447 case2 (1)

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Jan 9, 2024

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Xinyue Mao 1 ． I think both the 10-year US government bond mentioned by Connors and the S&P 500 mentioned by Williams are not relevant to the expansion decision. The benchmark mentioned by Connors is the 10-year US government bond returns, which is seen as a sign of investor sentiment about the economy. If Treasury bonds fall, investors prefer higher-risk, higher-reward investments. The controversy at Langtry’s board meeting was whether the expansion’s resulting return justified the investment. Consequently, it is not relevant to the expansion. The S&P 500 mentioned by Williams also cannot be a benchmark relevant to the expansion decision because the S&P 500 index covers a wide range of large-cap companies. This index misses the much large swath of small-cap stocks that make up most of the economy. The size of Langtry is relatively small, so Langtry did not enjoy the economies of scale that its competition did give. Consequently, the S&P 500 cannot be a benchmark. 2. Yes, a benchmark of the competitors would be a useful benchmark for Langtry to use because Langtry’s competitors were facing the same underlying risk and competing under the same economic conditions. These competitors are direct competitors to Langtry, which means companies that sell products or services identical or very similar to the ones Langtry sells. 3. I think tax-adjusted WACC is better to be used as a benchmark. The unlevered WACC is the expected return investors will earn holding the firm’s assets. It can be used to evaluate an all-equity financed project with the same risk as to the firm. However, the controversy at Langtry’s board meeting was whether the expansion’s resulting return justified the investment. The tax-adjusted WACC is the effective after-tax cost of capital to the firm. It can be used to evaluate a project with the same risk and the same financing as the firm itself, so it would be better. 4.

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