Case: AOL GLOBAL COST OF CAPITAL CASE DESCRIPTION.
QUESTIONS
After a quick glance at the available information and the decision making requirements of the Gordon Crown, you have decided that at the minimum you have to do the following:
Question 1: For component costs:
A. Compute the before- and after-tax costs of ITS debt.
B. Compute the cost of equity (assuming all funds come from internal sources):
i. Using the constant growth Gordon Dividend Valuation Model
ii. Using the Security Market Line Equation (SML) from the CAPM
Question 2: Compute the Weighted Average Cost of Capital (WACC) based on cost of equity estimated under the Gordon's Constant Growth Dividend Valuation Model:
A. Using book value weights for debt and equity
B. Using market value weights for debt and equity
Question 3: Compute the WACC based on cost of equity estimated under the CAPM:
A. Using book value weights for debt and equity
B. Using market value weights for debt and equity
Question 4: Address the pros and cons of using market value weights versus book value weights and reconcile the divergent views of Crown and Chang.
Question 5: Compute the Required Rate of Return for the project(s), adding appropriate risk premiums subjectively to the WACC's in questions 2 and 3. These risk premiums can differ depending on the nature and continental location of the projects.
Question 6: Make a recommendation as to which, if any, of the investments identified in Table 6 should be accepted taking into account the capital constraint.