scroll to top
Stuck on your essay?
Get ideas from this essay and see how your work stacks up
Word Count: 879
In 1968 Kennecott Copper Corporation made a hasty decision when it purchased Peabody Coal Company In the years preceding the acquisition Kennecott had experienced wide swings in its profitability which it was looking to offset by diversification Investing in another company in a different industry was an intelligent decision however Peabody was the wrong company to do this with Although Peabody had been profitable and stable over the past few years leading up to the acquisition the internal rate of return related to the investment was not high enough to justify a purchase of the company Peabodys cost of debt was 038 This was calculated by assuming a 40 tax rate and 095 rate on debt Exhibit 3 There was a 095 interest rate on notes payable due June 30 1998 therefore we assumed the rate of debt at the time of purchase would have been similar Also Peabodys cost of equity was 1397 This was calculated by using a risk-free rate of 055 which was the rate of the 90-day T-bill in 1968 A beta of 1 was assumed and a 082 market risk premium was used The latter figure was determined by taking the average returns on the short-term T-Bill rate from 1951-1975 This rate was used because we know Peabody was a short-term investment and the years 1951-1975 give a more accurate reflection of the market return than using the figure from 1926-1987 Furthermore the weight of debt and equity were 35 and 65 respectively These figures were used because we are told that approximately 65 of Kennecotts net worth was tied up in Peabody These figures gave a weighted average cost of capital of 970 The IRR for this purchased was calculated by using 6215 million as the initial investment This figure was determined as a result of Kennecott giving Peabody 285 million in cash assuming 365 million in liabilities and taking on a reserved payment of 300 million Also the
@Kibin is a lifesaver for my essay right now!!
- Sandra Slivka, student @ UC Berkeley
Wow, this is the best essay help I've ever received!
- Camvu Pham, student @ U of M
If I'd known about @Kibin in college, I would have gotten much more sleep
- Jen Soust, alumni @ UCLA