CORPORATE FINANCE: USE THE INFORMATION PROVIDED IN CASE STUDY PART ONE TO ANSWER THE QUESTIONS IN CASE STUDY PART TWO Case Study-Part One
A. From the company you selected, provide the following core business information and characteristics:
1. The company name and ticker symbol. Duke Energy Corporation (DUK)
2. Provide a brief description of this company and the type of product and/or services it provides. If it is a diversify entity, please provide a general description of its operations. Duke is the largest electric power company in the US, serving Americans since 1904
3. Identify the core business of the company. Duke core business is to drive its value going forward
4. Identify the management structure of the company. This can be done by simply pasting the corporate structure flowchart. The flowcharts are located on the next pages
5. Identify the market in which this company is publicly traded. NASDAQ
6. Identify the country in which this company operates (if it is a Multinational Corporation just say Multinational Corporation). Duke Energy Corporation only operates in the United States
7. Identify the major business and financial risk the company faces along with any major competitors if any.
8. Identify any regulatory or legal institutions that this company is subject to.
(a) Code of Business Ethics (b) Principles of Corporate Governance (c) Board of Directors (d) Stock Ownership Guidelines Policy (e) Security Trading Policy (f) Regulation FD Policy (g) Related Person Transaction Policy (h) Political Participation (i) Political Expenditures Policy (j) Principles for Health Care Reform (k) Board Committee Charters
B. From the company you selected, present the following financial information for year-end 2017:
1. What is company’s total market capitalization? $53.27 Billions
2. What is the company’s book value amount? $59.63 (As of December 2017)
3. What is the company’s total amount of outstanding liabilities? $96,175,000
4. What is the company’s total amount of assets outstanding? $137,914,000
5. What is the total amount of long-term debt outstanding? $49,035,000
6. What is the total amount of common equity outstanding? ($67,000)
7. What was the company’s total year-end resulting net income? $3,059,000
8. What is the effective year-end taxes paid by this company? $1,196,000
9. What was the company’s total year-end amount of reported earnings? If it is the same as total net income, the just state total net income. $3,059,000
10. What was the total year-end amount of dividends declared by this company? A cash dividend payment of $0.89 per share was scheduled to be paid on December 18, 2017. This represents an 4.09% increase over prior dividend payment.
11. What was the year-end dividend retention policy by this company? At the current stock price of $91.09, the dividend yield is 3.91%
12. What was total year-end amount of dividends paid, if any, by this company? $0.890
13. Identify the total year-end amount of shares outstanding. DUK's current earnings per share, an indicator of a company's profitability, is $3.37. Investment Research reports DUK's forecasted earnings growth in 2017 as -2.03%, compared to an industry average of 4.4%.
C. From the company you selected, present the following financial and valuation metrics for year-end 2016:
1. What was the current market stock price for this company? You could also use the 2016-year end average price or the year-end closing price. If you do so, please state what market stock price you are using. payment. At the current stock price of $86.12, the dividend yield is 4.13%.
2. What is the company’s year-end earnings per share (EPS)? 4.36
3. What is the company’s year-end dividends per share (DPS)? $3.03
4. What was the company’s year-end book value per share (BVPS)? 56.63
5. What is the company’s current dividend yield? You could also use the 2016-year end average dividend yield. If you do so, please state?
6. What is the company’s beta coefficient? 0.16
7. What is the company’s earnings price multiples (P/E)? 17.64
8. What is the company’s market to book ratio (M/B)?
Case Study-Part Two
A. Using the information from Case Study Part one, answer the following questions using Ratio Analysis:
1. State your company’s Total Assets (TA) Turnover Ratio:
a) Is your company managing its assets efficiently? What would you recommend your company to do to improve its asset management?
2. State your company’s debt ratio and Times-Interest-Earned (TIE) Ratio:
a) Is your company managing its debt issuances efficiently? What would you recommend your company to do to improve its asset and debt management?
3. State your company’s Return on Total Assets (ROA)?
a) Is your company having enough ability to turn its assets into net-income?
4. What is your company’s ROE?
B. Using the information from Case Study Part one, answer the following questions using market value analysis:
1. Using yahoo finance, answer the following:
a) What is the expected price earnings ratio (expected P/E).
b) How does the current ratio (P/E) indicate compared to the expected P/E ratio?
c) Is it undervalue based on expected P/E ratio? Please explain.
2. Using the ROE in the section A, answer the following:
a) Assuming an investment of 20 years, what is the present value of this stock?
b) Is the present value higher or lower than the current stock price?
c) Would you consider this stock be undervalue or overvalued? Please explain.
3. Answer the following:
a) What would be the company’s current indicated dividend?
b) What is the company’s expected Dividend?
c) What would be the company’s expected dividend yield, using the current price and expected dividend?
d) What is the Company’s expected growth rate in earnings?
e) What is the company’s expected growth in dividends?
f) What is the company’s dividend payout and/or earnings retention rate?
g) Is this dividend policy sustainable?
4. Using a Discounted Cash Flow (DCF) analysis with the information in part B, section 4, answer the following:
a) What is the DCF expected ROE?
b) Is the expected ROE higher or lower than the realized ROE in part A?
c) What can you conclude about the difference between the expected ROE and the realized ROE in part A?
5. Assuming a 5% historical risk-free rate of return, and a 10% market return, answering the following?
a) What is the market expected risk premium?
b) Using Capital Asset Pricing Model (CAPM), what is the expect company’s risk premium?
c) How this expected return compares to the other ROE’s?
c. Using the information from Section A and B, what is your final evaluation and recommendation regarding your company’s stock?
In: Finance
Your company gives everyone who applies to your company a proficiency test. Your boss likes to hire people who fall in the "average" range. They feel that people who score exceptionally high on the test are more likely to leave for a better job, and people who score very low are not productive enough. The average score on the proficiency test is 750 with a variance of 400. Your boss tell you to exclude the top 14% and the bottom 27%of applicants. What range of scores would get an interview?
What is the larger Z? What is the smaller Z? What is μ? What is σ ? What is the larger X? What is the small X? What is your conclusion?
In: Statistics and Probability
Milden Company is a merchandiser that plans to sell 37,000 units during the next quarter at a selling price of $55 per unit. The company also gathered the following cost estimates for the next quarter:
| Cost | Cost Formula | ||
| Cost of good sold | $27 per unit sold | ||
| Advertising expense | $184,000 per quarter | ||
| Sales commissions | 5% of sales | ||
| Shipping expense | $24,000 per quarter + $5.00 per unit sold | ||
| Administrative salaries | $94,000 per quarter | ||
| Insurance expense | $10,400 per quarter | ||
| Depreciation expense | $64,000 per quarter | ||
Required:
1. Prepare a contribution format income statement for the next quarter.
2. Prepare a traditional format income statement for the next quarter.
In: Accounting
The following information applies to questions 7 – 9:
A truck that cost $18,000 and on which $16,000 of accumulated depreciation has been recorded was sold on January 1, the first day of the year.
7. Assume the truck was sold for $2,500 cash. The entry to record the sale would include:
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a. a credit to the Accumulated Depreciation account for $16,000 |
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b. a debit to Gain on Disposal of $500 |
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c. a credit to the Truck account for $18,000 |
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d. a credit to Cash for $2,500 |
8. Assume the truck was sold for $1,500 cash. The entry to record the sale would include:
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a. a debit to the Accumulated Depreciation account for $2,000 |
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b. a credit to Cash for $1,500 |
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c. a debit to Loss on Disposal of $500 |
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d. a debit to the Truck account for $18,000 |
9. Assume the truck was traded for new equipment valued at $10,000 and that a $2,200 trade-in allowance was given for the old truck. The entry to record the exchange would include:
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a. a credit to the Truck account for $2,200 |
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b. a credit to the Equipment account for $10,000 |
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c. a debit to Loss on Disposal for $200 |
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d. a credit to Cash for $7,800 |
12. Jones Co. borrows $30,000 from the bank at 9% interest on August 31. Jones' journal entry to record accrued interest on the note on September 30 would include (use a 365-day year):
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a. a debit to Interest Expense for $221.92 |
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b. a credit to Interest Revenue for $225.00 |
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c. a debit to interest Receivable for $225.00 |
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d. a debit to Interest Payable for $221.92 |
In: Accounting
Suppose a simple monopoly faces the following demand curve for its product: P = 100 - Q. Suppose the monopolist faces total costs given by: TC = 20Q.
a. Draw the demand curve, the marginal revenue curve, and the marginal cost curve. Make sure to label all axes and intercepts.
b. What are the values for the simple monopoly profit-maximizing price and quantity? Label these on the graph.
c. Consider the consumers' surplus that is associated with the monopolist’s optimal price/quantity combination. Label this consumers' surplus on your graph and calculate its value.
d. Suppose the mayor proposes an executive order to regulate the simple monopoly so that it becomes allocatively efficient. How much would be traded under the proposed regulation? What would consumers' surplus be both graphically and numerically under the proposed regulation?
e. Is the simple monopolist’s original unregulated optimal output level allocatively efficient? f. If not, please show graphically and compute numerically a value that reflects the dollar loss to society of the inefficiency under the original unregulated simple monopoly solution.
g. Suppose the government is corrupt and the monopolist realizes he can bribe the mayor to stop him from proposing the regulation. Using all the information given above, what is the maximum amount that the monopolist would offer the mayor to "kill" the regulation idea?
In: Economics
Hawk Homes, Inc., makes one type of birdhouse that it sells for
$29.80 each. Its variable cost is $14.30 per house, and its fixed
costs total $13,376.50 per year. Hawk currently has the capacity to
produce up to 2,900 birdhouses per year, so its relevant range is 0
to 2,900 houses.
Required:
1. Prepare a contribution margin income statement for Hawk
assuming it sells 1,180 birdhouses this year. (Enter your
answers rounded to 2 decimal places.)
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2. Without any calculations, determine Hawk’s total contribution margin if the company breaks even. (Enter your answers rounded to 2 decimal places.)
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3. Calculate Hawk’s contribution margin per unit and its contribution margin ratio. (Round your answers to 2 decimal places. (i.e. .1234 should be entered as 12.34%.))
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4. Calculate Hawk’s break-even point in number of units and in sales revenue. (Round your "Sales Revenue" answer to 2 decimal places and "Unit" answer to the nearest whole number.)
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5. Suppose Hawk wants to earn $29,000 this year. Determine how many birdhouses it must sell to generate this amount of profit. (Round up to the next whole number.)
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In: Accounting
Via Gelato is a popular neighborhood gelato shop. The company has provided the following data concerning its operations: Fixed Element per Month Variable Element per Liter Actual Total for June Revenue $ 16.00 $ 90,540 Raw materials $ 5.05 $ 31,630 Wages $ 6,000 $ 1.80 $ 16,900 Utilities $ 2,030 $ 0.60 $ 6,000 Rent $ 3,000 $ 3,000 Insurance $ 1,750 $ 1,750 Miscellaneous $ 690 $ 0.75 $ 5,200 While gelato is sold by the cone or cup, the shop measures its activity in terms of the total number of liters of gelato sold. For example, wages should be $6,000 plus $1.80 per liter of gelato sold and the actual wages for June were $16,900. Via Gelato expected to sell 6,000 liters in June, but actually sold 6,200 liters. Required: 1. What is the amount of revenue that would be included in the flexible budget for Via Gelato in June? 2. What is the total amount of fixed expense per month in Via Gelato's flexible budget? 3. What is the variable expense per liter in Via Gelato's flexible budget for all expense lines combined? What is the total variable expense for the month in Via Gelato's flexible budget? 4. What is the Net Operating Income in Via Gelato's flexible budget? 5. What is the Via Gelato's actual Net Operating Income for the month? 6. Using your answers from steps 4 and 5, what is the overall revenue and spending variance (the revenue and spending variance for the Net Income column) for Via Gelato in June? (Input all amounts as positive values. Indicate the effect of the variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)
In: Accounting
1. A potential investor in your airline wants to know how his investment would compare with the share market as a whole. To do this, what ratio would he use? a) Dividend cover b) Dividend per share on historical basis c) Price earnings ratio d) Asset test e) None of the above
2.Return on equity should be above whic of these? a) Variable mortgage rates b) Fixed Mortgage rates c) Bank interest on long term deposits d) Bank interest on short term deposits e) None of the above
3.What is operating revenue in terms of aviation business? a) All except interline sales b) Revenue from frequent flyer sales c) Sub-leasing terminal space d) Interline sales e) Duty free sales f) All of the above g) Revenue from passenger services
4.In financial terms a Discounted cash flow valuation is mainly concerned with: a) Both selling cheaply and capital budgeting b) Capital budgeting c) Revenue from fare discounting d) Selling cheaply
5.Shares in a company entitle the owners of the shares to a proportional share of the profits, which is paid as a dividend. The level of the dividend is determined by the directors, who may elect to pay some or all of the profits. In general, what should they pay as dividends? a) They should defer dividends until realising two consecutive profit announcements b) The percentage depends on the number of directors c) At least some of the profits- but they can retain profits against future risk d) All of the profits. Thats what shareholders demand e) None of the profits. They are perfectly entitled to retain all profits for the future
In: Accounting
On an examination in Biochemistry 12 students in one class had a mean grade of 78 with a standard deviation of 6, while 15 students in another class had a mean grade of 74 with a standard deviation of 8. Using a significance level of 0.05, determine whether the first group is superior to the second group.
In: Statistics and Probability
The
Situation:
In the summer of 2015, Photonics, a leader in the production of biometric sensors, started to experience a decline in sales growth for one of their most popular products, OxyAlert. OxyAlert was launched in 2011 and quickly became the industry standard in analyzing the oxygen levels of surgically repaired tissue after emergency care procedures. In the first year of sales this product captured 25% of the market in post operation biometric devices. By the second year it had rapidly overtaken the industry leader with a 55% share of the market. The success of this product was primarily due to innovative features that were not found on any other product. Features such as wireless disposable sensor probes and advance analytic software allowed doctors to shorten the recovery time of their patients in ICU units, which decreased per patient ICU expense by 10%. Based on these innovative features Photonics was able to charge a premium for this product and establish themselves as one of the most profitable companies in the industry.
Several competitors have now closed the gap in product design and functionality. In the fall of 2014, SeaBridge, one of Photonics biggest rivals, launched the product TotalDiagnostic. This product contains similar disposable sensory technology as OxyAlert, however, it allows doctors to analyze a broader range of a patient’s biometrics. While this product was priced around 10% higher than OxyAlert, doctors had the added advantage of not only maintaining the same recovery rates but also decrease the rate of post surgical infection by 15%. By February of 2015, TotalDiagnostic had captured 30% of the market.
Photonics response was swift. They immediately reduced the price of OxyAlert by 20% in order to regain market share. From March through May, sales of OxyAlertrebounded. While profit margins of the company did take a hit, it appeared that the price reduction stabilized the company’s market share. Unfortunately, recent sales reports from June show that pre-orders for OxyAlert are significantly down. As the CFO of Photonics you are worried that OxyAlert has become an obsolete product and further price reduction will have very little impact on sales growth.
Background and History:
Photonics was founded in 2008 by Rachel Walker, a professor of Bioengineering. From 2001 through 2006, Dr. Walker authored several papers on photonic measuring systems and it’s applications in biometrics. By 2007 she developed a prototype sensor that that was extremely non-invasive to the patient. She realized that this type of sensor combined with advanced computer algorithms could quickly analyze oxygen levels in surgically repaired tissues giving doctors “real time” information on the likelihood that a patient’s body would accept or reject the repaired tissue.
Dr. Walker believed that she had an important technology that could be highly profitable if she could find a way to commercialize it. Given the uniqueness of this technology she was able to obtain a patent in 2008. She felt fairly confident that her technology would be a major improvement in post-surgical care. However, several obstacles existed. The cost to turn this technology into a commercialized product was fairly substantial. However, more importantly, this was a highly disrupted technology that would require hospitals to change ICU and post operation processes. She wasn’t even sure if hospitals had a desire to change their current practices.
After interviewing several prominent hospital administrators, she concluded that that demand would be high if she could find a way to mass-produce her prototype at a cost that was on par with biometric sensors currently being sold to hospitals and other surgical centers. After several investor presentations, she was able to attract significant funding from a venture capital firm that specialized in funding small biomedical start-ups. With a $15 million dollar investment, Photonics was able to launch its first product, The BMD 1000, in January 2010.
In the first three months of 2010, sales of the BMD 1000 were tepid at best. While the product design was innovative, it did not integrate well with the current technology employed by most hospitals. Based on the criticisms of this product, Dr. Walker and her engineering team went back to the drawing board. The redesigned product was named OxyAlert and was introduced to the industry with much fanfare in January of 2011. By July of 2011, Photonics had secured orders with several large health care facilities on the East Coast. One year later, OxyAlert become the standard in the biometrics device industry.
Solutions
All along, you and Dr. Walker have known that five years was the typical product life cycle in this industry. Fortunately, you employ some of the brightest engineers in the field who have been developing three new interesting products that could restore your company’s sales growth. The first product is an improved version of OxyAlert, codenamed “OxyAlertII”. The second product is completely new to the industry and will allow doctors in emergency rooms to diagnose pre-existing conditions of incapacitated patients through breathalyzer tests. This product is codenamed “AutoAnalytics”. The third product is a complimentary product to OxyAlert that will enhance OxyAlert’s diagnostic capabilities. This product is codenamed “Diagnostic Solutions”.
The following are brief descriptions of each product’s financial costs and revenue projections:
OxyAlertII
Your marketing department believes that this product will not completely replace OxyAlert, as there will still be some companies who will want the older and cheaper version. However, they do believe that there will be significant cannibalization of your old product. By introducing this new product, sales of OxyAlert is forecasted to steadily decrease by 20% each year over the next 5 years. First year sales of OxyAlertII are projected to be $15 million with a 10% increase in revenue each year over the next 5 years. In the prior two years your company has spent $1 million on the development of this project. To finish the development of OxyAlertII and create the manufacturing infrastructure to produce it, your engineers estimate that they will need another $20 million in equipment purchases. This equipment has a 5-year life. The manufacturing process for this product will be fairly automated. As a result, cost of goods sold will be only 45% of revenue, much lower than current company averages. Incremental SG&A will be 15% of revenue. Working capital requirements will be 8% of revenue. In order to successfully launch this product, your marketing department is requesting a one-time advertising budget of $2.5 million, which will be spent in the first year of sales.
“AutoAnalytics”
This product is neither a complimentary product nor a replacement product for OxyAlert. The launch of this product is intended to create a new product line by extending Photonics core competencies into the emergency response market. Prior years’ development cost for this product has totaled $1.5 million dollars. Your engineering team estimates that it will cost $10 million dollars in new equipment purchases to manufacture this product. The economic life of this equipment is also 5 years. Your marketing department forecasts first year revenue at $9.5 million with initial one time marketing expense of $1.25 million. Based on projected demand, revenue is expected to increase by 7% year over year for the next 5 years. Because of the lack of experience in manufacturing this type of product, your operations management team expects that costs of goods sold will be somewhat high at 55% of revenue. Incremental SG&A will be 13% of revenue with an additional working capital requirement of 10% of revenue.
“DiagnosticSolutions”
DiagnosticSolutions is a series of networked probes that will allow customers to use OxyAlert in more efficient ways. Marketing believes that this complimentary product will actually help the sales of OxyAlert and prevent the full adoption of your competitor’s product, TotalDiagnostic, in the marketplace. Market share for OxyAlert is projected to slightly increase by 1.5 percent over the next 5 years. Your finance team believes that this will provide an additional $50,000 of cash flow per year in this five-year time period. While this product will help the sales of OxyAlert, it will be sold separately. Revenue projections for DiagnosticSolutions will be $4 million in the first year of sales. Since this is already a fairly saturated market, the sales of DiagnosticSolutions are projected to increase by only 2% per year over the next five years. As this is a complimentary product, the development cost is nominal. You will, however, need to expand your assembly line with more specialized equipment. This will require an additional $6 million of capital. Since this equipment is custom made it tends to have a longer life than the equipment used for the other products under consideration. Typically the economic useful life of this equipment is 7 years. Your incremental cost of goods sold and SG&A expense will be in line with current company margins of 50% and 10% respectively. Projected working capital is 12% of revenue. Given that this is a complimentary product, you will not incur any additional one time marketing expenses for launching this product.
Decisions
As the year progresses, investors and creditors are getting nervous that your company cannot maintain its leadership position within the industry. They still believe in your management team and your company’s ability to produce innovative products. As a result you have the ability to access up to $30 million dollars from your financiers. Your creditors are willing to loan you money at a 6% interest rate, while your investors expect a return of 12% on their equity. Based on the required returns on equity and debt, the company’s weighted average cost of capital is 9.45%. On all projects, assume a 30% tax rate on income. With good financial backing you have some important decisions to make in regards to these product launches. Again, your assignment is to make a recommendation on what new products to launch and provide an analysis on each product’s projected cash flow over a 5-year period. In order to support your recommendation, you will need to integrate the principles of capital budgeting decision-making in your analysis.
In: Finance