............................... Target Stores: ...................... 3.5% + (2.27 x 5.0%) = 14.85% 3.5% + (0.78 x 5.0%) = 7.40% 3.5% + (1.20 x 5.0%) = 9.50% (2) We use the book value of the debt and the market value of the equity as the proxies for the intrinsic values of debt and equity, respectively. Whirlpool 2,597 46.7% 2,959 53.3% 5,556 100% IBM 23,925 17.7% 110,984 82.3% 134,909 100% Target Stores 21,752 49.1% 22,521 50.9% 44,273 100% IVd IVe IVf Weighted Average Cost of Capital: Whirlpool: ........................ IBM: .................................. Target Stores: ................... (.467 x .65 x 6.1%) + (.533 x 14.85%) = 9.76% (.177 x .65 x 4.3%) + (.823 x 7.40%) = 6.58% (.491 x .65 x 4.9%) + (.509 x 9.50%) = 6.40% Note that Whirlpool has the highest weighted average costs of capital because it has the highest cost of both debt and equity. However, this does not mean firms with higher cost of debt and higher cost of equity will always have higher WACC. Look at the comparison between IBM and Target. IBM has the lower cost of debt and equity than Target. However, IBM has least leveraged capital structure (Debt-to-Equity ratio= .177/.823 = 0.216) while Target has the most leveraged capital structure with Debt-to-Equity ratio = 0.966. The extremely high portion of equity capital in IBM increases its weighted cost of equity and thus its WACC. In nutshell, highly leveraged firms do not necessarily have the highest weighted cost of capital. 1 (3) First we...
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...Homework 1: Part 1: H Partners and Six Flags Case Study. Following questions are based on the case study. 1. Briefly describe the reasons for Six Flag’s deteriorating performance. Do you believe the core business is sound? (Note-I am not looking for a very long answer. The reasons for bankruptcy will play a big role in your decision to invest or not invest in a company. For instance: a business cycle downturn vs new research that shows company’s products are harmful for people (think asbestos)) Due to the volatile state of Six Flags between 2003 and 2009, one could conclude that Six Flag’s business model was not financially sound. In looking at comparable firms such as Disney or Universal Studios, the amusement parks are not their only component in their business model. In addition to being poorly diversified, Six Flags sold tickets at steep discounts and heavy promotions, which drove the average ticket price to $21.10 in 2008. Unlike their competitors, the parks are marketed to consumers within 100 miles of the park. Firms like Disney and Universal have both domestic and international tourists, the majority of which come from more than 100 miles away. This leaves Six Flags with limited same-park growth because they are limited to the population within driving distance to the park. Furthermore, an unfortunate sequence of events hit the company in 2009. The outbreak of the H1N1 (swine flu virus) caused the Mexico City park to shut down and negatively impacted...
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...American Finance Association Limited Arbitrage in Equity Markets Author(s): Mark Mitchell, Todd Pulvino, Erik Stafford Source: The Journal of Finance, Vol. 57, No. 2 (Apr., 2002), pp. 551-584 Published by: Blackwell Publishing for the American Finance Association Stable URL: http://www.jstor.org/stable/2697750 Accessed: 08/01/2010 15:26 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=black. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Blackwell Publishing and American Finance Association...
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...equity is examined. It is shown that for banks in the U.S., for the relatively less regulated 1983 to 1989 period as well as the more highly regulated 1996 to 2002 period, there is a positive relationship between financial leverage and the return on equity. The analysis is extended to determine the relationship between return on assets and equity capital. The evidence supports the hypothesis that there is a positive relationship between equity capital and return on assets. Relevance to Practice: Previous empirical evidence for U.S. banks had indicated a perverse negative relationship between financial leverage and the return on equity for the 1983 to 1989 period. The cause of such an association was attributed to a reputation effect for large banks who adopted an aggressive capital structure. These contrary findings coupled with regulations on improving equity capital adequacy from the Basel II accord supported the efforts to promote a reduced capital structure risk posture by banks. However, these opposite results conflicted with traditional thought from the DuPont analysis wherein, when operating profitability is positive, increased financial leverage augments the return on equity. Thus, banks continue to have an incentive to ratchet up their financial leverage so as to increase the returns to stockholders albeit with increased financial risk. Key Words: Banks, Capital Profitability JEL Classification: G21, G32 1 Contact: Raymond A. K. Cox*, Faculty of Business & IT...
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...your firm’s financial statements for the most recent 5 years. (If your firm doesn’t have this year or last year as its most recent available financial statement, do not use this firm. It may have gone out of business or been acquired.) Compute the common financial ratios shown in the PowerPoint slides posted for this project. Be sure to use DuPont Analysis to decompose ROA and ROE into profit margin, turnover, and leverage. Discuss your firm’s strengths and weaknesses relative to the other firms in your group with respect to leverage and coverage, profitability, liquidity and turnover, and market values. In particular, you should be trying to explain your firm’s relative market value ranking using the other ratios. For example, if your firm’s market value ratios tend to be higher than those of the other firms in your group, your firm might do a better job of using debt (some to boost ROE but still having good coverage), might be more profitable or have faster turnover, and might have reasonable but not excessively high liquidity. Note here that because leverage and liquidity have costs and benefits and because high profit margins tend to lead to low turnover and vice versa, having intermediate levels of these ratios might be more desirable than highest or lowest values. Be sure to provide tables or charts to display the ratios you reference and “prove” the points you are making. In addition to the ratio analysis, I would like you to do two things: 1. Compute your firm’s...
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...Get to Know the BAT Table of Contents Introduction Test Overview Sample Questions Scoring Introduction We are excited about your participation in the Bloomberg Assessment Test (BAT). The BAT is a global, standardized online exam that the Bloomberg Institute has developed in partnership with premier companies, university faculty, and business professionals around the world. The test is designed for undergraduates and recent graduates who are interested in an entry‐level job in the business world. The following information packet is intended to familiarize you with the content and structure of the BAT. Enclosed you will find information about the test’s goals, sections, and scoring. There is also a list of annotated sample questions for you to review. If you have any additional questions about the content of the test, please feel free to contact us at bat@bloomberginstitute.com. Table of Contents Introduction Test Overview Sample Questions Scoring Test Overview The BAT aids employers in identifying and screening students who wish to pursue a career in the business world. Test takers should have a general understanding of and familiarity with current events in business, finance, and economics; however, much of what is being assessed is a person’s aptitude and skills to be successful in business. 3 hours 10 sections 150 questions The following pages discuss the different sections of the BAT and the concepts you can expect to see. Test Overview ...
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...costs, and profits. | | | | |5-2. |What factors would cause a difference in the use of financial leverage for a utility company and an automobile | | |company? | | | | | |A utility is in a stable, predictable industry and therefore can afford to use more financial leverage than an | | |automobile company, which is generally subject to the influences of the business cycle. An automobile | | |manufacturer may not be able to service a large amount of debt when there is a downturn in the economy. | | | | |5-3. |Explain how the break-even point and operating leverage are affected by the choice of manufacturing facilities | | |(labor intensive versus capital intensive)....
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...About the BAT with Sample Questions Table of Contents Introduction Test Overview Sample Questions Scoring Introduction We are excited about your participation in the Bloomberg Aptitude Test (BAT). The BAT is a global, standardized online exam that the Bloomberg Institute has developed in partnership with premier companies, university faculty, and business professionals around the world. The test is designed for undergraduates and recent graduates who are interested in an entry-level job in the business world. The following information packet is intended to familiarize you with the content and structure of the BAT. Enclosed you will find information about the test’s goals, sections, and scoring. There is also a list of annotated sample questions for you to review. If you have any additional questions about the content of the test, please feel free to contact us at bat@bloomberginstitute.com. Table of Contents Introduction Test Overview Sample Questions Scoring Test Overview The BAT aids employers in identifying and screening students who wish to pursue a career in business and finance. Test takers should have a general understanding of and familiarity with current events in business, finance, and economics. However, we are not assessing knowledge: we are assessing a person’s aptitude to be successful in these fields, regardless of background. 2 Hours 8 Sections 100 Questions Chart and Graph Analysis 12% News Analysis 12% Global Markets...
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...| | |Chapter 18: Operating & Financial Leverage | |Chapter Review Solutions | Note: Answers contain the new company tax rate of 30%. 1. | | |( i ) |( ii ) |( iii ) | | |E.B.I.T. | 400,000 | 400,000 | 400,000 | |Less |Interest | < 0 > | < 240,000 > | | | |E.B.T. | 400,000 | 160,000 | 280,000 | |Less |Tax @ 30% | < 120,000 > | < 48,000 > | < 84,000> | | |E.A.T. | 280,000 | 112,000 | 196,000 | |÷ |No. of Ordinary Shares |5,000,000 |3,000,000 |4,000,000 | |( |E...
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...value-creating aspects. You are invited to combine the valuation principles and methods discussed in the course to evaluate a complex transaction from the perspectives of the various participants. Here are some guidelines for your valuation analysis. • Overview of the Valuation Process. Given the nature of the forecast data, it is useful for valuation purposes to treat the 1980-1984 period differently from the post-1984 period. In fact, the case writer hinted at the possibility of another reorganization at the end of 1984 in the note to Exhibit 14. Throughout, assume that time 0 is year 1979. • Make sure that you notice the changing debt ratios in 1980-1984. Which is the best valuation approach to deal with this? • Free Cash Flow. As usual, the following (unlevered) free-cash-flow formula should prove useful: EBIT = Operating Income − Corporate Expenses − Depreciation, UFCF = (1 − tc )EBIT + Depreciation − Change in NWC − Capital Expenditures. Note that there is a difference between UFCF defined above and what are referred to as “free cash flows” in Exhibit 13 (on line 14)? • Discount Rates. As we mentioned when discussing the Marriott case, the choice of discount rates is an important part of any valuation procedure. It is worthwhile to spend some time thinking carefully about these issues. – Congoleum’s equity beta is known (see Exhibit 9). Do you need to rely on comparable companies’ data to obtain Congoleum’s asset beta? – For the borrowing cost in the LBO years and...
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...viewed as a result of an investment decision because if the current assets are less than its liabilities, the company may have a negative net worth (Block, Hirt, & Danielson, 2010). The degree of operating leverage or DOL is defined as the percentage change in the operating income that occurs as a result of a percentage change in the units sold (Block, Hirt, & Danielson, 2010). When a company is highly leveraged, they will have an increase in income as their volume expands. When the DOL is computed close to the break-even point it will result in a higher number because of the increase in the operating income (Block, Hirt, & Danielson, 2010). There are leveraged firms and conservative firms. The DOL for a leveraged firm is higher than of a conservative firm. This means that in this example, the Hi Tech Manufacturing Company would be considered to be more leveraged than that the Old School. Financial leverage is the amount of debt used in the capital structure of the firm (Block, Hirt, & Danielson, 2010). The text pointed out that it is helpful to remember that the operating leverage primarily affects the left-hand side of the balance sheet and the financial leverage primarily affects the right-hand side of the balance sheet. The degree of financial leverage or DFL is defined as the percentage...
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...Sensitivities? What happened to the gross margins? Willing to use these projections for valuation? Car Wash Partners Management Tom Curtis – successful entrepreneur from the past. Credible? Curtis capable of leading major change in this industry? No further management team as yet Investors Cabot Brown (Brown & McMillan) Start up-VCs? First deal Who are their investors? Bill Burgin (Bessemer Partners) Experienced VC Investing with a friend? Does the investment fit their needs? Car Wash Partners Valuation Who puts up the money? (BMC, Bessemer; total of $6.6) How much is Curtis’ contribution worth at this stage? The “pre-money” value ($1.1; “post-money” value ($7.7, see Exh 9). VCs had 86% of capital) P/EBITDA 1997 (Exh 6); assuming 50% leverage P = $7,700 EDITDA = $629 Ratio = 12.2x In 2001: EBITDA = $50,192 (Increase due to 45x growth in revenues; 1.8x growth in CF margins) ROI = $18.8/$142 = 13.2% (after $135 of new equity financing) In 2001, at Exit via IPO at EBITDA x 12 = $600 million X 15% = 90 4yr ROI = EBITDA x 10 = 500 75 P/E of 25 = 470 70 P/E of 15 = 282 42 85% 77 74 53%...
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...book ratio where investors value Pepsi's balance sheet structure more than Coke. Pepsi is priced 5.5x of equity value compared to Coke which is priced only at 5x. Having a higher operating and profit margin, Coke is more likely to be able to sustain any shocks in the market (eg. from lower sales). The sustainability of Coke’s earnings are also helped by more efficient tax structure seen from lower effective tax rate compared to Pepsi. Its Selling General Administration expenses are also within the industry norm (compared to Pepsi). Coke’s has room to further improve its efficiency by improving its balance sheet structure. This includes a more efficient use working capital (eg. reducing receivables and inventory days), using higher leverage to attain higher return on equity and optimizing/sweating the assets more to generate higher asset turnover. Coke’s acquisition is substantially cashless. It exchanged $3.4bn of equity investment it had in CCE and assumed $9.5bn in debt and obligations to control CCE’s North American bottling operations. This will impact Coke’s financials in a few ways: i) With the acquisition, there could possibly be synergies and cost reduction which would benefit Coke’s bottom line. The resultant Coke’s earnings could improve with the consolidation of North American bottling earnings. This will then improve EPS....
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...appeal to the core readers. The very foundation of the business is therefore neglected * Rationale for the diversification strategy was a mitigate to cyclicality, but this clearly did not pay off. No clear evidence of alternative synergies between the businesses. Moreover, restructuring charges are substantial * Additional investment in declining trading cards business through the acquisition of SkyBox, while Marvel was already showing signs of distress * Drafting an unconvincing reorganization plan, which among others includes an additional acquisition (which raises new risk and debt in the short term). Selling off unsynergetic business units may have made more senses Bad execution * High leverage using overpriced shares as collateral. Given the this leverage in combination with relatively high coupon rates, debt service became problematic * Structuring debt based on collateral shares instead of others assets and cash flows makes a company highly dependent of debt providers in case of a covenant breach * Cash flow in a declining market is used for investments instead of deleveraging. Through SkyBox acquisition additional debt was taken on. Besides that,...
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...solid foot by 1980. The four year plan included steps to introduce fiscal discipline and maintain certain limits on debt to capital ratio, rating and fund raising activities. Also growth in hotel management fees and cash inflows from selling stakes in low return operations generated an excess amount of cash for the firm. The firm strongly believed in investing its cashflows as it believed in the operating model and the fact that investors would gain higher returns than if dividends were paid out. This higher cash inflow led to reduced need to raise debt. Also this excess cash could be used to pay down outstanding debt (expected to be $125 million by 1883). On the other hand the firm’s equity value was rising and this led to a declining leverage ratio. The management of the company believed that its expertise was in hotel development and management and not in long term hotel ownership. The strategies they designed were based on these factors and they started producing excellent results. In 1980 the growth prospects looked great, especially when compared to its competitors. While its peer companies had stopped growing in businesses they owned and grew very selectively in those they managed without owning, the independent companies weren’t even able to obtain financing for their planned expansion. Marriott wanted to make use of their advantage in position to accelerate their hotel room growth to 20%-25%. Their management contracts earned them a minimum constant percentage of...
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