Finance Case Study: Impact of Decisions on Shareholder Value

This finance case study analyzes the financial performance and strategic decisions of a company, examining the impact of various scenarios on Return on Equity (ROE) and shareholder value. The case explores the implications of sales fluctuations, investment choices, and capital structure decisions. It presents calculations and insights related to key financial metrics, including Net Income, Earnings Before Interest and Taxes (EBIT), Earnings Before Tax (EBT), and the Hurdle Rate (WACC). The analysis evaluates the cost of retained earnings, the impact of debt financing, and the importance of market-based funding strategies. The study also includes a discussion on the practical aspects of financial statements and decision-making, providing recommendations for optimizing financial performance and maximizing shareholder returns. The assignment evaluates the impact of decisions on shareholder value.

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Finance
[Type the document subtitle]
8/21/2019
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FINANCE 1
Table of Contents
Case 2...............................................................................................................................................2
Question 1....................................................................................................................................2
Question 2....................................................................................................................................2
Case 3...............................................................................................................................................3
Question 1 (a)...............................................................................................................................3
Question 1 (b)...............................................................................................................................3
Question 2 (a)...............................................................................................................................3
Question 2(b)................................................................................................................................4
Question 3....................................................................................................................................4

FINANCE 2
Case 2
Question 1
Current Situation 1 Situation 2 Situation3
Sales Increase by
10%
Sales Increase by
20%
Sales Increase by
30%
Sales 15000000 Sales 16500000 19800000 25740000
EBIT 2250000 Less: COGS 11550000 12600000 13650000
Net
Income 1350000
Less: Selling &
Admin 750000 750000 750000
Equity 15000000 Less: Depreciation 1500000 1500000 1500000
ROE 9% EBIT 2700000 4950000 9840000
Less: Interest on
DEBT 10% 700000 700000 700000
EBT 2000000 4250000 9140000
Net Income 1200000 2550000 5484000
Equity 15000000 15000000 15000000

FINANCE 3
ROE 8.0% 17.0% 36.6%
The impact of the shareholder of the company can be seen in ROE (Return on Common
Equity). The percentage of the ROE decline in the case when the sales of the company decreases
by 10% with the net income $1320000 however, when the sales of the company enhance by 10,
20, or 30 percent. The ROE increases as well up to the 17% as well as 36%. Therefore, with the
increase in the sales of the company, the shareholder will get higher rate of return.
Question 2
If I am Andrew Lamb, I would like to suggest that the company should raise its funds
from the market rather than to borrow funds from the bank due to the main reason, if company
will raise fund from the market, the cost of the interest will become low that will support the
company to grow in the market and can able to raise its revenue in an effective manner.

FINANCE 4
Case 3
Question 1 (a)
In order to analyze the statement of the Stephanie, it has been found that:
 The main statement of Stephanie can realistically be stately practical.
 However, there are some particular situations that required to be evaluated properly as in
the case there are some aspects that have to be measured earlier than providing the
practicality of such theories.
 In the initial stage with such theories that are liable to be practical it is in the fact likely
for the floatation fee to be market at % for the debit as well as % for the equity as it can
be normally generated in the course of the merchant bankers.
 Stephanie assume that the organization would able to continue in raising its capital for the
project related to future by using the similar target proposition as it determine by the
book value of the equity as well as debt. It represent as the realistic statement as the
organization can raise its funds through target capital structure.
 Stephanie also assumes that the growth rate of earning as well as dividends would
continue at their historic price that can be termed as the true statement.
 The tax rate which is 34% is seems as realistic. However the floatation cost of debt is
assumed as 5% as well as of equity is 10%.
 Stephanie assumes that the new debt would cost about the similar as the profit n
outstanding debt as well as would also assume as the similar rating.
Question 1 (b)
No, Larry cannot assume that the rate of hurdle that is calculated by Stephanie would
remain constant for the main reason the level of debt is expected to be increases. It represent that
the rating of the company could also change as well as the investors would demand higher rate to
purchase its security. Moreover, the cost of equity could change in the case the beta of the
company change.

FINANCE 5
Question 2 (a)
The main reasons behind the cost connected with the retained earning of the company are
explain in the below points:
 The expense that is linked in the retailed earning represent the cost of opportunity that us
the feature of stockholders. It is equal to the rate of return investors except on the
common stock of the company
 Retain earning is detained by the organization that is required to be reinvested in the
organization in the form of the earning that must be earned as much as. However, the
option investment may have earned if advance by the shareholders.
 Moreover, the earning of the company can either be retain as well as reinvested in the
business or paid out as the divided. It the earning of the company are retained, the
shareholder of Stephanie forgoes the opportunity to receive cash as well as to reinvest in
the real state, stock, bond. Therefore, the company should earn its retained earnings at
least as much as its shareholder themselves could also earn on the alternative investment
of the equivalent risk
Question 2(b)
Cost of Retain Earning= Risk Free Rate of Return beta (Market Risk-Risk free rate of
return). Therefore, the cost of retain earning is 13%.
Question 3
Hurdle Rate (WACC) = Cost of Equity (ke) x Proportion of Equity in capital structure +
Cost of Debt (kd) x Proportion of Debt in capital structure
Calculation = 13%*0.813953+7.26%*0.186047
Hurdle Rate= 11.93%

FINANCE 6