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Homework answers / question archive / Suppose you are an adventurous entrepreneur who would like to start up your own business or organization

Suppose you are an adventurous entrepreneur who would like to start up your own business or organization

Finance

Suppose you are an adventurous entrepreneur who would like to start up your own business or organization. I want you to start brainstorming your idea for that business or organization. Not only am I interested in knowing about your product or service but tell me how it will be produced. Where will you get the inputs to production, the resources? Who are you making it for or providing it to? What kind of market structure will you be part of (perfect competition, monopoly, oligopoly or monopolistic competition?) Answer the following questions to get your business started. Remember it can be a service as well as a good. When writing up your answers, please use complete sentences and proper punctuation. Also keep your answers separated according to numbered questions below. This makes it easier for me to read - and that makes me happy. You can either type it up in a word document or put it together in a powerpoint presentation if you know how to do that. 1. What type of goods/service do you want to sell or provide? What is your objective in providing this good or service? Why do people need this? Or want this? Create a very clear idea of what your product is. Describe it in detail. Give it a name. Create a name, slogan, and logo (it can be a stock photo) for your business. 2. How does your business answer each of the 3 Basic Economic Questions of what to produce, how to produce, and for whom to produce? This can be the story of how your business got started. You can use real data or do some general research on the production process or best practices - be sure to cite your sources. You can also cite trends in the news or even just trends that you notice - these things will contribute to the demand for your good or service. 3. What are your factors of production? What land, labor, and capital do you need/will you use in your business? What kinds of skills will your workers need? What machines and buildings will you need? Do you need special land or property? Will it need to have any specific resources? Feel free to include pictures. 4. Describe the Market Structure you face - are you a perfectly competitive firm, a monopoly, a monopolistically competitive firm or an oligopoly? I want you to identify which market structure your firm falls into. You will want to make sure you know the differences between the different market structures. Look to your book, lecture and slides for resources. You will address this question by answering the following questions: a. Do you have competition? Who or what is your competition? How much competition is there? Are there many firms doing the same or similar things? Or not? b. Can new firms enter the market easily or do natural or artificial barriers block them? c. Are there any similar or alternative goods or services that consumers might choose instead (trade-offs and opportunity cost)? What are they? d. Do firms compete through price competition or non-price competition? Do they try to undercut each other with price cuts (think Coke and Pepsi) or do they compete through better advertising and improved products (think Android vs iphone)? e. How do you get customers to choose your product? f. Be sure to identify the market structure you think you'll be in based on the information you reported above.

 

Questions 1 and 2 have been answered. This is what someone has started.

 

Answer 1. I would prefer selling a good which is a daily need, for all kinds of people. For example if I go for chocolate, not everybody likes it. But if I choose a 'soap' then it is something which everybody needs. Soaps can be in different forms and types as suited for skins types and usage.

 

Soap can be produced by using simple ingredents and thus it can be made at low cost. My objective is to make soaps for all skin types, in different forms, and affordable for masses.

 

Soap is a basic cleanser, people need it for various purposes.

 

My product is basically soaps for all types and in all forms, like liquid soap, gel soap, etc.

 

Name: Green touch

 

Slogan: Suitable and sustainable

 

Logo: LEAF

 

Answer 2. What to produce?

 

As the resources used in making of soap in easily available in plenty, its good to go for it. Before this, a soap is a necessity it should be produced.

 

How to produce?

 

A good can be produces by various technique. Soaps can be hand made, these are too much organic. As I am looking to make soaps of all types and ranges. I would try to make use of both labour and capital intensive technique. My brand will clearly mentioned the technique used in making of the product.

 

For whoom to produce?

 

When it comes to category of people my target people would be middle class and upper class people. Poor and very poor category won't be focused much.

 

The world is witnessing a slowdown due to the pandemic, in such a senario start ups has to be something related to need and not luxury. Therefore a soap making business where investment is also not that high would be the best option, in my opinion.

 

The trend is about ecofriendly products, be it anything. Plant based and cruelty free products are prefered most, because are becoming more and more aware of what they use and how they impact environment indeirectly. Therefore moving with this trend my products will be ecofriendly and natural.

 

 

 

Question B.

1?What are some of the reasons a family-owned or privately-owned business may want to go public? What are some of the reasons that discourage such firms from going public? (5 points)

 

2?You have been asked by an investor to value a local restaurant. In the most recent year, the restaurant earned pre-tax operating income of $325,000. Operating Income has grown an average of 6 percent annually during the last 6 years, and it is expected to continue growing at that rate into the foreseeable future. By introducing modern management methods, you believe the pre-tax operating income growth rate can be increased to 7 percent beyond the second year and sustained at that rate through the foreseeable future. The investor is willing to pay a premium to reflect the value of control equal to 15 percent.

 

The beta and debt-to-equity ratio for publicly traded firms in the restaurant industry are 1.8 and 1.5, respectively. The business' target debt-to-equity ratio is 2.0 and its pre-tax cost of borrowing based on its recent borrowing activities is 8 percent. The business specific risk for firms of this size is estimated to be 5 percent. You conclude that the specific risk of this business is less than other firms in this industry due to its sustained profit growth, low leverage, and high return on assets compared to comparable restaurants in this geographic area. Moreover, per capita income in this region is expected to grow more rapidly than elsewhere in the country, adding to the growth prospects of the restaurant business. At an estimated 14 percent, the liquidity risk premium is believed to be relatively low due to the excellent reputation of the restaurant. Since the current chef and the staff are expected to remain if the business is sold, the quality of the restaurant is expected to be maintained.

 

The 10-year Treasury bond rate is 6 percent, the equity risk premium is 5.5 percent, and the federal, state and local tax rate is 40 percent. The annual change in working capital is $20,000, capital spending for maintenance exceeded depreciation in the prior year by $14,000. Both working capital and the excess of capital spending over depreciation are projected to grow at the same rate as operating income. What is the business worth?  Make sure to show all your work. (10 points)

 

3?The most important element(s) in selecting a business valuation professional include which of the following: (3 points)

 

Overall experience

 

Demonstrated ability in the industry in which the firm to valued competes

 

Degree of specialization

 

Number of professional degrees

 

A and B only

 

Select only one and explain

 

4?How can an analyst determine if the target firm's costs and revenues are understated or overstated? (5 points)

 

5?The market value of a firm's equity can be estimated by subtracting the book value of the firm's current debt from the present value of the firm's enterprise cash flow. True or False. Explain. (3 points)

 

6?Realizing synergy often requires spending money. Which of the following are examples of such expenditures? (3 points)

 

Employee recruitment and training expenses

 

Severance expenses

 

Investment in equipment to improve employee productivity

 

Redesigning workflow

 

All of the above

 

Select one and explain

 

7?No Growth Incorporated had operating income before interest and taxes in 2011 of $225 million. The firm was expected to generate this level of operating income indefinitely. The firm had depreciation expense of $9.5 million that same year. Capital spending totaled $20 million during 2011. At the end of 2010 and 2011, working capital totaled $70 and $80 million, respectively. The firm's combined marginal state, local, and federal tax rate was 30% and its debt outstanding had a market value of $1 billion. The 10-year Treasury bond rate is 6% and the borrowing rate for companies exhibiting levels of creditworthiness similar to No Growth is 7%. The historical risk premium for stocks over the risk free rate of return is 6%. No Growth's beta was estimated to be 1.25. The firm had 2,000,000 common shares outstanding at the end of 2011. No Growth's target debt to total capital ratio is 30%. (14 points)

 

Estimate free cash flow to the firm in 2011. Make sure to show your work.

 

Estimate the firm's cost of capital. Make sure to show your work.

 

Estimate the value of the firm (i.e., includes the value of equity and debt) at the end of 2011, assuming that it will generate the value of free cash flow estimated in (a) indefinitely. Make sure to show your work.

 

Estimate the value of the equity of the firm at the end of 2011. Make sure to show your work.

 

Estimate the value per share at the end of 2011. Make sure to show your work.

 

8?The so-called PEG ratio is calculated by dividing the firm's price-to-earnings ratio by the expected growth rate in the firm's share price. True or False. Explain. (3 points)

 

9?Explain the primary differences between the income (discounted cash flow), relative (market-based), and asset-oriented valuation methods? (5 points)

 

10?For a return to be considered risk-free over some future time period it must be free of default risk and there must not be any uncertainty about the reinvestment rate (i.e., the rate of return that can be earned at the end of the investor's holding period). True or False. Explain. (3 points)

 

11?Applied Nanotech is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that Applied Nanotech can sell 15 units per year at $ 430,000 net cash flow per unit for the next five years. The engineering department has come up with the estimate that developing the machine will take a $ 20 million initial investment. The finance department has estimated that a 20 percent discount rate should be used. (10 points)

 

What is the base-case NPV? Make sure to show all your work below.     

 

If unsuccessful, after the first year the project can be dismantled and will have an after-tax salvage value of $ 12 million. Also, after the first year, expected cash flows will be revised up to 20 units per year or to 0 units, with equal probability. What is the revised NPV? Make sure to show all your work below.     

 

What is the maximum value of the option described in part (b)? Make sure to show all your work below.     

 

12?Which of the following represent limitations of real options? (3 points)

 

Key assumptions often are very difficult to quantify, especially volatility

 

Project delays may incur significant opportunity costs

 

Options often are not independent; therefore, selecting one option may foreclose other options

 

Often requires complex modeling

 

All of the above

 

Select one and explain.

 

13?For a firm having common and preferred equity as well as debt, common equity value can be estimated in which of the following ways? (3 points)

 

a. By subtracting the book value of debt and preferred equity from the enterprise value of the firm

 

b. By subtracting the market value of debt from the enterprise value of the firm

 

c. By subtracting the market value of debt and the market value of preferred equity from the enterprise value of the firm

 

d. By adding the market value of debt and preferred equity to the enterprise value of the firm

 

e. By adding the market value of debt and book value of preferred equity to the enterprise value of the firm

 

Select one and explain.

 

14?In normalizing historical data, monthly revenue may be aggregated into quarterly or even annual data to minimize possible distortions in earnings or cash flow due to inappropriate accounting practices. True or False. Explain. (3 points)

 

15?A firm's leveraged beta reflects all of the following except for (3 points)

 

unleveraged beta

 

the firm's debt

 

marginal tax rate

 

the firm's cost of equity

 

the firm's equity

 

Select one and explain.

 

16?Asset oriented approaches to valuation involve the use of tangible book value, liquidation value, discounted cash flows, and break-up values. True or False. Explain. (3 points)

 

17?Acquiring Company is considering the acquisition of Target Company in a stock for stock transaction in which Target Company would receive $55.00 for each share of its common stock. The Acquiring Company does not expect any change in its price/earnings multiple after the merger. (20 points)

 

Acquiring Co.

 

Target Co.

 

Earnings available for common stock

 

$160,000

 

$30,000

 

Number of shares of common stock outstanding

 

60,000

 

 20,000

 

Market price per share

 

$65.00

 

$42.00

 

Using the information provided above on these two firms and showing your work, calculate the following:

 

Purchase price premium

 

Exchange ratio

 

New shares issued by Acquiring Company

 

Total shares outstanding of the combined companies

 

Post-merger EPS of the combined

 

Pre-merger EPS of Acquiring Company

 

Post-merger share price

 

18?The analyst should be careful not to mechanically add an acquisition premium to the target firm's estimated value based on the comparable companies' method if there is evidence that the market values of these "comparable firms" already reflect the effects of acquisition activity elsewhere in the industry. True or False. Explain. (3 points)

 

19?Explain the process of normalizing historical data and why it should be done before undertaking the valuation process. (5 points)

 

20?Carlisle Enterprises, a specialty pharmaceutical manufacturer, has been losing market share for three years since several key patents have expired. The free cash flow to the firm in 2002 was $10 million. This figure is expected to decline rapidly as more competitive generic drugs enter the market. Projected cash flows for the next five years are $7.5 million, $6.5 million, $4.5 million, $1.5 million, and $.75 million. Cash flow after the fifth year is expected to decrease by 2 percent indefinitely. The firm's board has decided to sell the firm to a larger pharmaceutical company interested in using Carlisle's product offering to fill gaps in its own product offering until it can develop similar drugs. Carlisle's cost of capital is 12%. What purchase price must Carlisle obtain to earn its cost of capital? Make sure to show your work. (6 points)

 

21?The calculation of free cash flow to the firm includes all of the following except for   (3 points)

 

a. Net income

 

b. Marginal tax rate

 

c. Change in working capital

 

d. Gross plant and equipment spending

 

e. Depreciation

 

Select one and explain

 

22?Conventional DCF analysis does not incorporate the effects of real options into the valuation of an asset. How might an analyst incorporate the potential impact of real options into conventional DCF valuation methods? (5 points)

 

23?All of the following are examples of affirmative covenants except for (3 points)  

 

a. The borrowing firm must carry sufficient insurance to cover insurable business risks

 

b. The borrower must maintain a minimum amount of net working capital

 

c. The borrower must retain key management personnel acceptable to the lending institution.

 

d. The borrower is required to obtain the lender's approval before certain assets can be sold.

 

Select one and explain

 

24?What happens to the outstanding shares of the target firm when the acquirer purchases 100% of the target's outstanding stock? (3 points)

 

They are added to the number of shares of Acquirer stock outstanding

 

They are cancelled.

 

They are converted into preferred stock.

 

They are shown as treasury stock on the books of the combined companies.

 

They are swapped for debt in the new company.

 

Select one and explain.

 

25?The so-called PEG ratio is calculated by dividing the firm's price-to-earnings ratio by the expected growth rate in the firm's share price. True or False. Explain. (3 points)

 

26?Siebel Incorporated, a non-publicly traded company, has 2009 after-tax earnings of $21 million, which are expected to grow at 6 percent annually into the foreseeable future. The firm is debt-free, capital spending equals the firm's rate of depreciation; and the annual change in working capital is expected to be minimal. The firm's beta is estimated to be 1.85, the 10-year Treasury bond is 5.5 percent, and the historical risk premium of stocks over the risk-free rate is 5.5 percent. Publicly-traded Rand Technology, a direct competitor of Siebel's, was sold recently at a purchase price of 12 times its 2009 after-tax earnings, which included a 25 percent premium over its current market price. Aware of the premium paid for the purchase of Rand, Siebel's equity owners would like to determine what it might be worth if they were to attempt to sell the firm in the near future. They chose to value the firm using the discounted cash flow and comparable recent transactions methods. They believe that either method provides an equally valid. Estimate of the firm's value. (12 points)

 

What is the value of Siebel using the DCF method? Make sure to show your work.

 

What is the value using the comparable recent transactions method? Make sure to show your work.

 

What would be the value of the firm if we combine the results of both methods? Make sure to show your work.   

 

27?Market-based valuation methods are less prone to manipulation than discounted cash flow methods because they require a more detailed statement of assumptions. True or False. Explain. (3 points)

 

28?Acquiring Company is considering buying Target Company. Target Company is a small biotechnology firm, which develops products that are licensed to the major pharmaceutical firms? Development costs are expected to generate negative cash flows during the first two years of the forecast period of $(12) and $(6) million, respectively. Licensing fees are expected to generate positive cash flows during years three through five of the forecast period of $6, $11, and $16 million, respectively. Due to the emergence of competitive products, cash flow is expected to grow at a modest 5 percent annually after the fifth year. The discount rate for the first five years is estimated to be 20 percent and then to drop to 10 percent beyond the fifth year. In addition, the present value of the estimated synergy by combining Acquiring and Target companies is $32 million. Calculate the minimum and maximum purchase prices for Target Company. Show your work. (12 points)

 

29?A simple model to project cash flow rarely involves the projection of revenue and the various components of cash flow as a percent of projected revenue. True or False. Explain. (3 points)

 

30?Photon Inc. is considering acquiring one of its competitors.  Photon's management wants to buy a firm it believes is most undervalued. The firm's three major competitors, AJAX, BABO, and COMET, have current market values of $375 million, $310 million, and $265 million, respectively. AJAX's FCFE is expected to grow at 11 percent annually, while BABO's and COMET's FCFE are projected to grow by 13 and 15 percent per year, respectively. AJAX, BABO, and COMET's current year FCFE are $24, $22, and $17 million, respectively. The industry average price-to-FCFE ratio and growth rate are 12 and 10%, respectively. Estimate the market value of each of the three potential acquisition targets based on the information provided? Which firm is the most undervalued? Which firm is most overvalued? Make sure to show your work. (15 points)

 

EXTRA CREDIT: (8 points)

 

Two potential acquisition candidates, AJAX and COMET, exhibit price to cash flow ratios of 7 and 5, respectively. AJAX's cash flows per share are expected to grow at a 13% annual rate and COMET's at a more modest 11% rate. AJAX's current cash flow per share is $6, and COMET's is $7. Which of the two firms is more attractive based on their PEG ratios? Make sure to show your work below.

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