Star Appliance Company Essay Example for Free

Star Appliance Company Essay The methods that could be used to determine the cost of capital of Star Appliance Company would be to calculate the cost of equity of the company and then using that in finding another discount (hurdle) rate. Being that the currently used discount rate of 10 percent has been used since the company’s first years before the depression it should be recalculated in order to get a more appropriate discount rate in the time of the decision of for the dishwasher, trash compacter, or the food disposal. After increasing the discount rate to a more appropriate percent for the current time, you would then want to reevaluate the net present value of the three proposed investments in order to determine which of the three should be chosen. Now that these values have been recalculated with the newer discount rate, it can be determined that both the dishwasher and the trash compactor would be the best investment decisions for Star Appliance Company. This is because at the higher discount rate, these both still have positive net present values along with a higher internal rate of return than the new discount rate. These would prove best for the company’s investments where as the food disposal would be more costly to the firm. In the second half of the Star Appliance case (B), the given strategies would be in calculating dividend discount model, earnings/price model, and CAPM. Each of these models come about calculating things that are similar but different characteristics of the company can be represented by each different calculation. The current cost of capital that I calculated came to 11. 58%. The investment opportunities are now different than previous years for Star because now they are opening the chance for debt financing where as before they were 100 percent equity financed. It is because of this that they must calculate there newer cost of capital as compared to the original of 10 percent. Also, the investments made in the stock market are different than that of the company because the different betas used will result in different calculations for the stock market and for the company, as well as the various amount of different internal investing opportunities that Star could decide to do would also make for different investments. After going over the different circumstances the projects that Star should except would be the new grain dryer product. Although this project has more risk, the return on the project would be much greater than that of the refrigerator. This is also due to the different cost of capital from the years previous for Star as the more current at the time of the case. With newer investments in long-term debt, it amounts in different costs of capitals to the previous 0 debt 100 percent equity investments.