Description
For Mini Case 5, answer A and B fully.
For Mini Case 6, answer A and B, and use the mini case information to 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.
Reference the textbook when appropriate.
Book: Eugene F. Brigham, Michael C. Ehrhardt
Financial Management: Theory and Practice
15th Edition
CLC
Mini Case
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.
A.
1. What is meant by the term “distribution policy”? How has the mix of
dividend payouts and stock repurchases changed over time?
2. The terms “irrelevance,” “dividend preference” (or “bird-in-the-hand”), and
“tax effect” have been used to describe three major theories regarding the
way dividend payouts affect a firm’s value. Explain these terms, and briefly
describe each theory.
3. What do the three theories indicate regarding the actions management
should take with respect to dividend payouts?
4. What results have empirical studies of the dividend theories produced?
How does all this affect what we can tell managers about dividend
payouts?
B.
Discuss the effects on distribution policy consistent with: (1) the signaling
hypothesis (also called the information content hypothesis) and (2) the clientele
effect.
Benchmark
The purpose of this assignment is to 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 on page 651-652 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 250-500 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.
While APA style is not required for the body of this assignment, solid academic writing is expected, and
documentation of sources should be presented using APA formatting guidelines, which can be found in the
APA Style Guide, located in the Student Success Center.
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. Please refer to the directions in the Student
Success Center.
Mini Case
Assume you have just been hired as a business manager of PizzaPalace,
a regional pizza restaurant chain. The company’s EBIT was $50 million
last year and is not expected to grow. 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. 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:
If the company were to recapitalize, then debt would be issued and the
funds received would be used to repurchase stock. PizzaPalace is in the
40% state-plus-federal corporate tax bracket, its beta is 1.0, the riskfree rate is 6%, and the market risk premium is 6%.
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.
Purchase answer to see full
attachment
Financial Management: Theory and Practice
15th Edition
CLC
Mini Case
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.
A.
1. What is meant by the term “distribution policy”? How has the mix of
dividend payouts and stock repurchases changed over time?
2. The terms “irrelevance,” “dividend preference” (or “bird-in-the-hand”), and
“tax effect” have been used to describe three major theories regarding the
way dividend payouts affect a firm’s value. Explain these terms, and briefly
describe each theory.
3. What do the three theories indicate regarding the actions management
should take with respect to dividend payouts?
4. What results have empirical studies of the dividend theories produced?
How does all this affect what we can tell managers about dividend
payouts?
B.
Discuss the effects on distribution policy consistent with: (1) the signaling
hypothesis (also called the information content hypothesis) and (2) the clientele
effect.
Benchmark
The purpose of this assignment is to 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 on page 651-652 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 250-500 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.
While APA style is not required for the body of this assignment, solid academic writing is expected, and
documentation of sources should be presented using APA formatting guidelines, which can be found in the
APA Style Guide, located in the Student Success Center.
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. Please refer to the directions in the Student
Success Center.
Mini Case
Assume you have just been hired as a business manager of PizzaPalace,
a regional pizza restaurant chain. The company’s EBIT was $50 million
last year and is not expected to grow. 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. 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:
If the company were to recapitalize, then debt would be issued and the
funds received would be used to repurchase stock. PizzaPalace is in the
40% state-plus-federal corporate tax bracket, its beta is 1.0, the riskfree rate is 6%, and the market risk premium is 6%.
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.
Purchase answer to see full
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