HW 2 Fundamentals of corporate finance

The cost of equity was found using CAPM, with the given market risk premium of 5%, a beta of .88, and risk-free rate of 4.03%. The beta was found by running a regression of Southwest’s percent change in stock price versus the S&P 500’s percent change in stock price for two years (June 28, 2000 to June 28, 2002). The risk-free rate was the return on a ten-year treasury note issued on June 28, 2002, according to the U.S. Treasury’s website. The tax rate of 39% was used to account for tax savings from leverage. In order to calculate the firm’s leverage, the market value of equity was found from the price per share on July 24, 2002 (Yahoo Finance) and the shares outstanding on the balance sheet of the July 10-Q report, as shown in Exhibit X. The debt value was approximated at the book value since data could not be found regarding its market value. This analysis resulted in a debt weight of 11.74% and equity weight of 88.26%. The final approximation for the weighted average cost of capital was 8.64%.

In 2016, the company has 8,970,824 US Dollars in Long Term Assets (Current Assets: 7,036,578), 146,947,000 US Dollars in profits, and 6,959,225 US Dollars in Total Liabilities (Current Liabilities: 2,689,770). The problem with Labilities is that it is debt that has to be paid off over a certain period of time and in this case for current liabilities, it is a year. Labilities are expected to be paid off with cash but that’s a problem for Cabela’s. Cabela’s has a cash flow of -51,241,000 US Dollars and a long term debt value of 3,158,085 US Dollars which means cash is limited for Cabela’s. The current Ratio is at 2.616 which means the company is not managing its assets a properly and in turn could be having financial issues. [2] What is also not a good sign is the debt to equity ratio is 3.460 and this value is a sign that the Cabela’s has a high debt level and is having financial troubles. [3] Then the Return on Sales Ratio is .04 or 4% which terrible because this percent should be over 10%. Another sign that a company is having trouble is that the Acid Test Ratio is 2.30 because the ratio value should never be over 1. These troubling financial records shows that Cabela’s is having troubles but the real certain are in the direction of the

The firm shows positive health for the Shareholders Equity with an equity ratio of 44.2% in 2011 and increasing to 45.2% in 2012. Calculating the percent of total assets that shareholders would receive in the event of company liquidation looks positive and very healthy for any investors or shareholders of this firm. The interest coverage ratio is also at a value that is significantly positive 14.0% in 2011 and 12.8% in 2012. Although 2021 shows a decrease, the company is still very capable of generating sufficient revenues to cover their interest payments on any debt they have incurred.

In a(n) __________, countries and peoples are increasingly interconnected with respect to labor markets and business dealings.

They carry a larger proportion of current assets relative to their operating revenue than their competitor.

Return on Total Assets was 4.43% which is below five percent. That indicates that the company is not accurately converting its assets into profit. The total for Return on Stockholders’ Equity was 8.89%, however financial analysts prefer ROE to range between 15-20 %. The company’s low ROE indicates that the company is not generating profit with new investments. Lastly, Debt-to-Equity ratio for the company was 1.01 which indicates that investors and creditors are equally sharing assets. In the view of creditors, they see a high ratio as a risk factor because it can indicate that investors are not investing due to the company’s overall performance. The totals of these three ratios demonstrate that the company’s financial state is not as healthy as it should be.

|Debt to equity ratio shows the relative mix of the investors supplied capital and the extent to which the company is financed by borrowed |

As of Jun 30, 2014, Spectra Energy had a long-term debt of $14.4 billion with a debt-to-capitalization ratio of 57% (compared with 58% in the previous quarter). The company’s revenue was 5.52B and their operating cash flow was 2.03B. PE ratio (price earnings ratio) 23.97, PS ratio (price sales ratio) 4.1, Debt to Equity ratio was 1.24, Asset Turnover ratio 0.17, receivables turnover ratio 4.57 PB ratio (price to book ratio 2.28.) (“You Can Make Money in the Stock Market!")

1. The ACE Company has five plants nationwide that cost $100 million. The current market value of the plants is $500 million. The plants will be recorded and reported as assets at

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Investment decisions are of vital importance to all, since they determine the potential to succeed. The decision whether or not to invest in a particular business would be based on a careful consideration of some key financial indicators of that particular business.

1. Locate the annual balance sheets for General Motors (GM), Merk (MRK), and Kellogg (K). For each company calculate the long term debt-equity ratio for the prior two years. Why would these companies use such different capitals structures?

alone has the ability to increase profits. The company’s debt is very low as indicated by the debt ratio of

4.1 Interest Rates [2] Remember the first lesson about market efficiency: Markets have no memory. Just because long-term interest rates are high relative to past levels does not mean that they won’t go higher still. Unless you have special information indicating that long-term rates are too high, issuing long-term bonds should be a zero-NPV transaction. So should issuing short-term debt or common stock. 4.2 Semistrong [3] All of these are public information, you do not expect them to explain future changes in stock price. Hence, you can not expect to make excess returns using this information. You can only use private information to generate excess returns. 4.3 UPS [3] Once the announcement is made and the price has reacted (downward) to the lower (discounted) future dividend stream, there is no

I, Harshit Goel, student of B.Tech ECE + MBA, Amity Business School, Amity University Uttar Pradesh, Noida, hereby declare that the project titled “Corporate Finance and Investment Planning” which is submitted by me and carried out at Micromax Informatics Ltd. In partial fulfilment of requirement for the award of degree of Bachelor of Technology in Electronics and Communication, has not been previously formed the basis for the award of any degree, diploma or other similar title or recognition.