GC FIN 650-0101 FIN Mgnmt wk 6

Week 6

 Financial Analysis and Proposal Component 3

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Throughout this course, you will prepare a comprehensive financial analysis and proposal (excluding tables, figures, and addenda) that will demonstrate your understanding of key financial concepts, strategies, and practices. After selecting a company to profile, you will construct a comparative financial analysis of your selected company’s financial position with that of a prime competitor, for example, Amazon and Netflix, Microsoft and Oracle, or Bank of America and JPMorgan Chase & Co. Following the nine-step assessment process detailed in Assessing a Company’s Future Financial Health, your financial analysis and proposal will be composed of four separate component assignments in Topics 2, 4, 6, and 8.

For this assignment, apply the next three steps of the nine-step assessment process detailed in Assessing a Company’s Future Financial Health(i.e., Step 5: External Financing Need, Step 6: Target Sources of Finance, and Step 7: Viability of 3-5 Year Plan) to compose further assessment of the company/competitor pairing analysis as below:

1. Current financial plan. Interpret current equity valuations in order to recommend strategic solutions regarding future financial goals. Consider how stock splits and stock dividend allocations can impact the plan.
2. Future external financing needs. To support growth, companies need capital, and external financial needs are vital any firm’s future success. Describe external financing needs sufficient to support your ongoing analytical assumptions and pro forma financial statements for your chosen company and competitor.
3. Access to target sources of external financing. You will need to consider the amount of financing, timing, length of time required, and deferability of financing options.
4. Viability of a 3-5 Year Plan. Assess the consistency of the plan with the firm’s goals, and the achievability of both the operating plan and the financing plan you are proposing.

Note: You will be required to re-submit this assignment, revised to incorporate all instructor feedback, along with the other three component assignments as one comprehensive submission in Topic 8. To save time later in the course, consider addressing any feedback soon after this assignment has been graded and returned to you.

Prepare this assignment according to the guidelines found in the APA Style Guide, located in the Student Success Center. An abstract is not required.

 Problem Set 3 put in Excel

Due Date:  Details:

Complete the following problems from Chapters 7, 14, and 15 in Financial Management: Theory and Practice:

Chapter 7: 

Topics: Equity Valuation Models, Preferred Stock Valuation Model, and Free Cash Flow Valuation Model

Problems: 7-3, 7-4, 7-5, 7-9, 7-12, 7-13, 7-14, 7-17, 7-18, 7-20

 (7-3)WoidtkeManufacturing’sstockcurrentlysellsfor$22ashare.Thestockjustpaidadividendof$1.20ashare(i.e.,D0=$1.20),andthedividendisexpectedtogrowforeverataconstantrateof10%ayear.Whatstockpriceisexpected1yearfromnow?WhatistheestimatedrequiredrateofreturnonWoidtke’sstock(assumethemarketisinequilibriumwiththerequiredreturnequaltotheexpectedreturn)?

(7-4)Nick’sEnchiladasIncorporatedhaspreferredstockoutstandingthatpaysadividendof$5attheendofeachyear.Thepreferredsellsfor$50ashare.Whatisthestock’srequiredrateofreturn(assumethemarketisinequilibriumwiththerequiredreturnequaltotheexpectedreturn)?

(7-5)Acompanycurrentlypaysadividendof$2pershare(D0=$2).Itisestimatedthatthecompany’sdividendwillgrowatarateof20%peryearforthenext2years,andthenataconstantrateof7%thereafter.Thecompany’sstockhasabetaof1.2,therisk-freerateis7.5%,andthemarketriskpremiumis4%.Whatisyourestimateofthestock’scurrentprice?

 (7-7)CurrentandprojectedfreecashflowsforRadellGlobalOperationsareshownbelow.Growthisexpectedtobeconstantafter2015,andtheweightedaveragecostofcapitalis11%.Whatisthehorizon(continuing)valueat2016ifgrowthfrom2015remainsconstant?

(7-9)CrispCookware’scommonstockisexpectedtopayadividendof$3ashareattheendofthisyear(D1=$3.00);itsbetais0.8;therisk-freerateis5.2%;andthemarketriskpremiumis6%.Thedividendisexpectedtogrowatsomeconstantrateg,andthestockcurrentlysellsfor$40ashare.Assumingthemarketisinequilibrium,whatdoesthemarketbelievewillbethestock’spriceattheendof3years(i.e.,whatisP3^)?

 (7- (7-12)Assumethattheaveragefirminyourcompany’sindustryisexpectedtogrowataconstantrateof6%andthatitsdividendyieldis7%.Yourcompanyisaboutasriskyastheaveragefirmintheindustry,butithasjustsuccessfullycompletedsomeR&Dworkthatleadsyoutoexpectthatitsearningsanddividendswillgrowatarateof50%[D1=D0(1+g)=D0(1.50)]thisyearand25%thefollowingyear,afterwhichgrowthshouldreturntothe6%industryaverage.Ifthelastdividendpaid(D0)was$1,whatistheestimatedvaluepershareofyourfirm’sstock?

(7-13)SimpkinsCorporationdoesnotpayanydividendsbecauseitisexpandingrapidlyandneedstoretainallofitsearnings.However,investorsexpectSimpkinstobeginpayingdividends,withthefirstdividendof$0.50coming3yearsfromtoday.Thedividendshouldgrowrapidly—atarateof80%peryear—duringYears4and5.AfterYear5,thecompanyshouldgrowataconstantrateof7%peryear.Iftherequiredreturnonthestockis16%,whatisthevalueofthestocktoday(assumethemarketisinequilibriumwiththerequiredreturnequaltotheexpectedreturn)?

(7-14)Severalyearsago,RolenRidersissuedpreferredstockwithastatedannualdividendof10%ofits$100parvalue.Preferredstockofthistypecurrentlyyields8%.Assumedividendsarepaidannually.a.WhatistheestimatedvalueofRolen’spreferredstock?b.Supposeinterestratelevelshaverisentothepointwherethepreferredstocknowyields12%.WhatwouldbethenewestimatedvalueofRolen’spreferredstock?

(7-17)KendraEnterpriseshasneverpaidadividend.Freecashflowisprojectedtobe$80,000and$100,000forthenext2years,respectively;afterthesecondyear,FCFisexpectedtogrowataconstantrateof8%.Thecompany’sweightedaveragecostofcapitalis12%.PreferredStockRateofReturnDecliningGrowthStockValuationNonconstantGrowthStockValuationNonconstantGrowthStockValuationPreferredStockValuationReturnonCommonStockConstantGrowthStockValuationValueofOperationsChapter7ValuationofStocksandCorporations a.Whatistheterminal,orhorizon,valueofoperations?(Hint:FindthevalueofallfreecashflowsbeyondYear2discountedbacktoYear2.)b.CalculatethevalueofKendra’soperations.

(7-18)DozierCorporationisafast-growingsupplierofofficeproducts.Analystsprojectthefollowingfreecashflows(FCFs)duringthenext3years,afterwhichFCFisexpectedtogrowataconstant7%rate.Dozier’sweightedaveragecostofcapitalisWACC=13%.a.WhatisDozier’sterminal,orhorizon,value?(Hint:FindthevalueofallfreecashflowsbeyondYear3discountedbacktoYear3.)b.WhatisthecurrentvalueofoperationsforDozier?c.SupposeDozierhas$10millioninmarketablesecurities,$100millionindebt,and10millionsharesofstock.Whatistheintrinsicpricepershare?

.(7-20)ReizensteinTechnologies(RT)hasjustdevelopedasolarpanelcapableofgenerating200%moreelectricitythananysolarpanelcurrentlyonthemarket.Asaresult,RTisexpectedtoexperiencea15%annualgrowthrateforthenext5years.Bytheendof5years,otherfirmswillhavedevelopedcomparabletechnology,andRT’sgrowthratewillslowto5%peryearindefinitely.Stockholdersrequireareturnof12%onRT’sstock.Themostrecentannualdividend(D0),whichwaspaidyesterday,was$1.75pershare.a.CalculateRT’sexpecteddividendsfort=1,t=2,t=3,t=4,andt=5.b.Calculatetheestimatedintrinsicvalueofthestocktoday,^P0.Proceedbyfindingthepresentvalueofthedividendsexpectedatt=1,t=2,t=3,t=4,andt=5plusthepresentvalueofthestockpricethatshouldexistatt=5,^P5.The^P5stockpricecanYear123Freecashflow($millions)–$20$30$40FreeCashFlowValuationChallengingProblems19–21ConstantGrowthStockValuationNonconstantGrowthStockValuation318Part3StocksandOptions befoundbyusingtheconstantgrowthequation.Notethattofind^P5youusethedividendexpectedatt=6,whichis5%greaterthanthet=5dividend.c.Calculatetheexpecteddividendyield(D1/P0^),thecapitalgainsyieldexpectedduringthefirstyear,andtheexpectedtotalreturn(dividendyieldpluscapitalgainsyield)duringthefirstyear.(AssumethatP0^=P0,andrecognizethatthecapitalgainsyieldisequaltothetotalreturnminusthedividendyield.)Alsocalculatethesesamethreeyieldsfort=5(e.g.,D6/P5.

Answers 7:

7-3P^1=$24.20;r^s=16.00%.7-4rps=10%.7-5$50.50.7-6Vop=$6,000,000.7-7Vopat2016=$15,000(Millionof$).7-8g=9%.7-9P^3=$43.08.7-10a.11.67%.

7-9P^3=$43.08.7-10a.11.67%.b.8.75%.c.7.00%.d.5.00%.7-11$32.00.7-12$25.03.7-13P^0=$10.76.7-14a.$125.b.$83.33.7-15a.7%.b.5%.c.12%.7-16a.(1)$15.83.(2)$23.08.(3)$39.38.(4)$110.00.b.(1)Undefined.7-17a.HV2=$2,700,000.b.$2,303,571.43.7-18a.$713.33million.b.$527.89million.c.$43.79.7-19a.$1.79b.PV=$3.97.c.$18.74.d.$22.71.

7-20a.$2.01,$2.31,$2.66,$3.06,$3.52.b.P^0=$39.42.c.D1/P0=5.10%;D6/P5=7.00%.7-21P^0=$78.35.

Chapter 14:

Topics: Dividend Distribution Policies and Alternative Dividend Policies

Problems: 14-9, 14-10

(14-9)HarrisCompanymustsetitsinvestmentanddividendpoliciesforthecomingyear.Ithasthreeindependentprojectsfromwhichtochoose,eachofwhichrequiresa$3millioninvestment.Theseprojectshavedifferentlevelsofriskandthereforedifferentcostsofcapital.TheirprojectedIRRsandcostsofcapitalareasfollows:Harrisintendstomaintainits35%debtand65%commonequitycapitalstructure,anditsnetincomeisexpectedtobe$4,750,000.IfHarrismaintainsitsresidualdividendpolicy(withalldistributionsintheformofdividends),whatwillitspayoutratiobe?(14-10)BoehmCorporationhashadstableearningsgrowthof8%ayearforthepast10yearsandin2013Boehmpaiddividendsof$2.6milliononnetincomeof$9.8million.However,in2014earningsareexpectedtojumpto$12.6million,andBoehmplanstoinvest$7.3millioninaplantexpansion.Thisone-timeunusualearningsgrowthwon’tbemaintained,though,andafter2014Boehmwillreturntoitsprevious8%earningsgrowthrate.Itstargetdebtratiois35%.a.CalculateBoehm’stotaldividendsfor2014undereachofthefollowingpolicies:(1)Its2014dividendpaymentissettoforcedividendstogrowatthelong-rungrowthrateinearnings.(2)Itcontinuesthe2013dividendpayoutratio.(3)Itusesapureresidualpolicywithalldistributionsintheformofdividends(35%ofthe$7.3millioninvestmentisfinancedwithdebt).(4)Itemploysaregular-dividend-plus-extraspolicy,withtheregulardividendbeingbasedonthelong-rungrowthrateandtheextradividendbeingsetaccordingtotheresidualpolicy.b.Whichoftheprecedingpolicieswouldyourecommend?Restrictyourchoicestotheoneslisted,butjustifyyouranswer.c.Doesa2014dividendof$9millionseemreasonableinviewofyouranswerstopartsaandb?Ifnot,shouldthedividendbehigherorlower? (

Answers

14-9Payout=17.89%.14-10a.(1)$2,808,000.(2)$3.34Million.(3)$7,855,000.(4)Regular=$2,808,000;Extra=$5,047,000.

Chapter 15:

Topics: Break-Even Point and Capital Structure Analysis

Problems: 15-7, 15-8, 15-9

(15-7)SchweserSatellitesInc.producessatelliteearthstationsthatsellfor$100,000each.Thefirm’sfixedcosts,F,are$2million,50earthstationsareproducedandsoldeachyear,HamadaEquationEasyProblems1–6Break-evenQuantityUnleveredBetaPremiumforFinancialRiskValueofEquityafterRecapitalizationStockPriceafterRecapitalizationSharesRemainingafterRecapitalizationIntermediateProblems

7–8Break-evenPointChapter15CapitalStructureDecisions profitstotal$500,000,andthefirm’sassets(allequityfinanced)are$5million.Thefirmestimatesthatitcanchangeitsproductionprocess,adding$4milliontoinvestmentand$500,000tofixedoperatingcosts.Thischangewill(1)reducevariablecostsperunitby$10,000and(2)increaseoutputby20units,but(3)thesalespriceonallunitswillhavetobeloweredto$95,000topermitsalesoftheadditionaloutput.Thefirmhastaxlosscarryforwardsthatrenderitstaxratezero,itscostofequityis16%,anditusesnodebt.a.Whatistheincrementalprofit?Togetaroughideaoftheproject’sprofitability,whatistheproject’sexpectedrateofreturnforthenextyear(definedastheincrementalprofitdividedbytheinvestment)?Shouldthefirmmaketheinvestment?Whyorwhynot?b.Wouldthefirm’sbreak- evenpointincreaseordecreaseifitmadethechange?c.Wouldthenewsituationexposethefirmtomoreorlessbusinessriskthantheoldone?

(15-8)TheRivoliCompanyhasnodebtoutstanding,anditsfinancialpositionisgivenbythefollowingdata:Thefirmisconsideringsellingbondsandsimultaneouslyrepurchasingsomeofitsstock.Ifitmovestoacapitalstructurewith30%debtbasedonmarketvalues,itscostofequity,rs,willincreaseto11%toreflecttheincreasedrisk.Bondscanbesoldatacost,rd,of7%.Rivoliisano-growthfirm.Hence,allitsearningsarepaidoutasdividends.Earningsareexpectedtobeconstantovertime.a.Whateffectwouldthisuseofleveragehaveonthevalueofthefirm?b.WhatwouldbethepriceofRivoli’sstock?c.Whathappenstothefirm’searningspershareaftertherecapitalization?d.The$500,000EBITgivenpreviouslyisactuallytheexpectedvaluefromthefollowingprobabilitydistribution:Determinethetimes-interest-earnedratioforeachprobability.Whatistheprobabilityofnotcoveringtheinterestpaymentatthe30%debtlevel?

(15-9)PettitPrintingCompanyhasatotalmarketvalueof$100million,consistingof1millionsharessellingfor$50pershareand$50millionof10%perpetualbondsnowsellingatpar.Thecompany’sEBITis$13.24million,anditstaxrateis15%.Pettitcanchangeitscapitalstructurebyeitherincreasingitsdebtto70%(basedonmarketvalues)ordecreasingitProbabilityEBIT0.10($100,000)0.20200,0000.40500,0000.20800,0000.101,100,000Assets(Marketvalue=Bookvalue)$3,000,000EBIT$500,000Costofequity,rs10%Stockprice,P0$15Sharesoutstanding,n0200,000Taxrate,T(federal-plus-state)40%CapitalStructureAnalysisChallengingProblems9–11CapitalStructureAnalysis622Part6CashDistributionsandCapitalStru to30%.Ifitdecidestoincreaseitsuseofleverage,itmustcallitsoldbondsandissuenewoneswitha12%coupon.Ifitdecidestodecreaseitsleverage,itwillcallitsoldbondsandreplacethemwithnew8%couponbonds.Thecompanywillsellorrepurchasestockatthenewequilibriumpricetocompletethecapitalstructurechange.Thefirmpaysoutallearningsasdividends;henceitsstockisazero-growthstock.Itscurrentcostofequity,rs,is14%.Ifitincreasesleverage,rswillbe16%.Ifitdecreasesleverage,rswillbe13%.Whatisthefirm’sWACCandtotalcorporatevalueundereachcapitalstructure?

Answers

15-7a.ΔProfit=$850,000;Return=21.25%>rs=15%.b.QBE,Old=40;QBE,New=45.45.15-8a.V=$3,348,214.b.$16.74.c.$1.84.d.10%.15-930%debt:WACC=11.14%;V=$101.023million.50%debt:WACC=11.25%;V=$100million.70%debt:WACC=11.94%;V=$94.255million.

General Instructions:

Use the Topic 6 Excel Resource (if needed).