Suppose you are analyzing a new project for Air Canada. Since the company isn't publiclytraded, you will use comparative data from the North American Airline industry to estimatethe beta for Air Canada. The top 4 companies according to Market Share are Delta AirLines (DAL-US), Southwest Airlines (LUV-US), United Airlines (UAL-US), and American Airlines(AAL-US). A summary of each firm is provided below as at April 5, 2024:Market CapTotal DebtEquityName.($mm)($mm)BetaDAL-US29,63027,2811.12LUV-US16,9119,2000.84UAL-US14,16636,7061.19AAL-US9,01040,6631.25* 3-Year BetoUsing the information provided, answer the following:a) Calculate the Levered Beta for Air Canada using the industry information providedabove, and Air Canada's target Debt-to-Equity ratio of 0.60. Assume the samestatutory tax rate of 22% applies to the four US companies as well as Air Canada.b) Assume Government of Canada Treasury Bills have a yield of 4.00% and the market riskpremium is 5.50%. Air Canada has a credit spread of 2.50% above Government ofCanada risk-free debt. Calculate Air Canada's Weighted Average Cost of Capital(WACC). Show your answer to 2 decimal places.

Part a) - Calculating Levered Beta for Air Canada:Calculate the unlevered beta using the…

Answered: Suppose you are analyzing a new project…

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter12: Differential Analysis And Product Pricing

Section: Chapter Questions

Problem 12.4E

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Dr. Feng wants to invest in the Australian mining sector. The following list of companies has been provided to you in order to evaluate whether these companies appear to be in financial difficulties and which company is the best investment option. Please provide a brief summary about the financial status of each of the companies and provide a recommendation for the investment choice. Justify your recommendations. 1). BHP Group LtdCurrent ratio in 6/2016 = 1.44 times (or 1.44:1) Current ratio in 6/2017 = 1.85 times (or 1.85:1) Current ratio in 6/2018 = 2.51 times (or 2.51:1) Current ratio in 6/2019 = 1.89 times (or 1.89:1) Current ratio in 6/2020 = 1.45 times (or 1.45:1) ROCE in 6/2016 = 21.2% ROCE in 6/2017 = 26.7% ROCE in 6/2018 = 40.4% ROCE in 6/2019 = 42.1% ROCE in 6/2020 = 37.6% Z-score in 2018 = 2.69Z-score in 2019 = 2.77 Z-score in 2020 =2.39 2). Rio Tinto LtdCurrent ratio in 12/2016 = 1.61 times (or 1.61:1) Current ratio in 12/2017 = 1.71 times (or 1.71:1) Current ratio in…
Dr. Feng wants to invest in the Australian mining sector. The following list of companies has been provided to you for your analysis of their performance and position in order to evaluate whether these companies appear to be in financial difficulties and which company is the best investment option (use the 2016, 2017, 2018, 2019, 2020 data). We know that: BHP Group Ltd ROCE in 6/2016 = 21.2% ROCE in 6/2017 = 26.7% ROCE in 6/2018 = 40.4% ROCE in 6/2019 = 42.1% ROCE in 6/2020 = 37.6% Rio Tinto Ltd ROCE in 12/2016 = 14.8% ROCE in 12/2017 = 23.9% ROCE in 12/2018 = 27.2% ROCE in 12/2019 = 32.3% ROCE in 12/2020 = 32.4% Fortescue Metals Group Ltd ROCE in 6/2016 = 18.9% ROCE in 6/2017 = 40.6% ROCE in 6/2018 = 22.8% ROCE in 6/2019 = 62.9% ROCE in 6/2020 = 80.5% Required: • Whether the ROCE ratios are favourable or unfavourable? Why?• Whether the MDA approach will be useful in predicting financial failure in terms of the trends shown? Why?
Please find the Asset Beta (IndustryBeta) based on the following information below: Currently, Ljutic A/I Inc. has hired a consulting firm (Oakland Association-OA) to estimate the size of the market and hence expected unit sales for its main product (E-toral application sensor). OA’s work resulted in unit sales estimates of 318,331, 341,342, 368,769, 383,432, and 376,532 units respectively for the next five years conditioned on Ljutic adhering to an average sales price of $568 per unit for the first two years and $387 in years three, four, and five. From that point going forward, growth in unit sales is predicted to be 2.72% indefinitely. The results of an independent outside analysis by a leading market research firm has determined that the company can manufacture its product line at a variable cost per unit expected to be $63.47 growing at 2.23% per year for the first 5 years and 3.17% per year indefinitely thereafter while overall fixed costs are estimated to be $10,482,000…
Sinaloa Appliance, Incorporated, a private firm that manufactures home appliances, has hired you to estimate the company's beta. You have obtained the following equity betas for publicly traded firms that also manufacture home appliances. Pirm Robot Middleby's National Presto Nevell Brands Whirlpool Beta 0.94 1.89 Asset beta 0.14 1.09 1.79 Debt (5 millions) 50 762 D 11,943 4,520 Market Value of Equity 3,240 7,510 849 26,770 14,260 a. Estimate an asset beta for Sinaloa Appliance. Note: Round intermediate calculations and final answer to 3 decimal places.
Jill needs to determine a beta for a private company for its valuation. She found a public comparable with a beta of 1.2. As of the valuation date, the public comparable has 40% of debt and 60% equity. The private company is 20% funded by debt and 80% funded by equity. Assume both companies' debt is high quality. In your written response, please start with question numbers such as a) or b) before showing your work and answer to the question. a) What is the unlevered or asset beta for the public company? b) What is the levered beta or the estimated beta of the private company?
Apex Industries Ltd. (AIL) asked you to find the required rate of return to be used for a new project it is going to take in Information Technology Industry (IT Industry). As part of your assignment you have collected the following information of a company in the IT Industry: Beta of the company’s equity is 1.5; Debt to value ratio of the company is 50%; Market risk premium is 8% (expected return of market portfolio minus risk-free rate), risk-free rate is 6%, The company’s cost of debt is 10% and its corporate tax rate is 30%. AIL wants to finance the project with a debt to value ratio of 40%. It can borrow at 8% interest rate and its corporate tax rate is also 30%. 1. Find out the required rate of return, i.e. RWACC, that AIL wants to use as the discount rate to find out the NPV of the project.…
You are going to value Lauryn's Doll Company using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.5, a debt-to-equity ratio of 0.3, and a tax rate of 21 percent. Based on this information, what is the asset beta for Lauryn's? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. > Answer is complete but not entirely correct. Lauryn's asset beta 1.86 X
As a business valuation expert, you have been allotted with the project to estimate the cost of equity for Alton Holdings. Alton Holdings operates in three different business sectors - Entertainment, Hotels, and Travel Services. The table beneath gives the information you collected both for the firm and for other comparable firms in each business sector. i. ii. iii. Business Sector Entertainment Hotel Travel Alton Holdings Sales Revenues €500 million €500 million €950 million Unlevered beta 0.95 1.15 Comparable Firms 1.45 Value/Sales Revenues 2.5 3.5 1.5 Estimate the (bottom-up) unlevered beta for Alton Holdings. Assume that Alton Holdings has no market-traded debt but €1.3 billion in book debt, an interest expense of €75 million per year, maturity 5 years and corporate bonds with the same credit rating as Alton Holdings yield 7.5%. Estimate the market value of debt of Alton Holdings. Assume next that Alton Holdings has 100 million shares trading at €12 per share. The tax rate is 40%.…
You are going to value Lauryn's Doll Co. using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.5, a debt-to-equity ratio of .4, and a tax rate of 21 percent. Based on this information, what is the asset beta for Lauryn's? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Answer is complete but not entirely correct. Lauryn's asset 1.22 x beta
COMPUTING RESIDUAL INCOME.Suppose the following hypothetical data represent total assets, book value, and market value of common shareholders’ equity (dollar amounts in millions) for three firms. Each of these firms, Southwest Airlines, Kroger, and Yum! Brands, operates in a different industry, but all of them operate in very competitive industries. Southwest Airlines is a U.S. domestic airline that provides low-cost point-to-point air transportation services. Kroger operates retail supermarkets across the United States. Yum! Brands operates and franchises quick-service restaurants, including KFC, Pizza Hut, Taco Bell, Long John Silver’s, and A&W All American Food restaurants. These data also include hypothetical market betas for the three firms and analysts’ consensus forecasts of net income for Year +1. For each firm, analysts expect other comprehensive income items for Year +1 to be zero, so Year +1 net income and comprehensive income will be identical. Assume that the risk-free…
Nur Inc., is a private company that designs, manufactures, and distributes branded consumer products. During its most recent fiscal year, the had revenues of $200 million and earnings of $30 million. The company has filed a registration statement with the SEC for its IPO. Before the stock is offered, Nur's investment bankers would like to estimate the value of the company using comparable companies. The investment bankers have assembled the following information based on data for other companies in the same industry that have recently gone public. In each case, the ratios are based on the IPO price. After the IPO, Nur Inc will have 10 million shares outstanding. Estimate the IPO price for Nur Inc using the price/earnings ratio and the price/revenues ratio. Company Ray Products Corp. Byce-Frasier Inc. Fashion Industries Group Recreation International Average Price/Earnings Price/Revenues 18.8 X 19.5 X 24.1 X 22.4 X 21.2 X 1.2 X 0.9 X 0.8 X 0.7 X 0.9 X
Tou have observed the cumulative abnormal returns graphed below surrounding the announcement of a new CEO for all publicly traded frms in the US from 1990 to 2020. The average CAR is plotted relative to the event date (0 on the higure). Chart A uses the CAPM to calculate expected returns Chart Buses the Fama-French 3-factor Model to calculate expected returns. Based on this evidence, what can we conclude about market efficlency Chart A Chart B 4.00% 5.00% 3.00% 4,00% 3,00% 200% 200% 1.00% 1.00% 0.00% 0.00% -12 -8 -4 8. 12 -12 -8 -4 4. 8 12 O Looking at Chart A, we can conclude that the market is definitely efficient, because there is no change in CAR after the event O Looking at Chart B, we can conclude that the market is definitely inefficient, because the CAR continues to increase after the event We can conclude nothing about efficiency because of the joint-hypothesis problem We can conclude both a. and b. are true

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