Explanation:
To determine which factor the company's value is most sensitive to, we need to calculate the percentage change in valuation for each variable:
Cost of Debt:
$540 million to $240 million$540 - $240) / $540 = 55.6% decreaseCost of Equity:
$370 million to $230 million$370 - $230) / $370 = 37.8% decreaseManufacturing Costs:
$410 million to $300 million$410 - $300) / $410 = 26.8% decreaseAnalysis:
Therefore, the company's value is most sensitive to changes in the cost of debt because it results in the largest percentage swing in valuation between the low and high estimates.
This makes intuitive sense because:
Ultimate access to all questions.
An analyst reviews the following information:
| Low Estimate | High Estimate | Valuation with Low Estimate | Valuation with High Estimate | |
|---|---|---|---|---|
| Cost of debt | 8.2% | 10.3% | $540 million | $240 million |
| Cost of equity | 10.0% | 12.5% | $370 million | $230 million |
| Manufacturing costs (% of revenue) | 20.3% | 24.8% | $410 million | $300 million |
Based on this information, the company's value is most sensitive to changes in the:
A
cost of debt
B
cost of equity
C
manufacturing costs
No comments yet.