Case 4 Cost of Capital: Silicon Valley Medical Technologies, Inc. | Documents and Forms | Research Papers

Case 4 Cost of Capital: Silicon Valley Medical Technologies, Inc.

Case 4 Cost of Capital: Silicon Valley Medical Technologies, Inc. PLDZ-506 Instant Download Price
In Stock
$ 30.00 USD
Bright Solutions
Buy and Download Description

Case 4 Cost of Capital: Silicon Valley Medical Technologies, Inc.

A+ Grade Solutions

 

QUESTIONS:

  1. What specific items of capital should be included in SIVMED’s estimated weighted average cost of capital (WACC)? Should before-tax- or after-tax values be used? Should historical (embedded) or new (marginal) values be used? Why?

 

  1. A) What is your estimate of SIVMED’s cost of debt?

            B) Should flotation costs be included in the component cost of debt calculation? Explain.

            C) Should the nominal cost of debt or the effective annual rate be used? Explain.

            D) How valid is an estimate of the cost of debt based on 15-year bonds if the firm normally issues 30-year long-term bond? If you believe the estimate is not valid, what could be done to make the 15-year cost a better proxy for the 30-year cost (Hint: Think about the yield curve).

            E) Suppose SIVMED’s outstanding debt had not been recently traded, what other methods could be used to estimate cost of debt?

            F) Would it matter if the currently outstanding bonds were callable? Explain.

 

  1. A) What is your estimate of the cost of preferred stock?

B) SIVMED’s preferred stock is more risky to investor that its debt, yet you should find that its before-tax yield to investors is lower than the yield on SIVMED’s debt. Why does this occur?

C) Now suppose SIVMED’s preferred stock had a mandatory redemption provision, which specified that the firm must redeem the issue in 5 years at the price of $110 per share. What would SIVMED’s cost of preferred be in this situation? (in fact, SIVMED’s preferred does not have such a provision, so ignore this question when working the remainder of the case).

 

  1. A) Why is there a cost associated with retained earnings?

B) What is SIVMED’s estimated cost of retained earnings using the CAMP approach?

C) Why might one consider the T-bond rate to be a better estimate of the risk-free rate than the T-bill rate? Can you think of an argument that would favor the use of the T-bill rate?

D) How do historical betas, adjusted historical betas, and fundamental betas differ? Do you think SIVMED’s historical beta would be better or worse measure of SIVMED’s future market risk than the historical beta for an average NYSE company would be for its future market risk? Explain your answer.

E) How can SIVMED obtain a market risk premium for use in a CAPM cost-of-equity calculation? Discuss both the possibility of obtaining an estimate from some other organization and also the way in which SIVMED could calculate a market risk premium in-house.

 

  1. A) Use the discounted cash flow (DCF) method to obtain an estimate of SIVMED’s cost of retained earnings.

B) Suppose SIVMED, over the last few years, has had a 14% average return on equity (ROE) and has paid out about 25% 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 g estimate.

 

C) The firm’s per share dividend payment over the past 5 years has been as follows:

      YEAR                               DIVIDEND

1995                                                                                $0.72

1996                                                                                $0.75

1997                                                                                $0.85

1998                                                                                $1.00

1999                                                                                $1.09

What was the firm’s historical dividend growth rate using the point-to-point method? Using linear regression?

 

 

Continued

B) What are SIVMED’s market value weights of debts, preferred stock, and common stock?

C) Should book value or market value weights be used when calculating the firm’s weighted average cost of capital? Why?

Case 4 Cost of Capital: Silicon Valley Medical Technologies, Inc. A+ Grade Solutions QUESTIONS: What specific items of capital should be included in SIVMED’s estimated weighted average cost of capital (WACC)? Should before-tax- or after
Recent Reviews Be the first to Review this product!
0 0 0 0 reviews