Ben had started his career with mole right after

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the cost of debt of each of the divisions equaled the firm’s cost of debt as a whole.Ben had started his career with MOLE right after graduating from UCLA 20 years ago and had been involved in financing some of its most successful films. Over the past 20 years, as he rose through the company, he was amazed at how it had grown and changed. The acquisition of the CEG group had just made MOLE large enough that it could potentially compete with the really big Media companies. Ben had recently taken a week long Finance course at Georgetown University's Executive Training Program. His professor had described the concepts of WACC and divisional cost of capital for evaluating investment projects. MOLE was currently at its target capital structure and had traditionally used a discount rate of 14% for all its investment projects. However, Ben was wondering if the arbitrarily chosen 14% discount rate could be replaced by more rigorously estimated discount rates for MOLE as whole and each of its two divisions. Ben asked his staff to provide him with information to examine cost of capital. As Ben paged through the file (Exhibits 3.1-3.5), he saw the recent MBA associate that he had hired last fall from Georgetown University. The associate was bright and appeared to be well acquainted with the latest in financial theory. A smile broke on Ben's face - here was someone who could help him resolve these issues …1According to Miriam-Webster’s online dictionary (), MOLE has many definitions including: a pigmented spot on the human body; a burrowing insectivore with tiny eyes, concealed ears, and soft fur; the base unit of amount of pure substance in the International System of Units that includes the same number of elementary entities as there are atoms in exactly 12 grams of the isotope carbon 12 (you may recall that the number of molecules in a mole is Avagadro’s constant which is roughly 6.02 x 1023); and others. Granted it has nothing to do with finance, but hey, reading footnotes can be informative. You’re doing great…keep going.
10 Exhibit 3.1 Selected Data on MOLE and its two Divisions MOLE Total Debt $1,500 million Market Value of Equity $4,500 million Applicable Tax Rate 40% Consumer Electronics Group Estimated Value of Division $3,000 million Current Debt/Equity Ratio Target Debt/Equity Ratio 0.36 0.50 Media Group Estimated Value of Division $3,000 million Current Debt/Equity Ratio Target Debt/Equity Ratio 0.30 0.20 Exhibit 3.2 Selected data on interest rates and historical returns Current rates on Treasuries 1-year T-bill rate 3.50% 10-year T-bond rate 6.00% Historical Stock Performance MOLE returns in excess of 1-year T-bills (2000-2011) 18.00% MOLE returns in excess of 10 year T-bonds (2000-2011) 15.00% S&P returns in excess of 1-year T-bills (1950-2011) 10.00% S&P returns in excess of 10 year T-bonds (1950-2011) 7.00% Media & Entertainment Industry returns in excess of 1-year T-bills (1950-2005) 14.00% Media & Entertainment Industry returns in excess of 10-year T-bonds (1950-2005) 11.00% Exhibit 3.3: Closing prices on Dec 13, 2011 of selected corporate bonds Company Maturity Date Security Type Coupon Rate S&P Rating Moody’s Rating Price per $100 of face Dell Computer 8/1/2018

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