Interco Case Study

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How do free cash flows and the weighted average cost of capital interact to determine a firm’s value?

3. Using the cash flow indicator and investment valuation ratios, discuss which company is more likely to have satisfied stockholders.

From the big picture, they could have avoided the crisis in several ways. First is

Nucor has been facing many industry challenges including the overall development of the industry. They are competing with foreign firms on cost and efficiency. Nucor has a low cost strategy because as they say their product is not necessarily very attractive. It does not have attractive or unique selling features other than its cost. The commodity of steel is in a very competitive market. Nucor understands that innovation and productivity are going to be key factors to keep their buyers satisfied with their prices. Nucor is facing many challenges with a growing world market and many of their competitors merging in order to create stronger more dominate

4. Compute a separate cost of capital for the E&P and Marketing & Refining divisions. What causes them to differ from one another?

1. If I were Skip Grenoble, which alternative would you advise Ms. Shannon to implement? What criteria would you use to arrive at your decision?

The business model for IDEO began as an open-minded place to design, develop and manufacture new products. The last 20 years of proven product design driven by innovation has translated into profit margins for their clients and continuous refinement for IDEO’s process. IDEO pioneered “concurrent engineering” where design and engineering work together to produce aesthetically pleasing products that are also highly functional. This was different from many other similar companies that placed more emphasis on the industrial design than the engineering. IDEO’s strengths grew out of the ability to master this ability with high tech clients. Corporations came to IDEO because they had a proven

c) What will be the required return on equity (rE) after the change in capital structure from part b?

InsuraCorp financial services companies existed as separate entities until, in 2005, its officers contemplated developing InsuraCorp into an enterprise system. The three primary business services at InsuraCorp, individual insurance, retirement services, and group insurance, had been operating autonomously. The idea was to cross-market across the three financial service divisions to create a company that could offer a synergistic financial product and services environment for their clients. When undertaking an enterprise project of this magnitude, InsuraCorp predicted there would be data governance issues. The predominant governance issues involved IT planning (strategy development), implementation (tactic), and the most critical,

1. Please conduct a financial ratio analysis using the data in Exhibit 2. How do the results reflect different strategies pursued by the 4 firms?

{. How many consecutives years the company has been profitable, its current ration and its ROE

Once the goal of corporations became maximizing the value of the firm, they attracted wealthy “corporate raiders”, who used this new corporate philosophy to launch many takeover attempts on companies, with the intent on restructuring these companies, as to increase their stock prices, so that they can “refloat” them for a considerable profit. Most of these takeovers were financed with borrowed money, hence the term lever­aged buyouts, or LBOs. As the article states, “In a typical LBO, the acquirer would buy out the public stockholders and run the com­pany as a private concern, slashing costs and slimming it down. The ultimate aim was to refloat the company on the stock market at a higher valuation”. Initially this was seen as one of the best remedies for the agency issues that surfaced between shareholders and mangers. However as the economic climate changed, many realized that the LBO was not the answer. “When the economy went into a reces­sion during the early nineteen nineties, many of the firms that had gone private, such as Macy’s and Revco, couldn’t keep up their interest

a. What risk-free rate and risk premium did you use in calculating the cost of equity for each division? Why did you choose these numbers?

1. What do you think about the capital structure policies Diageo has pursued in the past. Do they make sense? How does it compare to Diageo’s competitors’ policies? Which competitors would make for the best comparison? 2. Why is Diageo selling Pillsbury and spinning off Burger King? How might value be created through these transactions? 3. Based on the results of the simulation model, what recommendations would you make for Diageo’s capital structure? Does the model capture all of the important risk factors faced by Diageo? Would you want to adjust the model I any way?