Reference no: EM131182002

Assignment: You work for the Berea Amalgamated Products Company that produces coloring books, velvet paintings and other fine arts. 

You are proposing a new venture, to branch out into figurine animals and cartoon characters but this will require new equipment and a capital outlay.

You need to explore the financials before further researching unto a complete recommendation relative to this proposed venture.

Pertinent financial information is below briefly stated:

Cash	2,000,000	Accounts Payable and Accruals	18,000,000
Accounts Receivable	28,000,000	Notes Payable	40,000,000
Inventories	42,000,000	Long-Term Debt	60,000,000
		Preferred Stock	10,000,000
Net Fixed Assets	133,000,000	Common Stock	77,000,000
Total Assets	205,000,000	Total Claims	205,000,000

• Last year's sales were $225,000,000.
• The company has 60,000 bonds (par value $1,000.; 30-year life) with 15 years until maturity. The bonds carry a 10 percent annual coupon, and are currently selling for $874.78.
• You also have 100,000 shares of $100 par, 9% dividend perpetual preferred stock outstanding. The current market price is $90.00. Any new issues of preferred stock would incur a $3.00 per share flotation cost.
• The company has 10 million shares of common stock outstanding with a currently price of $14.00 per share. The stock exhibits a constant growth rate of 10 percent. The last dividend (D₀) was $.80. New stock could be sold with 15% flotation costs.
• The risk-free rate is currently 6 percent, and the rate of return on the stock market as a whole is 14 percent. Your stock's beta is 1.22.
• Stockholders require a risk premium of 5 percent above the return on the firms bonds.
• The firm expects to have additional retained earnings of $10 million in the coming year, and expects depreciation expenses of $35 million.
• Your firm does not use notes payable for long-term financing.
• The firm considers its currentmarket valuecapital structure to be optimal, and wishes to maintain that structure. (Hint: Examine the market value of the firm's capital structure, rather than its book value.)
• The firm is currently using its assets at capacity.
• The firm's management requires a 2 percent adjustment to the cost of capital for risky projects.
• Your firm's federal + state marginal tax rate is 40%.
• Your firm's dividend payout ratio is 50 percent, and net profit margin was 8.89 percent.

PROJECT DELIVERABLES: Steps to WACC for the Optimal Capital Structure

• Find the costs (rate of returnunder current market conditions) of the following individual capital components:
• Long-term debt, Bonds. [Hint:PV=-$874.78 (current selling price of Bonds), FV = $1000, PMT=$100, n=15 solve for i]. This is a calculator problem and if you follow the hints you will find the effective rate (see textbook appendix 10B, pages 337: Bond Valuation)
• New Preferred stock
• New common stock
• Compute the current Total Value of the Firm depicting its long-term elements of the capital structure.
• Determine the target percentages for the optimal capital structure: i.e. the weighted average cost of capital (WACC) using current values.

Assignment

A company produces and sells four grades of industrial solvents - A, B, C, and D. The selling price per gallon of each grade of solventis $6.40, $5.00, $4.20, and $3.50 respectively.  Because of demand limitations, the company can sell at most 100,000 gallons of solvent A; 300,000 gallons of solvent B; 360,000 gallons of solvent C; and 220,000gallons of solvent D. 

The solvents are produced by blending two types of liquid ingredients: Ingredient1 and Ingredient2. The cost price per gallon for the ingredients are $3.20 for Ingredient1 and $2.40 for Ingredient2. At most 400,000 gallons of Ingredient1 and 600,000 gallons of Ingredient2 are available.

Regulations require a minimum percentage by volume of Ingredient1 in each grade of solvent: 60% for A, 50% for B, 40% for C, and 10% for D.

For your convenience, the information presented above is summarized in the tables below:

Solvent grade	A	B	C	D
Selling price per gallon	$   6.40	$  5.00	$  4.20	$  3.50
Maximum quantity allowed (gallons)	100,000	300,000	360,000	220,000
Minimum % of Ingredient1 required	60%	50%	40%	10%

	Availability (gallons)	Price per gallon
Ingredient1	400,000	$   3.20
Ingredient2	600,000	$  2.40

The company must determine an optimal production plan so as to maximize their profits subject to the applicable constraints. 

Formulate the problem as a linear program

Define the decision variables:

Specify the objective function:

Specify the constraints:

Solve the linear program and report your optimal solutions.

What is the maximum profit attainable under an optimal plan?

Maximum Profit =

$

How many gallons of each ingredient should be used to produce each grade of solvent under this optimal plan?

Quantity (in gallons)	A	B	C	D
Ingredient1
Ingredient2

How many gallons of each ingredientis used up under this optimal plan?

Quantity (in gallons)	Used	Available
Ingredient1		400,000
Ingredient2		600,000

At most how much should the company be willing to pay per gallon for additional quantities of the ingredients? Justify your answer. (4 points)

The maximum amount that the company should be willing to pay for each additional gallon:

Ingredient1:	$	per gallon.
Ingredient2:	$	per gallon.

Reasoning:

Assignment 

Review the H. J. Heinz M&A case and provide a written answer to the following questions.

1. Interests and strategies (maximum 5 pages):

1. Describe the activities of Nelson Peltz and the role he played in laying the groundwork for the acquisition by Berkshire Hathaway and 3G.

2. Discuss the positions of various stakeholders including Heinz shareholders, management, employees and citizens of Pittsburgh.

3. Discuss the go-shop process, explain why it may be necessary and list any potential risks of such a process.

4. Why investment bankers involved in this transaction and what are are their respective roles?

2. Valuation: Do you agree that the acquirers' offer was fair from a financial perspective?

1. What is Heinz worth? Provide a valuation using different valuation methods including discounted cash flows, comparable companies and comparable transactions. First and for each valuation method, start with a baseline valuation and make sure to clearly explain all data sources from the case, assumptions and calculations. Second, provide alternative valuation scenarios. Finally, compare the different values that you calculated and draw conclusions about the fairness of the deal.

2. What was the acquisition premium and what do you conclude from it regarding the fairness of the deal?

3. What was the market reaction to the acquisition announcement and what do you conclude from it regarding the fairness of the deal?

3. Overall assessment: Was it a fair deal for all stakeholders? (maximum 1 page)