Ace Repair Essay

Suppose Ace, over the last few years, has had an 18 percent average return on equity (ROE) and has paid out 20 percent of its net income as dividends. Under what conditions could this information be used to help estimate the firm’s expected future growth rate, g? Estimate ks using this procedure for determining g.

The table below shows the equity betas for the firms presented in the case (using Jan-92 to Dec-96 equal weight NYSE/AMEX/NASDAQ as market portfolio):

Net Income = 7,238,748/5,321,295 = $1.36/share (mainly from the one time gain on the bond exchange)

WACC = Cost of Debt X proportion of debt + Cost of Preferred Stock X Proportion of preferred stock + Cost of equity X proportion of equity

2. Beta for mercury is calculated by comparison with the companies having similar debt/equity ratio (25%). This beta is used in the calculation of cost of equity afterwards. The equity beta comes out to be 1.12.

AT&T had a beta of .55. In order to find the rate of return of AT&T I used

By using the company return and the Value Weighted Returns of the Market, we derived the companies’ levered equity betas and then unlevered them.

      Beta: is seen as an ‘index of responsiveness’ of changes in a security’s returns relative to changes in returns on the market, in this case is sport utility industry)

* Risk-free rate: Choose a risk-free rate that is consistent with the life of the asset that is being valued.

Some modifications of the beta coefficient are the adjusted beta and the fundamental beta. The former tries to transform the historical beta closer to an average beta of 1.0. The latter seeks to incorporate information concerning the company to achieve a better estimate for beta. Moreover, beta values out of less-developed financial markets are not good estimates and therefore partly biased. Problems in estimating beta for divisions of a corporations could arise if the divisions are too small and therefore can be compared with less-developed financial markets. Hence, beta coefficients could be biased (Brigham & Daves, 2007).

The beta coefficient is a measure of a stock’s market risk, or the extent to which the returns on a given stock move with the stock market.

For beta, there are mainly two different ways to calculate the value for beta. The first is to calculate it yourself based on historical data. By using this method, you run the risk of using inaccurate data if you choose a period that is too broad or narrow. Conversely, the other way to determine it is to use published sources such as Bloomberg and Standard & Poor’s. Similar to using historical data to determine beta, there are variations in these published sources for the values of beta. As a result, the calculation of the overall cost of capital will vary depending on which source of beta you

Beta: Companies in the same industries usually have different betas, one of the reasons this can happen is the kind of financing or debt equity ratio. The higher the debt equity ratio the higher the beta: this shows why company N has a higher beta compared to company M that has a lower debt equity ratio.

Answer: WACC covers computation of SIVMED’s cost of capital in which each category of capital is proportionately weighted. All capital basis - common stock, preferred stock, bonds or any other long-term borrowings – should be listed under SIVMED’s WACC. We determine WACC by multiplying the cost of the corresponding capital component by its proportional weight and then adding: where: Re is a cost of equity Rd is a cost of debt E is a market value of the firm's equity D is a market value of the firm's debt V equals E + D E/V is a proportion of financing that is equity

The risk free rate is 0.50%. This is the return, investor get without exposure of any risk including market and diversifiable. For the purpose of calculating risk free rate, US one year treasury interest rates are used. These securities are issued on discount and redeemed at face value. These securities are considered as risk free because these are backed by US government and there are no probabilities that US government will be declared as default.1, 2