These two segments are fundamentally different and do not have the same risks. By using a company wide hurdle rate the risks of these two segments are not taken into account. Looking at industry wide equity betas we can see that telecommunications services industries are less risky at an average of 1.04 while telecommunications equipment and computer equipment industries are riskier and have an average beta of 1.36. Investors should ask for a much higher return from the Products and Systems segment than from the Telecommunications segment. To calculate the separate hurdle rates the cost of equity for each segment must be determined first.
What is this firm’s free cash flow for the year? (2 points) Increase in NFA: $50 Increase in NWC: $20+$45=$65 FCF=NOPAT-increase in NFA-increase in NWC=$400-$50-$65=$285 (3) The four key elements of a good corporate strategy that has the potential to create substantial shareholder value are: (4 points) Good strategy must think more expansively about the right scope. Can typically distinguish the firm sharply from its competition. Match opportunities to capabilities and core competencies. Corporate focus (4) Describe how the four key elements of the Value Sphere interact to create value ( don’t just list the four elements—describe how they interact): (4 points) There are four elements of Value Sphere: Strategy, Resource acquisition & allocation, Performance metrics, People & organization culture.
Answer: C For a nondiscriminating imperfectly competitive firm: A) the marginal revenue curve lies above the demand curve. B) the demand and marginal revenue curves coincide. C) the demand curve intersects the horizontal axis where total revenue is at a maximum. D) marginal revenue will become zero at that output where total revenue is at a maximum. Answer: D When a
According to the calculated ratios in Table-1, SSB had the following major trends in profitability during the time of 1991 to 1993: Decreasing return on equity (ROE) – shareholder return Gradual & unsteadily decreasing return on assets (ROA) – managerial efficiency Decreasing net non interest margin ? less profit earned on non-interest banking components Increasing earnings spread ? have established effective processes of borrowing and lending money with little immediate threat of competitors Unfavorably increasing operating efficiency ratio – there is an excess of operating cost in relation to operating revenues generated by SSB. Declining credit risk/depositor risk ? decline of bad loans, increased market values of good loans relative to amount of deposits.
This, in turn, leaves us with a high offer premium of 62.723 million euro’s. The market estimates the future synergy benefits at a vast amount of 110.398 million euro’s. This low October 21 share price, we assume in case the merger fails,
With local operations in over 200 countries around the world. Debt Ratio (in Millions of Dollars) 2013 2012 Total Liabilities / 1,085 1,148 Total Assets 1,276 1,283 Debt Ratio 83.50% 89.48% The ratio shows the company’s ability to cover its debts through its total assets. The ratio was 89.48% in 2012, then went down in 2013 to 83.50%. The ratio has to be low. So we can interpret that in the year 2013, the risk of the firm is getting lower as the ratio goes down.
Continental Carriers Continental Carriers, Inc. Advanced Financial Management Continental Carriers, Inc. (CCI) should take on the long-term debt to finance the acquisition of Midland Freight, Inc. for a few reasons. The company is heavy on assets, the debt ratio will only grow to 0.40 with the added $50M in debt. Also, the firm will benefit from an added $2M in a tax shield and be able to return $12.7M a year to its stockholders and investors, instead of $8.9M if equity is raised to finance the acquisition. Lastly, the stock price and earnings per share will increase to $3.87 in comparison to an equity-financed acquisition of $2.72 per share. CCI would be taking a somewhat high risk by issuing additional stock due to the uncertainty about the offering price.
Since the hurdle rate is usually the cost of capital, WACC for the company is calculated as below: Cost of debt 5.88% After tax 3.53% D/E 28.21% Company Beta 1.15 Cost of equity 10.95% WACC 9.3% It means that any project that will not return 9.3% will be rejected and anything above 9.3% has a good chance of being accepted. Actually the required rate of return and the systematic risk of cash flows for each project were not equal. Actually the projects with low return has a lower beta and would have a lower hurdle rate and projects with higher return have a higher beta and higher hurdle rate. The application of single hurdle rate will result in rejection of projects which return is higher than the actual hurdle rate and accept projects which return is lower than the actual hurdle rate. In other words, it would lead to false rejects for Telecom services while signaling false accepts for the Product and Systems group.
This make it lucrative for companies to finance with internally generated cash, which is the most liquid asset. A drawback is that Apple earned a mere 0.77% on its cash and investments in fiscal year of 2011 [5]. The disadvantage is that the rate of return is close to the inflation rate. Apple has not debt and therefore no apparent reason to pile up cash, if they cannot invest it at a higher return than their current interest rate allows. Though another way of looking at it is that Apple is only waiting for the really good investments, and that opportunity offset the lost revenue of hoarding cash at a low interest rate.
On the other hand MI backed mainly by shareholders equity and performing assets and thus would be able to issue new debt increasing value for both shareholders and the corporation. Thus the shareholders would gain at the expense of bond holders and the equity value of the company would increase. b) Bondholders Bondholders had a lot to lose as according to Project Chariot almost all the debt would be assigned to HM. Given the problems in real estate and hotel markets there was a concern of HM’s ability to meet its debt payment and there was a high probability of default. This meant that the risk was issued at investment grade but now was not backed by valuable assets of the companies which were to be spun off to MI which was to be backed by equity.