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Domino’s Pizza Enterprises (Australia): Weighted Average Cost of Capital
內容大綱
On November 4, 2020, the group chief financial officer of Domino’s Pizza Enterprises Limited was tasked with determining the cost of capital in preparation for the corporate response to the COVID-19 pandemic. In planning for 2021, the company would need to make considerable investments throughout its franchises in Australia, New Zealand, Japan, and Europe. The cost of capital would be integral to these investment decisions. In the previous year, Domino’s Pizza Enterprises Limited had made A$98.9 million in investments, so the difference of a few per cent in capital costs could mean a swing in millions of dollars in expenditures. The chief financial officer had all background information including balance sheets, income statements, cash flow statements, common stock data, financial ratios, market return data, peer firm data, and an itemized list of debt obligations. Based on this information, he had to derive the company’s cost of capital using a weighted average cost of capital methodology.
學習目標
This case can be used in both undergraduate- and graduate-level finance courses when discussing capital investments or project investments, particularly surrounding periods of great uncertainty. Students are asked to determine the cost of capital, a calculation that is simple in execution, but that contains many subtleties and assumptions within the formula that make the estimate more nuanced. After working through the case and assignment questions, students will be able to<ul><li>explain the importance of the cost of capital;</li><li>identify the cost of various sources of financing;</li><li>explain the nature and estimation of risk premiums;</li><li>understand the importance of the capital asset pricing model;</li><li>determine how to weight various costs of financing; and</li><li>relate the cost of capital to hurdle rates.</li></ul>