FIN 516 (Advanced Managerial Finance) Entire Course
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<strong>FIN</strong> <strong>516</strong> WEEK 2 MINI CASE ASSIGNMENT<br />
(This should be posted in Document Sharing)<br />
Select a major industrial or commercial company based in the United States, and listed on one of the<br />
major stock exchanges in the United States. Each student should select a different company. Avoid<br />
selecting an insurance company or a bank, as the financial ratios for these financial businesses are<br />
different. Write a 7 – 8 page double spaced paper answering and demonstrating with calculations and<br />
financial data the following questions:<br />
1. What is the name of the company? What is the industry sector?<br />
2. What are the operating risks of the company?<br />
3. What is the financial risk of the company (the debt to total capitalization ratio)?<br />
4. Does the company have any preferred stock?<br />
5. What is the capital structure of the company?: Short term portion of Long Term Debt, Long Term Debt,<br />
Preferred Stock (if any), and market value of Common Stock issued and outstanding?<br />
6. What is the company’s current actual Beta?<br />
7. What would the Beta of this company be if it had no Long Term Debt in its capital structure? (Apply the<br />
Hamada Formula.)<br />
8. What is the company’s current Marginal Tax Rate?<br />
9. What is the Cost of Debt, before and after taxes?<br />
10. What is the Cost of Preferred Stock (if any)?<br />
11. What is the Cost of Equity?<br />
12. What is the cash dividend yield on the Common Stock?<br />
13. What is the Weighted Average Cost of Capital of the company?<br />
14. What is the Price Earnings Multiple of the company?<br />
15. How has the company’s stock been performing in the last 5 years?<br />
16. How would you assess the overall risk structure of the company in terms of its Operating Risks and<br />
Financial Risk (Debt to Capitalization Ratio)?<br />
17. Would you invest in this company? Why? Or Why not?<br />
18. The last page of your paper should be a Bibliography of the sources you used to prepare this paper.<br />
<strong>FIN</strong> <strong>516</strong> Week 2 Homework<br />
Problem 14-11 Based on Chapter 14: WACC and Modigiani & Miller Extension Models With Growth<br />
Assumptions<br />
Consider the entrepreneur described in Section 14.1 (and referenced in Tables 14.1–14.3). Suppose she<br />
funds the project by borrowing $750 rather than $500.<br />
a. According to MM Proposition I, what is the value of the equity? What are its cash flows if the economy<br />
is strong? What are its cash flows if the economy is weak?<br />
b. What is the return of the equity in each case? What is its expected return?<br />
c. What is the risk premium of equity in each case? What is the sensitivity of the levered equity return to<br />
systematic risk? How does its sensitivity compare to that of unlevered equity? How does its risk premium<br />
compare to that of unlevered equity?<br />
d. What is the debt-equity ratio of the firm in this case?<br />
e. What is the firm’s WACC in this case?<br />
Problem 14-18 Based on Chapter 14: WACC and Modigliani & Miller Extension Models With Growth<br />
Assumptions<br />
In mid-2012, AOL Inc. had $100 million in debt, total equity capitalization of $3.1 billion, and an equity<br />
beta of 0.90 (as reported on Yahoo! <strong>Finance</strong>). Included in AOL’s assets was $1.5 billion in cash and riskfree<br />
securities. Assume that the risk-free rate of interest is 3% and the market risk premium is 4%.<br />
a. What is AOL’s enterprise value?<br />
b. What is the beta of AOL’s business assets?<br />
c. What is AOL’s WACC?<br />
Problem 15-15 Based on Chapter 15: Debt and Taxes<br />
Acme Storage has a market capitalization of $100 million and debt outstanding of $40 million. Acme plans
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