CARMAX INC.

Carmax Inc.

Carmax Inc.

Introduction

The main purpose of this paper is to talk about the financial analysis of Carmax Incorporation. Carmax, inc. is a US based company and their main business is the retail of used cars. Main functions of company are to purchase, maintain and sell the used vehicles to final consumers. Carmax Inc. has almost 68 superstores in most of the markets in United States by February 2006. Carmax had started selling new vehicles by coming in contract with four new car manufacturers.

Components of the WACC

"WACC" stands for Weighted Average Cost of Capital. Translated into Spanish would be the weighted average cost of capital. Its calculation involves obtaining a percentage rate of return required by sponsors of a particular company or business (both shareholders and lending financial institutions) in relation to the funds provided. So on the one side are the shareholders who provide equity of society and that, depending on perceived risk (top, in any case, risk lenders) demand a certain return on funds provided. On the other hand, there are lenders also require a given return, depending on perceived risk, the funds provided society. Therefore, we can deduce that the WACC calculation of leave in the first place calculating the return demanded by shareholders and lenders. The explanations are detailed below on how to precede calculation again and return demanded by these groups is based on the CAPM (Capital Asset Pricing Model):

The WACC depends on two components:

1. Financial market conditions, which assigns a cost to the money used by the company (e and d)

2. Management decision on capital structure Company (D% and E %).

The capital structure is the mix of long-term financing used by the company. For example, a company could use very little long-term debt, some preferred stock and a considerable amount of common stock, another alternative is to use a high proportion of debt and common equity to supplement it with without recourse to the preferred equity. The combinations are literally endless. However, according to the current financial theory, not all these combinations are equally beneficial for the company. Only a combination of financing allows the company to maximize its market value and the combination is known as optimal capital structure. Throughout the text will mean that the examples and develop the necessary tests performed and were able to determine its optimal capital structure. Moreover, the time when the company decides to obtain additional financing should comply with its optimal capital structure.

The WACC of Carmax Inc. is 10.85which means that the company is managing its WACC very efficiently.

DCF Model - Optimistic, Pessimistic & Expected

Valuing a company by the method of Discounted Cash Flows (DCF) is tantamount to assuming that the economic value of its operating assets is equal to the sum of Free Cash Flows (FCF) discounted future that they will generate.

Correspond to the operating assets other than financial assets and working capital. Therefore, the economic value of financial investments and investments in associates should be added to the FCF discounted for ...