1.1 Project : SuperTread Tyre Brand ABC Tyres has recently developed a new tyre, The Supertread. Managers and Financial Directors (Mr George Lee) must determine whether it is beneficial for the company to make the investment necessary to produce and market it. A report has been prepared analysing the concerns Mr Lee has with the company’s proposed new project. 1.2 Financial Decisions within ABC Investment decisions have major consequences for the future development of a company, in this case ABC Tyres. Assessing a project under uncertainty can be an extremely complex task. Uncertain future events which could affect the entire economy, a business or a project, lead to variable cash flows, which have different values that the projected ones under certainty, in a deterministic environment (Bruner et al, 1998). Given the huge annual expenditure on capital projects and corporate acquisitions each year, the wise selection of discount rates is of material importance to financial managers such as Mr Lee. Estimating discount rate is always a benchmark in every valuation process. Cash flows appraisal follows a precise pattern. All we need to do is to focus only on entries required in the free cash flows model. Things become more complicated when assessing discount rates, because there are many valuation models, some of them are unrefined but strongly disputed, and some of them are complex but are not preferred by users (Brigham et al, 1990). Choosing a model for estimating discount rate depends on available information and on Mr Lee’s reasons and preferences. 1.3 Market Value Weights versus Book Value Weights When deciding whether to use market value weights or book value weights, Mr Lee must be guided by the purpose of the analysis to decide which value is relevant, and will lead to the most accurate results and decisions. In most cases, the weights to be assigned to different types of capital are going to clearly be different if Mr Lee chooses to apply current market values as contrasted with the stated values found on Goodyear Tyres’ balance sheet. In this case, Mr Lee is interested in determining a ‘criterion’ against which to compare expected returns from future investments for ABC tyres (Rappaport et al, 2001). This is the most common use for the cost of capital, and therefore current market value weights should typically be used. This is because the cost of capital incorporates the expected returns of both debt holders and shareholders, since both groups have claims to free cash flows.
During 2014 there was an ethical dilemma that occurred at Canadian Tire. There was an employee named Samantha and she held the position of a Supervisor at Canadian Tire. Canadian Tire would give out Canadian Tire money to their clients depending on how much they have spent at the store and this was basically a marketing strategy for Canadian Tire whereby the clients could use the Canadian Tire money to purchase merchandise at the store. Samantha was in charge for restocking the Canadian Tire money at all times. Every time Samantha restocked the Canadian Tire money she would always withdraw few dollars out for herself and make adjustments on the paperwork and she would go to the Canadian Tire Gas station and purchase gas for herself. She went
Canadian Tires Supply Chain & Distribution teams guarantees their promise to their customers, to be their when they need them the most. For Canadian tire that means transporting excellent products from vendor to stores in the most effective and responsible way there is. Canadian Tire is always improving, they always tuning their capacity models, employing technology solutions, and building strong relationships with third party logistics and their product suppliers so they can do an excellent job at managing one of country’s deepest and most extensive supply chain network. They are always sharing long- term agreements with their partners. , They are always sharing forecast information and performing metrics so they can better
Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should undertake.
Earlier 2002, the stock price of Agnico-Eagle Mines sharply decreased by $1 finally closed at $13.89. This price has reached one of the lowest level, from the company's historical perspective. As a professional equity portfolio manager, who has a large number of AEM stocks on hand. Acker and his team are necessary to find a proper way to estimated the fair value of AEM as well as its equity. Discounted Cash Flow (DCF) has been chosen to do this job. The theory behind DCF valuation approach is that the firm's value can be estimated by using the expected future free cash flow discounted by an appropriate discounted rate (Koller etc 2005). However several assumptions need to be clearly examined within this approach. The following sections are showing the process of DCF step by step.
Tradeway Tire Company is one of the largest tire manufacturing company in the North America. It is the major supplier of tires to the original equipment manufacturer. Lima tire plant is one of the several tire plants operated by the Tradeway tire company in Ohio (Skinner & Beckham, 2008).
11a. Answer: (Book Value WACC) Debt = 61.2 / 155.7 = 39% Preferred Stock = 15 / 155.7 = 10% Common Stock = 79.5 / 170.8 = 51% 2. Answer: (Market Value WACC) Debt = 30% Preferred Stock = 10% Common Stock = 60% C. Answer: Weighted Average Cost of Capital determines marginal cost of issuing new securities to finance projects. Such securities should be issued at market value. Therefore weights allocated to debt and equity in determining WACC should be based on market value.
The cash flows discounted by the risk-free rate of 9% allows us to compare the present values. This comparison illustrates a net advantage to buying the truck:
2. Given the forecasts provided in the case, estimate the expected incremental free cash flows associated with Du Pont’s growth strategy and maintain strategy for the TiO2 market. How much risk and uncertainty surround these future cash flows? Which strategy looks most attractive (i.e., using the DCF (e.g., NPV) method)??
Discounted cash flow is a valuation technique that discounts projected cash inflows and outflows to evaluate the potential value of an investment. There are three discounted cash flow methods: Net Present Value (NPV), Profitability Index (PI) and Internal Rate of Return (IRR). The net present value discounts all cash inflows and outflows at a minimum rate of return, which is usually the cost of capital. The profitability index refers to the ratio of the present value of cash inflow to the present value of cash outflows. The internal rate of return refers to the interest rate that discounts cash inflow projections to the present to ensure that the present value of cash inflows is equivalent to the present value of cash outflows (Brown, 1992).
Introduction The purpose of this report is to undertake financial analysis of the position of the three major supermarket chains (Tesco plc, Morrison plc and Sainsbury plc) in the UK, using the financial tools such as Horizontal and Vertical Analysis and Ratio Analysis. The calculations done are considering the figures from the income statement and balance sheet of these three companies for the last 2 years (2008 & 2007). Doing these calculations is an effort to find out the current position and if any forecast on their performance. Tesco Plc *Interpreting the Horizontal and Vertical *Analysis The balance sheet’s horizontal analysis reveals the first worrying statistics about the company- the fact that stock level has increased by 25.84% in the year, even though net assets have increased by only 12.59%. The vertical analysis of the balance sheet again highlights the increase in amount of stock held by the company at the end of 2008 and increase in current assets. Interpreting the Ratio Analysis By looking at the ROCE* ratio it is clear that the business has not generated any higher return in the period 2007-2008. Though there is a marginal decrease in the returns (0.14% from 0.16%), however when compared with returns of other competitors Tesco plc has performed much better. Drop in asset utilisation ratio in the year 2008 indicates that the company did not use its assets efficiently to generate sales. As a result profit margin dropped down to 5.91% in 2008 from 6.21% in the year 2007. The Acid test ratio also doesn’t meet the ‘ideal’ ratio of 1:1. In other words Tesco had only 38p of quickly realisable assets to meet each £1 of current liabilities. Stock turn shows the effect of increased stock at the end of 2008 as it s...
The times interest earned ratio uses a company’s income statement to assess its ability to meet long-...
There is a range of criteria relevant for a decision of financing a new venture. To construct my list for the evaluation of a new company as an opportunity I have selected to refer to t...
Present theoretical arguments for the choice of net present value as the best method of investment appraisal;
With the competitiveness of the US tire industry in 1992, Goodyear Tire and Rubber Company is reconsidering a proposal from the department store Sears to carry Goodyear Eagle brand tires. With a $38 million loss in 1990 and a change in top-level management in 1991, the Sears proposal from 1989 was being looked at again. These new top-level managers have two decisions to make: whether Sears should carry only the Goodyear Eagle brand or all of Goodyear’s tire line. Goodyear will have to look at their distribution policy and the potential backlash that could come from their independent franchised dealers.
The capital maintenance concept used results in differences between the relevance and faithful representation of the data that appears in the balance sheet and income statement. The difference between financial capital maintenance and physical is the treatment of unrealized holding gains and losses. Financial capital maintenance does not allow for unrealized holding gains and losses. Only realized gains and losses are included in income because they “are considered a return on capital” (Schroeder et al., 2013). This means, “income is measured only after the investment is recovered” (Gamble, 1981). Physical capital maintenance “consider[s unrealized holding gains and losses] as returns of capital and do[es] not include them income.” (Schroeder et al., 2013). Instead, they are treated as adjustments to equity and included in other comprehensive income. Therefore, with physical capital maintenance “an increase in an entity’s wealth as...