POPM 3240 Lecture 2: Measures of Association and Measures of Effect
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- Compute the Person-Years of smoking exposure using the tablebelow. (Hint: add the years at risk of throat cancer (TC) â seeexamples).
- Once they develop TC they are no longer at risk and their yearsin the study canât be counted.
- Add each personâs years of exposure in the right column andenter the value in the box next to âTotal P-Y at Risk of ThroatCancerâ.
- Then count the P-Y at risk for the Current/Former Smokers(exposed) and the P-Y at risk for the Never-Smokers (notexposed)
- Using the Person-Years for each exposure group as thedenominator and the number of TC recorded for each exposure group;compute the Incidence Density for TC risk in current/former smokers(exposed) (IDE) & compute the incidence density forTC risk in never smokers (not exposed) (IDNE).
- The compute the Incidence Density Ratio (also call RR), dividethe IDEby the IDNE. This value is interpretedthe same as the Relative Risk.
Years in the Study at Risk of Developing ThroatCancer | Years at Risk | |||||||||
Person | Smoker | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | |
A | Yes | at risk | at risk | TC | No longer at risk of throat cancer | 2 | ||||
B | No | at risk | at risk | at risk | at risk | at risk | at risk | at risk | at risk | 8 |
C | No | |||||||||
D | Yes | TC | ||||||||
E | Yes | TC | ||||||||
F | No | |||||||||
G | No | TC | ||||||||
H | No | TC | ||||||||
I | Yes | TC | ||||||||
J | Yes | TC | ||||||||
Total P-Y at Risk of Throat Cancer | ||||||||||
- Sum the Person-Years of Exposure for each exposure group? (1point)
Former/Current Smoker (1/2 point)
Never Smoker(1/2 point)
- How many of the exposed & not exposed participantsdeveloped throat cancer (1 point)?
Former/Current Smoker (1/2point):
Never Smoker(1/2point):
- What is the Incidence Density for the exposed (IDE)and non-exposed (IDNE) groups? (1 point)
Former/Current Smoker (1/2point):
Never Smoker (1/2 point):
- Compute the Incidence Density Ratio (IDR). Is the IDRprotective or hazardous? (1 point).
10. Using the interpretation for Relative Risk onpage 120 of your text, interpret the meaning of the IncidenceDensity Ratio (1 pt):
Part A: Weighted Average Cost of Capital (WACC)
1. Go to http://thatswacc.com/[1] and enter the ticker symbol for the stock you selected and click on the tab entitled âCalculate WACC.â
2. Complete the following tables:
| Name of Company/Stock | The Coca Cola Company |
| Ticket Symbol | KO |
From the http://thatswacc.com/ results for your company:
| WACC | 7.81% |
| Cost of Debt, iD | 1.99% |
| Corporate Tax Rate, TC | 23.98% |
| Total Debt, D | 44,213,000,000 |
| Total Equity, E | 201,070,000,000 |
| Total Firm Value, V | 244,049,000,000 |
| Cost of Equity, iE | 9.16% |
CAPM Components
| Beta, β | 0.77 |
| Historical market return, iM | Assume 11% |
| Risk-free rate, iF | Assume 3% |
3. Using data in the table confirm the accuracy of the siteâs WACC calculation:
| Weight of Equity | .8197469861 |
| Weighted Average Cost of Equity | .0750888239 or 7.51% |
| Weight of Debt | .1802530139 |
| Pre-Tax Weighted Average Cost of Debt | .003587035 or .36% |
| After-Tax Weighted Cost of Debt | .0027265178 or .27% |
| Weighted Average Cost of Capital | .0078540019 or 7.78% |
Part B: Dividend Payout and Growth Ratios:
Internal growth rate = (ROA â RR) / [1-(ROA â RR)]
where RR = Retention ratio = (Addition to retained earnings)/Net income
The internal growth rate measures the amount of growth a firm can sustain if it uses only internal financing (retained earnings) to increase assets
Sustainable growth rate= (ROE â RR) / [1-(ROE â RR)]
If the firm uses retained earnings to support asset growth, the firmâs capital structure will change over time, i.e., the share of equity will increase relative to debt
To maintain the same capital structure managers must use both debt and equity financing to support asset growth
The sustainable growth rate measures the amount of growth a firm can achieve using internal equity and maintaining a constant debt ratio
1. For the firm selected for Part A, calculate its internal growth rate for the last fiscal year:
ROA= 8.16% RR= .22 Net Income for December 2015 = 7,351,000
|
2. Calculate the firmâs sustainable growth rate for the last fiscal year:
ROE= 28.77% RR= .22 Net Income for December 2015 = 7,351,000
|
Part C
1. Consider your results for Parts A and B. If the chosen firm grows at its internal growth rate, increasing assets only with its retained earnings, how will this likely affect its WACC? Show calculations.
Hi Everyone, I just need help on Part C question 1. I'm confused about the calculations they are asking for to the show the work needed to answer that question. If someone could explain their calculations for the question, I would really appreciate it!
Above I listed all of my work and calculations that I've done for Part A and Part B.
Financial Analysis Exercise IV
Part A: Weighted Average Cost of Capital (WACC)
Here again is the formula for WACC. For simplicity the term for preferred stock has been removed:
Go to http://thatswacc.com/[1] and enter the ticker symbol for the stock you selected and click on the tab entitled âCalculate WACC.â
Complete the following tables:
| Name of Company/Stock | Walt Disney |
| Ticker Symbol | DIS |
From the http://thatswacc.com/ results for your company:
| WACC | 13.50% |
| Cost of debt, iD | 0 |
| Corporate tax rate, TC | 34.98 |
| Total debt, D | 48,768,000 |
| Total equity, E | 10,251,618,400 |
| Total firm value, V | 10,300,386,400 |
| Cost of equity, iE | 13.56% |
CAPM Components
| Beta, β | 1.32 |
| Historical market return, iM | Assumed 11% |
| Risk-free rate, iF | Assumed 3% |
Using data in the table confirm the accuracy of the siteâs WACC calculation:
| Weight of Equity | ||
| Weighted Average Cost of Equity | E | |
| Weight of Debt | ||
| Pre-Tax Weighted Average Cost of Debt | D | |
| After-Tax Weighted Cost of Debt | D · (1- TC) | |
| Weighted Average Cost of Capital | = · iE + · iD · (1-Tc) |
Part B: Dividend Payout and Growth Ratios
Recall from Module 1 the following two ratios:
Internal growth rate = (ROA â RR) / [1-(ROA â RR)] (Eq. 3-30)
where RR = Retention ratio = (Addition to retained earnings)/Net income (Eq. 3-31)
The internal growth rate measures the amount of growth a firm can sustain if it uses only internal financing (retained earnings) to increase assets
Sustainable growth rate = (ROE â RR) / [1-(ROE â RR)] (Eq. 3-33)
If the firm uses retained earnings to support asset growth, the firmâs capital structure will change over time, i.e., the share of equity will increase relative to debt
To maintain the same capital structure managers must use both debt and equity financing to support asset growth
The sustainable growth rate measures the amount of growth a firm can achieve using internal equity and maintaining a constant debt ratio
1. For the firm selected for Part A, calculate its internal growth rate for the last fiscal year:
| = (ROA â RR) / [1-(ROA â RR)] = |
2. Calculate the firmâs sustainable growth rate for the last fiscal year:
| = (ROE â RR) / [1-(ROE â RR)] = |
Part C.
Consider your results for Parts A and B. If the chosen firm grows at its internal growth rate, increasing assets only with its retained earnings, how will this likely affect its WACC? Show calculations.
If the chosen firm grows at its sustainable growth rate with increases in both its retained earnings and debt, maintaining a constant debt ratio, how will this affect its WACC?
If the chosen firm attempts to grow faster than its sustainable growth rate with modest increases in its debt ratio, how will this likely affect its WACC? What about very large increases in its debt ratio? Explain.
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