Reference no: EM133065115

Question 1: Given that many new businesses fail in the first few years, how should an entrepreneur think about the risk of failure associated with a new business? From what you have learnt in this chapter, what can an entrepreneur do to increase the chance of success?

Question 2: You have just received a business valuation report that is dated six months ago. Describe the factors that might have changed during the past 6 months and, therefore, caused the value of the business today to be different from the value 6 months ago. Which of these changes affect the expected cash flows, and which affect the discount rate that you would use in a discounted cash flow valuation of this company?

Question 3: Starting a business: What are some of the things that the founder of a company must do to launch a new business?
18.8 Multiples analysis: It is 15 August 2013, and your company is considering the possibility of purchasing the OfficeExpress business from Supplies Ltd. Since Office Express does not have publicly traded shares of its own, you have decided to use TopOffice as a comparable company to help you determine the market value of OfficeExpress.

This morning, TopOffice ordinary shares were trading at $8.15 per share, and the company had 1.89 billion shares outstanding. You estimated that the market value of all the company's other outstanding securities is $100 billion. Its revenues from sales were $143.3 billion last year. OfficeExpress revenue in 2012 was $62.2 billion. Based on the enterprise value/ revenue ratio, what is the total value of OfficeExpress that is implied by the TopOffice market values?

Question 4: Dividend discount approach: You want to estimate the total intrinsic value of a large gas and electric utility company. This company has publicly traded shares and has been paying a regular dividend for many years. You decide that, due to the predictability of the dividend that this company pays, you can use the dividend discount valuation approach. The company is expected to pay a dividend of $1.25 per share next year, and the dividend is expected to grow at a rate of 3 per cent per year thereafter. You estimate that the appropriate rate for discounting future dividends is 12 per cent. In addition, you know that the company has 46 million shares outstanding and that the market value of its debt is $350 million. What is the total value of the company?

Question 5: Organisational form: Compare a sole trader with a partnership and company.

Question 6: Break-even: You have started a business that sells a home gardening system that allows people to grow vegetables on the bench in their kitchens. You are considering two options for marketing your product. The first is to advertise on local TV. The second is to distribute flyers in the local community. The TV option, which costs $50,000 annually, will promote the product more effectively and create a demand for 1,200 hundred units per year. The flyer advertisement costs only $6,000 annually but will create a demand for only 250 units per year. The price per unit of the indoor gardening system is $100, and the variable cost is $60 per unit. Assume that the production capacity is not limited and that the marketing cost is the only fixed cost involved in your business. What are the break-even points for both marketing options? Which one should you choose?

Multiples analysis: You are an analyst at a company that buys private companies, improves their operating performance, and sells them for a profit. Your boss has asked you to estimate the fair market value of the Johnson Machine Tools Ltd. Billy's Tools is a public company with business operations that are virtually identical to those at Johnson. The most recent income statement for Billy's Tools is as follows:

All dollar values are in millions. Billy's had depreciation and amortisation expenses of $71 million last year and 200 million shares and $600 million of debt outstanding as of the end of the year. Its share is currently trading at $12.25 per share.
Using the P/E multiple, what is the value of Johnson's shares? What is the total value of Johnson Machine Tools Ltd?

Multiples analysis: Using the enterprise value/EBITDA multiple, what is the total value of Johnson Machine Tools Ltd? What is the value of Johnson's shares?

Multiples analysis: Which of the above multiple analyses do you believe is more appropriate?

Question 7: A friend of yours is trying to value the equity of a company and, knowing that you have read this book, has asked for your help. So far she has tried to use the FCFE approach. She estimated the cash flows to equity to be as follows:

Sales                                                                    $800.0

-  Cost of Sales                                                    -450.0

-  Depreciation                                                       -80.0

-  Interest                                                             -24.0          

Earnings before tax (EBT)                                   $246.0

- Tax (0.35 × EBT)                                             -86.1          

= Cash flow to equity                                          $159.9

She also computed the cost of equity using CAPM as follows:
kE = kF + βE(Risk premium) = 0.06 + (1.25 × 0.084) = 0.164 or 16.4%
where, the beta is estimated for a comparable publicly traded company. Using this cost of equity, she estimates the discount rate as
WACC = xDebtkDebt pretax(1 - t) + xcs kcs
= 0.20 × 0.06 × (1 - 0.35) + 0.80 × 0.165 = 0.14, or 14%
Based on this analysis, she concludes that the value of equity is $159.9 million/0.14 = $1142 million.
Assuming that the numbers used in this analysis are all correct, what advice would you give your friend regarding her analysis?

Question 8: Addition to retained earnings: Southern Cross Ltd has revenue of $455,316 and costs of $316,487, and pays a tax rate of 30 per cent. If the company pays out 45 per cent of its earnings as dividends every year, what is the amount of retained earnings and what is the company's retention ratio?

Question 9: Capital intensity ratio: Sweetooth Confectioners has total assets of $3,257,845 and sales of $5,123,951. What is the company's capital intensity ratio?

Question 10: Internal growth rate: Swan Supply Ltd has a profit of $1,212,335 on assets of $12,522,788 and retains 70 per cent of its profit every year. What is the company's internal growth rate?

Question 11: Retention ratio: Refer to Problem 19.7, Southern Cross Ltd expects to increase its sales by 15 per cent next year, and all costs vary directly with sales. Southern Cross wants to retain $65,000 as retained earnings next year. Will it have to change its dividend payout ratio? If so, what will be the new dividend payout ratio and retention ratio for the company?

Question 12: Maximum sales growth: Sydney Consulting Group expects to add $271,898 to retained earnings this year. The company has total assets of $3,425,693 and wishes to add no new external funds for the coming year. If assets and costs vary directly with sales, how much sales growth can the company support while retaining an EFN of zero? What is the company's internal growth rate?