Provide detailed answers for each of the Mini-Case study and provide any references that you use for each mini case separately. The references can be those that are easily found online:
2.43:
Mini-Case: You recently completed your undergraduate degree in Business Administration, majoring in Finance, at University. You are now working at PPL Corporation, at their corporate headquarters, in Allentown, PA. Your first assignment is to estimate the weighted average cost of capital for the company. You can start by studying the annual report of PPL Corporation available at their website. You can use public information about the company, available at various sources, such as Yahoo Finance. You should identify the source of your data. In effect, you have to find the current values of the following quantities for the corporation. If you are unable to find a number precisely, you will have to estimate it.
http://www.pplweb.com/
http://finance.yahoo.com/
1. Income tax rate
2. Market value of debt
3. Market value of equity
4. Cost of debt
5. Cost of equity
3.24:
Mini-Case: The information about Microsoft, given earlier in this chapter, is quite old. You have just found a good position in the finance department at Microsoft, at their headquarters office in Redmond, WA. Your first assignment is to find the current values of the financial ratios. You should focus on the ratios related to the short-term financial management of the company. Do you find any significant changes in these values, compared to the numbers for 2001? Comment on the significance of these changes.
http://www.microsoft.com/en-us/default.aspx
Microsoft Profile, January 1, 2001
One Microsoft Way
Redmond, WA 98052 Tel: (452) 882-8080, Fax: (425) 936-7329
Website - http://www.microsoft.com
Company Calendar
Earnings report announcement: January 15, 2001
Profile
Microsoft Corporation, incorporated in 1981, develops, manufactures, licenses and supports a wide range of software products for a multitude of computing devices. Microsoft software includes scalable operating systems for servers, personal computers (PCs) and intelligent devices, server applications for client/server environments, knowledge worker productivity applications, and software development tools. The Company's online efforts include the MSN network of Internet products and services and alliances with companies involved with broadband access and various forms of digital interactivity. Microsoft also licenses consumer software programs, sells hardware devices, provides consulting services, trains and certifies system integrators, and researches and develops advanced technologies for future software products.
The Company is divided into three main areas: the Business Divisions, the Sales, Marketing and Support Group, and the Operations Group. The Business Divisions work in close partnership in order to create powerful software services and solutions built around the Internet, Windows and new devices. The product segments, based on these business divisions, are the Windows Platforms segment, the Business Productivity Applications and Developer segment, and the Consumer and other segment. The Sales, Marketing and Support Group is responsible for building long-term business relationships with original equipment manufacturers (OEMs), enterprises, small and medium-sized businesses, application developers, educational institutions and consumers. Enterprises are offered tailored license programs, enterprise-wide support, consulting services and other specialized services. The Operations Group is responsible for managing business operations and overall business planning. This includes the process of manufacturing and delivering finished goods and licenses, corporate functions such as finance, administration, human resources and legal.
Windows Platforms
The Windows Platforms segment is responsible for the development of PC and server platforms, including the Microsoft Windows and Windows 2000 operating systems. The segment is also responsible for developing the Microsoft Internet Explorer browsing software and Microsoft Windows Media Technologies. Specific products of the Windows Platforms segment include the Windows Millennium Edition (Me) operating system, Windows 2000 Professional operating system, Windows NT Workstation and Windows 2000 Server, Advanced Server and Datacenter Server. Other products in this segment include Windows NT Server, other servers (Microsoft Proxy Server, Microsoft SNA Server and Microsoft Systems Management Server), and Windows Media Technologies.
Productivity Applications and Developer
The Productivity Applications and Developer segment has two primary divisions, the Business Productivity Group and the Developer Group. The Business Productivity Division delivers integrated business productivity solutions for the knowledge worker, including the Office family of products, other desktop applications, server applications and the Windows CE operating system for productivity appliances. Specific products include the Microsoft Office (Microsoft Word, Microsoft Excel, Microsoft Outlook, Microsoft PowerPoint, Microsoft Access, etc), other desktop application products (such as Microsoft Project, Microsoft Visio and Microsoft Publisher), server applications (Microsoft BackOffice family of servers), Microsoft Exchange Server, Windows CE and bCentral.
The Developer Group provides software development tools and distributed application platforms to developers of Windows-based applications and Internet applications. These products and services empower independent software developers, corporate developers, solutions developers and Webmasters to create a broad spectrum of applications. Microsoft Windows Distributed interNet Applications (DNA) Architecture is the application development model for the Windows platform. Specific products include Developer Tools (Microsoft Visual C++, Microsoft Visual Basic, Microsoft Visual InterDev), Microsoft Visual J++, and Microsoft Visual Studio, and the Microsoft SQL Server.
Consumer
The Consumer Group supplies services and content to consumers over the Internet including MSN Internet Access, WebTV Internet Service, MSN Portal and vertical properties, and develops software and hardware products that are designed to meet the needs of consumers in the home environment. MSN Internet Access provides dial-up Internet access, free Web-based e-mail through MSN Hotmail and Microsoft MSN Messenger Service. WebTV Networks is an online service that enables consumers to experience the Internet through their televisions via set-top terminals based on WebTV technologies. The MSN Portal business provides services on the Internet, encompassing the home page as well as the vertical services, and includes the Microsoft CarPoint online automotive service, Microsoft HomeAdvisor online real estate service, Expedia, Inc., MSNBC, Microsoft Passport and TransPoint.
Major product categories include learning, productivity, entertainment and hardware peripherals. Learning titles include Microsoft Encarta multimedia encyclopedia and Microsoft Bookshelf CD-ROM reference library. Microsoft's productivity offerings include Microsoft Works, Microsoft Money and the Works Suite. The Company offers a line of entertainment products from classical software games to online games (Microsoft Internet Gaming Zone), simulations, sport products and strategy games. These products include the Microsoft Flight Simulator, Combat Flight Simulator, Age of Empires, Monster Truck Madness racing simulation, Microsoft Baseball, Microsoft Links and other sports and action titles. Hardware peripherals include the Microsoft Mouse, Microsoft IntelliMouse, Microsoft Natural Keyboard and Microsoft SideWinder game controllers.
Microsoft Press
Microsoft Press offers comprehensive learning and training resources to help new users, power users and professionals get the most from Microsoft technology through books, CDs, self-paced training kits and videos that are created to accommodate different learning styles and preferences. Microsoft Press books are authored by professional and technical writers, Microsoft employees and independent authors. Books are marketed by independent sales representatives and by Microsoft Press sales personnel. Internationally, Microsoft Press has numerous agreements with publishers for the worldwide distribution of its books. Microsoft Press has granted a publisher in England the right to distribute English language versions of its books in all countries except the United States, Canada, Latin America and certain Asian countries.
The Company's sales and marketing group seeks to build long-term relationships with customers of Microsoft products. The OEM sales group includes the sales force that works with original equipment manufacturers that preinstall Microsoft software on their PCs. In addition to the OEM channel, Microsoft has three major geographic sales and marketing organizations: the South Pacific and Americas, Europe, Middle East and Africa, and Asia. The Company's customers include consumers, small and medium-sized organizations, enterprises, dotcoms, educational institutions, ISPs, application developers and OEMs. Most consumers of Microsoft products are individuals in businesses, government agencies, educational institutions and at home.
Microsoft's most significant competitors include IBM, Sun Microsystems, Oracle and AOL.
Microsoft Profile, January 1, 2001
Ratios & Statistics
Ratios Company Industry S&P 500
P/E Ratio (TTM) 27.81 28.93 32.46
P/E High - Last 5 Yrs. 86.12 85.56 48.25
P/E Low - Last 5 Yrs. 32.43 27.35 17.13
Beta 1.80 1.71 1.00
Price to Sales (TTM) 11.67 17.04 5.48
Price to Book (MRQ) 5.77 13.25 7.84
Price to Tangible Book (MRQ) 5.77 16.20 11.63
Price to Cash Flow (TTM) 26.07 28.65 25.43
Price to Free Cash Flow (TTM) 20.86 45.99 45.81
% Owned Institutions 41.01 38.20 57.72
Dividends Company Industry S&P 500
Dividend Yield 0.00 0.27 1.60
Dividend Yield - 5 Year Avg. 0.00 0.02 1.26
Dividend 5 Year Growth Rate - ( 10.39) 8.87
Payout Ratio 0.00 0.21 24.73
Growth Rates (%) Company Industry S&P 500
Revenue (MRQ) vs Qtr 1 Yr. Ago 7.73 37.28 22.83
Revenue (TTM) vs TTM 1 Yr Ago 16.25 40.76 22.34
Revenue - 5 Yr. Growth Rate 30.46 43.19 19.73
EPS (MRQ) vs Qtr. 1 Yr. Ago 17.72 34.94 31.16
EPS (TTM) vs TTM 1 Yr. Ago 17.78 19.15 26.31
EPS - 5 Yr. Growth Rate 42.42 47.91 20.41
Capital Spending - 5 Yr. Growth Rate 12.17 20.35 17.18
Financial Strength Company Industry S&P 500
Quick Ratio (MRQ) 3.00 2.99 1.21
Current Ratio (MRQ) 3.37 3.22 1.71
LT Debt to Equity (MRQ) 0.00 0.11 0.60
Total Debt to Equity 0.00 0.12 0.91
Interest Coverage (TTM) - ( 12.55) 10.65
Profitability Ratios (%) Company Industry S&P 500
Gross Margin (TTM) 86.53 77.35 50.12
Gross Margin 5 Yr. Avg. 2.23 74.98 48.27
EBITD Margin (TTM) 49.54 25.17 23.77
EBITD - 5 Yr. Avg. 47.92 23.78 21.69
Operating Margin (TTM) 46.74 19.38 18.53
Operating Margin 5 - Yr. Avg 42.91 16.07 17.64 Treasury Management 3. Ratio Analysis _____________________________________________________________________________
5 3
Profitability Ratios (%) Company Industry S&P 500
Pre-Tax Margin (TTM) 63.35 9.00 18.49
Pre-Tax Margin - 5 Yr. Avg. 50.18 21.62 16.86
Net Profit Margin (TTM) 41.98 23.41 13.07
Net Profit Margin - 5 Yr. Avg. 32.62 13.23 10.64
Effective Tax Rate (TTM) 33.74 36.86 34.64
Effective Tax Rate - 5 Yr. Avg. 35.10 35.23 35.38
Management Effectiveness (%) Company Industry S&P 500
Return On Assets (TTM) 20.11 17.21 9.83
Return On Assets 5 Yr. Avg. 24.86 12.33 8.55
Return On Investment (TTM) 25.17 6.86 13.76
Return On Investment - 5 Yr. Avg. 24.86 24.58 13.57
Return on Equity (TTM) 25.61 7.17 23.16
Return on Equity - 5 Yr. Avg. 35.09 28.90 22.06
Efficiency Company Industry S&P 500
Revenue/Employee (TTM) 597,749.00 394,756.81 677,268.23
Net Income/Employee (TTM) 250,921.00 167,225.70 103,161.13
Receivable Turnover (TTM) 7.89 6.29 8.76
Inventory Turnover (TTM) - 26.85 9.53
Asset Turnover (TTM) 0.48 0.68 0.99
MRQ = Most Recent Quarter, TTM = Trailing Twelve Months
Note: Reported in Thousands of U.S. Dollars
4.15:
Mini-Case: After graduation from University, your first job is at Home Depot. After the initial training period, you get your first assignment. You have to find the following items.
http://www.homedepot.com/
(A) Inventory period
(B) Accounts receivable period, assuming all sales are on credit
(C) Accounts payable period
(D) Operating cycle
(E) Income tax rate
(F) Weighted average cost of capital
(G) NPV of an operating cycle
(H) The overall value of the company
How does your result in (H) compare with the actual market value of the company?
6.36:
Mini-Case: Right after graduation from University, you have found a responsible position at Boeing Company. The management is worried that the credit rating of the bonds of the company may drop due to slow deliveries of the Boeing 787 Dreamliner. Your supervisor has asked you to find the Z-score of the company. Based on your findings, write a report on the creditworthiness of Boeing and its impact on the bond ratings.
http://www.boeing.com/stories/?cm_ven=Paid+Search+Google&cm_cat=Innovation&cm_pla=Brand-Aviation+Word+Stories&cm_ite=%7BKeyword%7D
8.22:
Mini-Case: You have recently acquired a franchise for Dunkin’ Donuts. You have reviewed the operations of the business carefully, from marketing to management, from accounting to finance. You have noticed that the store manager does not have a proper inventory policy. You want to optimize the amount of coffee that you should order at one time. The price of coffee is $4.50 per lb and it comes in 25-lb bags. The price per bag is 4.5*25 = $112.50. The store uses 3000 lb of coffee every year, that is, 3000/25 = 120 bags. The coffee is stored in a back room, where other supplies are also stored. You have found that the storage cost of coffee per year, based on average inventory is $1.25 per lb per year. Or, it is 1.25*25 = $31.25 per bag per year. The cost of capital for this business is 15% per year. The ordering cost of coffee is $35 per order.
From finance, you have learned that you should find the present value of all the payments you have made to (1) order, (2) purchase, and to (3) store the coffee. Of course, you need not include the financing cost because it is included in the present value calculations. You can find the optimal solution by minimizing the PV of the total cost.
You realize that you are working on a calculus problem. You set out to develop a new function, P, which is the present value of all payments for ordering, purchasing, and storing coffee. You assume n, the number of orders placed in a year, as the independent variable. Since you are going to use 120 bags of coffee per year, you will order 120/n bags at one time, at the cost of $112.50 per bag.
You place your first order right now.
The ordering cost is $35.
The purchasing cost is ($112.50/bag) * (120/n bags) = $13,500/n.
Since you buy 120/n bags at one time, the average inventory is 60/n bags. The storage cost is proportional to the average inventory. You will store the first order for 1/n year and then you will get another order. Recall that the storage cost per bag per year is $31.25. Therefore, the storage cost of the first order is
($31.25/bag/year) * (60/n bags) * (1/n year) = 1875/n2
PV of the first order = 35 + 13,500/n + 1875/n2
You place another order after 1/n year. The cost of the second order is the same as the first one except that this cost occurs after 1/n year. To find its present value, use the discount rate of 15% and a time of 1/n year. This gives
PV of the second order = 35 + 13‚500/n + 1875/n21.151/n
You will place another order after 2/n years. Likewise, its present value is
PV of the third order = 35 + 13‚500/n + 1875/n21.152/n
Comparing the terms, you discover that they form an infinite series, with a = 35 + 13,500/n + 1875/n2 and multiplicative factor x = 1/1.151/n. Mathematically, it is easier to find the sum of an infinite geometric series. Using equation (1.5), you get
The present value of infinite orders is = 35 + 13‚500/n + 1875/n21 − 1/1.151/n
To minimize the cost, you can differentiate it with respect to n and set the derivative equal to zero. This is
ddn35 + 13‚500/n + 1875/n21 − 1/1.151/n = 0
You can use Maple to solve the above equation by using these instructions,
diff((35+13500/n+1875/n^2)/(1-1/1.15^(1/n)),n)=0;
fsolve(%);
The result is n = 9.027667691. The number of bags that you should buy at one time is 120/9.027667691 = 13.29246978 = 13 bags.
You expect that the price of coffee will rise by 15% during the next year due to flooding in the coffee-producing areas. You want to overcome this possibility of rising prices by ordering a larger quantity of coffee for each order. Assuming that you are right, what is your optimal order quantity?
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