The Risky Nature Of The Company

First, the projected cash flows range from $21.2 million in 2007 to $29.5 million in 2011 as shown in the data exhibit ‘DCF model.’ To generate these numbers Liedtke’s base case performance projections are used for the projected 2007 – 2011 net revenue numbers and the estimated depreciation and then his projections for Balance sheet accounts were used to determine the current net working capital and capital expenditure as in the exhibit ‘Financial statements.’ These projections were based by Liedtke under the following assumptions, women’s casual footwear would be wound down within one year and the historical corporate overhead-revenue ratio would conform to historical averages. These annual cash flows give us a PV (Cash flows) of $96.15 million over the next 5 years.

Here is a rundown of the variables we used to first determine the cash flows for Years 0 through 10: depreciation of equipment over the 10 years, sales minus COGS to identify gross profit, summed expenses (advertising, start-up, and Jell-o erosion only; the test market expense in Year 1 is considered a sunk cost and thus should not be included), and subtracted taxes to come up with the cash flow. When assessing the below issues, the team concluded the following

In 1989 and 1990 the firm was able to generate enough cash flows to cover its capital expenditures. However, in 1991 the firm’s capital expenditures were 50% higher than CFO.

Barb Williams and Rick Thomas, while attending an executive education course at a well-known business school, came across a case which involved calculating the cost of capital for Telus Corporation (Telus). Basic data such as the Balance Sheet, Income Statement, Data on Telus’ Common Stock, Market Index, and the Average Annual Returns in North American Capital Markets were provided. In order to calculate Telus’ cost of capital we need to calculate the company’s Cost of Equity, Cost of Debt, and Tax Rate along with their weighted cost and then apply these to the Weighted

Based on paragraph 33 (c) in IAS 36, “estimate cash flow projections … based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified.” With increasing uncertainty in the future, the growth rate should be settled in a declining manner year by year. However, in the case, the growth rates of discounted cash flows derived from Eagle’s identifiable asset demonstrated an increasing trend from 6% in 2011 to 12% in 2015. In addition, the case indicated that external industry reports estimate no growth rate for the foreseeable, which means the average growth rate equal to 0. In the same paragraph of IAS 36, “this growth rate shall not exceed the long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market in which the asset is used, unless a higher rate can be justified.” However, the company estimates its average future 5 years growth rate at about 8.6%. Unfortunately, no substantial evidence can justify that the company have the capability to keep an upward growth over 5 years and outperform the external industry so well.

Estimate the effect of capitalizing software costs on Microsoft’s fiscal 1997, 1998, and 1999 income statements and balance sheets. Assume that 1) 60% of Microsoft’s research and development expenses were incurred after technological feasibility was established, 2) the average product life was two years, 3) the company had always capitalized these costs; and 4) the company begins amortization capitalized software costs at the beginning of the following fiscal year.

The mixture of debt-equity mix is important so as to maximize the stock price of the Costco. However, it will be significant to consider the Weighted Average Cost of Capital (WACC) as well so that it can evaluate the company targeted capital structure. Cost of capital (OC) may be used by the companies as for long term decision making, so industries that faced to take the important of Cost of capital seriously may not make the right choice by choosing the right project(Gitman’s, ).

* We assume the cost of capital to be a stated annual rate to facilitate calculations;

Weights of Debt and equity are 8.3 and 91.7%. Now, plugging all the values in, we can derive company’s Weighted Average Cost of Capital.

WPC has used a discount rate of 15% to evaluate potential projects for the last 10 years. Many in management are correct in thinking that this rate should be evaluated on a much more frequent basis. The current rate of 15% is much too high considering the yield on treasury bonds has declined from 10% to 5% over the last ten years. In order to calculate the correct discount rate we must first determine what their equity and debt ratios are. As you can see in Exhibit1, in order to find the total value of equity we must multiply the number of total outstanding shares of stock times the market value of each share. Completing this calculation shows us that WPC has $12 billion in outstanding equity. WPC also has $2.5 billion in outstanding debt. If you add the debt and equity together we see that WPC has a total of $14.2 billion in outstanding financing. Assuming the 10 year rate of Government Bonds of 4.60% as our risk free rate and using the Capital Asset Pricing Model we find that that WPC’s return on equity is 11.2% (See Exhibit 1). As stated in the case, Worldwide Paper Company has an A bond rating so we can use the 5.78% for their return on debt. Combining all of these variables in the Weighted Average Cost of

In the revised income statement, projected net income after taxes would significantly increase from $3,963K to $4,651K in 2011, and from $3,818K to $4,716K in 2012. This is predominantly driven by the sales growth of $21.6 million in 2011 and $28 million in 2012. Without this project, net income would have otherwise peaked in 2011 and decline in subsequent years. Thus, this investment

GFI Risk Assessment Celida M. Bruss CMIT 425 8 July, 2015 Executive Summary The following risk analysis of Global Finance Incorporated (Inc.) addresses the weaknesses discovered not only in the physical and logical infrastructure, but in the corporate climate that dictates security and technology operations for GFI Inc. GFI leadership must compromise on how to manage its assets by dividing what it can among internal IT staff and outsourcing less critical functions to a commercial cloud provider. Additional findings from the Risk Analysis reinforce the need for a new and updated architecture.

We added the market risk premium of 6% to the 4.60% because 6% is the rate that investors want above the risk free rate due to the risk of the investment. This equals 10.6% which is then multiplied by the beta of the company of 1.1. Beta is a measure of the stock’s volatility in relation to the market. A beta of 1.1 means that Worldwide Paper Company has slightly higher volatility than the market does. The total cost of equity then calculates to equal 11.2%. This tells us that given the risk taken in investing in the company, a shareholder should expect an 11.2% return.

Here is one optimistic and one pessimistic scenario. With the pessimistic scenario we took WACC with +3, 5 % and it give us a discounted cash flow value of 1,6 billion pounds which indicates a major drop in real value of the company. With the optimistic scenario we took WACC with - 4,5% and it gave us an increase of value to 2.38 billion pounds which indicates that with a little bit better adjusting and a good marketing campaign the optimistic scenario will give us an optimistic scenario of 590 million

The above graph is used to represent a high and a low risk investment. As it describes, a high-risk investment may at first seem to be a very bad investment, but will become a high return investment after a short time. However, for a low risk investment, there will also be positive returns, but not so significant, as those of a high-risk investment.