Wacc, Corporate Finance

Assignment Help:
The cost of capital for a firm can differ from the cost of capital for each of its businesses. When a firm has multiple businesses, it is important to use the cost of capital appropriate to the particular project under consideration, rather than the firm''s overall cost of capital, when evaluating a proposed project. Renowned Cola, Inc.''s 2005 annual report explains that Renowned Cola''s investments are expected to generate cash returns that exceed its "long-term cost of capital," which Renowned Cola estimated to be approximately 10% at year-end 2005. Renowned Cola has three main lines of business, soft drinks, notably Dr. Cola; snack foods, such as Fritos; and restaurants. Restaurant investments include NPC, which has a beta of 0.80 and a debt-to-firm value ratio is 0.31. Renowned Cola did not report costs of capital separately for these three businesses.
Below, we have available year-end data for 2005 provided by Renowned Cola.
• Renowned Cola’s Items Values (M = millions)
• Cash and marketable securities $1,498M (market value assumed)
• Short-term debt $706M
• Long-term debt $8,509M ($8,747M market value)
• Common shares outstanding 788M
• Year-end share price $55.875
• Income tax rate 34%
• Renowned Cola''s beta 1.0
• Long-term borrowing rate 6.75%
• Short-term riskless rate 5.13%
• Intermediate-term riskless rate 5.50%
• Long-term riskless rate 6.00%
• Short-term market risk premium 8.40%
• Intermediate-term market risk premium 7.40%
• Long-term market risk premium 7.00%
• Given the above information, answer the below questions.
Questions:
1. Calculate the market value of Renowned Cola''s debt at year-end 2005. What is the book
value of debt? Why do usually use market or book values for debt? Explain. (4 marks)

2. To the nearest million, calculate the market value of Renowned Cola''s stockholders'' equity at year-end 2005. (3 marks)

3. Renowned Cola subtracts the value of its short-term debt from its total debt when calculating its "net debt ratio." Renowned Cola believes that the market values for its traded debt are not accurate because the bonds trade infrequently. Given this belief and their treatment of short-term debt, compute Renowned Cola''s net debt ratio using book values for debt and market value for equity. (5 marks)
4. Compute Leverage keeping the short-term debt as part of total debt. Using the CAPM compute re for short-term, medium-term, and long-term investments. Compute WACC for short-term, medium-term, and long-term investments. Suppose you were considering a long-term capital investment project, which WACC would you use and why? You can assume that the asset''s risk profile for the project mirrors Renowned Cola''s overall risk profile. (6 marks)

5. Should Renowned Cola use its overall cost of capital to evaluate its restaurant capital
investments? Under what circumstances would it be correct to do so? (4 marks)

Related Discussions:- Wacc

Corporate identity in marketing, a) Describe what you understand by corpora...

a) Describe what you understand by corporate identity in marketing. b) Show how corporate identity is normally visibly manifested. c) Management has delegated you the role o

Top - down methods, For a large set of SKUs and in two successive selling s...

For a large set of SKUs and in two successive selling seasons, we have compared the accuracy of three quantitative forecasting methods based on advance (preview) demand information

Why the discount rate equals opportunity cost of capital, Question: (a)...

Question: (a) Describe why the discount rate equals opportunity cost of capital? (b) "Nominal rate less inflation rate is equal to real rate of return" - Is it true? Why or

Describe the validity of the modigliani and miller model, Theoretically Mod...

Theoretically Modigliani and Miller (1958) took a fairly straightforward view of the purpose of a company in an economy. They pointed out that companies take cash from providers o

Touring enterprises, what is the major value of the weighted cost of capita...

what is the major value of the weighted cost of capital calculation for the firm?

Use of forecasting method, Cooper Toys sells a portable baby stroller calle...

Cooper Toys sells a portable baby stroller called the Tot n' Trot. The past two years of demand for Tot n'Trots are shown in the table below. Use an appropriate method to forecast

Finance, Question 5 A company has a total investment of Rs 500,000 in asset...

Question 5 A company has a total investment of Rs 500,000 in assets, and 50,000 outstanding ordinary shares at Rs 10 per share (par value). It earns a rate of 15 per cent on its in

IRR & WACC, I have been given 3 different types of projects. They state th...

I have been given 3 different types of projects. They state the IRR and how much the project will add. The question goes on to give a WACC with break points. The question wants

Main types of estimating methodology, (a) Accurate estimation is crucial f...

(a) Accurate estimation is crucial for effective planning and control and is related with time, information, experience of estimator, techniques used and funding. Discuss the thre

Hybrid paying method taxation and raising cash , Finance There are var...

Finance There are various ways of making a payment for M&A. Cash, stock-swap and combination of both. The hybrid paying method is commonly used method for most of organisations

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd