Uses of Capital Rationing Models

Linear programming models seem tailor-made for solving capital budgeting problems when resources are limited. Why then are they not universally accepted either in theory or in practice One reason is that these models can turn out to be very complex. Second, as with any sophisticated long-range planning tool, there is the general problem of getting good data. It is just not worth applying costly, sophisticated methods to poor data. Furthermore, these models are based on the assumption that all...

Lesson 6 Seen One Stock Seen Them

The elasticity of demand for any article measures the percentage change in the quantity demanded for each percentage addition to the price. If the article has close substitutes, the elasticity will be strongly negative if not, it will be near zero. For example, coffee, which is a staple commodity, has a demand elasticity of about - .2. This means that a 5 percent increase in the price of coffee changes sales by .2 X .05 .01 in other words, it reduces demand by only 1 percent. Consumers are...

New Economy Transport

The New Economy Transport Company NETCO was formed in 1952 to carry cargo and passengers between ports in the Pacific Northwest. By 2002 its fleet had grown to four vessels, one of which was a small dry-cargo vessel, the Vital Spark. The Vital Spark is badly in need of an overhaul. Peter Handy, the finance director, has just been presented with a proposal, which would require the following expenditures Install new engine and associated equipment Replace radar and other electronic equipment...

Alternative Tax Systems

In the United States shareholders' returns are taxed twice. They are taxed at the corporate level corporate tax and in the hands of the shareholder income tax or capital gains tax . These two tiers of tax are illustrated in Table 16.2, which shows the after-tax return to the shareholder if the company distributes all its income as dividends. We assume the company earns 100 a share before tax and therefore pays corporate tax of .35 X 100 35. This leaves 65 a share to be paid out as a dividend,...

How Much Is the Concatenator Business Worth per Share

Suppose the concatenator division is spun off from its parent as an independent company, Concatco, with one million outstanding shares. What would each share sell for We have already calculated the value of Concatco's free cash flow as 18.8 million, using the constant-growth DCF formula to calculate horizon value. If this value is right, and there are one million shares, each share should be worth 18.80. This amount should also be the present value of Concatco's dividends per share although...

Your Questions Answered

Question All these cost of capital formulas which ones do financial managers actually use Answer The after-tax weighted-average cost of capital, most of the time. WACC is estimated for the company, or sometimes for an industry. We recommend industry WACCs when data are available for several closely comparable firms. The firms should have similar assets, operations, business risks, and growth opportunities. Of course, conglomerate companies, with divisions operating in two or more unrelated...