Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, and rents the property to tenants. The company has shown a profit every year for the past 18 years, and the shareholders are satisfied with the company’s management. Prior to founding Stephenson Real Estate, Robert was the founder and CEO of a failed alpaca farming operation. The resulting bankruptcy made him extremely averse to debt financing. As a result, the company is entirely equity financed, with 9 million shares of common stock outstanding. The stock currently trades at $37.80 per share.

Stephenson is evaluating a plan to purchase a huge tract of land in the southeastern United States for $95 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Stephenson’s annual pretax earnings by $18.75 million in perpetuity. Jennifer Weyand, the company’s new CFO, has been put in charge of the project. Jennifer has determined that the company’s current cost of capital is 10.2 percent. She feels that the company would be more valuable if it included debt in its capital structure, so she is evaluating whether the company should issue debt to entirely finance the project. Based on some conversations with investment banks, she thinks that the company can issue bonds at par value with a 6 percent coupon rate. From her analysis, she also believes that a capital structure in the range of 70 percent equityy30 percent debt would be optimal. If the company goes beyond 30 percent debt, its bonds would carry a lower rating and a much higher coupon because the possibility of financial distress and the associated costs would rise sharply. Stephenson has a 40 percent corporate tax rate (state and federal).

1. If Stephenson wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain.

2. Construct Stephenson’s market value balance sheet before it announces the purchase.

3. Suppose Stephenson decides to issue equity to finance the purchase.

What is the net present value of the project?

Construct Stephenson’s market value balance sheet after it announces that the firm will finance the purchase using equity. What would be the new price per share of the firm’s stock? How many shares will Stephenson need to issue to finance the purchase?

Construct Stephenson’s market value balance sheet after the equity issue but before the purchase has been made. How many shares of common stock does Stephenson have outstanding? What is the price per share of the firm’s stock?

Construct Stephenson’s market value balance sheet after the purchase has been made.

4. Suppose Stephenson decides to issue debt to finance the purchase. What will the market value of the Stephenson company be if the purchase is financed with debt?

Construct Stephenson’s market value balance sheet after both the debt issue and the land purchase. What is the price per share of the firm’s stock?

5. Which method of financing maximizes the per-share stock price of Stephenson’s equity?

Founded in 1964 as Clipper Trucking Co., within two
decades Spirit Airlines was chugging through the skies as
a tiny commercial airline connecting passengers between
Florida and the Midwest. Yet by the 2000s, Spirit was
near failure—a common story in the commercial airline
business—until seasoned aviation executive and merciless
cost-cutter Bill Franke stepped in in 2006 to buy the airline
and then did something remarkable. Franke had honed his
chops cutting costs as CEO of America West Airlines in the
1990s and was an early investor in ultra-low cost Ryan Air.
Despite his detractors, Franke, along with his CEO, Ben
Baldanza, put Spirit on a steadier (if frill-free) fl ight path,
making it not only one of the few post-9/11 success stories,
but also a trend-setter and model in a deeply challenged
industry.
While larger carriers have suff ered billions of dollars in
losses and bankruptcies, Spirit was fl ying high last year with
$289 million in earnings, 40 percent more per plane than any
other domestic airline. Th e company is currently valued at
about $1.63 billion, the same as U.S. Airways Group Inc., which
is about nine times larger in terms of traffi c. Despite its tiny
size—Spirit carries just 1 percent of the nation’s fl iers on its
40-jet fl eet—only two U.S. airlines have fared better: Southwest
(with 692 Boeing jets) and Alaska Air Group Inc. (with
122 aircraft). While many airlines continue to cancel services,
lay off employees, and cut corners to maintain minimal
profi tability, in 2011 Spirit’s revenue soared 37.1 percent over
the previous year. Th e airline also fl ew 15.2 percent more seats
and added multiple routes.
So how did Franke and Baldanza transform a company
once facing bankruptcy into the most profitable airline
in the United States? By doing everything that was once
deemed impossible, yet has since—thanks to Spirit’s
innovative example—become the industry standard. That
means offering the cheapest tickets in the business and
making everything—from water to boarding passes—a
la carte. Spirit was the first U.S. airline to reintroduce
a charge for checked luggage, which has since become
commonplace.
Spirit has found its niche—the traveler who is ultra-budget
conscious and is interested in little more than getting from
A to Z at the cheapest possible price. It’s that simple, and
Spirit doesn’t pretend to embody anything else—not comfort,
not convenience, not service. Spirit’s on-time performance
is among the worst in the industry; its legroom is negligible
at best, and (not surprisingly, considering its bare bones
approach to travel), it has suff ered more than a few PR
disasters in recent years. Th ese include irate, vocal customers
like Jerry Meekins, a 76-year-old Vietnam vet with terminal
cancer, who was denied a refund by Spirit after he was told by
doctors that he had only months to live and couldn’t fl y (and
so couldn’t use his ticket); and a 2010 pilot strike that saw the
airline grounded for 10 days.

Yet Baldanza seems unphased: “We just want to have the
lowest price. Th at drives almost every other decision in the
company: how many seats to have in the airplane, what times
of day to fl y, the kinds of cities we fl y to, and so on.”
With Spirit’s enviable balance sheet, it’s likely that more
airlines will get on board with the nickel-and-diming scheme.
It may be bad news for consumers, but it’s good news to
airlines that are struggling to make a profi t in uncertain
times.

1. Spirit’s number one goals seems to be “the lowest-price airline ticket.” Is this a S.M.A.R.T Goal? Explain.

2. Will this strategic goal continue to be successful for Spirit? Why or Why Not?

3. If you were the CEO of Spirit, what goals would you add to ensure that the company prospers in the long run?

Founded in 1970 in Alençon (Orne), the company MPO Fenêtres (Menuiserie Plastique de l’Ouest) was one of the first French companies in the PVC/carpentry sector to offer a customized service. However, at that time, in France, very little was known about PVC, carpentry and double-glazing technology: these markets were still in their infancy. It took about ten years, and two oil crises (in 1974 and especially in 1979) for the PVC window market to really take off. The commercial policy of EDF (the French public energy provider) at that time favored the development of this product, encouraging investors to push for “all electric” installations, which would, according to the manufacturer provider, require better insulation of public buildings to reduce heat loss. With regard to marketing and distribution, the business is customer-oriented: therefore, MPO Fenêtres has chosen to keep control of the entire supply chain, right through from the order to delivery to (and sometimes installation for) the customer. For both new and replacement windows, MPO Fenêtres markets, designs, manufactures and installs its own products, thus ensuring complete control of the order and keeping to a minimum the number of contacts for the customer. The company distributes its products through two distribution channels: a central department in charge of “key accounts” and “communities”, and a network of eight agencies deployed in northeastern France, all owned by the company. These agencies are the cornerstone of the distribution network. Each agency employs fifteen salespersons, as the control of about 15% of its market area, and operates in a sales territory of approximately 45,000 customers. The company’s salespeople actively seek potential clients, especially at trade fairs and exhibitions. These events are of paramount importance: they afford opportunities to expand the client base and win new contracts. Up to 25% of the annual turnover of an agency can be attributed to contacts made during these events.

Today, the continuing strong growth of the market has encouraged MPO Fenêtres’s CEO to rethink the organizational model of its agencies. In order to improve performance and increase the commercial strength of the company, an audit of its business performance was conducted. Internal research within the company enabled the identification of tasks conducted by employees, and the time allocated to each task, over the course a year. The results are as follows. Each year, a salesperson has two weeks of training and five weeks of paid holidays (in accordance with employment law). Two weeks of their annual working time is devoted to attending trade fairs. In addition, the average salesperson is absent one week per year for personal reasons. In terms of the organization of their five-day working week, the Director observed that one day is devoted to purely administrative tasks (making appointments and reporting activities). For the remaining four days of the week, based on a working day of11 hours, one hour is devoted to the management of administrative problem sand urgent tasks, and one hour is taken as a lunch break. In terms of customer contacts, information obtained from sales staff showed that the average sale is concluded at the end of the third meeting, and that such meetings last on average about an hour. Convinced that high thermal performance PVC windows are the future of the company, the company’s directorate decided to develop sales of these as its primary strategic activity. It therefore needed to develop a marketing strategy for these products on the retail market. Some factors are key to the strategic approach needed: individuals are not necessarily aware of the technical features of the products. In addition, although they offer real benefits, triple-glazed products are more expensive. This may hinder sales of triple-glazed products, because many alternatives, which are cheaper and perform equally well, are still marketed, both in the company’s own catalogue and in those of its competitors. Although the triple-glazed products are better in terms of insulation and sophistication, their price may be an important deterrent.

Required:  

1. Identify the key factors for success from the passage

2. Suggest incentives to stimulate the staff to encourage their continued training and to support sales of the company product that will lead to competitive advantage

Explain briefly both answers

JIT at Arnold Palmer Hospital

Orlando’s Arnold Palmer Hospital, founded in 1989, specializes in treatment of women and children and is renowned for its high- quality rankings (top 10% of 2000 benchmarked hospitals), its labor and delivery volume (more than 14,000 births per year), and its neonatal intensive care unit (one of the highest survival rates in the nation). But quality medical practices and high patient sat- isfaction require costly inventory—some $30 million per year and thousands of SKUs.* With pressure on medical care to manage and reduce costs, Arnold Palmer Hospital has turned toward con- trolling its inventory with just-in-time (JIT) techniques.

Within the hospital, for example, drugs are now distributed at the nursing stations via dispensing machines (almost like vending machines) that electronically track patient usage and post the related charge to each patient. Each night, based on patient demand and prescriptions written by doctors, the dispensing stations are refilled.

To address JIT issues externally, Arnold Palmer Hospital turned to a major distribution partner, McKesson General Medical, which as a first-tier supplier provides the hospital with about one-quarter of all its medical/surgical inventory. McKesson supplies sponges, basins, towels, Mayo stand covers, syringes, and hundreds of other medical/surgical items. To ensure coordinated daily delivery of inventory purchased from McKesson, an account executive has been assigned to the hospital on a full-time basis, as well as two other individuals who address customer service and product issues. The result has been a drop in Central Supply average daily inventory from $400,000 to $114,000 since JIT.

JIT success has also been achieved in the area of custom surgical packs. Custom surgical packs are the sterile coverings, dispos- able plastic trays, gauze, and the like, specialized to each type of surgical procedure. Arnold Palmer Hospital uses 10 different cus- tom packs for various surgical procedures. “Over 50,000 packs are used each year, for a total cost of about $1.5 million,” says George DeLong, head of Supply-Chain Management.

The packs are not only delivered in a JIT manner, but packed that way as well. That is, they are packed in the reverse order they are used so each item comes out of the pack in the sequence it is

*SKU 5 stock keeping unit needed. The packs are bulky, are expensive, and must remain sterile. Reducing the inventory and handling while maintaining an ensured sterile supply for scheduled surgeries presents a challenge to hospitals.

Here is how the supply chain works: Custom packs are assem- bled by a packing company with components supplied primar- ily from manufacturers selected by the hospital, and delivered by McKesson from its local warehouse. Arnold Palmer Hospital works with its own surgical staff (through the Medical Economics Outcome Committee) to identify and standardize the custom packs to reduce the number of custom pack SKUs. With this inte- grated system, pack safety stock inventory has been cut to one day.

The procedure to drive the custom surgical pack JIT system begins with a “pull” from the doctors’ daily surgical schedule. Then, Arnold Palmer Hospital initiates an electronic order to McKesson between 1:00 and 2:00 p.m. daily. At 4:00 a.m. the next day, McKesson delivers the packs. Hospital personnel arrive at 7:00 a.m. and stock the shelves for scheduled surgeries. McKesson then reor- ders from the packing company, which in turn “pulls” necessary inventory for the quantity of packs needed from the manufacturers.

Arnold Palmer Hospital’s JIT system reduces inventory investment, expensive traditional ordering, and bulky storage and supports quality with a sterile delivery.

Discussion Questions** (pls provide different answers from the textbook solutions and from online).

1. When a doctor proposes a new surgical procedure, how do you recommend the SKU for a new custom pack be entered into the hospital’s supply-chain system?

Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stock's current value?

Year: 0 1 2 3 4 5 6

Growth rate: NA NA NA NA 30.00% 15.00% 8.00%

Dividends: $0.000 $0.000 $0.000 $0.250 $0.325 $0.374 $0.404 ​

Question options: $8.60 $9.29 $10.50 $9.21 $10.75

Silverline Electricals Limited was founded ten years ago by Jim and Wendy Birt. The company manufactures

and installs both traditional and contemporary models of lights for residential and commercial purposes.

Silverline Electricals Ltd has experienced rapid growth because of the new technology that increases the

energy efficiency of its systems and the introduction of new models of LED integrated lights. The company is

equally owned by Jim and Wendy holding 100,000 shares each.

In August 2018, Jim and Wendy have decided to value their holdings in the company for financial planning
purposes. To accomplish this, they have gathered the following information about their main competitors in
the industry

Last year, Silverline Electricals Ltd had an EPS of $0.52 and paid dividends to Jim and Wendy of $31,200 each.

The company also had a return on equity of 15%. Jim and Wendy believe a required rate of return of 12% for

the company is appropriate.

Required:
1. Assuming the company continues its current growth rate (growth rate should be inferred from the
data given) into the infinite period, what is the share price of the company?
(7marks)
2. To verify their calculations, Jim and Wendy have hired Richard Wang, a consultant. Richard was
previously an equity analyst, and he has a good understanding of the electrical Industry. Richard has
examined the company’s financial statements as well as those of its competitors. Although Silverline
Electricals Ltd currently has a technological advantage, Richard’s research indicates that Silverline
Electricals Ltd’s competitors are investigating other methods to improve efficiency. Given this, Richard
believes that Silverline Electricals technological advantage will last for only the next five years. After
that period, the company’s growth is likely to slow down to the industry average. Additionally,
Richard believes that the company’s required return currently is too high and so after year 5, the
industry average required return is a more appropriate rate for valuation. Taking Richard’s
assumptions into consideration, calculate the estimated share price of Silverline Electricals Ltd.

3. What is the industry average price-earnings ratio? What is Silverline Electricals Ltd’s price-earnings
ratio based on Richard’s estimation in part (2) above? Comment on any differences and explain why
these differences may exist?

4. After a discussion with Richard, Jim and Wendy agree that they wanted to increase the value of the
company’s equity. Like many small business owners, they want to retain control of the company and
do not want to sell shares 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
share price? - justify each of your suggestions.

Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, and rents the properties to tenants. The company has shown a profit every year for the past 18 years, and the shareholders are satisfied with the company’s management. Prior to founding Stephenson Real Estate, Robert was the founder and CEO of a failed alpaca farming operation. The resulting bankruptcy made him extremely averse to debt financing. As a result, the company is entirely equity financed, with 9 million shares of common stock outstanding. The stock currently trades at $37.80 per share.

Stephenson is evaluating a plan to purchase a huge tract of land in the southeastern United States for $95 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Stephenson’s annual pre-tax earnings (EBIT) by $18.75 million in perpetuity. Jennifer Weyand, the company’s new CFO, has been put in charge of the project. Jennifer has determined that the company’s current cost of capital is 10.20%. She feels that the company would be more valuable if it included debt in its capital structure, so she is evaluating whether the company should issue debt to entirely finance the project. Based on some conversations with investment banks, she thinks that the company can issue bonds at par (face value) with a 6 percent coupon rate. From her analysis, she also believes that a capital structure in the range of 70 percent equity/30 percent debt would be optimal. If the company goes beyond 30 percent debt, its bonds would carry a lower rating and a much higher coupon because of the possibility of financial distress and the associated costs would rise sharply. Stephenson has a 40 percent corporate tax rate.

What after-tax cash flow must Stephenson be currently producing per year, assuming that its current cash flows remain constant each year?

Construct Stephenson’s market value balance sheet before it announces the purchase.

3)Suppose Stephenson decided to issue equity to finance the purchase.

What is the net present value of the land acquisition project?

Construct Stephenson’s market value balance sheet after it announces that the firm will finance the purchase using equity. (Assume that the value of the firm will immediately change to reflect the NPV of the new project.)

What would be the new price per share of the firm’s stock? How many shares will Stephenson need to issue to finance the purchase?

Construct Stephenson’s market value balance sheet after the equity issue, but before the purchase has been made. How many shares of common stock does Stephenson have outstanding? What is the price per share of the firm’s stock?

e)What is Stephenson’s weighted average cost of capital after the acquisition? What after-tax cash flow will be produced annually after the acquisition? What is the present value of this stream of after-tax cash flow? What is the stock price after the acquisition? Does this agree with your previous calculations?

Suppose Stephenson decides to issue debt to finance the purchase.

What will be the market value of the Stephenson company be if the purchase is financed with debt?

Construct Stephenson’s market value balance sheet after both the debt issue and the land purchase. What is the price per share of the firm’s stock?

c)What is Stephenson’s cost of equity if it goes forward with the debt issue? (Do not round your answer.)

d)What is Stephenson’s weighted average cost of capital if it goes forward with the debt issue? (Do not round your answer.)

e)What total after-tax cash flow is being generated by Stephenson after the acquisition?

f)What is the present value of this after-tax cash flow? What is the market value of equity? What is the stock price? Does this agree with your work from parts (a) and (b)?

Which method of financing maximizes the per-share price of Stephenson’s equity?

Does the resultant capital structure (with the land acquisition financed by debt) satisfy Jennifer’s concerns about the negative effects of moving beyond the optimal capital structure?

Case 6-1  Chobani

Chobani LLC, is a producer and marketer of Greek yogurt. The company was founded in 2005 by Hamdi Ulukaya, an immigrant from Turkey, who recognized the lack of options for high-quality yogurt in the United States. The company is headquartered in Norwich, New York, and it employs approximately 2,000 employees. It operates two manufacturing plants—its original facility in central New York and a second new state-of-the-art facility in Twin Falls, Idaho.

The mission of the company is “To provide better food for more people. We believe that access to nutritious, delicious yogurt made with only natural ingredients is a right, not a privilege. We believe every food maker has a responsibility to provide people with better options, which is why we’re so proud of the way our food is made.” Chobani’s core values are integrity, craftsmanship, innovation, leadership, people, and giving back.

The company’s beginning in 2005 occurred when Hamdi Ulukaya discovered a notice about an old Kraft yogurt factory in South Edmeston that was closed. He decided to obtain a business loan in order to purchase it. Between 2005 and 2007, Ulukaya worked with four former Kraft employees and yogurt master Mustafa Dogan to develop the recipe for Chobani Greek Yogurt. Between 2007 and 2009, the company started to sell its yogurt in local grocery stores including Stop and Shop and ShopRite. By 2010, Chobani Greek yogurt became the best selling Greek yogurt in the United States. The company pursued global expansion by entering Australia in 2011 and the United Kingdom in 2012. In 2013, the company opened its international headquarters in Amsterdam, and Hamdi Ulukaya was named the Ernst and Young World Entrepreneur of the Year.

Chobani has achieved its success in large part due to its ability to innovate in its product lineup. For example, in 2016, it launched a new line of yogurt drinks, more flavors of its Flip mix-in product, and even a concept café in Manhattan.

The company also created a food incubator program that is designed to provide resources, expertise (e.g., brand and marketing, packaging and pricing), and funding to small, young companies that have promising ideas for new natural foods that they aspire to develop.

Although Hamdi Ulukaya has been extremely successful in his founding and establishment of Chobani, he has recognized that there are some key lessons learned from his experience as the head of a young but very successful and industry-leading company. These include the importance of hiring people with functional experience such as marketing, supply chain, logistics, operations, and quality control, as they were essential to the smooth operation of the company. In addition, remembering to respect the competition and not to underestimate it is critical, as Chobani’s two main competitors, Dannon and Yoplait, launched their own Greek yogurt lines, and they were able to win back some of Chobani’s market share over time.

Discussion Questions

5.   Think about managing change at a personal level. Why is it so hard for so many people to change their behavior or way of thinking? Are these personal challenges to managing change also relevant to managing change in organizations?

6.   What can you learn from Hamdi Ulukaya about what is needed to become a successful entrepreneur?

Case 6-1  Chobani

Chobani LLC, is a producer and marketer of Greek yogurt. The company was founded in 2005 by Hamdi Ulukaya, an immigrant from Turkey, who recognized the lack of options for high-quality yogurt in the United States. The company is headquartered in Norwich, New York, and it employs approximately 2,000 employees. It operates two manufacturing plants—its original facility in central New York and a second new state-of-the-art facility in Twin Falls, Idaho.

The mission of the company is “To provide better food for more people. We believe that access to nutritious, delicious yogurt made with only natural ingredients is a right, not a privilege. We believe every food maker has a responsibility to provide people with better options, which is why we’re so proud of the way our food is made.” Chobani’s core values are integrity, craftsmanship, innovation, leadership, people, and giving back.

The company’s beginning in 2005 occurred when Hamdi Ulukaya discovered a notice about an old Kraft yogurt factory in South Edmeston that was closed. He decided to obtain a business loan in order to purchase it. Between 2005 and 2007, Ulukaya worked with four former Kraft employees and yogurt master Mustafa Dogan to develop the recipe for Chobani Greek Yogurt. Between 2007 and 2009, the company started to sell its yogurt in local grocery stores including Stop and Shop and ShopRite. By 2010, Chobani Greek yogurt became the best selling Greek yogurt in the United States. The company pursued global expansion by entering Australia in 2011 and the United Kingdom in 2012. In 2013, the company opened its international headquarters in Amsterdam, and Hamdi Ulukaya was named the Ernst and Young World Entrepreneur of the Year.

Chobani has achieved its success in large part due to its ability to innovate in its product lineup. For example, in 2016, it launched a new line of yogurt drinks, more flavors of its Flip mix-in product, and even a concept café in Manhattan.

The company also created a food incubator program that is designed to provide resources, expertise (e.g., brand and marketing, packaging and pricing), and funding to small, young companies that have promising ideas for new natural foods that they aspire to develop.

Although Hamdi Ulukaya has been extremely successful in his founding and establishment of Chobani, he has recognized that there are some key lessons learned from his experience as the head of a young but very successful and industry-leading company. These include the importance of hiring people with functional experience such as marketing, supply chain, logistics, operations, and quality control, as they were essential to the smooth operation of the company. In addition, remembering to respect the competition and not to underestimate it is critical, as Chobani’s two main competitors, Dannon and Yoplait, launched their own Greek yogurt lines, and they were able to win back some of Chobani’s market share over time.

Discussion

1. Start with a brief (1-2 paragraphs) summary of the case.

2. List the management issues short term & longer term you see in the case.

3.Propose a solution to fix the major current problem and a longer term course of action to prevent the problem.