{"id":179244,"date":"2018-02-20T23:50:30","date_gmt":"2018-02-20T23:50:30","guid":{"rendered":"https:\/\/writemyessayfree.com\/santas-shoes-is-a-retailer-that-has-just-begun-having-financial-difficulty-santas-suppliers-are-aware-of-the-increased-possibility-of-bankruptcy"},"modified":"2018-10-24T09:11:58","modified_gmt":"2018-10-24T09:11:58","slug":"santas-shoes-is-a-retailer-that-has-just-begun-having-financial-difficulty-santas-suppliers-are-aware-of-the-increased-possibility-of-bankruptcy","status":"publish","type":"post","link":"https:\/\/www.benedictsol.com\/blogs\/santas-shoes-is-a-retailer-that-has-just-begun-having-financial-difficulty-santas-suppliers-are-aware-of-the-increased-possibility-of-bankruptcy\/","title":{"rendered":"Santa\u2019s Shoes is a retailer that has just begun having financial difficulty. Santa\u2019s suppliers are aware of the increased possibility of bankruptcy."},"content":{"rendered":"

1. Santa\u2019s Shoes is a retailer that has just begun having financial difficulty. Santa\u2019s suppliers are aware of the increased possibility of bankruptcy. What might Santa\u2019s suppliers do based<\/p>\n

2. A few years ago, a friend of yours started a small business that develops gaming software. The company is doing well and is valued at $1.5 million based on multiples for comparable public companies after adjustments for their lack of marketability. With 300,000 shares outstanding, each share is estimated to be worth $5. Your friend, who has been serving as CEO and CTO (chief technology officer), has decided that he lacks sufficient managerial skills to continue to build the company. He wants to sell his 160,000 shares and invest the money in an MBA education. You believe you have the appropriate managerial skills to run the company. Would you pay $5 each for these shares? What are some of the factors you should consider in making this decision?<\/p>\n

&nbsp;<\/p>\n

3. A friend of yours is trying to value the equity of a company and, knowing that you have read this book, has asked for your help. So far she has tried to use the FCFE approach. She estimated the cash flows to equity to be as follows:<\/p>\n

<\/p>\n\n\n\n\n\n\n\n\n\n
Sales<\/td>\n\n

$800.0<\/p>\n<\/td>\n<\/tr>\n

-CGS<\/td>\n\n

-450.0<\/p>\n<\/td>\n<\/tr>\n

-Depreciation<\/td>\n\n

-80.0<\/p>\n<\/td>\n<\/tr>\n

-Interest<\/td>\n\n

-24.0<\/p>\n<\/td>\n<\/tr>\n

Earnings before taxes (EBT)<\/td>\n\n

246.0<\/p>\n<\/td>\n<\/tr>\n

-Taxes (0.35 x EBT)<\/td>\n\n

-86.1<\/p>\n<\/td>\n<\/tr>\n

= Cash Flow to Equity<\/td>\n\n

$159.9<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

She also computed the cost of equity using CAPM as follows:<\/p>\n

kE<\/sub>&nbsp;= kF<\/sub>&nbsp;+ ?E<\/sub>(Risk premium) = 0.06 + (1.25 x 0.084) = 0.165, or 16.5%<\/p>\n

where the beta is estimated for a comparable publicly traded company. Using this cost of equity, she estimates the discount rate as<\/p>\n

WACC = xDebt<\/sub>k<\/i>Debtpretax<\/sub>(1 \u2013&nbsp;t<\/i>) +&nbsp;x<\/i>cs<\/sub><\/i>k<\/i>cs<\/sub><\/i><\/p>\n

= [0.20 x 0.06 x (1-0.35)]+(0.80 x 0.165) = 0.14, or 14%<\/p>\n

Based on this analysis, she concludes that the value of equity is $159.9 million\/0.14 = $1,142 million.<\/p>\n

Assuming that the numbers used in this analysis are all correct, what advice would you give your friend regarding her analysis?<\/p>\n

&nbsp;<\/p>\n

4. A firm plans to issue $700,000 worth of debt at a YTM of 7.5%. The debt is trading at par. The firm\u2019s marginal corporate tax rate is 30%. What is the present value of the tax savings in perpetuity?<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\n$210,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\n$490,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\n$280,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\n$ 15,750<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

5. Besides providing an interest tax shield, the inclusion of debt in a firm\u2019s capital structure provides it with all of the following advantages, except<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\nless likelihood of managers wasting shareholders\u2019 money due to better oversight by debt-holders.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\nlower agency costs.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\nlower transactions costs.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\nbetter focus on the maximization of the firm\u2019s cash flows.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

6. Under which of the following forms of business organization are the owners faced with double taxation?<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\nLimited partnership.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\nSole proprietorship.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\nLimited liability Corporation (LLC.)<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\nC Corporation.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

7. Which of the following factors does not directly affect the value of a business?<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\nAll of these directly affect the value of a business.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\nThe magnitude of the expected cash flows that the business is likely to produce.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\nThe timing of the expected cash flows that the business is likely to produce.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\nThe riskiness of the expected cash flows that the business is likely to produce.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

8. Tiptop Corp. has debt of $150 million and generated a net income of $88 million in the last fiscal year. In attempting to determine the total value of the firm, an investor identified a similar firm in Mammoth, Inc., an all-equity firm. This firm had 100 million shares outstanding, a share price of $17.50, and net income of $225 million. What is the total value of Tiptop Corp.? Round to the nearest million dollars.<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\n$ 685 million<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\n$ 1,750 million<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\n$ 835 million<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\n$ 535 million<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

9. Valuations differ between young and mature companies because of all of the following except:<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\nYoung companies have less certain futures.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\nMany young companies are not yet profitable.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\nYoung companies must invest a considerable amount and that makes it hard to use a cost approach.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n

&nbsp;<\/p>\n\n\n\n
<\/td>\nAll of these are reasons valuations differ between young and mature companies.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

&nbsp;<\/p>\n

Go to&nbsp;http:\/\/www.economist.com\/index.html. Open the&nbsp;Economics<\/b>&nbsp;tab. Scroll down until you see \u201cMarkets and Data\u201d on the left hand side menu. Underneath that heading, click on the link for \u201cBig Mac Index,\u201d then review some of the articles under the heading \u201cThe Big Mac index.\u201d<\/p>\n

Be prepared to discuss your findings in the Discussion area.<\/p>\n

&nbsp;<\/p>\n

10.&nbsp;What might explain why the currency of some countries is undervalued or overvalued relative to the American dollar?<\/p>\n

&nbsp;<\/p>\n

11. &nbsp;This question is based on your Web Field Trip.<\/p>\n

&nbsp;<\/p>\n

What does the Big Mac Index tell you that managers should be aware of when they make decisions to invest internationally?<\/p>\n","protected":false},"excerpt":{"rendered":"

1. Santa\u2019s Shoes is a retailer that has just begun having financial difficulty. Santa\u2019s suppliers are aware of the increased possibility of bankruptcy. What might Santa\u2019s suppliers do based 2. A few years ago, a friend of yours started a Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-179244","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/179244","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=179244"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/179244\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=179244"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=179244"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=179244"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}