Overview

Complete a series of problems based on the Megaware case study described in the assessment.Note: The assessments in this course build upon each other, so you are strongly encouraged to complete them in sequence.SHOW LESSBy successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment objectives:

• Competency 1: Apply the theories, models, and practices of finance to the financial management of the firm.
  • Analyze how cash dividends affect stock price and the value of an organization.
• Competency 2: Assess the impact of ethical, regulatory, and tax considerations on financial policy decisions.
  • Analyze how paying off debt and expanding manufacturing capability affect an organization.
• Competency 3: Evaluate alternative methods of financing a firm in diverse economic environments.
  • Evaluate how a stock repurchase affects the value of an organization.
• Competency 4: Integrate financial analyses into general business management planning and decision making.
  • Apply an appropriate equation to inform business management planning and decision making.
  • Analyze how the organization of a company determines dividend payouts.
• Competency 5: Communicate in a manner that is professional and consistent with expectations for members of the business professions.
  • Communicate in a manner that is professional and consistent with expectations for members of the business professions.

Competency Map

CHECK YOUR PROGRESSUse this online tool to track your performance and progress through your course.

Questions to Consider

To deepen your understanding, you are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.SHOW MORE

Resources

Suggested Resources

The resources provided here are optional. You may use other resources of your choice to prepare for this assessment; however, you will need to ensure that they are appropriate, credible, and valid. They provide helpful information about the topics in this unit. The MBA-FP6016 – Finance and Value Creation Library Guide can help direct your research. The Supplemental Resources and Research Resources, both linked from the left navigation menu in your courseroom, provide additional resources to help support you.The following resources will provide assistance to complete the assessment.

• Excel Examples [XLS].

SHOW LESS

Additional Resources for Further Exploration

The following texts are designed to assist learners to master core concepts, solve financial problems, and analyze results.

• Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. D. (2014). Corporate finance: Core principles and applications (4th ed.). New York, NY: McGraw-Hill. – Available from the bookstore
  • Chapter 14, “Capital Structure: Basic Concepts,” pages 423–451.
  • Chapter 15, “Capital Structure: Limits to the Use of Debt,” pages 452–480.
  • Chapter 16, “Dividends and Other Payouts,” pages 481–515.

The text offers an introductory look at corporate finance.

• Welch, I. (2017). Corporate finance (4th ed.). Retrieved from http://book.ivo-welch.info/read/

Assessment Instructions

Complete the following problems based on the Megaware case study below. Where appropriate, show or explain your work. You may use Excel to work on the problems.

Megaware Case Study

Megaware Incorporated is a technology firm that was founded eight years ago by John Thompson and Jill Dillman. Megaware manufactures various hardware and software components. Its products are used in personal computers and other peripheral devices. In addition to John and Jill, Nick Jones is also an owner of the firm because he provided capital. Each of the three owns 20 percent of the company. The current employees own the remaining part of the company.The firm recently developed a new computer hardware component. The component is supposed to be more energy efficient and less costly to produce. After investigating the possibility of manufacturing the new hardware component, Megaware determined that constructing a new plant would be too costly. John, Jill, and Nick do not want to bring in another outside investor, so Megaware has decided to sell the hardware component for an after-tax payment of $42 million.

Case Study Problems

Problem 1. John thinks that the firm should use the excess cash flow to pay a special one-time dividend to the investors. How will implementing this proposal affect the value of the company as well as the stock price?Problem 2. Jill believes that the firm should use the excess cash flow to pay off debt and expand its manufacturing capability. How would implementing this proposal affect the company?Problem 3. Nick contends that a share repurchase will increase the company’s ROA, ROE, and P/E ratio. Do you agree? How will a share repurchase affect the value of the firm?Problem 4. John, Jill, and Nick have discussed a proposal to commence a regular dividend payment to stockholders. Evaluate this plan.Problem 5. The dividend growth model is used by many investors to value stock. Calculate the price of a share of Megaware stock today by using the following dividend growth model equation:P0 = E1(1 − b) / Rs = ROE × bThe value of the stock equals next year’s dividends divided by the sustainable growth rate.

• The dividend-payout ratio is 1 minus b, where b is the retention ratio. The dividend next year (P0) will be the earnings next year (E1) times 1 minus the retention ratio: P0 = E1(1 − b).
• The sustainable growth rate (Rs) is the return on equity (ROE) times the retention ratio: Rs = ROE × b.

Based on your results, should Megaware pay a dividend or expand its manufacturing capability? Explain your decision.Problem 6. Does the way a company is organized (as a corporation, LLC, or another structure) determine whether the company should pay a dividend?

Megaware Case Study Scoring Guide