After considering expanding your line of equipment and apparel for high school athletic teams to include soccer teams and gathering information on the increase in sales for your division and the investment needed in new manufacturing equipment, without having to hire additional manufacturing personnel, you arrange a meeting with the CFO. During the meeting Don listened to your proposal, reviewed your information, but questioned your use of a 6% cost of capital. He indicated to you that the head of treasury could raise debt at 7% in today's market. Taking into consideration how a company's cost of capital is calculated, and how market rates and the company's perceived market risk impacts a firm's cost of capital; provide your viewpoint on whether 6% is reflective of Abel Athletics' current cost of capital. Include in your assessment the following:
What does a company's cost of capital represent and how is it calculated?
How do market rates and the company's perceived market risk influence its cost of capital, and how does the company's debt to equity mix impact this cost of capital?
What is market risk and how is it measured?
Don mentioned using standard deviation and the coefficient of variation to measure risk. What does that mean?
The following website, found in the phase resources, might be useful:
Revisiting the Capital Asset Pricing Model (http://www.stanford.edu/~wfsharpe/art/djam/djam.htm)
In your own words, please post a response to the Discussion Board and comment on other postings. Include a spreadsheet showing your calculations. You will be graded on the quality of your postings.
Suggested Topic Resources
From the left navigation bar, click Course Materials under Interactive Learning. This will allow you to view the supporting multimedia or text-based materials for this Phase.
Click on the link for tutorials on Microsoft Excel.
Click on the link for an article on Microsoft Excel.
To access the Microsoft Excel Learning Lab, click on the Learning Center on the top navigation bar. Then click on the Learning Labs in the left navigation. From there you can go to one of the following labs:
"Advanced Functions of Excel Lab"
"Basic Microsoft Office and Virtual Campus Lab"
"Center for Excellence in IT"
All of the labs have information on Excel in them.
Objective: Measure risk using standard deviation and coefficient of variation.
Use effective communication techniques
This solution is comprises of question related with Cost of Capital, CAPM and Risk Analysis.