Stock Valuation

Rue Company is a great corporation going through some good times. It has never paid a dividend in the past and is not planning on ever doing so. The CFO, Dr. Rue, expects that the inflation in Europe will be higher than the one in Asia due to the recovery. The main product of Rue Co is a mechanical pencil which is made in the US and sold in South America, Europe and Asia

Recently he (Dr. Rue) was interviewed by the Partition Street Journal. When asked about the free cash flows for the current year (FCF0), Dr. Ruesaid: “The company expects that the after-tax operating income, EBIT(1-T) will be $300 million next year. The depreciation will be $45 million and given the growth prospects, capital expenditures will reach $25million. Net operating working capital will increase by $5million”. In the same interview, he said that investors should expect this FCF0 to grow by and astonishing 50% for the next 2 years, then at 25% for years 3, 4 and 5, after which FCFs are expected to grow at a boring but constant rate of 3% forever.

You searched on Bloomberg and discovered that similar companies have a WACC of 12% and you plan to use it as the discount rate in your calculations. You found out that Rue Co has $5,000 million (5 billion) in debt and $200 million in non-operating assets. The company has 500 million shares outstanding.

You want to invest in this company but you are very concerned about the results of the US election next week. Depending on who wins, you expect EBIT to fluctuate between $275m to $325m and the WACC to fluctuate between 10% to 14%. For this reason, you to have to answer the following questions before investing

1. Under the base case assumptions, what should be the current stock price for Rue Company?

2.   Complete the table below with the changes to EBIT and WACC:

Price of Rue Co under different assumptions

3. Explain how EBIT(1-T) and WACC effect stock prices?

4. Looking at the University as an institution of higher learning over the past two decades. Do you think we have made significant progress as a university in a developing country? Why or Why not?    

Do you Agree or Disagree to the discussion of the Bernie Madoff Accounting Scandal? Explain your thoughts and add any new findings”

Accounting Scandal: Bernie Madoff a wall street investment firm founded by Madoff and his accountant David Friehling and Frank Dipascalli. The company tricked investors out of $64.8 billion through the most extensive Ponzi scheme ever buy promising them above market, and steady returns that never existed. The most damage of the Madoff scheme seems to focus on the small world of Jewish philanthropy, where he was a leading figure. The North Shore-Long Island Jewish Health System said it was scheme out of $5 million. The Julian J. Levitt Foundation, based in Texas lost about $ 6 million and the Yeshiva University, a New York institution where Madoff served on the board lost $19 million. This scam ran for over five decades from early 1960 to late 1990. The crash caused several Madoff investors to lose everything forcing some of them to go homeless, live in their cars and RV’s.  

Illegal act/ Unethical act: The investors were paid returns out of their own money or that of other investors than profit, and by doing this the investors were not aware of the illegal activity taking place with their investments. The list of investors that Madoff scheme was not your average person, but prominent peoples such as Steven Spielberg, actor Kevin Bacon, and owners of the New York Mets. There were banks and pension funds that were also schemed by Madoff and his followers. The company made its trades and held the shares it bought and kept its illegal activities hidden from view. The thousands of investors and numerous organization that had invested with Madoff firm directly or indirectly spent the early part of 2009 assessing theirs loses.

Detection: The way that Bernie Madoff got caught he told his sons Mark and Andrew about his scheme months after the 2008 U.S. market collapse. Madoff sons reported him to the SEC. The SEC said that they would have to testify against their father if the investigation goes to trial.

Detection that could have found earlier: The SEC had been investigating Madoff and his securities firm on and off since 1999 a fact that did not go well with the investors that lost their life savings. They felt that if the SEC had warned them of Madoff illegal activities before his arrest and conviction, this would have prevented the scam from going on for so many years.

Penalties: Bernie Madoff pleaded guilty to defrauding his client out of their life-saving in one of the world most massive Ponzi scheme, and for his part, Madoff received 150 years in a maximum-security prison for his crime and had to pay $170 billion restitution and his co-conspirator Friehling and D received light prison time as well. The FBI continued to pursue suspects that may have a hand in the Madoff scheme, including some members of Madoff family. Madoff insisted that his sons had nothing to do with the Ponzi scheme.

Stock Valuation at Ragan, Inc.

Ragan, Inc., was founded nine years ago by brother and sister, Carrington and Genevieve Ragan. The company manufactures and installs heating, ventilation and cooling (HVAC) units. Ragan, Inc., has experienced rapid growth because of a proprietary technology that increases the energy efficiency of its units. The company is equally owned by Carrington and Genevieve. The original partnership agreement between the siblings gave each 50,000 shares of stock in the company. In the event either wished to sell their stock, the shares first would have to be offered to the other at a discounted price.

            Although neither sibling wants to sell, they have decided that they should determine the value of their ownership in the company. To get started, they have gathered information about their main competitors, provided in the table on the next page.

            One of their competitors, Expert HVAC Corp., had negative Earnings Per Share last year, due the result of a one-time accounting write-off. Had the write-off not occurred, Earnings Per Share for that company would have been $1.10. The Return On Equity for Expert HVAC Corp is based on net income excluding the one-time write-off.

            Last year, Ragan, Inc., had an Earnings Per Share of $3.15 and paid a dividend to Carrington and Genevieve of $45,000 each. The company also had a Return On Equity of 17 percent. The siblings believe that 14 percent is an appropriate required return for the company.

(continued on next page)

2) To verify their calculations, Carrington and Genevieve have hired Josh Schlessman as a consultant. Josh was previously an equity analyst who covered the HVAC industry. Josh has examined the company’s financial statements, as well as examining its competitors’ financials. Although Ragan, Inc. currently has a technological advantage, his research indicates that other companies are investigating methods to improve efficiency. Given this, Josh believes that the company’s competitive advantage will only last for the next five years. After that time period, the company’s growth will likely slow to the industry growth average. Additionally, Josh believes that the required return used by the company is too high. He believes the industry average required return is more appropriate. Under this growth rate assumption, what is your estimate for the stock price of Ragan, Inc.?

Create a Balance Sheet to record the following transactions for Taylor Company for the month of March.

a.   Borrowed $4,500 from Local Bank and Trust
b.   Investors contributed $10,000 in cash for shares of stock
c.   Bought inventory costing $2,000 on credit
d.   Sold inventory that originally cost $400 for $600 on credit
e.   Purchased a new piece of equipment for $500 cash
f.   Collected $600 in cash from sale of inventory in (d) above
g.   Paid for inventory purchased in (c) above, which was originally purchased on credit
h.   Paid $1,200 in cash for an insurance policy that covers the next year
i.   Employees salary was $3,000 during the month of February, but have not yet been paid
j.   Paid employees $2,900 for wages earned and recorded during February

On June 1, Haimes Company spent $200,000 to purchase 250,000 coffee
mugs to sell at its retail store. During the year, Haimes Company
recorded the following sales of coffee mugs:

         Month          Mugs solds        Selling price per mug
         June             16,000                  $2.00
         July             35,000                  $2.50
         August            2,000                  $3.00
         September        31,000                  $2.00
         October          46,000                  $3.00
         November         47,000                  $4.00
         December         40,000                  $3.50

Calculate the gross profit earned by Haimes Company for the months
August through November.

Consider two firms, A and B. Firm A is a US-based company and firm B is a Germany-based company. Firm A wants to finance a 10-year, €100 million project in Germany. Firm B wants to finance a 10-year, $111 million project in the US. The current spot rate is $1.11/€. Their borrowing opportunities are given in the table below:

1. Calculate the quality spread differential (QSD) between Firm A and Firm B.

2. Develop a cross-currency interest rate swap in which both Firm A and Firm B have an equal cost savings in their borrowing costs, and the swap bank makes 0.30% per annum in arranging the swap and assuming all foreign exchange risks.

3. Illustrate your swap and its cash flows by drawing the proper swap diagrams showing the swap interest rates, and the cash flows at the initiation of the swap, at each annual settlement during the life of the swap, and at maturity of the swap.

Enumerate and briefly explain some of potential accounting problems resulting from inflation.

Enumerate and briefly explain methods of dealing with inflation in financial reporting.

What are acceptable methods of dealing with inflation under US GAAP and IFRS?

Define “control” and “group” under US GAAP and IFRS.

CEO Selections: John Kanas, Bob Nardelli, or Hank McKinnel

Background: A few years ago, companies such as AIG, who had a hand in the cause of the economic downturn that has devastated our economy, were planning to give or actually gave out huge golden parachutes to the same executives who led and approved of the companies actions.

Instructions: Please answer the questions below:

1) Perform a search of a CEO who has received a golden parachute.

1a) Who was the CEO?

1b) What was the company from where he or she received the golden parachute?

1c) What was the total compensation in the golden parachute?

1d) What happened to the company after the CEO's departure terms of before and after revenue?

1e) After the CEO's departure, did the former CEO obtain a leadership position at another firm? If yes, what company.

2) Based on your reading of Chapter 10 of your DLR e-text, do you believe the payment of these golden parachutes was ethical, right or wrong, and why? Please be substantive in your answers.

Notes:

1) Do not use Carl Icahn or Michael Corbat from Chapter 10 of your e-text, as examples of CEOs who have received golden parachutes.

2) DO NOT USE THE SAME CEO AS ANOTHER STUDENT! (Ignore)

3) Use academically credible sources.

4) Be sure to relate your post to Chapter 10 of your e-text and/or other credible source(s) with proper APA in-text citations and References listing. Failure to properly cite sources will result in a zero.

Make at least 250 words or more, thank you.

Answer all of these questions with the right question number next to the correct choice (letter).

11) You are the CEO of Cute Pups Company, which makes blue jeans for dogs. Sales of your products are taking off so you decide to go public. However, without an MBA, you have no clue how to price and distribute your stock. You would probably hire the services of a(n):

Investment banking house

Savings and loan

Commercial bank

Mutual fund

12)

The SEC (Securities and Exchange Commission) requires companies to file annual financial statements. This disclosure is an example of:

Allocational efficiency

Operational efficiency

Informational efficiency

Frictionless markets

13)

Which of the following describes the main role of financial intermediaries:

Set the price of stocks, bonds, and other assets

Bridge gaps between savers and debtors

All of the above

Help the Federal Reserve set interest rates for other investors

15) After graduation you decide it is time to start planning for the future. You set up a retirement fund that is estimated to earn 5% interest over the next 20 years. What type of markets are you most likely to invest in?

Capital markets

Money markets

It is impossible to tell from the information given.

Private markets