Ask Question, Ask an Expert


Ask Corporate Finance Expert

The cost of capital for a firm can differ from the cost of capital for each of its businesses. When a firm has numerous businesses, it is significant to use the cost of capital appropriate to the specific project under consideration, instead of the firm's overall cost of capital, when computing a proposed project. Renowned Cola, Inc.'s 2005 annual report describes that Renowned Cola's investments are expected to produce cash returns which 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 comprise 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 problems shown below.

problem 1: Compute the market value of Renowned Cola's debt at year-end 2005. What is the book value of debt? Why do generally use market or book values for debt? Describe.

problem 2: To the nearest million, compute the market value of Renowned Cola's stockholders' equity at year-end 2005.

problem 3: Renowned Cola subtracts the value of its short-term debt from its total debt when computing its "net debt ratio." Renowned Cola believes that the market values for its traded debt are not accurate as the bonds trade infrequently. Given this belief and their treatment of short-term debt, find out Renowned Cola's net debt ratio using book values for debt and market value for equity.

problem 4: find out Leverage keeping the short-term debt as part of total debt. Using the CAPM find out re for short-term, medium-term and long-term investments. find out WACC for short-term, medium-term and long-term investments. Assume that you were considering a long-term capital investment project, which WACC would you use and why? You can suppose that the asset's risk profile for the project mirrors Renowned Cola's overall risk profile.

problem 5: Should Renowned Cola use its total cost of capital to assess its restaurant capital investments? Under what conditions would it be correct to do so?

Corporate Finance, Finance

  • Category:- Corporate Finance
  • Reference No.:- M9648

Have any Question? 

Related Questions in Corporate Finance

Use a graph to explain why the fed cannot target both an

Use a graph to explain why the Fed cannot target both an interest rate and a monetary aggregate at the same time, assuming that there is a drop in aggregate demand.

Oil spills from oceangoing tankers are rare but bring huge

Oil spills from oceangoing tankers are rare but bring huge damages to coastlines when they occur within 200 miles of shore. Unfortunately, most tanker spills do occur on or near coasts. Rank the following alternatives ac ...

Assignment the weighted average cost of capitalcomplete the

Assignment: The Weighted Average Cost of Capital Complete the following assignment: Coogly Company is attempting to identify its weighted average cost of capital for the coming year and has hired you to answer some quest ...

Countries a and b both have the same money growth rate and

Countries A and B both have the same money growth rate and in both countries, real output is constant. In Country A velocity is constant while in Country B velocity has fallen. In which country will inflation be higher? ...

Assignmentchapter 3please remember that you must do your

Assignment Chapter 3 Please remember that you must do your own work. Any plagiarism will result in a grade of zero for all students involved. Please use your own words even if you are using the textbook for answers. Alwa ...

10-k ford motor companyreview ford motor companys form 10-k

10-K Ford Motor Company Review Ford Motor Company's Form 10-K for 2012. Explain the purpose of a company's 10-K and how it interprets the firm's financial strength. Write a description of three important items, including ...

If the yendollar exchange rate is 125 how much will 25000

If the yen/dollar exchange rate is 125, how much will 25,000 yen cost in dollars? If the dollar appreciates to 150 yen/dollar, how much will the 25,000 yen cost in dollars?

How will a reduction in a government deficit affect

How will a reduction in a government deficit affect aggregate demand? Do changes in transfer payments affect aggregate demand?

Assignment calculating financial ratiosvital to any ratio

Assignment: Calculating Financial Ratios Vital to any ratio analysis are the steps of gathering financial data and selecting and calculating relevant ratios. This assignment provides you with an opportunity to do just th ...

Whole foods market inc included these statements in its

Whole Foods Market, Inc. included these statements in its 2010 annual report.* WHOLE FOODS MARKET, INC. Consolidated Balance Sheets (in thousands) September 26, 2010 and September 27, 2009 Assets 2010 2009 Current Assets ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

A cola-dispensing machine is set to dispense 9 ounces of

A cola-dispensing machine is set to dispense 9 ounces of cola per cup, with a standard deviation of 1.0 ounce. The manuf

What is marketingbullwhat is marketing think back to your

What is Marketing? • "What is marketing"? Think back to your impressions before you started this class versus how you

Question -your client david smith runs a small it

QUESTION - Your client, David Smith runs a small IT consulting business specialising in computer software and techno

Inspection of a random sample of 22 aircraft showed that 15

Inspection of a random sample of 22 aircraft showed that 15 needed repairs to fix a wiring problem that might compromise

Effective hrmquestionhow can an effective hrm system help

Effective HRM Question How can an effective HRM system help facilitate the achievement of an organization's strate