Microeconomics Topic 6: “Be able to explain and calculate average and marginal cost to make production decisions.” Reference: Gregory Mankiw’s Principles of Microeconomics‚ 2nd edition‚ Chapter 13. Long-Run versus Short-Run In order to understand average cost and marginal cost‚ it is first necessary to understand the distinction between the “long run” and the “short run.” Short run: a period of time during which one or more of a firm’s inputs cannot be changed. Long run: a period of time during which
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Explainthe relationship between the average cost and marginal cost curve? Answer: We usually assume that the Average Cost curve is U shaped The MC curve will intercept the AC curves at its minimum point. When AC is decreasing‚ MC lies below AC - because when MC is below AC‚ producing an extra unit of output will pull down average cots When AC is increasing‚ MC lies above AC - because when MC is above AC‚ producing an extra unit of output will raise average costs Therefore MC will intercept the AC
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used to determine the weighted average cost of capital (WACC). This SLP calculates the WACC for my SLP company – McDonalds‚ discusses how those calculations were arrived at and briefly describes WACC and what investors use it for. COMPANY NAME: McDonalds Inc Balance sheet date: 31 DEC 07 Market values date: 1 SEP 08 SOURCE BOOK VALUE MARKET VALUE PROPORTIONS COST (%) PRODUCT (a) (b) (c) (d)
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WACC: Weighted average cost of capital =WACC= SS+B×Rs+BS+B×RB×1-tC note: Rs ‚ cost of equity; RB ‚ cost of debt; tC ‚ corporate tax rate. For cost of equity‚ Rs‚ we calculate it by using the SML‚ according to CAPM model. Rs=RF+β×[RM-RF] As we can see in the chart behind the case‚ beta of Worldwide Paper Company is 1.10; the Market risk premium (RM-RF) is 6.0%. Because this on-site longwood woodyard project has six year life and the investment spend over two years‚ the total long of this program
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15% preferred stock‚ and 35% debt. If the cost of common equity for the firm is 19.6%‚ the cost of preferred stock is 12.9% and the before tax cost of debt is 9.5% what is the weighted average cost of capital? The firm’s tax rate is 35%. Answer: WACC = (50% x 19.6%) + (15% x 12.9%) + ( 35% x 9.5% x 65% = Q2: The following are the information of a company: |Type of capital |Book value (Tk) |Market value (Tk) |Specific cost (%) | | |
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Weighted Average Cost of Capital What It Measures The weighted average cost of capital (WACC) is the rate of return that the providers of a company’s capital require‚ weighted according to the proportion each element bears to the total pool of capital. Why It Is Important WACC is one of the most important figures in assessing a company’s financial health‚ both for internal use (in capital budgeting) and external use (valuing companies on investment markets). It gives companies an insight into
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WACC Weighted Average Cost of Capital Formula The WACC Weighted Average Cost of Capital formula is complex‚ and can be broken into several components. The individual component costs are provided in the following sections. WACC Weighted Average Cost of Capital Variables V=Firm Total Value (Debt + Preferred Shares + Common Equity + Retained Earnings) Md=Market Value of Debt Mp=Market Value of Preferred Shares Mc=Market Value of Common Equity Mr=Market Value of Retained Earnings K=Current
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Extra Credit Assignment: Yeats Valves and Controls Inc. Completed as a Group with the Following Individuals: (in alphabetical order by last name) Adetunji Adeniyi Tung F. Cheng Gregory Chiu Rashmin Patel WenHao Zhang Course Title: Accounting and Finance Course No./Section: MG6093 Instructor: Frank X. Apicella November 28‚ 2012 Yeats Valves Question The following are questions which should focus the groups on important
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Q1: The first financial strategy “Manage rather than own hotel assets” is consistent with growth objectives. The company sold out the hotel assets while keeping a long-term management contract. We calculated the Return on Assets (ROA) from 1978 to 1987‚ it increased a little in 1979 and kept decreasing to 1987(Exhibit 1). By managing rather than owning the hotel assets‚ Marriott is able to increase its ROA thereby increasing potential profitability and its financial position in the market. Marriott
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CHAPTER 9 THE COST OF CAPITAL (Difficulty: E = Easy‚ M = Medium‚ and T = Tough) Multiple Choice: Problems Easy: Cost of common stock Answer: d Diff: E [i]. Bouchard Company ’s stock sells for $20 per share‚ its last dividend (D0) was $1.00‚ and its growth rate is a constant 6 percent. What is its cost of common stock‚ rs? a. 5.0% b. 5.3% c. 11.0% d. 11.3% e. 11.6% Cost of common stock Answer: b Diff: E [ii]. Your company ’s stock
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