商业财务Case答案.docx

商业财务Case答案.docx

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Case1

GrowthOpportunities

EdmontonWoodworksCo.,（today）expectstoearnCAD6pershareforeachofthefutureoperatingperiods（beginningattime1）ifthefirmmakesnonewinvestmentsandreturnstheearningsasdividendstotheshareholders.However,ClintWilliams,presidentandCEO,hasdiscoveredanopportunitytoretainandinvest30percentoftheearningsbeginningthreeyearsfromtoday.Thisopportunitytoinvestwillcontinueforeachperiodindefinitely.Heexpectstoearn12percentonthisnewequityinvestment,thereturnbeginningoneyearaftereachinvestmentismade.Thefirm’sequitydiscountrateis14percentthroughout.

a.WhatisthepricepershareofEdmontonWoodworksCo.,stockwithoutmakingthenewinvestment?

b.Ifthenewinvestmentisexpectedtobemade,pertheprecedinginformation,whatwouldthepriceofthestockbenow?

c.Supposethecompanycouldincreasetheinvestmentintheprojectbywhateveramountitchose.Whatwouldtheretentionrationeedtobetomakethisprojectattractive?

AnswersofCase1

a. Ifthecompanydoesnotmakeanynewinvestments,thestockpricewillbethepresentvalueoftheconstantperpetualdividends.Inthiscase,allearningsarepaiddividends,so,applyingtheperpetuityequation,weget:

P=Dividend/R

P=$6/.14

P=$42.86

b. Theinvestmentoccurseveryyearinthegrowthopportunity,sotheopportunityisagrowingperpetuity.So,wefirstneedtofindthegrowthrate.Thegrowthrateis:

g=RetentionRatio´ReturnonRetainedEarnings

g=0.30×0.12

g=0.036or3.60%

Next,weneedtocalculatetheNPVoftheinvestment.Duringyear3,30percentoftheearningswillbereinvested.Therefore,$1.80isinvested（$6´.30）.Oneyearlater,theshareholdersreceivea12percentreturnontheinvestment,or$0.216（$1.80×.12）,inperpetuity.Theperpetuityformulavaluesthatstreamasofyear3.Sincetheinvestmentopportunitywillcontinueindefinitelyandgrowsat3.6percent,applythegrowingperpetuityformulatocalculatetheNPVoftheinvestmentasofyear2.Discountthatvaluebacktwoyearstotoday.

NPVGO=[（Investment+Return/R）/（R–g）]/（1+R）2

NPVGO=[（–$1.80+$0.216/.14）/（0.14–0.036）]/（1.14）2

NPVGO=–$1.90

ThevalueofthestockisthePVofthefirmwithoutmakingtheinvestmentplustheNPVoftheinvestment,or:

P=PV（EPS）+NPVGO

P=$42.86–1.90

P=$40.95

c. Zeropercent!

Thereisnoretentionratiowhichwouldmaketheprojectprofitableforthecompany.Ifthecompanyretainsmoreearnings,thegrowthrateoftheearningsontheinvestmentwillincrease,buttheprojectwillstillnotbeprofitable.Sincethereturnoftheprojectislessthantherequiredreturnonthecompanystock,theprojectisneverworthwhile.Infact,themorethecompanyretainsandinvestsintheproject,thelessvaluablethestockbecomes.

Case2

Casestudy----Bethesdaminingcompany

BethesdaMiningisamidsizedcoalminingcompanywith20mineslocatedinOhio,Pennsylvania,WestVirginia,andKentucky.Thecompanyoperatesdeepminesaswellasstripmines.Mostofthecoalminedissoldundercontract,withexcessproductionsoldonthespotmarket.

Thecoalminingindustry,especiallyhigh-sulfurcoaloperationssuchasBethesda,hasbeenhard-hitbyenvironmentalregulations.Recently,however,acombinationofincreaseddemandforcoalandnewpollutionreductiontechnologieshasledtoanimprovedmarketdemandforhigh-sulfurcoal.BethesdahasjustbeenapproachedbyMid-OhioElectriccompanywitharequesttosupplycoalforitselectricgeneratorsforthenextfouryears.

BethesdaMiningdoesnothaveenoughexcesscapacityatitsexistingminestoguaranteethecontract.ThecompanyisconsideringopeningastripmineinOhioon5,000acresoflandpurchased10yearsagofor$6million.Basedonarecentappraisal,thecompanyfeelsitcouldreceive$7milliononanaftertaxbasisifitsoldthelandtoday.

Stripminingisaprocesswherethelayersoftopsoilaboveacoalveinareremovedandtheexposedcoalisremoved.Sometimeago,thecompanywouldsimplyremovethecoalandleavethelandinanunusablecondition.Changesinminingregulationsnowforceacompanytoreclaimtheland;thatis,whentheminingiscompleted,thelandmustberestoredtonearitsoriginalcondition.Thelandcanthenbeusedforotherpurposes.Becauseitiscurrentlyoperationatfullcapacity,Bethesdawillneedtopurchaseadditionalnecessaryequipment,whichwillcost$85million.Theequipmentwillbedepreciatedonaseven-yearMACRSschedule.Thecontractrunsforonlyfouryears.Atthattimethecoalfromthesitewillbeentirelymined.Thecompanyfeelsthattheequipmentcanbesoldfor60percentofitsinitialpurchasepriceinfouryears.However,Bethesdaplanstoopenanotherstripmineatthattimeandusetheequipmentatthenewmine.

Thecontractcallsforthedeliveryof500,000tonsofcoalperyearatapriceof$95perton.Bethesdaminingfeelsthatcoalproductionwillbe620,000tons,680,000tons,730,000tons,and590,000tons,respectively,overthenextfouryears.Theexcessproductionwillbesoldinthespotmarketatanaverageof$90perton.Variablecostsamountto$31perton,andfixedcostsare$4,300,000peryear.Theminewillrequireanetworkingcapitalinvestmentof5percentofsales.TheNWCwillbebuiltupintheyearpriortothesales.

Bethesdawillberesponsibleforreclaimingthelandatterminationofthemining.Thiswilloccurinyear5.thecompanyusesanoutsidecompanyforreclamationofallthecompany’sstripmines.Itisestimatedthecostofreclamationwillbe$2.8million.Afterthelandisreclaimed,thecompanyplanstodonatethelandtothestateforuseasapublicparkandrecreationarea.Thiswilloccurinyear6andresultinacharitableexpensedeductionof$7.5million.Bethesdafacesa38percenttaxrateandhasa12percentrequiredreturnonnewstripmineprojects.Assumethatalossinanyyearwillresultinataxcredit.

Requirement:

Youhavebeenapproachedbythepresidentofthecompanywitharequesttoanalyzetheproject.Calculatethepaybackperiod,profitabilityindex,averageaccountingreturn,netpresentvalue,internalrateofreturn,andmodifiedinternalrateofreturnforthenewstripmine.

ShouldBethesdaminingtakethecontractandopenthemine?

AnswersofCase2

Toanalyzethisproject,wemustcalculatetheincrementalcashflowsgeneratedbytheproject.Sincenetworkingcapitalisbuiltupaheadofsales,theinitialcashflowdependsinpartonthiscashoutflow.So,wewillbeginbycalculatingsales.Eachyear,thecompanywillsell500,000tonsundercontract,andtherestonthespotmarket.Thetotalsalesrevenueisthepricepertonundercontracttimes500,000tons,plusthespotmarketsalestimesthespotmarketprice.Thesalesperyearwillbe:

Year1

Year2

Year3

Year4

Contract

$47,500,000

$47,500,000

$47,500,000

$47,500,000

Spot

10,800,000

16,200,000

20,700,000

8,100,000

Total

$58,300,000

$63,700,000

$68,200,000

$55,600,000

Thecurrentaftertaxvalueofthelandisanopportunitycost.TheinitialoutlayfornetworkingcapitalisthepercentagerequirednetworkingcapitaltimesYear1sales,or:

Initialnetworkingcapital=.05（$22,400,000）=$1,120,000

So,thecashflowtodayis:

Equipment

–$85,000,000

Land

–7,000,000

NWC

–2,915,000

Total

–$94,915,000

NowwecancalculatetheOCFeachyear.TheOCFis:

Year1

Year2

Year3

Year4

Year5

Year6

Sales

$58,300,000

$63,700,000

$68,200,000

$55,600,000

VC

19,220,000

21,080,000

22,630,000

18,290,000

FC

4,300,000

4,300,000

4,300,000

4,300,000

$2,800,000

$7,500,000

Dep.

12,155,000

20,825,000

14,875,000

10,625,000

EBT

$22,625,000

$17,495,000

$26,395,000

$22,385,000

–$2,800,000

–$7,500,000

Tax

8,597,500

6,648,100

10,030,100

8,506,300

1,064,000

2,850,000

NI

$14,027,500

$10,846,900

$16,364,900

$13,878,700

–$1,736,000

–$4,650,000

+Dep.

12,155,000

20,825,000

14,875,000

10,625,000

0

0

OCF

$26,182,500

$31,671,900

$31,239,900

$24,503,700

–$1,736,000

–$4,650,000

Years5and6areofparticularinterest.Year5hasanexpenseof$2.8milliontoreclaimtheland,anditistheonlyexpensefortheyear.Taxesthatyearareacredit,anassumptiongiveninthecase.InYear6,thecharitabledonationofthelandisanexpense,againresultinginataxcredit.Thelanddoeshaveanopportunitycost,butnoinformationontheaftertaxsalvagevalueofthelandisprovided.TheimplicitassumptioninthiscalculationisthattheaftertaxsalvagevalueofthelandinYear6isequaltothe$7.5millioncharitableexpense.

Next,weneedtocalculatethenetworkingcapitalcashfloweachyear.NWCis5percentofnextyear’ssales,sotheNWCrequirementeachyearis:

Year1

Year2

Year3

Year4

Beg.NWC

$2,915,000

$3,185,000

$3,410,000

$2,780,000

EndNWC

3,185,000

3,410,000

2,780,000

NWCCF

–$270,000

–$225,000

$630,000

$2,780,000

Thelastcashflowweneedtoaccountforisthesalvagevalue.Thefactthatthecompanyiskeepingtheequipmentforanotherprojectisirrelevant.Theaftertaxsalvagevalueoftheequipmentshouldbeusedasthecostofequipmentforthenewproject.Inotherwords,theequipmentcouldbesoldafterthisproject.Keepingtheequipmentisanopportunitycostassociatedwiththatproject.Thebookvalueoftheequipmentistheoriginalcost,minustheaccumulateddeprec