Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $27.3 million in perpetuity. The current required return on the firm’s equity is 13 percent and the firm distributes all of its earnings as dividends at the end of each year. The company has 2.04 million shares of common stock outstanding and is subject to a corporate tax rate of 22 percent. The firm is planning a recapitalization under which it will issue $37.1 million of perpetual 6.2 percent debt and use the proceeds to buy back shares.

a-1. Calculate the value of the company before the recapitalization plan is announced. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)

a-2. What is the price per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b-1. Use the APV method to calculate the company value after the recapitalization plan is announced. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)

b-2. What is the price per share after the recapitalization is announced? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

c-1. How many shares will be repurchased? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)

c-2. What is the price per share after the recapitalization and repurchase? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

d. Use the flow to equity method to calculate the value of the company’s equity after the recapitalization. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)

Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $31.7 million in perpetuity. The current required return on the firm’s equity is 12 percent and the firm distributes all of its earnings as dividends at the end of each year. The company has 2.26 million shares of common stock outstanding and is subject to a corporate tax rate of 23 percent. The firm is planning a recapitalization under which it will issue $40.4 million of perpetual 6.3 percent debt and use the proceeds to buy back shares.

In 2008, one of the largest financial crises since the stock market crash -- along with resulting failures of several large banks -- was met with a massive intervention in the financial markets by the Federal Reserve and the federal government. The problem was associated with a financial "innovation" in which large numbers of mortgages were “bundled” into a security and sold in the financial markets to banks, investors, foreigners, and investment banks. The problem of excessive risk and moral hazard by home buyers was said to be solved because each of these “securities” represented large numbers of mortgages so that the default on a few of them would have little effect on the underlying value of the “security.”

How could such a system lead to a problem of moral hazard on the part of lenders? What would be a constructive way to solve this challenge?

1. A farmer pays $0.20 for seed that he uses to grow wheat which he sells to the miller for $0.40; the miller makes wheat flour and sells it to the baker for $0.60. The baker makes bread and sells it to the grocery store for $0.80 and the store sells it to the consumer for $1.00. The total contribution to the Gross Domestic Product (GDP) from all these transactions is

   	A.	$3.00
   	B.	$2.00
   	C.	$1.00
   	D.	$0.20 2-    There has been some concern in the United States that people are NOT saving enough. This is a concern because A. decreases in saving lead to increases in innovation. B. decreases in saving lead to decreases in investment. C. decreases in saving lead to decreases in labor productivity. D. decreases in saving lead to increases in consumption in the futur

In the movie The Lorax 2012, How did profit maximization play a role in the destruction of the trees? Describe at least two examples of innovation in that we see in the movie. Explain the role of advertising in the movie. How did advertising impact market outcomes? Describe at least two examples of a moral hazard that we see in the movie. What role does a moral hazard play in economics? Would you anticipate that price elasticity for demand for O'Hare Air is elastic, inelastic or unitary elastic and why? Describe at least two ways the government could have or should have intervened in the economy to change the market outcomes of having not trees and dirty air. Why didn’t the government intervene in the market to “fix” these issues?

First, watch Igniting Creativity to Transform Corporate Culture. This TED Talk by Catherine Courage examines how creativity needs to be infused into the organizational culture to foster innovation and to challenge the status quo. Next, watch this Zappos Company Culture video. As you watch the videos, think about the various elements of effective organizational structure. In your initial post, answer the following questions:

Do you think the unique culture of Zappos will help or hurt the company in the long run? Explain and provide specific examples, where applicable.

Do you think more companies in the future will follow this model? Why or why not?

In your opinion, what company today could benefit from this unique strategy? Explain your rationale.