Summary Modigliani & Miller

The purpose is that the cost capital will be used for capital budgeting, financial accounting, performance assessment, stock repurchases estimations. Also the cost of capital is a necessary basis for the expected growth and forecasted demand.

The cost of equity is the theoretical return that equity investors expect or receive from the company for investing their funds in the company. The risk free rate that is the Government Treasury bill rate is 3.1%, the market risk premium is 7% and the beta has been calculated as

Barb Williams and Rick Thomas, while attending an executive education course at a well-known business school, came across a case which involved calculating the cost of capital for Telus Corporation (Telus). Basic data such as the Balance Sheet, Income Statement, Data on Telus’ Common Stock, Market Index, and the Average Annual Returns in North American Capital Markets were provided. In order to calculate Telus’ cost of capital we need to calculate the company’s Cost of Equity, Cost of Debt, and Tax Rate along with their weighted cost and then apply these to the Weighted

Capital planning and budgeting is a very vital piece in the Public Budgeting System process. It is an essential implement in the financial management practice and is effective in both public and private organizations. It is the method which consists of the determination and the evaluation of the investments and the possible expenses by an organization. As explicate by Lee, Johnson, & Joyce (2008), capital budgets help in determining how much of each form of investment is needed, and it supports an organization in assessing the available revenue which includes loans is required to finance those investments (p. 475). Capital budgeting is a central part of the universal

In 2008, Miles, Ana and Cindy, who are partners in the MAC Company, had average capital balances of $114,000, $98,000 and $128,000, respectively. The partners share profits and losses by allowing a 12% return on average capital, with any remaining income or loss divided in a ratio of 5:3:2. If the company's income for the current year was $147,600, Cindy’s capital account would increase by:

Capital budgeting decisions involve investments requiring large cash outlays at the beginning of the life of the project and commit the firm to a particular course of action over a relatively long period of time. As such, they are costly and difficult to reverse, both because of: (1) their large cost and (2) the fact that they involve fixed assets, which cannot be liquidated easily.

The Return on Equity ratio is a measure of the efficiency with which a company employs owners’ capital. It

In November 2001, the costs of required rates of return on debt in the capital market are as follows:

* We assume the cost of capital to be a stated annual rate to facilitate calculations;

This is estimated using the data given in case (Exhibit 1). Considering the tax rates of last ten

Equity Ratio measures percentage of assets provided by shareholders and the extent of using gearing.

The cost of debt (kd) rate of 13% was used after we assessed the key industrial financial ratios and compared them with that of Wrigley’s (See Appendix 2) to conclude that it was in the range between the BB rate of

a. Capital budgeting is the process of analyzing projects and determining which ones to accept and include in the capital budget.

Already in 1958, Modigliani and Miller have pointed the discussion of capital structure towards the cost of debt and equity. According to their first proposition, in a world of no corporate taxes and with perfect markets, financial leverage has no effect on a firm’s value. In their second proposition, they state that the cost of equity equals a linear function defined by the required return on assets and the cost of debt (Modigliani and Miller, 1958).

This section starts with the theory of irrelevancy of capital structure. Following subsections give the overview of theories that suggest that the capital