Tesla Inc. is thinking about acquiring Lithium Power Corp. Tesla's VP thinks that it is going to add value to the firm because Lithium Power has a relatively low P/E ratio and is earnings accretive. As Tesla's shareholder, do you agree with what the VP says? Explain.
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- One fine day, you and your friend chit chat over at tea stall and your friend asked for an financial advice. We always argue that company that pays high dividend meaning that company is doing well. In fact, it is always not the case because some don't pay the dividend, instead they keep the money for future use. Is there is a perfect payout to fit the shareholders? Please consider a few considerations like the nature of the business, which industry, future growth and expansion plan, capital gain, and many others. Decribe it to your understanding.David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: d. Suppose that Firms U and L have the same input values as in Part c except for debt of 980,000. Also, both firms have total net operating capital of 2,000,000 and both firms are expected to grow at a constant rate of 7%. (Assume that the EBIT in part c is expected at t = 1.) Use the compressed adjusted present value (APV) model to estimate the value of U and L. Also estimate the levered cost of equity and the weighted average cost of capital.David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: Now assume that Firms L and U are both subject to a 25% corporate tax rate. Using the data given in part b, repeat the analysis called for in parts b(1) and b(2) using assumptions from the MM model with taxes.
- You are the founder of IGRO, an Internet firm that delivers groceries. a. Give an example of an idiosyncratic risk and a systematic risk your company faces. b. As founder of the company, you own a significant portion of the firm, and your personal wealth is highly concentrated in IGRO shares. What are the risks you face, and how should you try to reduce them? c. Given your answer to part b, do you think it is a good idea for lower level employees to have large amounts of stock in their savings when that stock is issued by their employer? Is there an upside, as well as a downside?David Lyons, CEO of Lyons Solar Technologies, is concerned about his firm’s level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: Who were Modigliani and Miller (MM), and what assumptions are embedded in the MM and Miller models?In a few sentences, answer the following question as completely as you can. Imagine you are the treasurer of a small manufacturing firm. Your firm is planning to go public (i.e., sell stock to investors for the first time). One unresolved question concerns the market’s required return on the stock. Given what you have learned, how do you think the required return will affect the market value of your firm’s stock? How would you go about estimating this rate?
- Explain how you will manage each of these situations. Your company invests in overseas companies paying high dividends. Due to COVID-19, foreign companies have reduced their dividend payouts.Assume that you are the owner of a successful small-to-medium-sized business. You want to grow your business and separate it from your personal finances. What should you do? How will you do it? In regard to dividends and earnings, when and how should you and other owners be rewarded? What are examples of each type of dividend? Why do some large corporations forgo dividends?After discussions with Josh, Carrington and Genevieve agree that they would like to try to increase the value of the company stock. Like many small business owners, they want to retain control of the company and do not want to sell stock to outside investors. They also feel that the company's debt is at a manageable level and do not want to borrow more money, What steps can they take to increase the price of the stock? Are there any condi- tions under which this strategy would not increase the stock price?
- 2) Financial Statement Analysis. Your firm has hired a consultant. At the conference you're attending, she says this about your company: "Sure, you've got high ROE, but with that comes a lot of risk. You have lots of ROE because you have a high Debt/Equity Ratio." People are looking very confused. Can you explain what the consultant means? How does high Debt/Equity cause lots of risk for your firm? Risk of what, exactly?The shareholder of Al-Karam wants to maximize his profits by selling his goods in the larger quantities. In order to achieve his target (s) he hired a manager to look after his business. However, the manager instead of maximizing business profits started maximizing his own interest by selling the designs in black to the competitor’s designers. Analyze the above situation and explain the possible problem that might occur for Al-Karam. If the wealth of the stockholder is decreasing ever since he hired the new manager, using EVA rule of thumb explain what would be the value of EVA and what is its economic interpretation.Do all companies pay dividends? What is another way stockholders can get a return on their investment? Did Microsoft always pay dividends, and if not why would they start?