--%>
Assignment Help - homework help

Capital Structure

Case Study 1 You work in Walt Disney Company's corporate finance and treasury department and have just been assigned to the team estimating later today. You quickly realize that the information you need is readily available online. 1) Go to https://finance.yahoo.com. under " Market Summary," you will find the yield to maturity for the ten year treasury bond listed as "10 Yr Bond (%)." Collect this number as your risk-free rate. 2) In the box next to the "Get Quotes" button, type Walt Disney's ticker symbol (DIS) and click search. Once you see the basic information for Disney, find and click "Key Statistics" on the left side of the screen. From the key statistics. collect Disney's market capitalization (its market value of equity), enterprise value (market value equity + net debt), cash and beta. 3) To get Disney's cost of debt and the market value of its long term debt, you will need the price and yield to maturity on the firm's existing long term bonds. Go to https://www.finra.org, click on Investors and then under "Market Data." click on Bonds. Under " Quick Bond Search, click"Corporate," type Disney's ticker symbol (DIS). and click search. A list of Disney's outstanding bond issues will appear. Assume that Disney's policy is to use the yield to maturity on non callable ten year obligations as its cost of debt, Find the non-callable bond issue that is as close to ten years from maturity as possible. (Hint: You will see a column titled "Callable": make sure the issue you choose has "NO" in this column.) You may have to choose a bond issued by one of its subsidiaries, like ABC. Find the yield to maturity for your chosen bond issue (it is in the column titled "Yield") and enter that yield as your pre tax cost of debt into your spreadsheet. Next, copy and paste the date in the entire table into Excel. 4) You now have the price for each bond issue, but you need to know the size of the issue. Returning to the Web page, go to the row of the bond you chose and click the Issuer Name in the first column (this will either be Walt Disney Company or ABC or another subsidiary). This brings up a Web page with all of information about the bond issue. Scroll down until you find "Amount Outstanding" on the right side. Nothing that this amount is quoted in thousands of dollars (eg., $60,000 means $60 million = $60,000,000) , record the issue amount in the appropriate row of your spreadsheet. Repeat this step for all of the bond issues. 5) The price of each bond issue in your spreadsheet is reported as a percentage of the bond's par value. For example, 104.50 means that the bond issue is trading at 104.5% of its par value. You can calculate the market value of each bond issue by multiplying the amount outstanding by (Price ÷100). Do so for each issue and calculate the total of all the bond issues. This is the market value of Disney's debt. Required: a. Compute the weights for Disney's equity and debt based on the market value of equity and Disney's market value of debt, computed in step 5 b. Calculate Disney's cost of equity capital using the CAPM, the risk free rate you collected in step 1, and market premium risk premium of 5%. c. Assuming that Disney has a tax rate of 35%, calculate its effective cost of debt capital. d. Calculate Disney's WACC. e. Calculate Disney's net Debt by subtracting its cash (collected in step 2 from its debt. Recalculate the weights for the WACC using the market value of equity, net debt and enterprise value. Recalculate Disney's WACC using the weights based on the net debt. How much does it change? f. How confident are you of your estimate? Which implicit assumptions did you make during you data collection efforts? Case Study 2 You have joined Zurich Pvt. Ltd as a Finance manager. You are given the following information: Zurich Pvt Ltd. is a diversified manufacturing firm dealing with electrical appliances. In 2012, the firm reported an operating income of Rs. 857.60 million and faced a tax rate of 35% on income. The firm had a book value of equity is Rs. 4068.3 million and book value of debt of Rs.1567.83 million at the end of 2011.The management of the firm is expecting a stable growth at a rate of 5% annually. You are aware that the risk free rate is 9% and the company operates in a risk premium of 7.5%. You have been informed that the beta for the company has averaged around 1.2. At the same time the after tax cost of debt is 11%. Case Questions: On the basis of the above mentioned information you as a finance manager are asked to provide the following : • Estimate the firms return on capital. • What would be the reinvestment rate of the firm? • What is the cost of equity under which Zurich is operating? • What is the cost of capital? • What is the expected free cash flow to the firm? • What is the value of the operating assets of firm?

   Related Questions in Corporate Finance

  • Q : Explain Butterfly Spread Strategies

    Butterfly Spread Strategies: In this strategy, there is no limit on the number of options that can be combined to form the butterfly spread. This strategy essentially combines both the bear spread and the bull spread. In this case, options with three

    		•
  • Q : Corporate Earnings Analysis exercise

    Identify two comparable corporations.  Explain why you think they are comparable to your corporation. Earnings analysis:  Do an earnings analysis of your corporation.  Calculate and plot.

    Q : Iterative System Solvers Iterative

    Iterative System Solvers, Power Methods, and the Inverse Power Method for Boundary Value Problems. 1. Code and test Jacobi and Gauss-Sidel solvers for arbitrary diagonally dominant linear systems. 2. Compare performance/results with tridiagonal Gaussian elimination so

    		•
  • Q : Problem on implied exchange rate a) The

    a) The Australian firm sold a ship to a Swiss firm and gave the Swiss client an option of paying either AUS10,000 or SF15,000 in 9 months. (i) In above, the Australian firm efficiently gave the Swiss client a free option to buy up

    		•
  • Q : Financing EBIT problem Rusk Inc needs

    Rusk Inc needs $50 million in new capital that it might obtain by selling bonds at par with coupon of 12% or by selling stock at $40 (net) per share. The current capital structure of Rusk consists of $300 million (face value) of 10% coupon bonds selling at 90 and 10 m

    		•
  • Q : Is this better to repurchase shares or

    Assuming a company needs to distribute money to shareholders of it, is this better to repurchase shares or to distribute dividends?

    		•
  • Q : Cost of Equity AB Corporation has 16%

    AB Corporation has 16% cost of equity, 35% tax rate, and debt-to-equity ratio of 30%. XY Corporation has 30% tax rate and debt-to-equity ratio of 40%. Both AB and XY are in the same business of selling automotive parts. If the riskless rate is 4% and the expected retu

    		•
  • Q : Finance I need the answers for the

    I need the answers for the midterm exam for FIN6000

    		•
  • Q : Explain usual value of the sales of net

    Does the usual value of the sales and of the net income of Spanish companies have anything to do along with sustainable growth?

    		•
  • Q : Calculating the Cost of Equity You are

    You are an analyst in the financial division of Flipper Industries (FI) which has a beta of 1.80 (you are risk-philic, so you enjoy the thrill of working somewhere so risky). The company just paid a dividend of $1 and dividends are expected to grow at 5% per year. The

    		•