Reference no: EM131488014
Case 1
The purpose of this assignment is to explain core concepts related to business risk and recommend sound financial decisions based on analysis of a firm's capital structure and capital budgeting techniques.
Case on page 626 in Financial Management: Theory and Practice.
Assume you have just been hired as a business manager of PizzaPalace, a regional pizza restaurant chain. The com pany' s EBIT was $50 million last year and is not expected to grow. The firm is currently financed with all equity, and it has 10 million shares outstanding. When you took your corporate finance course, your instructor stated that most firms' owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. As a first step, assume that you obtained from the firm' s investment banker the following estimated costs of debt for the firm at different capital structures:
Percent Financed
With debt,Wd rd
0% -
20 8.0%
30 8.5
40 10.0
50 12.0
If the company were to recapitalize, then debt would be issued and the funds received would be used to repurchase stock. PizzaPalace is in the 40% state-plus-federal corporate tax bracket, its beta is 1.0, the risk-free rate is 6%, and the market risk premium is 6%.
Question:
a. Using the free cash flow valuation model, show the only avenues by which capital structure can affect value.
b. (1) What is business risk? What factors influence a firm' s business risk?
(2) What is operating leverage, and how does it affect a firm' s business risk? Show the operating break-even point if a company has fixed costs of $200, a sales price of $15, and variable costs of $10.
Instructions:
1) Using complete sentences and academic vocabulary, please answer questions a and b.
2) Using the mini case information, write a 250-500 word recommendation of the financial decisions you propose for this company based on an analysis of its capital structure and capital budgeting techniques.
APA format is not required, but solid academic writing is expected.
Case 2
The purpose of this assignment is to explain core concepts related to cash distributions and capital structure.
Read the Chapter 14 Mini Case on page 586 in Financial Management: Theory and Practice. Using complete sentences and academic vocabulary, please answer questions a and b.
APA format is not required, but solid academic writing is expected.
Integrated Waveguide Technologies, Inc. (IWT) is a 6-year-old company founded by Hunt Jackson and David Smithfield to exploit metamaterialplasmonic technology to develop and manufacture miniature microwave frequency directional transmitters and receivers for use in mobile Internet and communications applications. IWT' s technology, although highly advanced, is relatively inexpensive to implement, and its patented manufacturing techniques require little capital as compared to many electronics fabrication ventures. Because of thelow capital requirement, Jackson and Smithfield have been able to avoid issuing new stockand thus own all of the shares. Because of the explosion in demand for its mobile Internetapplications, IWT must now access outside equity capital to fund its growth, and Jacksonand Smithfield have decided to take the company public. Until now, Jackson and Smithfieldhave paid themselves reasonable salaries but routinely reinvested all after-tax earnings in thefirm, so dividend policy has not been an issue. However, before talking with potentialoutside investors, they must decide on a dividend policy.
Your new boss at the consulting firm Flick and Associates, which has been retained to helpIWT prepare for its public offering, has asked you to make a presentation to Jackson andSmithfield in which you review the theory of dividend policy and discuss the following issues.
Question:
a. (1) What is meant by the term " distribution policy" ? How has the mix of dividendpayouts and stock repurchases changed over time?
(2) The terms " irrelevance," " dividend preference," or " bird-in-the-hand," and " tax effect" have been used to describe three major theories regarding the waydividend payouts affect a firm' s value. Explain these terms, and briefly describe each theory.
(3) What do the three theories indicate regarding the actions management should take with respect to dividend payouts?
(4) What results have empirical studies of the dividend theories produced? How does all this affect what we can tell managers about dividend payouts?
b. Discuss (1) the information content, or signaling, hypothesis, (2) the clientele effect,and (3) their effects on distribution policy.
Case 3
The purpose of this assignment is to explain core concepts related to stock, equity, debt, and the roles they play in making tactical financial decisions.
Read the Chapter 20 Mini Case on pages 824-825 in Financial Management: Theory and Practice. Using complete sentences and academic vocabulary, please answer questions a and b.
APA format is not required, but solid academic writing is expected.
Paul Duncan, financial manager of EduSoft Inc., is facing a dilemma. The firm was founded 5 years ago to provide educational software for the rapidly expanding primaryand secondary school markets. Although EduSoft has done well, the firm' s founderbelieves an industry shakeout is imminent. To survive, EduSoft must grab market sharenow, and this will require a large infusion of new capital.
Because he expects earnings to continue rising sharply and looks for the stock price to follow suit, Mr. Duncan does not think it would be wise to issue new common stock atthis time. On the other hand, interest rates are currently high by historical standards, andthe firm' s B rating means that interest payments on a new debt issue would be prohibitive.Thus, he has narrowed his choice of financing alternatives to (1) preferred stock, (2) bondswith warrants, or (3) convertible bonds.
As Duncan' s assistant, you have been asked to help in the decision process by answering the following questions.
a. How does preferred stock differ from both common equity and debt? Is preferred stock more risky than common stock? What is floating rate preferred stock?
b. How can knowledge of call options help a financial manager to better understand warrants and convertibles?
Reference:
Brigham, E. F., & Ehrhardt, M. C. (2014). Financial management: Theory and practice (14th ed.). Mason, OH: South-Western.