COST FOR THE FOLLOWING: a. A bond that has a Rs 1,000 par value (face value) and coupon interest rate of 12 percent. A new issue would have a flotation cost of 5 percent of the Rs 1,100 market value. The bonds mature in 10 years The firm's average tax rate is 25 percent and its marginal tax rate is 30 percent. b. A preferred stock paying a 9 percent dividend on a Rs 100 par value. If a new issue is offered, flotation costs will be 5 percent of the

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  • Cost of Capital

    COSTO DE CAPITAL Este capítulo trata sobre uno de los temas más importantes para las empresas, y es el costo de capital (rendimiento requerido o tasa de descuento apropiada) el cual se utiliza para determinar el valor de una inversión en comparación al rendimiento de otra opción, generalmente, la opción libre de riesgo. El costo de capital puede ser accionario y se refiere a los rendimientos que los inversionistas de capital accionario requieren por su inversión en la empresa. En este caso, debemos

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  • Heinz: Estimating the Cost of Capital

    H.J. Heinz Company Case: Cost of Capital in Times of Uncertainty Group 10 Alan Ho 20349978 Saraniya Paramanathan 20332829 Christopher Abeleda 20335744 Nathanael Cheung 20345672 Reuban Nadesan 20346511 To: Board of Directors Committee, H.J. Heinz Company From: Group 10 Consulting Date: July 7, 2011 ------------------------------------------------- Subject: Weighted Average Cost of Capital Recommendation ------------------------------------------------- Heinz has

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  • Marriott Corporation: the Cost of Capital

    type of investments would you value using Marriott’s WACC? (Note: the WACC formula is on page 398 of the textbook. You might want to answer these questions on your way to WACC: a. What risk-free rate and risk premium did you use to calculate the cost of equity? The risk free rate used was a weighted average of the short-term treasury bills and long-term bond rates found in Exhibit 4. Using a weighted average based off the amount of revenue for each of the three divisions, long-term bond rate of

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  • Cost of Capital

    financial instrument and determining the capital cost for each of these instruments is intertwined. Similar factors are involved in both calculations. Issues surrounding estimating the future cost of capital and placing a value on a financial instrument are similar too. A WACC formula makes it clear that the problem of discount rate determination can be separated in the problem of determining the financial weights and the problem of determining the segment cost of capital (e.viaminvest.com). A company’s assets

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  • Nike, Inc.: Cost of Capital

    Nike as a “Strong Buy” and others recommending a “Hold.” In case 13, Nike Inc.: Cost of Capital, I am acting as a portfolio manager to estimate Nike’s cost of capital to determine whether the stock is overvalued or undervalued. II. Alternative Solutions • Dividend Growth Model (DGM) see appendix for calculations • Capital Asset Pricing Model (CAPM) see appendix for calculations • Weighted Average Cost of Capital (WACC) see appendix for calculations III. Analysis of the Alternatives • Dividend

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  • Cost of Capital

    sell and that there are no significant switching costs. However, their degree of operating advantage is high at 2.93 (Exhibit 1) which would indicate high business risk. If management adds fixed operating costs to their business operations, without an increase in sales, the firm's profit declines and it becomes possible for total costs—variable plus fixed—to exceed sales and the firm to report a loss. Bed Bath and Beyond Cash and Debt-to-total Capital While BBBY's balance sheet is strong, there

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  • Computing the Divisional Cost of Capital

    Papers University of Wollongong Year  Computing the divisional cost of capital using the pure play method H. W. Collier∗ S. Haslitt‡ T. Grai† C. B. McGowan∗∗ of Wollongong, collier@uow.edu.au University, USA ‡ Oakland University, USA ∗∗ Norfolk State University, USA † Oakland ∗ University This is a preprint of an article accepted for publication as Collier, HW, Grai, T, Haslitt, S and McGowan, CB, Computing the divisional cost of capital using the pure play method, Applied Financial

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  • Cost of Capital

    technical the capital asset pricing model relevant to ACCA Qualification Paper F9 the cost of equity Section F of the Study Guide for Paper F9 contains several references to the Capital Asset Pricing Model (CAPM). This article introduces the CAPM and its components, shows how it can be used to estimate the cost of equity, and introduces the asset beta formula. Two further articles will look at applying the CAPM in calculating a project-specific discount rate, and will review the theory, and

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  • The Cost of Capital

    Cost of Capital Introduction This paper examines key elements of a cost of capital policy to facilitate objective management and allocation of corporate funds. In order for a company to make long-term investments to grow, whether that is new equipment, new products or other assets, managers must be aware of the cost of acquiring any of these assets. The obvious objective for these managers is to earn more than the cost of capital and in doing so will increase their company’s market value. If

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  • Cost of Capital and Bunky's Burgers

    COST OF CAPITAL The Problem On January 1, 1997 Bunky's Burgers, Inc. is planning its yearly capital budget and is faced with a list of 5 potential independent proposals: PROJECT | OUTLAY | IRR | A |  8,000,000 | 14.0% | B |  8,000,000 | 21.0% | C | 10,000,000 | 19.0% | D | 12,000,000 | 13.5% | E | 12,000,000 | 16.0% | The firm's capital structure relations shown below are considered optimal and will be maintained: Debt | $120,000,000 | Preferred Stock | 20,000,000 | Common

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  • Cost of Capital

    Estimating the Cost of Capital The Cost of Capital The purpose of this case is to present evidence on how some of the most financially sophisticated companies and financial advisers estimate capital costs. This evidence is valuable in several respects. First, it identifies the most important ambiguities in the application of cost-of-capital theory, setting the stage for productive debate and research on their resolution. Second, it helps interested companies benchmark their cost-of-capital estimation

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  • Cost of Capital

    THE ACCOUNTING REVIEW Vol. 79. No. 4 2004 pp. 967-1010 Costs of Equity and Earnings Attributes Jennifer Francis Duke University Ryan LaFond University of Wisconsin Per M. Olsson Duke University Katherine Schipper Financial Accounting Standards Board ABSTRACT: We examine the relation between the cost of equity capital and seven attributes of earnings: accrual quality, persistence, predictability, smoothness, value relevance, timeliness, and conservatism. We characterize the first four attributes

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  • Cost of Capital

    Cost of Capital Pfizer is researched drug corporation that increases their own inventive pharmaceutical goods. Pfizer's global income exceeds $65 billion with a marketplace fissure close to 140 billion. The organization was founded in 1849 by two cousins, Charles Pfizer and Charles Ehart with the mission of learning and evolving new and better, ways to prevent and treat disease and improve the well-being of people. (History, 2014) This paper shall present to the reader Team B’s prospective of

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  • Cost of Capital for 2008

    Cost of Capital For 2008 Name: Course: Instructor: Date: COST OF CAPITAL FOR 2008 Introduction The cost of capital of a company refers to the return on investment that is to be expected by the lenders and the owners of the business on the resources that they put in the company. Owners hope to get returns in terms of dividends as lenders hope to gain interest on the loans that they have advanced to the company. The cost of credit can be derived as follows; Weighted

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  • Cost of Capital for 2008

    Cost of Capital For 2008 Name: Course: Instructor: Date: COST OF CAPITAL FOR 2008 Introduction The cost of capital of a company refers to the return on investment that is to be expected by the lenders and the owners of the business on the resources that they put in the company. Owners hope to get returns in terms of dividends as lenders hope to gain interest on the loans that they have advanced to the company. The cost of credit can be derived as follows; Weighted

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  • Cost of Capital for 2008

    Cost of Capital For 2008 Name: Course: Instructor: Date: COST OF CAPITAL FOR 2008 Introduction The cost of capital of a company refers to the return on investment that is to be expected by the lenders and the owners of the business on the resources that they put in the company. Owners hope to get returns in terms of dividends as lenders hope to gain interest on the loans that they have advanced to the company. The cost of credit can be derived as follows; Weighted

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  • Cost of Capital Misconceptions

    4 The cost of capital is a central concept in financial management linking the investment and financing decisions. Hence, it should be calculated correctly and used properly in investment evaluation. Despite this injunction, we find that several errors characterize the application of this concept. The more common misconceptions, along with suggestions to overcome them are discussed below; The concept of cost of capital is too academic or impractical. Some companies do not calculate the cost of capital

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  • Nike Inc Cost of Capital

    NIKE, INC.: COST OF CAPITAL The cost of capital represents the minimum return required by providers of finance for investing in an asset, it may be a project, a business or strategic unit or an entire company. It needs to represent the capital structure used to finance the investment and therefore likely to include cost of equity and debt. The cost of capital also represents a “hurdle rate” that a company’s projects must exceed in order to increase shareholders wealth and is used as a

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  • Nike Cost of Capital

    UV0010 NIKE, INC.: COST OF CAPITAL On July 5, 2001, Kimi Ford, a portfolio manager at NorthPoint Group, a mutual-fund management firm, pored over analysts’ write-ups of Nike, Inc., the athletic-shoe manufacturer. Nike’s share price had declined significantly from the beginning of the year. Ford was considering buying some shares for the fund she managed, the NorthPoint Large-Cap Fund, which invested mostly in Fortune 500 companies, with an emphasis on value investing. Its top holdings included

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  • Nike Inc. - Cost of Capital

    it so important to estimate a firms cost of capital? The WACC (weighted average cost of capital) is a percentage figure resulting from a calculation method by which the adequate cost of capital of a firm is expressed. It considers the composition of a company’s funding, be it debt or equity. A corporation whose source of funding is equity by 100 percent will have a WACC equal to the cost of equity. By contrast, a levered company will have to reflect the cost of debt as well. The WACC takes their

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  • Mariott Cost of Capital

    | |Cost of Capital | Concepts Covered Cost of Equity: Cost of Equity is the minimum rate of return a firm must offer to the shareholders. This is necessary as the shareholders who have taken a risk in investing would be waiting for returns. The formula for Cost of Equity is given by: Cost of Equity =

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  • Cost of Capital

    Week 5 Cost of Capital Video Pfizer corporation is a research based pharmaceutical company in fact they are the world’s largest. They develop their own products, in a risky environment where a new product may have hundreds of millions of dollars invested in it and may fail and not be a viable product. Development of these types of products causes some significant cost of capital challenges for Pfizer. Pfizer’s capital structure like many large publicly held corporations is made up primarily of

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  • Cost of Capital Paper

    Capital Budgeting Techniques | | GLOSSARY Capital Budget:  (1) The amount of money set aside for the purchase of fixed assets (e.g., equipment, buildings, etc.).  Also, (2) a request for authorization to purchase new fixed assets. Mutually Exclusive Proposals:  Consideration of two or more assets that perform the same function.  If one is chosen for purchase, the others are automatically rejected. Profitability Index:  A ratio of the present value of the benefits (PVB) to the present value

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  • Cash Flow & Cost of Capital

    Cash  Flow  and  Cost  of  Capital   Learning  Objec-ves     2 ¨  Cash  flow  to  invested  capital   ¤  $4,000.00   $3,500.00   $3,000.00   $2,500.00   Free  cash  flow       NOA NIBCL NOA ¨  Rate  cost  of  capital   ¤  NIBCL C IC OA Weighted  average  cost  of  capital   Includes  all  costs  of  capital     Fair  value  of  invested  capital     $2,000.00   $1,500.00   $1,000.00   $500

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  • Cost of Capital

    POST-GRADUATE STUDENT RESEARCH PROJECT Estimating the Cost of Capital of CNX Nifty Prepared by Bhaswar Sarkar Student of PGDM Program of 2011-2013 Xavier Institute of Management, Bhubaneswar Supervised by Dr. Shridhar Kumar Dash Professor, Accounting and Finance Xavier Institute of Management, Bhubaneswar March 2013 Estimating the Cost of Capital of CNX Nifty Prepared by Bhaswar Sarkar1 Abstract This paper calculates the cost of capital of the CNX Nifty 50 Stock Index. It explores

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  • Cost of Capital

    MANAGEMENT ADVISORY SERVICES COST OF CAPITAL THEORY 1. All of the following statements are correct except: a. The matching of asset and liability maturities is considered desirable because this strategy minimizes interest rate risk. b. Default risk refers to the inability of the firm to pay off its maturing obligations. c. The matching of assets and liability maturities lowers default risk. d. An increase in the payables deferral period will lead to a reduction in the need

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  • Marriott Corporation: the Cost of Capital

    Harvard Business School 9-298-101 Rev. March 18, 1998 Marriott Corporation: The Cost of Capital In April 1988, Dan Cohrs, vice president of project finance at the Marriott Corporation, was preparing his annual recommendations for the hurdle rates at each of the firm's three divisions. Investment projects at Marriott were selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division. In 1987, Marriott's sales grew by 24% and its return on equity stood

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  • Cost of Capital

    Cost of Capital Practice Problems 1. Why is it that, for a given firm, that the required rate of return on equity is always greater than the required rate of return on its debt? The required rate of return on equity is higher for two reasons: • The common stock of a company is riskier than the debt of the same company. • The interest paid on debt is deductible for tax purposes, whereas dividends paid on common stock are not deductible. 2. The Mountaineer Airline Company has consulted

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  • Midland Energy Resources: Cost of Capital

    Midland Energy Resources, Inc.: Cost of Capital Analysis TABLE OF CONTENTS I. EXECUTIVE SUMMARY ........................................................................................ 2 II. COMPONENT ESTIMATIONS ............................................................................... 2 1. Effective Tax Rate - t ............................................................................................. 2 2. Capital Structure – D/E ..............................................

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  • Nike Cost of Capital

    Case Study: Nike, Inc.: Cost of Capital BUSFIN 4214 Written By: Joe Nau Nau.33@osu.edu Section: 32347 Cost of Capital NorthPoint Group’s strategy consists of identifying and investing in undervalued public companies. Joanna Cohen, an assistant to a portfolio manager at NorthPoint, is asked to help evaluate whether Nike Inc. is undervalued. Analysis by the portfolio manager shows that when Nike’s cash flows are discounted at 12% their shares are overpriced, however, when discounted at rates

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  • Marriott Corporation Cost of Capital

    Harvard Business School 9-298-101 rP os t Rev. March 18, 1998 Marriott Corporation: The Cost of Capital In April 1988, Dan Cohrs, vice president of project finance at the Marriott Corporation, was preparing his annual recommendations for the hurdle rates at each of the firm's three divisions. Investment projects at Marriott were selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division. op yo In 1987, Marriott's sales grew by 24%

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  • Cost of Capital

    Cost of Capital Calculating Cost of Capital: * Component Costs * Capital Structure Component Costs: * Cost of debt – R d * Cost of preferred stock – R p * Cost of equity – R e Component Cost of Debt (R d) * Loan: R d = Effective Annual Rate of Loan. EAR=1+APRmm-1 * Bond: R d = YTM. P0=c×1Rd-1Rd(1+Rd)t+FV(1+Rd)t Where: “c” is dollar coupon; “FV” is Face or par value, which is $1,000; “t” is remaining years to maturity. “P 0” is current market price of

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  • Cost of Capital

    US E RE VI PR EW O P ON E R LY T Y ± N OF OT C E NG FO A R GE SA LE LEA OR R N CL ING AS SR O Northern Forest Products OM Case 90 Cost of Capital Directed FO R Northern Forest Products (NFP) was established in the 1800s to log timber in the Great North Woods. In response to changing conditions, the company underwent radical changes in the way it operates and currently it is a large multidivisional corporation. The major focus of the company remains managing

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  • Cost of Capital

    Quiz 11 Cost of Capital 1(11-2) NPV and IRR F I Answer: b EASY [i]. A basic rule in capital budgeting is that If a project's NPV exceeds its IRR, then the project should be accepted. a. True b. False 2(11-2) Mutually exclusive projects F I Answer: b EASY [ii]. Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method puts the other one first. In theory, such conflicts should be resolved in

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  • Cost of Capital

    Cost of Capital FINANCING DECISION  In financing decision, it is totally concentrated on how to generate finance from long term sources  It is also considered the following points:  Cost of Finance  Time period  Purpose of Finance  Amount of Finance  Risk involvement SOURCES OF FINANCE Finance required for investing purpose may be from one or combination of the following sources: 1) From Debt Source 2) From Equity Source i. Ordinary Shares ii. Preference Shares iii. Retained Earning

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  • Midland Resources Cost of Capital

    Data and their limitation 3. Use of CAPM, Cost of Equity, Effect of Leverage on the Ce, WACC 4. Use of data for comparable to estimate asset betas for division-specific cost of capital 5. Biases and Limitations No financial modeling. In the previous years they would include WACC as part of case study 3 – Now it has been changed to 2 – without any actual financial statements. No excel modeling. Focused on how to address the issues. Multi-Divisional Comapnies Discount Rate, based on the U

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  • Nike Cost of Capital

    order to completely analyze Nike and its possible place in the NorthPoint Large-Cap Fund, Ford needs to know Nike’s cost of capital. One of the most useful ways to measure the cost of capital is the weighted average cost of capital (WACC). Theoretically, the optimal capital structure in the mix of types of financing that produces the lowest WACC. WACC is calculated by multiplying the cost of each type of financing a company uses, be it debt or the many types of equity, by their respective weights. It

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  • Cost of Capital

    HOW DO CFOS MAKE CAPITAL BUDGETING AND CAPITAL STRUCTURE DECISIONS? by John Graham and Campbell Harvey, Duke University* e recently conducted a comprehensive survey that analyzed the current practice of corporate finance, with particular focus on the areas of capital budgeting and capital structure. The survey results enabled us to identify aspects of corporate practice that are consistent with finance theory, as well as aspects that are hard to reconcile with what we teach in our business

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  • Cost of Capital

    COST OF CAPITAL The Marietta Corporation, a large manufacturer of mufflers, tailpipes, and shock absorbers, is currently carrying out its financial planning for next year. In about two weeks, at the next meeting of the firm's board of directors, Frank Bosworth, vice president of finance, is scheduled to present his recommendations for next year's overall financial plan. He has asked Donna Botello, manager of financial planning, to gather the necessary information and perform the calculations for

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  • Cost of Capital

    With trillions of dollars in cash sitting on their balance sheets, corporations have never had so much money. How executives choose to invest that massive amount of capital will drive corporate strategies and determine their companies’ competitiveness for the next decade and beyond. And in the short term, today’s capital budgeting decisions will influence the developed world’s chronic unemployment situation and tepid economic recovery. Although investment opportunities vary dramatically across

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  • Cost of Capital

    ef Concepts • Cost of capital is the rate of return that a firm must earn on its project/ investments to maintain its market value and attract funds. • Business risk is the risk to the firm of being unable to cover fixed operating costs. • Financial risk is the risk of being unable to cover required financial obligations such as interest and preference dividends. • Explicit cost is the rate that the firm pays to procure financing. • Implicit cost is the rate of return associated with the best

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