The company needs to create a plan to invest their excess cash to optimize company results and increase shareholder value. Observation #1: Return on Equity (ROE) is very strong at 49.9% which is entirely attributable to their Return on Invested Capital (ROIC). Since BBBY has not financed the business with any debt‚ the ROIC equals ROE. However‚ these returns are negatively impacted by the large balance of non-operating assets (i.e. marketable securities) because they are not offset against any
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well-performing Small Cap and Mid Cap companies‚ a reasonable level of debt in a given company capital structure helps lower the cost of capital partly‚ due to tax reduction. I would recommend that Dubinsky proposed a large share repurchase to the board. This share repurchase proposal should be presented to the founders’
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CHAPTER 3 Answers to Concepts Review and Critical Thinking Questions 1. Time trend analysis gives a picture of changes in the company’s financial situation over time. Comparing a firm to itself over time allows the financial manager to evaluate whether some aspects of the firm’s operations‚ finances‚ or investment activities have changed. Peer group analysis involves comparing the financial ratios and operating performance of a particular firm to a set of peer group firms in the same industry
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1. CORPORATE GOVERNANCE Objective of corp finance: maximize firm value. Narrower objective of maximizing stockholder wealth; when stock is traded and markets are viewed to be efficient‚ objective is to maximize stock price. A. Stockholder interests vs management interests In theory: stockholders have significant control over management. Mechanisms for discipline: Annual meeting and BOD In Practice: Most stockholders do not go to meetings since cost of going exceeds the value of their holdings; incumbernt
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Dubinski recommend a large share repurchase to Blaine’s board? What are the primary advantages and disadvantages of such a move? 3. Consider the following share repurchase proposal: Blaine will use $209 million of cash from its balance sheet and $50 million in new debt-bearing interest at the rate of 6.75% to repurchase 14.0 million shares at a price of $18.50 per share. How would such a buyback affect Blaine? Consider the impact on‚ among other things‚ BKI’s EPS‚ ROE‚ its interest coverage and debt
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competitive to other acquires as well as be able to acquire the firms. Question 2: A. Please refer to the spreadsheet attached. B. With the implantation of the stock repurchase proposal‚ the EPS will increase from 0.91 to 0.93 for 2006‚ and will grow to 1.39 instead of 1.26 in 2010 assuming a 10% in EBIT per year. The ROE ratio for 2006 will grow from 10.98% to 18.29%. Also‚ the enterprise value of
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to recapitalize‚ there are a few ways in which the debt can be used in regards to equity. Our extensive evaluation of the possible outcomes has revealed that borrowing $3 billion to either pay out an equivalent dividend‚ or continue with a share repurchase could positively affect many aspects of your company. This capital restructure could improve your firm’s share value‚ cost of capital‚ debt coverage‚ earnings per share and voting control. Please refer to our analysis below and in the attached excel
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is expected to grow at a constant rate of 5 percent per year‚ 200‚000 shares of stock are outstanding‚ and the current WACC is 13.40%. The company is considering a recapitalization where it will issue $1 million in debt and use the proceeds to repurchase stock. Investment bankers have estimated that if the company goes through with the recapitalization‚ it’s before-tax cost of debt will be 11%‚ and its cost of equity will rise to 14.5%. Assuming the company maintains the same payout ratio‚ what
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Chapter 3 Analyzing Bank Performance 1. Which of the following is not a characteristic of a typical commercial bank? a. Most banks own few fixed assets. b. Most banks have a high degree of operating leverage. c. Most banks have few fixed costs. d. Many bank liabilities are payable on demand. e. Banks generally operate with less equity capital than non-financial firms. Answer: b 2. Bank assets fall into each of the following categories except: a. loans. b.
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CHAPTER 3 WORKING WITH FINANCIAL STATEMENTS Financial statement information is often our ONLY source of information. Consequently‚ we use the information we have and make adjustments where appropriate. 1. Ratio Analysis ♦ Short-Term Solvency or Liquidity Ratios – Measures the ability of the firm to meet its current (short-term‚ < 1 year) obligations. • Liquidity is defined as the ability to convert assets to cash quickly without a significant loss in value
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