The CEO of ABC Corp believes that each share of ABC will pay a dividend of $2.40 at the end of the current year, $3.25 next year, and $4.40 the following year. After that dividends should grow at a steady rate of 10% a year for the following 5 years. Then the growth rate should drop to 3% for the foreseeable future.

a. Given an opportunity cost of 12% annually, what is the value of each ABC share?

b. What percent of share value is accounted for by the first three dividends?

(Manually Calculate)

Carolyn Nesbitt, the CEO of Macrocorp, is considering a project to expand the existing business into a new product line that involves considerable up-front investments in new equipment as well as an initial investment in net operating working capital. Her executives’ cash flow projections are fairly aggressive with $500 M in sales at the end of the first year increasing by 5% annually for the next five years. Cost of goods sold is expected to be $250M in the first year, increasing by 6% annually for the next five years. The initial equipment costs $1,500M and its salvage value in five years is $750 M. Annual depreciation is calculated using the straight-line method (e.g. an equal amount each year based on the salvage value in five years). The initial investment in net operating working capital is $300M, which Carolyn thinks she can redeploy elsewhere in the firm after five years. After five years, it is expected that the technology will be obsolete. Carolyn expects to pay taxes at a corporate rate of 25%.

Carolyn is considering whether to take on the project, as well as how to finance it. Her chief financial officer is proposing to borrow $800 M to finance the equipment and investment in net operating working capital. If the firm borrows to finance the project, its leverage ratio (defined as the ratio of total debt to total assets) would be approximately 53%. The current cost of debt for a five-year bond with principal repayment in five years is 6%.

Were the firm to finance the project entirely with equity, the expected return to its investors would be 7.5%.

Part A

What is the net present value of the project if it is all equity financed? Should Carolyn take on the project under this financing scenario? Explain why.

Part B

Suppose now that Carolyn adopts her CFO’s plan to finance the project with $800M in debt. Calculate the NPV of the project using the APV method. Should Carolyn take on the project? Explain why.

Part C

Calculate the NPV of the project using the WACC method, assuming that CFO’s plan to finance with debt is adopted.

Part D

Calculate the NPV of the project using the FTE method, assuming that the CFO’s plan to finance with debt is adopted.

Carolyn Nesbitt, the CEO of Macrocorp, is considering a project to expand the existing business into a new product line that involves considerable up-front investments in new equipment as well as an initial investment in net operating working capital. Her executives’ cash flow projections are fairly aggressive with $500 M in sales at the end of the first year increasing by 5% annually for the next five years. Cost of goods sold is expected to be $250M in the first year, increasing by 6% annually for the next five years. The initial equipment costs $1,500M and its salvage value in five years is $750 M. Annual depreciation is calculated using the straight-line method (e.g. an equal amount each year based on the salvage value in five years). The initial investment in net operating working capital is $300M, which Carolyn thinks she can redeploy elsewhere in the firm after five years. After five years, it is expected that the technology will be obsolete. Carolyn expects to pay taxes at a corporate rate of 25%.

Carolyn is considering whether to take on the project, as well as how to finance it. Her chief financial officer is proposing to borrow $800 M to finance the equipment and investment in net operating working capital. If the firm borrows to finance the project, its leverage ratio (defined as the ratio of total debt to total assets) would be approximately 53%. The current cost of debt for a five-year bond with principal repayment in five years is 6%.

Were the firm to finance the project entirely with equity, the expected return to its investors would be 7.5%.

Part A

What is the net present value of the project if it is all equity financed? Should Carolyn take on the project under this financing scenario? Explain why.

Part B

Suppose now that Carolyn adopts her CFO’s plan to finance the project with $800M in debt. Calculate the NPV of the project using the APV method. Should Carolyn take on the project? Explain why.

Part C

Calculate the NPV of the project using the WACC method, assuming that CFO’s plan to finance with debt is adopted.

Part D

Calculate the NPV of the project using the FTE method, assuming that the CFO’s plan to finance with debt is adopted.

The CEO of an organization read a research article describing the importance of generational influence on work motivation. He is now interested in determining if the distribution of Baby Boomer, Generation X, and Millennial employees is the same across engineering and management positions in his company. Staff in the HR department gather records and provide him with the following information:

• Provide the appropriate null and alternative hypotheses.
• Determine which type of analysis would be appropriate to answer this research question. Be specific. Please support your answer using course materials.
• Identify the variables included in this study. Label variables as dependent and independent, if applicable.
• What are the levels of measurement for each variable?
• What are the degrees of freedom associated with the test statistic?

Q3. Explain the benefits and disadvantages of resistance to change that Rose as a CEO may encounter as he launches his new organizational change management. (25 marks) answer in words

MARKS AND SPENCER

Stuart Rose, the CEO of Marks & Spencer, started with emphasising the critical need for change – by emphasising that the current state was untenable. Rose noted that inventory was not being managed effectively, decision making was being delegated without accountability or senior management sign-off, and customers were being attracted to newer, dynamic competitors. Change was imperative.

Rose started the change process with a core team of trusted people he had worked with – and he knew their strengths. Rose brought with him the Executive Director of IT, Supply Chain, and Property, and the Executive Director of Marketing and Store Design. With this core team, Rose was “able to hit the ground running.” Rose described the period prior to his leadership unflatteringly as the “consultant years, which were awash in numbers and surveys and complexity.” Rose reviewed the current use of consultants, and eliminated all but 10 of the consultants’ 31 existing “strategic projects.” For Rose, the change was simple: “improve the product, improve the stores, and improve the service.” Rose provided a simple, accessible and operational guiding vision.

In addition, he reinforced the communication of the message symbolically to reinforce the point, and focus energy around the core direction. Rose drove the change down into the “DNA” of the organisation not only by putting everyone through training on the basics, but sat in on operational day to day meetings to the “level of micromanagement” to focus the conversation in detail on the key points. Incentive structures were realigned to reward service performance instead of seniority, redefining the career progression path. The entire 56,000 strong workforce was put through motivational training sessions focused around teamwork and customer service.

Rose encountered an environment where “people within Marks & Spencer were already lobbying for different plans, different strategies.” However, because “the Christmas season is the key to the entire retail year and how industry analysts gauge a company’s health”. There were clear timelines to achieve results. There was no time to try one direction and perhaps change to a different course if that didn’t work. Rose committed to the direction he had selected, and “there was no Plan B.” That is, Rose committed to letting go of alternative ideas and the status quo, and committed the organisation to the new path.

The CEO of Healthy AreUs Hospital believes that employees are not performing to their best ability. Other hospitals are considered a great place to work, and employees are happy there and are very productive. He has heard the term “high performance organization” and wants Healthy AreUS to become one. Activity: Research information on high performance organizations and provide five methods that could be used to improve productivity at Healthy AreUs.

1. Pick an industry where there is a dominant firm. Assume that you are the CEO of that firm. What specific measures would you take to deter entry, if any?

2. Still assume that you are the CEO of the firm and an entry has been made. How would you respond? Would you do anything specifically to cause the firm to exit, if any?

3. Suppose that you are an entrepreneur. Pick a specific industry (in which there is a dominant firm that is profitable) into which you would like to enter. What entry-barriers do you see? What post-entry response do you anticipate, if you nevertheless decide to enter the industry?

4. Suppose that you are a manager of a firm in a specific industry. Would there anything that government can do through regulations that might reduce competition and enhance your profit? How would you go about obtaining such regulations? (Ignore for the moment the question of the desirability of the act of rent-seeking.)

The corporate CEO of "Life is Fun and Love is Strange Inc." claimed that the average sales of "Fun Life" are less than "Strange Love". In order to test the hypothesis, she asked you to conduct 2 tests. a) test the claim that the variances of the 2 stores are equal. Use a 5% significance level. b) based on your answer, use the appropriate test for the claim that the average sales of "Strange Love" are greater than "Fun Life". Use a 5% significance level for the test.