Mary Francis has just returned to her office after attending preliminary discussions with investment bankers. Her last meeting regarding the intended capital structure of Apex went well, and she calls you into her office to discuss the next steps.
"We will need to determine the required return for our intended project so that we have a decision criteria defined for the project," she says.
"Do you have the information I need to describe capital structure and to calculate the weighted average cost of capital (WACC)?" you ask.
"I do," she smiles. "We can determine the target WACC for Apex Printing, given these assumptions," she says as she hands you a piece of paper.
Weights of 40% debt and 60% common equity (no preferred equity)
A 35% tax rate
Cost of debt is 8%
Beta of the company is 1.5
Risk-free rate is 2%
Return on the market is 11%
"Great," you say. "Thanks."
"Be sure to indicate how these costs of capital might be used to determine the feasibility of the capital project," Mary says. "I want your recommendation about which is more appropriate to apply to project evaluation, too. Let me know what you think."
"One more thing," she says as she stands up to signal the end of the meeting. "You did a good job with the explanations you provided Luke the other day. Would you have time to define marginal cost of capital for me so I can include it in my discussions with investors? You seem to have a knack for making things accessible to non-financial folks."
"No problem," you say. "I'm glad my explanations are so useful!"
To recap, please assist with the following:
Describe capital structure.
Determine the WACC given the above assumptions.
Indicate how these might be useful to determine the feasibility of the capital project.
Recommend which is more appropriate to apply to project evaluation.
Define marginal cost of capital.
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Capital Structure & WACC - Apex Printing
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This paper mainly focuses on determining the target WACC of Apex Printing. Mary Francis has just returned to her office after preliminary discussions with investment bankers. The job now is to determine the target required return for the intended project along with description of capital structure. This paper also tells us how the capital structure and WACC might be useful to determine the feasibility of the project and a recommendation of which is more appropriate to apply to project evaluation. Finally this paper also defines marginal cost of capital.
Capital Structure & WACC - Apex Printing
Apex printing is targeting to determine the required return of the intended project. In connection with that, this paper describes the capital structure, determines the WACC, describes the usefulness of capital structure and WACC to determine the feasibility of the project and a recommendation of which is more appropriate to evaluate the project. Marginal cost of capital is also being described.
Capital structure refers to the composition of various types of financing namely debt, preferred stock and common stock. All these components are the ways by which financing can be obtained from the investors including public. The way the capital components are weighed in the capital structure also determines the risk and solvency of the company. For example, too much of debt in the capital structure increases the risk and cost of capital of a company. This is because the debt investors would then interfere in the operations of the company and may stipulate terms for further financing. Increase in debt also decreases the profits of the company because the interest cost on debt needs to be paid irrespective of the availability of profits. In a way this decreases the liquidity also because cash needs to be shed out regularly to pay interest. But the advantage of debt capital is that the interest on debt is allowed as an expense for tax purposes, thereby ...
The expert determines the WACC given embedded assumptions. The information required to describe the capital structures are calculated.
The company of this research is Nike
The Company on this research is NIKE.....Everything on this research need to be from Nike the shoe company...
Write a very brief introduction indicating why you chose this particular company. Provide a brief summary of the company's history and the type of business and industry it is in. Analyze the company's operations and forecast for the next 3 to 5
a. fiscal years' sales and earnings AND STOCK PRICE.
Obtain each of the company's various reports. You can call the company's treasurer or investor relations office and ask for the reports. Read each report and briefly analyze the company on the basis of these reports. Available reports may include the Annual Report, 10K, Quarterly Report (10Q), Prospectus, Proxy Statement for Annual Meeting, Press Releases and Financial Analysts' Reports.
4. Obtain current reports in Value Line (basic & expanded volumes), Moody's S&P's and from a securities brokerage firm. Read and analyze each report. What is YOUR analysis of the company based on reading the reports? Does your opinion of the company differ from the reports? What accounts for the difference? Your conclusions based on your analysis is most important.
5. Keep daily or weekly stock prices on your company for nine weeks. Also keep track of a stock index--Dow Jones Index, NYSE Index or S&P 500 Index for the same period. At the end of the nine weeks, calculate the rate of return on the stock and on the Index over the period.
6. BE BRIEF, CONCISE, TO THE POINT. In order to make a forecast of next year's sales, earnings and stock price you will have to answer the following questions or consider the following issues AT A MINIMUM:
7. What is the company's RISK? What does the beta tell you
a. about the riskiness of the stock? How does the company's
b. beta compare to the beta of other companies in the industry?
c. Value Line?
8. What type of stocks, bonds, options and warrants does the
a. company have? Give specifics--class, date, maturity, coupon
b. rate, outstanding volume, authorized, etc. What are the
c. ratings of the bonds?
9. What kind of capital structure does the company have (Debt
a. to Equity %)? Can you tell whether it is typical of the
b. industry or different? Has the company ever been in a
c. Why, and what was the outcome?
d. What was the capital structure before and after Chapter 11?
10. Various ratios relate the internal performance of the firm
a. to the external judgment of the market place in terms of
b. What is the book value and market value of the company?
c. What is the price-to-book ratio of the company?
i. What is the price-to-market ratio of the market?
ii. Check Value Line publication in library?
d. Do a trend analysis (five years) of at least five
1. important ratios.
ii. Analyze the company's liquidity and profitability position.
iii. Do a trend analysis (five years) of the sales, earnings & price of the company.
e. From the above, compare the most recent year's ratios
i. for your company to the ratios for the industry.
ii. How does the company compare? Is this good or bad?
11. Does the company pay a dividend?
a. If so, what has been the growth rate?
b. Does the company have a dividend reinvestment plan?
c. What is the company's past history of dividends?
d. Is there a trend?
12. Has the company ever had stock splits or stock dividends?
a. If so, what was the probable reason?
b. Check the Value Line graph.
13. Does the company have treasury stock?
a. How Much?
b. Check the balance sheet.
14. Has the company ever been involved in merger activity?
i. What transpired?
15. What are the amounts of the top salaries for the executive officers?
a. Is there a relationship between the top executive's salary, the number of years he has been with the firm and the number of shares of stock that he own?
b. Do you think the number of shares he owns seem high or low? Discuss.
c. What percentage of shares are owned by insiders?
d. Check Value Line.
16. Find two current articles on the company in Forbes, Fortune,
a. Business Week, The Wall Street Journal, Barrons or The Economist. Briefly
b. summarize the two articles in your report.
17. Obtain a copy of a research report on your company. It is generally available from one of the retail security brokerage firms. You may have to call the brokerage firm's research department.View Full Posting Details