CASE QUESTIONS Cash Flows and Value. Cost of Capital Case 1: Hop-In Food Stores, Inc. 1. Determine the correct price for this particular IPO. Use several methods to do this and compare them. 2. What extra information would you try to acquire in a real life situation? Case 2: Chem-Cal Corporation 1. How do you calculate the WACC for this firm? 2. What is the cost of capital of the debt, preferred stock, and common stock (assume the equity beta is 1.22)? 3. Calculate the WACC. How can a WACC be used? 4. Which projects should be selected? (State your assumptions) 5. How should the projects be financed? Analyze all other issues in the case. Case 3: Marriot Corporation 1. What is the Weighted Average Cost of Capital for Marriott Corporation? 2. …show more content…
which is about 34%); • Capital expenditures decline from 45.8% of revenues in 1995 to 10.8% of revenues by 2001 (again, close to Microsoft 's experience); • Depreciation is held constant at 5.5% of revenues; • Changes in net working capital of essentially zero; • Long-term steady-state growth of 4% annually after 2005; and • A long-term riskless interest rate of 6.71%. Given these assumptions, and starting from its current sales base of $16.625 million, how fast must Netscape grow on an annual basis over the next ten years to justify a $28 share value? 3. As an executive of Netscape, what would you recommend with respect to the proposed offering price? As an investor in Netscape, what would you recommend? As the manager of an institutional fund who was willing to buy and hold Netscape 's stock at the originally proposed price of $14 per share, would you be willing to buy and hold at an initial offering price of $28 per share? Case 9: Tiffany & Co. 1. Review Tiffany’s operations since the LBO. How attractive does the company look compared to other retailing operations? 2. As the lead manager of the underwriting syndicate, how far would you be willing to go in accommodating Tiffany’s pricing preferences? 3. As Tiffany’s top management, what is the highest gross spread you would be willing to settle for? 4. As the lead investment bank’s syndicate manager, what ‘short position’, if any, would you build into your offering
I feel that this case was somewhat representative of what was discussed in the textbook. The forensics aspects of this case were generally different from the impression of forensics I received from reading the textbook. Despite this fact, I feel that the investigative techniques of this case were similar to what was discussed in the textbook, as well as what has been discussed during lecture.
After having a very successful performance and getting second place on the first Littlefield simulation game we knew what we needed to do to win the second simulation game. We were very eager to outperform our competition and we almost did so, but ended up in second place again with a cash balance of $2,660,393.
1.3. In order to estimate the peso discount rate, assume that the International Fisher Effect (IFE) holds. Groupe Ariel's Euro hurdle rate for a project of this type was 8%. Assume that inflation rates are expected to be 7% in Mexico and 3% in France.
Sparkle Company is a Nigerian diamond mining company. Sparkle is a joint venture, 50 percent owned by Shine and 50 percent owned by Brighten. Both Shine and Brighten are U.S.-based companies with their functional currency being the American dollar. Sparkle Companies functional currency is that of Nigeria, being the Naira. During 2009, Sparkle had several transactions with its joint venture owners and outside parties. The details of Sparkle’s transactions are three loans, three expenditures, and one revenue stream. The loans the company took out were $1 million from Brighten, $1 million from Shine, and 300 million Naira from a local Nigerian bank. The expenditures
You are in a patient’s room performing a treatment. The patient, who has a type of cancer that is always fatal, has just been told of his condition. While you are there, a man visiting a patient in the next bed begins to describe the horror of his wife’s last days before she died of cancer. The patient becomes increasingly tense and finally begins to sob. Answer the following questions:
What are some alternative ways to obtain a market risk premium for use in a CAPM cost-of-equity calculation? Discuss both the possibility of obtaining estimates from outside organizations and also ways which Ace could calculate a market risk premium itself.
4) Do you think the total market value of Redhook, Pete’s and Boston Beer (at your proposed IPO price) makes sense, given the total size and profitability of the beer industry, and the craft-brewing segment? What profitability and growth assumptions are necessary to justify the total market value of these three craft brewers? (Hint: First determine the total market value of these three companies. Then figure out what the average after tax operating profit margin is for these three companies. Figure out what the value of these three companies would be if their after tax earnings continued forever, but did not grow at all. Then take the difference between their total Market Value and this (no growth) perpetuity value. This difference reflects the market value due to GROWTH. Try to figure out what growth rate in revenues is implied here by projecting total revenues for 10 years, and finding the after tax earnings for 10 years, and then discounting the after tax earnings at the cost of equity. Don't forget to calculate the terminal value (grow earnings at 4% after year 10.)
4) Do you think the total market value of Redhook, Pete’s and Boston Beer (at your proposed IPO price) makes sense, given the total size and profitability of the beer industry, and the craft-brewing segment? What profitability and growth assumptions are necessary to justify the total market value of these three craft brewers? (Hint: First determine the total market value of these three companies. Then figure out what the average after tax operating profit margin is for these three companies. Figure out what the value of these three companies would be if their after tax earnings continued forever, but did not grow at all. Then take the difference between their total Market Value and this (no growth) perpetuity value. This difference reflects the market value due to GROWTH. Try to figure out what growth rate in revenues is implied here by projecting total revenues for 10 years, and finding the after tax earnings for 10 years, and then discounting the after tax earnings at the cost of equity. Don't forget to calculate the terminal value (grow earnings at 4% after year 10.)
Build the management-research question hierarchy, through the investigative questions stage. Then compare your list with the measurement questions asked.
6. If the company decides to go ahead with the targeted stock issue, what specific provisions or features should the stock include to ensure maximum value creation? How closely would you model USX’s targeted stock on GM’s alphabet stock?
iii. Prepare a basic discounted cash flow analysis; i.e. compute incremental cash flows and a terminal value, and discount them at a weighted average cost of capital. Can you do a multiples-type analysis here as well?
5. If Marriott used a signle corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time?
Using the scenarios in case Exhibit 9, what role does leverage play in affecting the return on equity (ROE) for CPK? What about the cost of capital? In assessing the effect of leverage on the cost of capital, you may assume that a firm’s CAPM beta can be modeled in the following manner: BL = BU[1 + (1 − T)D/E], where BU is the firm’s beta without leverage, T is the corporate income tax rate, D is the market value of debt, and E is the market value of equity.
For the mock trial I was assigned to be one of the prosecuting attorneys. After being presented with case materials which included facts of the case, statements from both prosecuting and defense witnesses, penal code for the alleged charges, and map of the crime scene, we as a group decided to create one Google Drive document. There we would upload our parts of the case and help other group members with their assignments.