FIN 401 Study Guide - Midterm Guide: Capital Structure, Capital Budgeting, Leaseback

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blackherring195

2 Nov 2015

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Wacc= wd x kd(1-t) + we x ke +wps x kps. Finding cost of equity: dividend growth model (dgm) P 0 growth 1) historic average 2) retention ratio * roe: capital asset pricing model (capm or sml) Cost of debt: bond: i% on calculator for calculation, preferred stock (perpetuity): k ps= d. E = market value of equity = # outstanding shares * price per share. D = market value of debt = # outstanding bond * bond price. V = market value of firm = d + e: weights. V percent financed with equity percent financed with debt. Short-term, lessor responsible for insurance, tax, maintenance, often cancelable. Not on balance sheet: financial/capital lease leaseback and leveraged) Long term, lessee responsible, not cancelable, (tax-oriented, sale and. Pv of lease payments included as liability on bs, same amount on asset side ownership transfers end of term, lessee can purchase asset below market price, term is.

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WACC calculations in Excel with (a) Cost of Equity calculated in both Dividend Growth Model and CAPM (aka SML), (b) Cost of Debt calculated from Bond Table weighted average,WACC calculation including weighted average Bond Table for Debt Calculations, Equity from both Dividend Growth Model and CAPM Model, and Preferred Stock (if any).

information for calucations provided below.


	BONDS FOR ____Mattel -r_________________
		A	B	C	D	E	F
				(A * B) / 100			(D * E)/100
	SYMBOL	AMOUNT OUTSTANDING	LAST TRADE PRICE	MARKET VALUE	% of TOTAL	YTM	WEIGHTED YTM
1	Mattel 2.35%	500,000,000	100.7	503,500,000	0.229	1.99	0.456%
2	Mattel 2.35%	350,000,000	97.8	342,300,000	0.156	2.89	0.451%
3	Mattel 5.45%	300,000,000	102.9	308,700,000	0.141	5.24	0.737%
4	Mattel 4.35%	250,000,000	106.2	265,500,000	0.121	2.48	0.300%
5	Mattel 6.2%	250,000,000	111.1	277,750,000	0.127	5.36	0.678%
6	Mattel 1.7%	250,000,000	99.0	247,500,000	0.113	2.83	0.319%
7				-	0.000		0.000%
8				-	0.000		0.000%
9				-	0.000		0.000%
10	Mattel 3.15%	250,000,000	99.9	249,750,000	0.114	3.18	0.362%
	TOTAL			2,195,000,000	1.000		3.303%
					po	25.01
					D	2,195,000,000
					RD	3.30%
					shares outstanding	342,510,000
					beta	0.74
					g	10.56%
					10 year bond yield rf	2.21
					rm	12.44%
					d1	.38*4 =	1.52

					Re	Rf+Beta(Rm-Rf)

olivebuffalo87

GOAL is trying to determine its optimal capital structure. The Companyâs capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table:

D/V	Rating	Cost of Debt
0.1	AA	7.00%
0.2	A	7.2
0.3	A	8
0.4	BB	8.8
0.5	B	9.6

The companyâs tax rate is 40 percent. The company uses the CAPM model to estimate its cost of equity. The risk-free rate is estimated to be 5 percent and the equity market risk premium is 6 percent. Companyâs estimate of its asset beta is 1.05

Companyâs operating profit (EBIT) is expected to be $2,000,000 in the foreseeable future. Assume no net investment in fixed assets (only depreciated assets are replenished) and working capital. ABC currently has 1,000,000 outstanding shares.

1) Assume that company is planning to recapitalize to reach an optimal capital structure. Assuming that company will use the new debt to repurchase its shares, for each D/V level determine

a) Market Value of Firm

b) Cost of equity

c) Share Price after the recapitalization announcement

d) Number of shares outstanding following the stock repurchase

e) Market Value of Equity

f) WACC and Optimal Capital Structure

g) At what level of debt, companyâs WACC is minimized? Explain.

2) Reflect on what you have learned about firmâs choice of capital structure in the light of the question above. What other considerations are given in determining capital structure in practice that is not captured in the context of the current question?

aquamarineantelope510

Most of this question was answered the tax rate was missing. The tax rate is now included. 22.38%Thank you

Need

BONDS FOR ____Mattel -r_________________
	A	B	C	D	E	F
			(A * B) / 100			(D * E)/100
SYMBOL	AMOUNT OUTSTANDING	LAST TRADE PRICE	MARKET VALUE	% of TOTAL	YTM	WEIGHTED YTM
Mattel 2.35%	500,000,000	100.7	503,500,000	0.229	1.99	0.456%
Mattel 2.35%	350,000,000	97.8	342,300,000	0.156	2.89	0.451%
Mattel 5.45%	300,000,000	102.9	308,700,000	0.141	5.24	0.737%
Mattel 4.35%	250,000,000	106.2	265,500,000	0.121	2.48	0.300%
Mattel 6.2%	250,000,000	111.1	277,750,000	0.127	5.36	0.678%
Mattel 1.7%	250,000,000	99.0	247,500,000	0.113	2.83	0.319%
			-	0.000		0.000%
			-	0.000		0.000%
			-	0.000		0.000%
Mattel 3.15%	250,000,000	99.9	249,750,000	0.114	3.18	0.362%
TOTAL			2,195,000,000	1.000		3.303%
				po	25.01
				D	2,195,000,000
				RD	3.30%
				shares outstanding	342,510,000
				beta	0.74
				g	10.56%
				10 year bond yield rf	2.21
				rm	12.44%
				d1	.38*4 =	1.52

				Re	Rf+Beta(Rm-Rf)

				tax rate	22.38%

aquamarinealligator757

FIN 401 Study Guide - Midterm Guide: Capital Structure, Capital Budgeting, Leaseback

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