Robertson Real Estate Recapitalization

Founded 25 years ago by CEO Steve Robertson, Robertson Real Estate (RRE) purchases commercial real estate (land and buildings), rents both to tenants. The company has shown consistent annual profits over the past 18 years, and shareholders have been pleased with the company's management. Before he started RRE, Steve was also the founder and CEO of a now bankrupt Ostrich farm. This previous bankruptcy has made him extremely reluctant to undertake any type of debt financing, and he has financed the real estate company 100% with equity. Robertson Real Estate stock currently trades at $37.80 per share and has 8 million shares of common stock outstanding.

The company has been reviewing an opportunity to purchase a large segment of land in the southeastern United States for $85 million and plans to lease this property to one or more farming operations. The land purchase is expected to increase RRE's annual pretax earnings by $14.125 million in perpetuity. Raylynne Givins, the company's new CFO, determined the company's current cost of capital is 10.2%. She feels the company would be more valuable if it added some debt to its capital structure, so she is evaluating whether the company should issue debt to fully finance the project.

Based on conversations with several investment banks, Raylynne believes RRE can issue bonds at par value with a 6% coupon rate. Her analysis suggests a capital structure using 70% equity / 30% debt would be optimal. If the company's debt structure exceeds 30%, RRE's bond rating would be lower and require a significantly higher coupon due to the increased exposure to financial distress and the associated higher financing costs. RRE has a combined state and federal corporate tax rate of 23%.

Questions:

1. If RRE seeks to maximize total market value, should the company issue debt or equity to finance the land purchase? Explain.
2. Suppose RRE decides to issue equity to finance the purchase.
   1. What is the net present value (NPV) of the project?
   2. Construct RRE's market value balance sheet after it announces the firm will finance the purchase using equity.
      1. What would be the new price per share of the firm's stock?
      2. How many shares will RRE need to issue to finance the purchase?
   3. Construct RRE's market value balance sheet after the equity issue but before the purchase has been made.
      1. How many shares of common stock does RRE have outstanding?
      2. What is the price per share of the firm's stock?
3. Suppose RRE decides to issue debt to finance the purchase.
   1. What will be the market value of RRE if the purchase if financed with debt?
   2. Construct RRE'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?
4. Which method of financing maximizes the per-share stock price of RRE's equity?

3. Your company is contemplating on investing in a manufacturing facility in China. You are charged with doing the financial analysis for this project. You expect the cash flows (in Chinese RMB) for this project to last indefinitely. You estimated the following cash flows for 2018-2023 and that the cash flows will grow at a constant rate starting 2024.

Year FCF Other Data
2018 -50,000,000 RMB Growth rate of RMB FCF starting 2024 = 2%

2019 6,000,000 RMB Cost of Capital for similar U.S. Projects (WACC) = 12%

2020 7,000,000 RMB Inflation in the U.S. = 1%

2021 8,000,000 RMB Inflation in Chine 5%

2022 9,000,000 RMB Spot rate = 6.5 RMB/USD

2023 . 10,000,0000 RMB

a) What is the appropriate discount rate you should use to discount the RMB cash flows?

b) What is the RMB NPV and IRR for this project? (If Excel is used, please cut and paste it here, showing all the cash flows and answers to this question.)

c) What is the USD NPV for this project? (Please show your calculation converting RMB NPV to USD NPV.)

d) What are the i) RMB cost of capital, and ii) RMB NPV if inflation in China rises to 7% and the U.S. inflation rises to 2%?

Discuss ethics and trust as critical aspects for sustainable business and suggest how you would instill these if you were a CEO of an international company

A company wants to evaluate its main strategy which is cost-leadership. The CEO needs 4 criteria for evaluation purposes. What are the 4 criteria required to make sure it is the best strategy for the company and it has no flaw?   

3. We have seen several incidents of extreme violence toward former work colleagues or classmates recently. Choose one example where someone went to a former workplace or school and either injured or killed a number of former colleagues.

Describe what happened and what reasons are thought to have caused the violent behavior. Did organizational justice / injustice play a role in the tragedy? If so, how and what type of injustice was the key contributor?

A company with fixed manufacturing costs of $500,000 produces 100,000 units in 2020 and 125,000 units in 2021. The company sells 90,000 units each in both years. Other costs and selling price are unchanged for 2020 and 2021. Assume that there was no beginning inventory in 2020. Which of the following is true? Variable costing income will be greater in 2020 than in 2021. The dollar amount of ending inventory will be greater in 2020 than in 2021. Variable costing income will be the same in 2021 and 2020.

You are the founder of a start-up.  You incorporated a C corporation and currently own 1,000,000 shares as the founder. You raised $500,000 from friends and family using a convertible note, which will convert into equity if and when there is a “valuation event”, that is if and when your start-up manages to attract funds from a venture capital fund (at which point a valuation will be assigned to the company). The note provides that when the principal of the note ($500,000) converts into equity, the conversion will be done on the basis of a company valuation that may not exceed a total of $5 million (this is a “valuation cap” clause, meaning, friends and family get shares on the basis of the same valuation as the fund unless it is in excess of $5 million, in which case friends and family get shares on the basis of a $5 million valuation).

Your start-up is doing well. You are finally generating revenue and pitching to potential investors, including a VC fund “VC”. At this point you need VC to invest $10 million in your company in order to grow – if you secure this investment, you do not expect the company to produce any earnings for five years (though the company generates revenue, it still has negative earnings), but at the end of year 5 you anticipate to turn profitable and generate net income of about $16 million. VC knows that a firm comparable to yours with current earnings of $10 million was just sold for $100 million.

1. VC is concerned that you may need more than $10 million to get to the result where the company is generating net income of $16 million at the end of year 5. They introduce language in the investment agreement to be protected against any potential dilution of their interest in the event of subsequent funding rounds. If another funding round is needed at the end of year 3, in the amount of $12 million, what ownership percentage would the new investor insist upon if they wanted to get a 20% annual rate of return on their investment? How many new shares would need to be issued to this new investor? How many additional new shares would need to be issued to VC (to protect VC against dilution)? [hint: you need to first figure out total shares outstanding -- assume the dilution is shared with friends and family, meaning they just keep the shares they had]

2. Assuming that such additional funding round is indeed needed – what would happen to your ownership percentage, as the founder? How would this impact how much money you would make if the company were to eventually be sold for $200 million at the end of year 5?

Current practice requires that the assets acquired in a business combination be measured at fair value as defined by SFAS No. 157 (see FASB ASC 820-10).

Side 1: Argue that the acquiring company should measure the acquired company's plant assets that it plans to use in int operations in accordance with the requirements of SFAS No. 141 before its revisions.

Side 2: Argue that the acquiring company should measure the acquired company's plant assets that it plans to use in its operations in accordance with the SFAS No. 141 revision. Choose one side and present an argument.

MBA - Managerial Economics

Discuss briefly the supply schedule and the various factors affecting the supply in the market.

Thanks

On January 1st 2020 The Deloit and Acme Companies had the following balance sheets:

On January 2nd Deloit acquired of 90% the outstanding stock of Acme Company for 500,000 shares of common stock. On January 2nd Deloit stock was selling for $2 per share.

On January 1st the fair market value of Acme's land was $125,000; the fair market value of their inventory was $130,000; the fair market value of the equipment was $30,000; other assets and liabilities had a fair market value equal to book value.

A) Make the journal entry Deloit makes when it acquires the Acme stock

B) Make the journal entry Acme makes when its stock is acquired by Deloit

C) Prepare a consolidated balance sheet on Jan 2nd

D) Make the necessary worksheet entries needed to prepare the consolidated balance sheet