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700837 Corporate Financial Management You are a junior manager in a financial advisory firm

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700837 Corporate Financial Management

You are a junior manager in a financial advisory firm. The partner to whom you report has been taken ill, potentially with Covid-19, and has left six case files for your attention. The files have been screened and are virus free but you have limited time to review. To assist you in your endeavours your reporting partner has put a marks value by the side of the questions that they require answering to indicate their relative importance. Case file1 FBA is a food processing firm that wishes to setup a small ice-cream business. The new business is expected to have a net cash flow of $50,000 in its first year. The cash flows are projected to grow at a high rate of 20% until the end of year 3, and thereafter at a rate of 3% per year in perpetuity. The project will be all-equity financed, the initial investment is $500,000. (a) If the appropriate discount rate is 12%, should FBA undertake the project? (4 marks) (b) The in-house business analyst suggests to use benchmark the discount rate with Gelateria, a competing ice-cream maker. Gelateria does not have debt and has a beta of 1.50. If the market risk premium is 8% and risk-free rate is 3%, should FBA undertake the project? (4 marks) (c) If the in-house business analyst is confident about the first three years estimated cash flows but is skeptical on the 2% long-term growth rate. What is the NPV if the long-term growth rate is zero using the discount rate provided in part (a). (4 marks) Case file2 DublinTech is an all-equity firm and it has been paying out all its earnings as dividend. DublinTech’s cost of capital is 10%, and its last Earnings Per Share is $2. (a) Assuming DublinTech keeps paying all its earnings as dividend and there is no growth in its earnings. What is the value of DublinTech stock based on the dividend discount model? (7 marks) 3 (b) Suppose that DublinTech just announces its policy to payout 60% of the earnings as dividend. The return of new investment is 15%. What is the stock price for DublinTech according to the dividend discount model? (6 marks) Case file3 (a) Compare and contrast Trade-off Theory and Signaling Theory in capital structure. (6 marks) (b) Critically discuss over-investment and under-investment problems due to debt usage. What kinds of capital structures could prevent such problems? (6 marks) Case file4 KSA is a public company listed on Singapore Exchange. It is fully equity financed with diverse ownership. It has accumulated a substantial amount of cash recently. There are a few ongoing mergers and acquisitions in the industry. KSA announces a share repurchase program using its cash. (a) Discuss the rationale of share repurchase program launched by KSA. What signals would the market perceive? (7 marks) (b) Critically discuss three defenses against hostile takeover. (6 marks) Case file5 There is a survey of the corporate payout policy literature by Brav, Graham, Harvey, and Michaely (2005), Alon Brav, John R. Graham, Campbell R. Harvey, Roni Michaely, Payout policy in the 21st century, Journal of Financial Economics, Volume 77, Issue 3, 2005, Pages 483-527, https://doi.org/10.1016/j.jfineco.2004.07.004 Discuss the following four questions after referring to the textbook, article by Brav et al. (2005), and other relevant materials from the online library or internet. Please pay particular attention on relating empirical evidence to corporate finance theory. The maximum word count for the content is 1,000. 4 (a) Why dividend is relevant in the real world? (5 marks) (b) Discuss the rationale of using non-dividend payout policy such as share repurchases. (5 marks) (c) Do you prefer dividend paying or non-dividend paying stocks? Justify your answer. (5 marks) (d) Given two companies with the same amounts of assets and debts, should the dividend paying company have a higher valuation? (5 marks) Case file6 You must choose one company listed on New York Stock Exchange, NASDAQ, London Stock Exchange, or the Exchange of the country where you come from and perform the tasks specified. You can choose any company except those from financial services (bank, insurance, etc.), REITS, and utilities (electricity, water, gas, etc.). Avoid money losing companies. Most of the company’s data is available from Yahoo Finance, Google Finance, or company’s website. There are many other sources of information – NASDAQ, NYSE, LSE, SGX, Global Media, Bloomberg, Reuters, etc. Use any font type of your selection with 1.5 line spacing and 12 point font size. Cite and include any reference used appropriately. The final report shall contain around 2,000 words (excluding words in tables, diagram, and appendices). Besides a title, your firm valuation report must have 1. Executive Summary ? One page summary of your report and your recommendation 2. Introduction ? Brief History of Company. ? Current and Future Key Issues that Impact the Industry both globally and locally. 3. Valuation & Capital Structure ? Perform stock valuation for the selected company using valuation model that you have learnt from the course. ? Chapters 6 and 9 give you some ideas on the valuation process but you are not required to follow them closely. 5 ? Use two or more valuation methods. Compare the stock prices from the two methods to the actual stock price. ? Discuss capital structure of the selected company. 4. Conclusion and Recommendation ? Make recommendation as a financial analyst to the investors.