There are two companies (Heart and Apt). Here is financial data from the past year. All dollar amounts for sales, total assets and net income are in millions. The risk free rate (UST securities) = 4%. The S&P 500 is expected to grow 12% over the next year. The tax rate for both companies is 30%. Heart Apts Sales $ 9,350 $ 8,930 Net Income $ 902 $ 1,460 ROA 8.8% 7.6% ROE 30.2% 13.96% Current ratio 1.88x 2.17x Shares outstanding 238m 219m Beta 2.58 0.98 Stock price $18.79/sh. $159.00/sh. P/E ratio 4.97 23.9 Earnings per share $3.79 $6.65 Total Assets $10,244 $19,178 For this problem it might be helpful to use the DuPont equation. Based on the financials, which company has the most market risk? Why do you say that? Company H has a higher risk because it is more sensitive to market changes Which company has the strongest liquidity position? Why? Company As liquidity is better because it has a higher current ratio Which company uses the most leverage (debt)? Why? Company H uses more debt because it is 70% of total funds For an incremental dollar of sales, how much falls to the bottom line? Calculate the Total Asset Turnover. Which company is more efficient? H: 10244 A: 19178 For both companies the marginal tax rate is 30%. The market is expected to grow at a rate of 10%. Current bonds for both companies have a YTM of 10%. The CAPM is how both companies calculate the required return on common equity. Calculate the WACC for Heart. It has a targeted capital structure of 40% debt and 60% equity. Ignore flotation costs. Calculate the WACC for Apt. It has a targeted capital structure of 25% debt and 75% equity. Ignore flotation costs. Both companies are considering an investment in Project One, Project Two, and Project Three. All three projects carry an average amount of risk for each company. Both companies use Payback, NPV and IRR to make investment decisions. The cash flows for both projects are shown below. Based on NPV, What projects would Apt be likely to invest in? Based on IRR, what projects would Heart be likely to invest in? Which project has the fastest payback? Why might that be important to the investment decision? If money had no time value, which project would be the best decision? Project One: $10 million initial investment and $2million of free cash flow at the end of each year for 15 years. Project Two: $5 million initial investment. Free cash flows for 5 years : Yr. 1 = $3 million, Yr. 2 = $1.5 million, Yrs. 3-5 = 0.5 million Project Three: Initial investment of $20 million. One Free Cash flow of $40 million in 8 years. No other Free Cash Flows.
There are two companies (Heart and Apt). Here is financial data from the past year. All dollar amounts for sales, total assets and net income are in millions. The risk free rate (UST securities) = 4%.
The S&P 500 is expected to grow 12% over the next year. The tax rate for both companies is 30%.
Heart Apts
Sales $ 9,350 $ 8,930
Net Income $ 902 $ 1,460
ROE 30.2% 13.96%
Current ratio 1.88x 2.17x
Shares outstanding 238m 219m
Beta 2.58 0.98
Stock price $18.79/sh. $159.00/sh.
P/E ratio 4.97 23.9
Earnings per share $3.79 $6.65
Total Assets $10,244 $19,178
- For this problem it might be helpful to use the DuPont equation.
- Based on the financials, which company has the most market risk? Why do you say that?
- Company H has a higher risk because it is more sensitive to market changes
- Which company has the strongest liquidity position? Why?
- Company As liquidity is better because it has a higher current ratio
- Which company uses the most leverage (debt)? Why?
- Company H uses more debt because it is 70% of total funds
- For an incremental dollar of sales, how much falls to the bottom line?
- Calculate the Total Asset Turnover. Which company is more efficient?
- H: 10244
- A: 19178
- For both companies the marginal tax rate is 30%. The market is expected to grow at a rate of 10%. Current bonds for both companies have a YTM of 10%. The
CAPM is how both companies calculate the requiredreturn on common equity. - Calculate the WACC for Heart. It has a targeted capital structure of 40% debt and 60% equity. Ignore flotation costs.
- Calculate the WACC for Apt. It has a targeted capital structure of 25% debt and 75% equity. Ignore flotation costs.
- Both companies are considering an investment in Project One, Project Two, and Project Three. All three projects carry an average amount of risk for each company. Both companies use Payback,
NPV andIRR to make investment decisions. The cash flows for both projects are shown below.- Based on NPV, What projects would Apt be likely to invest in?
- Based on IRR, what projects would Heart be likely to invest in?
- Which project has the fastest payback? Why might that be
important to the investment decision?
- If money had no time value, which project would be the best decision?
Project One: $10 million initial investment and $2million of
at the end of each year for 15 years.
Project Two: $5 million initial investment. Free cash flows for 5 years :
Yr. 1 = $3 million, Yr. 2 = $1.5 million, Yrs. 3-5 = 0.5 million
Project Three: Initial investment of $20 million. One Free Cash flow of $40
million in 8 years. No other Free Cash Flows.
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