Free Essay

# Friendly Card

Submitted By destinycyy
Words 1084
Pages 5
ESTIMATION OF GROWTH RATES
The value of a firm is ultimately determined not by current cash flows but by expected future cash flows. The estimation of growth rates in earnings and cash flows is therefore central to doing a reasonable valuation. Growth rates can be obtained in many ways: they can be based upon past growth; drawn from estimates made by other analysts who follow the firm; or related to the firm's fundamentals. Since each of these approaches yields some valuable information, it makes sense to blend them to arrive at one composite growth rate to use in the valuation. This chapter examines different approaches to estimating future growth, and discusses the determinants of growth.
Question 1 - Arithmetic and Geometric Means
The following are the earnings per share of Thermo Electron, a company that designs cogeneration and resource recovery plants, from 1987 to 1992:
|Year |EPS |
|1987 |0.67 |
|1988 |0.77 |
|1989 |0.90 |
|1990 |1.10 |
|1991 |1.31 |
|1992 |1.51 |

A. Estimate the arithmetic average growth rate in earnings per share from 1987 to 1992.
B. Estimate the geometric average growth rate in earnings per share from 1987 to 1992.
C. Why are the growth rates different?
Question 2 - Linear and Log-linear Models of Earnings Growth
Consider again the example of Thermo Electron, described in the prior example, using the historical data from 1987 to 1992.
A. Estimate the growth rate from a linear regression model.
B. Estimate the growth rate from a log-linear regression model.
C. Project the earnings per share in 1993 using both models.
Question 3 - Dealing with Negative Earnings
The earnings per share from 1987 to 1993 are reported below for McDonnell Douglas, an aircraft manufacturer with extensive defense contracts:
|Year |EPS |
|1987 |7.27 |
|1988 |7.91 |
|1989 |-0.97 |
|1990 |-2.64 |
|1991 |8.42 |
|1992 |-0.06 |
|1993 |10.75 |

A. Estimate the geometric average growth rate in earnings from 1987 to 1993.
B. Estimate the arithmetic average growth rate in earnings from 1987 to 1993, using a correction for the negative earnings.
C. Estimate the growth rate in earnings, using the linear regression model.
Question 4 - Earnings Growth and ROE
Johnson and Johnson, a leading manufacturer of healthcare products, had a return on equity in 1992 of 31.4%, and paid out 36% of its earnings as dividends. It earned a net income of \$1,625 million on a book value of equity of \$5,171 million. As a consequence of healthcare reform, it is expected that the return on equity will drop to 25% in 1993 and that the dividend payout ratio will remain unchanged.
A. Estimate the growth rate in earnings based upon 1992 numbers.
B. Estimate the growth rate in 1993, when the ROE drops from 31.4% to 25%.
C. Estimate the growth rate after 1993, assuming that 1993 numbers can be sustained.
Question 5 - Earnings Growth, Leverage, and Risk
Eastman Kodak was, in the view of many observers, in serious need of restructuring in 1994. In 1993, the firm reported the following:
Net Income = \$1,080 million
Interest Expense = \$ 550 million
The firm also had the following estimates of debt and equity in the balance sheet:
Equity (Book Value) = \$6,000 million
Debt (Book Value) = \$6,880 million
The firm also paid out total dividends of \$660 million in 1993. The stock was trading at \$63, and there were 330 million shares outstanding. (It faced a corporate tax rate of 40%.) Eastman Kodak had a beta of 1.10.
Analysts believe that Kodak could take the following restructuring actions to improve its financial strength: ï It could sell its chemical division, which has a total book value of assets of \$2,500 million and has only \$100 million in earnings before interest and taxes. ï It could use the cash to pay down debt and improve its bond rating (leading to a decline in the interest rate to 7%). ï It could reduce the dividend payout ratio to 50% and reinvest more back into the business.
A. What is the expected growth rate in earnings, assuming that 1993 numbers remain unchanged?
B. What is the expected growth rate in earnings, if the restructuring plan described above is put into effect?
C. What will the beta of the stock be, if the restructuring plan is put into effect?
Question 6 - Adjusting Inputs For Firm Type
Computer Associates makes software that enables computers to run more efficiently. It is still in its high-growth phase and has the following financial characteristics:
Return on Assets = 25%
Dividend Payout Ratio = 7%
Debt/Equity Ratio = 10%
Interest rate on Debt = 8.5%
Corporate tax rate = 40%
It is expected to become a stable firm in ten years.
A. What is the expected growth rate for the high-growth phase?
B. Would you expect the financial characteristics of the firm to change once it reaches a steady state? What form do you expect the change to take?
C. Assume now that the industry averages for larger, more stable firms in the industry are as follows:
Industry Average Return on Assets = 14%
Industry Average Debt/Equity Ratio = 40%
Industry Average Interest Rate on Debt = 7%
Industry Average Dividend Payout ratio = 50%
D. What would you expect the growth rate in the stable growth phase to be?
Question 7 - Weighting Different Estimates of Growth Rate
The following are a number of valuation scenarios, where multiple estimates of growth are available. Specify how you weight the different growth rates and why.
A. A cyclical firm, whose earnings have dropped significantly (historical growth rate is negative) as a consequence of a recession, but which you believe has bottomed out and is in the process of recovering. The firm is heavily followed by analysts, who have a good track record in forecasting earnings growth.
B. A troubled firm, whose earnings have dropped significantly because of a combination of bad luck and bad management, but which is now restructuring. You have fairly good information on the form the restructuring will take and its expected impact. Analysts follow the firm, but their track record is spotty.
C. A healthy firm, where the estimates of growth from history, analysts, and fundamentals are fairly close.
D. A firm, which has a long and fairly reliable history of earnings growth, but which has just sold off three divisions (comprising almost half of the market value of the firm). Analysts follow the stock, but base forecasts primarily on historical growth.

### Similar Documents

#### Valuation of Friendly Cards Case

...Final Case: Friendly Cards, Inc. FINAN 4210 Lutz Jonathan Matsen 05/01/2013 Problem Identification Wendy Beaumont, president of Friendly Cards, is currently faced with 3 time sensitive issues that need to me dealt with immediately. As a relatively small company in the fiercely competitive greeting card industry, Ms. Beaumont must make some quick yet intelligent decisions to ensure the continued success of her company. To be more specific, she must decide upon:  The investment in equipment to enable the company to make rather than buy their own envelopes  The acquisition of Creative Designs Inc., a small Midwestern manufacturer of studio cards  The possibility of going to the market to raise additional equity capital in order to relieve pressure on its financial position Identification of Relevant Facts Friendly’s position in the industry As of early 1988, the main issues facing the greeting card industry were:  Continued industry consolidation (a decline of 15% per decade since 1954)  Cyclical revenues  The presence of high fixed costs Threat of Industry Consolidation Since its inception in 1978, Friendly Cards reacted to the looming threat of industry consolidation by rapidly expanding internally and through various acquisitions. These acquisitions allowed Friendly to access new markets and demographics that would have been previously unavailable to them. For example, through their acquisition of a California firm, the company gained......

Words: 2617 - Pages: 11

#### Friendly Cards Inc

...Friendly Cards Liu Xing 1. In order to calculate the WACC of Creative Design, we need to estimate the beta first. We can calculate the beta(e) from the weighted beta(e)s of the industry. According to Exhibit 5: βe of American Greetings=1.07 and the net income is 33.4, βe of Gibson Greetings=0.93 and the net income is 24.1. So we estimate theβe of CD: 1.07*33.4/(33.4+24.1)+0.93*24.1/(33.4+24.1)=1.01 Re of CD=Rf+βe(Rm-Rf)=8.4%+1.01*7%=15.47% According to Exhibit 7, the Debt of CD=2250 D/V=2250/4500=50% From Exhibit 6, the interest of 1987 is 100, Rd=100/2250=4.44%, Rtax=95/238=40% WACC=15.47%*50%+4.44%*50 %*(1-40%)=9.07% If we consider the CD’s Equity as it’s market value, which is 11 times of it’s 1987 earnings, the Equity=171*11=1881, the D/V will be bigger, and WACC will be smaller. 2. The purpose we do the projection is to determine whether we should acquire CD, so we need to consider the improvements Friendly intends, they are: Reduce COGS by 5%, other expense by 10%, and sales increase by 6% per year. Using the COGS/Net Sale and Total Expense/Net Sales of 1987, we can estimate that of 1990. When estimate the debt, we use the same rate as Interest/(COGS+Expense) in1987，because Debt is more closely related to the COGS and Expense. Then the income statement of 1990 is as follow: |　Income Statement |1987 |1988 |1989 |1990 | |Net sales |5,000 |5,000 |5,300 |5,618 | |COGS |3,075 |2,921 |3,097 |3,282 | | Gross profit |1,925 |2,079 |2,203......

Words: 731 - Pages: 3

#### Friendly Cards Case Analysis

...Investment Decisions Summary of Facts Friendly Cards, Inc. (first named Beaumont Greeting Card Co.) is a greeting card company started in 1978, in New York City by Wendy Beaumont. The company has experienced rapid growth, acquiring like companies and expanding its market base. The company became public through a stock offering at \$3 per share. From an operational viewpoint, Friendly cards performed all production at its plant in Reading, Connecticut. Company sales include nearly 30% from Christmas sales, 25% from Valentines sales and about 45% from average every day and spring holiday sales. The company reports low returns expense, as packages sold to stores were not returnable. Overall operations are well monitored under a tiered organizational structure. Wendy Beaumont, the company’s president is looking to further expand and has asked the advice of friend and financial consultant, Amy McConville to review a potential acquisition or partnership. The prospects will elevate some of the president’s concerns for financing. In her own words, Ms. Beaumont expressed that the cost of financing growth right now was high and Friendly Card's projects 20% growth over the next year and even more in subsequent years. Further stating, the company had never been without financing problems and had always been capital intensive relying on strong relations with its banks and suppliers in realizing success. Still, Friendly’s bankers have begun to feel uneasy regarding the......

Words: 3519 - Pages: 15

Free Essay

#### The Power of First Impressions

...amygdala also controls fear and alerts us to possible danger, it is easy to see how fast a first impression can come. If you are walking on the path in a forest and see something that could be a snake, the lightning like fight or flight response you get comes from the amygdala assessing the threat. This is the same part of the brain that creates first impressions, so you can see how quickly they are made. When I picture John after reading the first scenario, I see a confident, friendly person who eagerly talks to many people throughout his day. I see a man who knows who he is as a person and is very likeable. The scenario seems to show him as a very likeable individual who is very full of life and outgoing. I can almost see him smiling as he walks around, just enjoying being alive. When I picture John after reading the second scenario, I see a very different person. I see someone who walks slouched over and doesn’t engage in friendly repartee with anyone. He doesn’t appear to be as friendly. I wouldn’t say that I see him as unfriendly, maybe just withdrawn. Perhaps I read too much into it, but it seems to me as if the second John is not someone that...

Words: 765 - Pages: 4

Free Essay

#### House of 1000 Mirrors

...House of 1000 Mirrors Long ago in a small, far away village, there was place known as the House of 1000 Mirrors. A small, happy little dog came to know of this place and decided to visit. When he arrived, he bounced happily up the stairs to the doorway of the house. He looked through the doorway with his ears lifted high and his tail wagging as fast as it could. To his great surprise, he found himself staring at 1000 other happy little dogs with their tails wagging just as fast as his. He smiled a great smile, and was answered with 1000 great smiles just as warm and friendly. As he left the House, he thought to himself, "This is a wonderful place. I will come back and visit it often." In this same village, another little dog, who was not quite as happy as the first one, decided to visit the house. He slowly climbed the stairs and hung his head low as he looked into the door. When he saw the 1000 unfriendly looking dogs staring back at him, he growled at them and was horrified to see 1000 little dogs growling back at him. As he left, he thought to himself, "That is a horrible place, and I will never go back there again." All the faces in the world are mirrors. Just observe what kind of reflections do you see in the faces of the people you meet. Life is actually a reflection of our thoughts and...

Words: 254 - Pages: 2

Free Essay

#### Yo Bby

...specifically on consumers’ attitudes and purchase intention of eco-friendly products. It has been the global concern for the purpose of the preservation of the polluting and degradation of environment. Many studies have been done on the green marketing exploring the importance of the topic and relationship to the attitude and purchasing behavior of the consumers of eco-friendly products. Through the vital information provided by the expertise, competent and experience researchers, companies have understood the importance of green marketing in order to produce eco-friendly products and these provided much rich information for the literature studies of the thesis The objective of this research was looked into and explored the influencing of the four traditional marketing-mix elements, satisfaction and word of mouth (WOM) on attitude and purchasing intentions of consumers on eco-friendly products specifically fasting moving consumer goods (FMCG) or non-durable ones. The purpose of the study was to obtain information from consumers’ point of view. Furthermore, one perspective of the study was to look into the comparison of the Swedish and the Non-Swedish their attitudes towards ecofriendly products. A questionnaire provided to obtain the views of the Swedish and others nationalities, how they are influenced by the marketing-mix elements (4P), satisfaction and WOM concerning green attitudes and purchase intention of eco-friendly products. A quantitative approach was adopted for......

Words: 419 - Pages: 2

Free Essay

#### Hizsdxfghbnm

...make my room eco-friendly? * What are the things I need to making a eco-friendly room? * How to make a room more healthy? * What are the things that we should do to making a healthier room? * What are the instructions to making a healthy living room? Design Brief The solution to this problem is that, we could put windows to the room so the room can get fresh air and also oxygen. We could also put a door that we can open that leads to the back yard. Design Specifications * Wide Windows * Bright colours to the room * A transparent door to a backyard or swimming pool * Less lighting Wide windows: I will put wide windows so lots of sunshine for the room. Bright colours: bright coloured painted room for style but also nice to see. A transparent door to a backyard or swimming pool: so we can just go and exercise or take a swim. Less lighting: for saving more energy and electricity. Method of testing For the method of testing I will ask honest opinions from my friends for feedback and also I am going to tell them what am I going to make. 1. http://www.howcast.com/videos/172366-How-to-Make-Your-Bedroom-EcoFriendly, the author is unknown and also the date. This website gave lots of information for making this project because it gave me tips, steps, facts and videos. I watched the video so I can learn more also I read the steps. 2. http://theecodiva.com/guest-blogger/12-simple-ways-to-make-your-bedroom-more-eco-friendly/ , the......

Words: 449 - Pages: 2

#### Financial Analysis

...Target Financial Analysis Table of Contents Introduction 3 Background and History of Target 3 Social Responsibility, Corporate Governance, and Ownership 4 Corporate Governance 5 Ownership 5 Time Series and Cross Sectional Analysis 5 SWOT Analysis 7 Recommendations and Improvements 9 Conclusion 11 Introduction The company that our team has analyzed is Target. With having 1,801 stores in the United States, 133 stores in Canada, and global locations in India and Canada, Target has improved over the years. Comparing the financial aspects of the business you’re evaluating is very important for any company. It lets you know the different ratios and that can reveal a lot of financial information. Even though the financial aspect of a business is very important and crucial part to success, let’s take a look at how Target first got started and what they stand for. Target consists of different departments ranging from apparel, health and beauty aid, electronics, and a grocery section with many more. Most people would consider Target as their “one stop shop.” Background and History of Target In 1962 Stewart K.Widdess, who was the former Dayton’s Director of Publicity, was asked to come up with a name and purpose for a new retail store. His staff had brainstormed roughly 200 names. The came up with the name ‘Target’ out of a sudden inspiration. With that being said since the name was Target, they thought it would be appropriate to have their......

Words: 2437 - Pages: 10

#### Greenwashing in Todays Community

...In recent years, the competition among companies is fiercer than ever, and customers have been concerned about environmental issues, so many organizations devote themselves to attract customers via promoting green products and services. As a result, green products as well as greenwashing products, which are labeled as eco-friendly while actually they are not, have inundated the marketplace in modern society. However, some companies overstate their environmental claims so that customers have difficulty in distinguishing real eco-friendly products from greenwashing ones. This essay will show the reasons for greenwashing problems and discuss Chevron’s (one of the world’s largest integrated energy companies) marketing strategies, which hides its destructive environmental records behind eco-friendly rhetoric and advertising campaigns. There are four main reasons that greenwashing has become a problem in recent years. Firstly, greenwashing activities help to attract customers so that profits can be remarkably increased (Berkeley Media Studies Group 2008, p.20). According to Solman (2008, p.24), British Petroleum (BP), a well-known oil company, profited from the rebranding effort as the corporation changed its name to Beyond Petroleum which can be associated with nature. Meanwhile, greenwashing can help to improve a company’s reputation (Solman 2008, pp.22-23). For example, Solman (2008, pp.22-23) states that BP launched a series of campaigns, hoping that customers would......

Words: 284 - Pages: 2

Free Essay

#### Trimet Case Study

...cleaning solutions, which resulted in significant product waste and dollars lost as the cleaning staff was using more than one product per job. In addition, the solutions were not environmentally friendly, creating a negative cumulative effect on the staff and the environment. "We've always been an environmentally minded organization, yet struggled to find 'green' products that could get the job done," said Dan Koenig, Facilities Services with TriMet. "While our old solutions worked, we were tired of the excessive product waste and the harshness of the chemicals. We were determined to find a better way." The Solution TriMet was very receptive to testing the Staples Sustainable Earth line of products and worked closely with the Staples team to see how the solutions performed in a real-world environment. Staples showcased the products’ robustness by selecting one of the organization’s most hard-to-clean areas – the underground bus pits below where the vehicles were parked. The power of the Sustainable Earth line combined with the ease of dilution, safe ingredients and cleaning versatility made the decision to move to Staples an easy one. “The Sustainable Earth line is a perfect fit for our organization,” said Koenig. “We’d been searching for a cost-effective, eco-friendly solution for many years. It’s as if Staples read our mind and created the products just for us.” TriMet was able to meet all of...

Words: 482 - Pages: 2

#### Eco Friendly

...Definition Eco-friendly literally means earth-friendly or not harmful to the environment (see References 1). This term most commonly refers to products that contribute to green living or practices that help conserve resources like water and energy. Eco-friendly products also prevent contributions to air, water and land pollution. You can engage in eco-friendly habits or practices by being more conscious of how you use resources. Product Qualifications Making a truly eco-friendly product keeps both environmental and human safety in mind. At a minimum, the product is non-toxic. Other eco-friendly attributes include the use of sustainably grown or raised ingredients, produced in ways that do not deplete the ecosystem. Organic ingredients or materials are grown without toxic pesticides or herbicides. Products with "made from recycled materials" contain glass, wood, metal or plastic reclaimed from waste products and made into something new. Biodegradable products break down through natural decomposition, which is less taxing on landfills and the ecosystem as a whole. (See References 3) Practice Examples You can develop eco-friendly habits to help you use less and make the most of what you have. Turn off lights in empty rooms and use a programmable thermostat so you're only heating or cooling your home when it's occupied (see References 2). Businesses can also institute such practices, in addition to bigger initiatives, such as company-wide recycling programs to conserve...

Words: 327 - Pages: 2

#### Case Study Steam Whistle Brewing

...company. I will analyze their strengths, weaknesses, opportunities, and threats. I will then go on to determining the problem that this company is facing. To conclude, I will offer a few alternatives that could help with their problem, along with recommendations. SWOT Analysis: Strengths: - create beer with exceptional quality - It is free of genetically modified organisms - Uses environmentally friendly fuel alternatives - Reduced carbon dioxide emissions - State-of-the-art brew house - Strong sense of environmental responsibilities Weaknesses: - Only 1 product - Not enough product advertisement Opportunities: - Market unique “green” technologies - Acquire other smaller firms to grow - Expand production and distribution Threats: - Rising beer prices - Entry of new competitors in “green” beer - Lack of consumer dedication Problem Statement: As the article says, this company has taken great steps to making their brewery the greenest in North America. Many businesses around the country have begun turning themselves environmentally friendly, but Steam Whistle has gone the extra mile. Unfortunately, there are a few problems that this company is currently facing. By analysing their situation, these problems can be put in the past and their goals can be easily attained. A problem they...

Words: 891 - Pages: 4

Free Essay

#### Letter of Transmittal

...Mr. Fred Smith FedEx Corporation 3875 Airways, Module H3 Memphis, TN, 38116 Dear Mr. Fred Smith, Your company, FedEx, approached our company, The (company name) on October 12, 2009, with the desire of becoming more eco-friendly. The vast majority of your vehicles are not alternative fuel based; however our company would like to help enhance your fuel usage by developing a fuel that is healthier for the environment. The (company name) is pleased to submit this report to provide more environmentally friendly fuel for the trucks and planes for FedEx Corporation. Our company has been providing guidance to companies in the Los Angeles area in the subject of greener fuels since the year 2000. Many of the companies we have worked with have seen great success and are implementing the strategies we put in place for them. We feel very confident that with our plan your company will become more eco-friendly and will also save money on fuel. The (company name) has tested multiple fuels and have concluded that Solazyme algae fuel is the cheapest, most environmentally friendly, and best choice for FedEx. Both, compressed natural gas and hydrogen powered engines, were more expensive and produced more harm to the atmosphere than Solazyme fuels. Overall by FedEx choosing to go with this plan, it has a chance to be an innovator of the delivery industry and no other company has tried to implement this kind of fuel into their business. This presents some benefits to the company...

Words: 387 - Pages: 2

Free Essay

#### Ikea

...quite unique as well within the structure of IKEA as it has a very complex structure. The founder of IKEA does not technically own the company since it is held by a private foundation. The private foundation owns a group that controls the individual operations of the stores. IKEA utilizes technology to its fullest ability by simplifying and streamlining processes and operations in order to maintain its goal of providing solutions. Sustainability is a large part of the company’s focus and they take pride in their innovation and sustainable home furnishing offerings. These offerings allow the company to maintain a competitive advantage over other furniture products. They also offer tips and recommendations to customers to maintain an eco-friendly way of life. As far as culture goes, IKEA attempts to employ...

Words: 615 - Pages: 3

Free Essay

#### Bus 475

...beauty industry using the same concepts that align their mission and visions. Burt’s Bees creatively produces products that is not only good for you, it is also environmentally friendly. Within this paper, Team B has selected to analyze the value alignment of Burt’s Bees and will go more in-depth in what Burt’s Bees is all about. Team B will analyze personal and workplace values and behaviors of the business. Team B will also address the plans of the actions that Burt’s Bees plan to conduct, which will indicate the level of alignment between who they are and what their social responsibilities are to themselves, to the community, and to the consumers. Origins and Subsequent Evolution Burt’s Bees origin goes back to a summer day in Maine in 1984 (Our History, 2014). Roxanne Quimby, a single mother and artist, was hitchhiking and a long-bearded gentleman named Burt, well known for his local organic honey, picked her up. From there a relationship developed and Roxanne began using Burt’s left over bee’s wax to make artistic candles. Eventually, she created a lip-balm using an old farmer’s almanac and the bee’s wax. Her new product was a huge success. From there the company grew into a multi-national organization with a plethora of organic products. Today the company is still the same earth-friendly company that it was in 1984. They used their love of nature and helping others to develop the current philosophy, which also works as their business model: The greater......

Words: 1220 - Pages: 5