Hanson Private Label: Evaluating an Investment in Expansion

The appropriate discount rate was calculated using WACC formula as shown in the ‘WACC’ exhibit using the following assumptions:

General speaking, WACC is the rate that a company’s shareholders expect to be paid on average to finance its assets, and it is the overall required return on the firm as a whole. Therefore, company directors often use WACC to determine whether a financial decision is feasible or not. In this case, I will choose 9.38% as discount rate. The reason why I choose 9.38% as discount rate is because the estimated Debt/Equity is 26% under the assumptions by CFO Sheila Dowling, which is most close to 25% of Debt/Equity from the projected WACC schedule. There might be some flaws existing by using WACC as discount rate. As we know, the cost of debt would be raised significantly as the leverage increased. The investment will definitely increase the firm’s current debt. So, the cost of debt would not keep at 7.75%.

1) Estimate the WACC that is appropriate for discounting the Collinsville plant’s incremental cash flows. You should estimate and present each component of the WACC separately, explaining briefly but clearly what assumptions you are making for each of them. In the same spirit, estimate the appropriate all-equity cost of capital for the APV-based valuation.

First, we need to find the required rate of return (WACC) to calculate the discounted cash inflow so that we can evaluate the longwood woodyard project more accurately.

The company was recently presented an opportunity by its largest retail customer to significantly increase its share in their private label manufacturing. The prospect of growth was risky, since it

10. What is the correct capital structure and weighted average cost of capital for discounting the investment’s free cash flow. Assume a 35% tax rate. A correct response requires that you define capital structure and Weighted Average Cost of Capital (WACC) with a formula. When defining a term with a formula be sure that all the variables are also defined.

I used WACC as the discount factor, we expect the rate of return to be higher than it, the same at least. The WACC reflects the average risk and overall capital structure of the entire firm [2]. It’s the required return and it presents how much the company pays for the capital it finances. In this case, the cost of equity is 10.33%, the cost of debt is 6.50%. I calculated WACC using those numbers and got a result of 8.49%.

Since this project is a going concern, the levered terminal and present values are calculated using the weight average cost of capital (WACC) as the discount rate, which we calculate to be 16.17%.

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

Discounted cash flow analysis in Exhibit 12 We do not know the beta for Interco’s equity. Therefore, it is not possible for us to estimate the weighted average cost of capital (WACC) for Interco. Note that here WACC method is appropriate because Interco is not

The WACC is great for evaluating the cost of capital for a business, so they can determine if the financing will benefit their business growth and cash flow. For real estate investing the asset will be sold and the goal is to maximize the return on the investment and WACC is only the cost of capital and does not account for the rate of return on an investment or the increase in property value and the ultimate sale of the property sale at the higher price.

Mortensen’s estimates are used for capital budgeting, financial accounting, performance assessments, stock repurchase decisions. Some of the financial goals are to oversee the growth, and value creation. The calculations may be affected by the amount of risk must be averaged for the projects when calculating the WACC, adjustments may also occur if the project risk is different from the company's overall risk.

turned HPL into a success. HPL now counted most of the major national and regional retailers as

For the purpose of determination of cash flow’s present value, WACC is determined as 16%, as shown in the attached Exhibit B.

For example, the divisional cost of capital for production and exploration was 20%, and the divisional cost of capital for transportation was 10%, that translates to a WACC of 10% and 5% respectively. Suppose Pioneer uses its calculated overall WACC of 9% as the acceptance criterion for investment decisions. Then the real WACC (10% for the production and exploration division and 5% for the transportation division) will differ from that calculated and used for capital investment decisions (the overall rate of 9%). If the real cost is greater than that which is calculated, certain investment projects that will leave investors worse off than before will be accepted. On the other hand, if the real