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dcfriskeffect - FirmValueMultiples Inputs Before risk...

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Firm Value Multiples Page 1 Inputs Before risk managemeAfter risk manageme Risk hedging effect Risk Management effect EBIT from existing assets = $7,088 $6,988 Reduce by cost of hedging risk Reduce by cost of risk management strategies Capital Invested in existing assets $14,967 $14,967 No effect No effect Tax rate = 35% 35% Reduce tax rate over time by smoothing out earnings No effect Return on Capital on new investm 25.15% 25.15% No effect Increase as competitive advantages increase project returns Reinvestment Rate = 32.21% 40% Increase reinvestment rate if conservative management now willing to take more riskyIncrease reinvestment rate if more projects become availables Length of excess return period = 5 5 No effect Grow for longer period Debt Ratio = 10.00% 10% May increase optimal debt ratio as a result of risk hedging No effect Cost of Equity in high growth = 8.42% 8.42% May decrease if risk being hedged is market risk No effect Pre-tax Cost of Debt in high grow 5.85% 5.25% May decrease if risk being hedged reduces default risk
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