Benchmark – Mini Case

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BENCHMARK – MINI CASE 1
The purpose of this assignment is to analyze a
firm’s capital structure and its impact on firm performance. Within the
assignment, explain core concepts related to business risk and recommend sound
financial decisions based on analysis of a firm’s capital structure and capital
budgeting techniques.
Read the Chapter 15 Mini Case in Financial
Management: Theory and Practice. Using complete sentences and academic
vocabulary, please answer questions a and b.
Using the mini case information, write a 250
word recommendation of the financial decisions you propose for this company
based on an analysis of its capital structure and capital budgeting techniques.
Explain why you chose this recommendation.
This assignment uses a rubric. Please review
the rubric prior to beginning the assignment to become familiar with the
expectations for successful completion. You are required to submit this
assignment to LopesWrite. Refer to the LopesWrite
Technical Support articles for assistance.
MINI CASE
Assume you have just been hired as a business manager of
PizzaPalace, a regional pizza restaurant chain. The company’s EBIT was $120
million last year and is not expected to grow. PizzaPalace is in the 25% state-plus-federal
tax bracket, the risk-free rate is 6 percent, and the market risk premium is 6
percent. The firm is currently financed with all equity, and it has 10 million
shares outstanding.
When you took your corporate finance course, your instructor
stated that most firms’ owners would be financially better off if the firms
used some debt. When you suggested this to your new boss, he encouraged you to
pursue the idea. If the company were to recapitalize, then debt would be
issued, and the funds received would be used to repurchase stock. As a first
step, assume that you obtained from the firm’s investment banker the following
estimated costs of debt for the firm at different capital structures:

QUESTIONS
a)
Using the free cash flow valuation model, show
the only avenues by which capital structure can affect value.
b)

(1)
What is business risk? What factors influence a
firm’s business risk?
(2)
What is operating leverage, and how does it
affect a firm’s business risk? Show the operating break-even point if a company
has fixed costs of $200, a sales price of $15, and variable costs of $10.
RUBRIC
Ø Question
A
Answer to question A is extremely
thorough and supported with substantial relevant details.
Ø Question
B
Answer to question B is extremely
thorough and supported with substantial relevant details.
Ø Analysis
of Firm’s Capital Structure and Impact on Performance (C5.1)
An analysis of a firm’s capital
structure and its impact on the firm’s performance is extremely thorough and
supports with substantial relevant details.
Ø Financial
Decisions (C3.1; C9.1)
Recommendations for proposed
financial decisions based on analysis of capital structure and capital budgeting
techniques are extremely thorough and include substantial supporting details
and examples.
BENCHMARK – MINI CASE 2
Integrated Waveguide Technologies (IWT) is a 6-year-old
company founded by Hunt Jackson and David Smithfield to exploit metamaterial
plasmonic technology to develop and manufacture miniature microwave frequency
directional transmitters and receivers for use in mobile Internet and
communications applications. IWT’s technology, although highly advanced, is
relatively inexpensive to implement, and its patented manufacturing techniques
require little capital as compared to many electronics fabrication ventures.
Because of the low capital requirement, Jackson and Smithfield have been able
to avoid issuing new stock and thus own all of the shares. Because of the
explosion in demand for its mobile Internet applications, IWT must now access
outside equity capital to fund its growth, and Jackson and Smithfield have
decided to take the company public. Until now, Jackson and Smithfield have paid
themselves reasonable salaries but routinely reinvested all after-tax earnings
in the firm, so dividend policy has not been an issue. However, before talking
with potential outside investors, they must decide on a dividend policy.
Your new boss at the consulting firm Flick and Associates,
which has been retained to help IWT prepare for its public offering, has asked
you to make a presentation to Jackson and Smithfield in which you review the
theory of dividend policy and discuss the following issues.

QUESTION
What do the three theories indicate regarding the actions
management should take with respect to dividend payouts?

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