Corporate finance final assignment

Thèmes abordés

PIERRE-OLIVIER EDARD, WEIGHTED AVERAGE COST OF CAPITAL, DEBT AND EQUITY FINANCING, CASH MANAGEMENT

Résumé du document

Beta is the representation of the systematic risk of the company. This is the risk that bthe company takes even if it spread its share between more than 30 different company. If beta is equal to 1,0, it means that the stock evaluation will follow the tendencies of the market. If Beta is more than 1,0 it is riskier than the average. If Beta is less 1,0, it is less risky than the average.

Stocks with a high Beta are companies' stock that are really aware of what happened in the stock market and influenced by every little changes in the political or economical issues. Stocks with a low Beta are strong companies that can face economical or political changes in the geopolitical environment.
For example : BNP Paripas, LVMH and Vivendi are three company that have a Beta higher than 1,0. On the contrary, Total and Vinci are two companies that have a beta between 0,5 and 0,6.

Extraits

[...] WEIGHTED AVERAGE COST OF CAPITAL Question Cost of Equity: Bank Interest Rate: Tax Rate: Percentage Equity: 60% Calculate the after-tax cost of debt. The formula to calculate the cost of debt is : CoD = Interest rate * tax rate) CoD = 12% * CoD = 0,09 The after tax cost of debt is Calculate the Weighted Average Cost of Capital (WACC). The formula to calculate the WACC is : WACC = Wd * Kd * Tax rate) + We * Ke with d = debt and e = equity. [...]

[...] So te should not pursue the project A. On the contrary, the WACC is inferior to the project B IRR and the project C IRR, the company should pursue those project. However, if the company pursue two project at the same time, the interest rate will increase by 2%. So we will have : Kd(1-t) = 14%(1-0,25) Kd(1-t) = 0,14 * 0,75 Kd(1-t) = 0,105 And WACC = WdKd(1 + WeKe WACC = 0,4*0,105(1-0,25) + 0,6 * 0,22 WACC = 0,0315 + 0,132 WACC = 0,1635 The WACC at that time should Between the two project's IRR. [...]

[...] By issuing debt, the investors could be surer to get it's money back. Discuss the various types of bonds that the company could issue and their advantages and disadvantages. Debenture bonds that are standards bonds (Around Interest) Secured bonds, more secured than debenture, because the investors should have a part of the assets of the company, even if the company crashed. (Around Int.) + Convertible bonds. The advantage of this bonds is that it can be convertible into shares of the company. [...]

[...] The credit department can make a significant contribution to sales and profit maximization. It use creative methods to structure transactions that sales can be approved. The key is knowing when, where and how to do sales as safely as possible. The key is to find the best way to minimize the risk of late payment or non-payment by customers or business. Duties in that the credit department perfoms : - Maximizing sales, - Accelerating cash inflow, - Management reporting, and safeguarding the company's investment in accounts receivable. [...]

[...] Include the new stock issued in part in your calculations. Debt ratio of 2011 = Total Debt / Total Assets = / ( + + 000) = 0,375 The debt ratio of 2011 is 37,5% For 2012, the total of debt 2012 = + dept issue : can be replace by x. Common stk/Inv Capital of 2012 = + = The retain earnings of 2012 = + + = So, the Total Assets = x + + = x + To maintain the same debt ratio, we have : x / + 000) = 0,375 x = 0,375 + 000) x = 0,375x + x = The total debt of 2012 is $ To finish the debt issue = = To have the same debt ratio than 2011, the company has to issue $ of debt. [...]