59030412 AspeonSoluta
Case
Aspeon
Sparkling
Capital
CASE
10
Water,
Structure
Inc.
Policy
INFORMATION
Purpose
This case, which in all aspects is identical to Case 9, illustrates the capital structure decision for a firm that starts with zero debt. Either Case 9 or Case 10, but not both, should be assigned.
The primary analytical tool is valuation analysis, although the case briefly introduces the Modigliani and Miller (MM) with corporate taxes and Miller models.
The case also illustrates financial risk by looking at the impact of leverage on ROE.
Time Required
The case requires 3-4 hours of preparation, plus an additional hour if the case has to be handed in.
Complexity
B--intermediate complexity.
Flexibility
The case illustrates many of the concepts associated with the use of debt financing, and hence provides an ideal vehicle for summarizing that section of the course.
MODEL
INFORMATION
Description
The case model (filename CASE-10I) has two major sections.
The
first section constructs partial income statements to illustrate
©1993
The Dryden Press
All rights reserved.
Case 10-1
the effect of financial leverage on ROE, while the second part conducts the valuation analysis, where stock price, EPS, and WACC are calculated on the basis of capital cost relationships.
The
INPUT DATA and KEY OUTPUT sections are shown below:
INPUT DATA:
KEY OUTPUT:
Operating Data:
Impact on ROE:
Total assets $120,000,000
Cost of debt
EBIT
13.0%
$32,000,000
Tax rate
All equity:
Expected ROE
16.0%
SD of ROE
7.8%
40%
No. of shares
10,000,000
Capital Cost Data:
D
kd
-----------
50/50 mix:
Expected ROE
24.2%
SD of ROE
15.6%
Valuation Analysis:
-------
$0
0
D
P
-----------
-------
11.0%
$0
$12.00
13.0%
25,000,000
13.23
100,000,000
16.0%
50,000,000
14.09
125,000,000
20.0%
75,000,000
14.53
100,000,000
14.57
125,000,000
14.12
25,000,000
10.0%
50,000,000
75,000,000
D
ks
-----------
-------
$0
16.0%
25,000,000
16.5%
50,000,000
17.5%
Aspeon
Sparkling
Capital
CASE
10
Water,
Structure
Inc.
Policy
INFORMATION
Purpose
This case, which in all aspects is identical to Case 9, illustrates the capital structure decision for a firm that starts with zero debt. Either Case 9 or Case 10, but not both, should be assigned.
The primary analytical tool is valuation analysis, although the case briefly introduces the Modigliani and Miller (MM) with corporate taxes and Miller models.
The case also illustrates financial risk by looking at the impact of leverage on ROE.
Time Required
The case requires 3-4 hours of preparation, plus an additional hour if the case has to be handed in.
Complexity
B--intermediate complexity.
Flexibility
The case illustrates many of the concepts associated with the use of debt financing, and hence provides an ideal vehicle for summarizing that section of the course.
MODEL
INFORMATION
Description
The case model (filename CASE-10I) has two major sections.
The
first section constructs partial income statements to illustrate
©1993
The Dryden Press
All rights reserved.
Case 10-1
the effect of financial leverage on ROE, while the second part conducts the valuation analysis, where stock price, EPS, and WACC are calculated on the basis of capital cost relationships.
The
INPUT DATA and KEY OUTPUT sections are shown below:
INPUT DATA:
KEY OUTPUT:
Operating Data:
Impact on ROE:
Total assets $120,000,000
Cost of debt
EBIT
13.0%
$32,000,000
Tax rate
All equity:
Expected ROE
16.0%
SD of ROE
7.8%
40%
No. of shares
10,000,000
Capital Cost Data:
D
kd
-----------
50/50 mix:
Expected ROE
24.2%
SD of ROE
15.6%
Valuation Analysis:
-------
$0
0
D
P
-----------
-------
11.0%
$0
$12.00
13.0%
25,000,000
13.23
100,000,000
16.0%
50,000,000
14.09
125,000,000
20.0%
75,000,000
14.53
100,000,000
14.57
125,000,000
14.12
25,000,000
10.0%
50,000,000
75,000,000
D
ks
-----------
-------
$0
16.0%
25,000,000
16.5%
50,000,000
17.5%