MBA-FPX5014__Assessment3-1

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Capella University *

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5014

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Finance

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Feb 20, 2024

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Financial Engineering to enhance Shareholder Value ABC Healthcare David Estaphnous Applied Managerial Finance
ABC Healthcare Company Specialty: 50 Hospitals 20 Ambulatory Surgical Centers 100 Outpatient Clinics Obvious Uptrend from 206-2019
Financial Analysis
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Financial Analysis
WACC (Weighted Average Cost of Capital) A company’s cost to borrow money Incorporates common stock, preferred stock, bonds, and long term debt Calculated through this simple formula WACC = (E/V x Re)+(D/V x Rd x (1-Tc) E= Market value of firm’s equity D= Market value of firm’s debt V= E+D Re= Return on equity Rd= Return on debt Tc= Corporate Tax rate
Leveraging Return on Investments Major Equipment Purchase with a positive NPV of 44,262,269, PI of 5.43, and IRR of 79.79, payback period of 1.36 years Low risk investment Salvage value of 500,000 One time investment of 10,000,000
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Issuing Dividends to attract Investors Differential Growth Dividends Where dividends are tied to growth(g) and required rate of return(r) based on company’s performance. Why use this method? The company is growing Lucrative return on investment Low risk
Abbvie Supernatural Divident Payout from 2013-2019 Abbvie average stock price in 2013 was $33 In 2013 Abbvie issued $1.60 in dividends, meanwhile 2015, dividend payments increased by 21.7% to $2.02 Abbvie average stock price in 2015 was $43.3 which was an increase of 31% Abbvie Earnings on 2013 was 18,790 millions, Vs. 22,859 which was an increase of 21.7% EPS= Div Thus Abbvie was deemed a cash cow in the eyes of investors(Hiller, 2023)
Recommendations Maximizing the shareholder value is reliant upon the amount of dividends the company issues to their investors. Issuing dividends to investors show that the company is profitable and has an increasing revenue year over year For optimal growth, company needs to adopt projects that will increase its revenues and hold value to the company The company should also use debt to undergo future projects to obtain a tax shield(Tompkins, 2014) Using growth and required rate of return, supernatural dividend model can increase the stock value in the eyes of investors
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References Hargrave, M. (2023, May). Weighted average cost of capital (WACC) explained with formula and example . Investopedia. https://www.investopedia.com/terms/w/wacc.asp Hillier, D. (2023). Corporate finance . McGraw-Hill education. McClure, B. (2023, October). Understand the weaknesses of the price-to-book (P/B) ratio . Investopedia. https://www.investopedia.com/investing/using-price-to-book-ratio-evaluate-companies/#:~:text=In%20general%2C%20a%20P %2FB,ratios%20may%20be%20the%20norm. YouTube. (2014). James Tompkins: The capital structure decision and taxes . YouTube . Retrieved October 14, 2023, from https://www.youtube.com/watch?v=HeWcPUk8rGw.