FIN 2984 Lecture 8: Class 8

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limecattle544

5 Oct 2016

School

Virginia Tech

Department

Finance, Insurance, Business Law

Course

FIN 2984

Professor

Charles Carter

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Document Summary

Private start up"s up to large companies. Shares trade less often or not at all. Start up"s can"t issue debt (no demand, too risky) only equity. Public - used to be private, went public (small to large companies) Primary = stocks and bonds issued by corporations to raise money. Use cash to grow (buy other companies, build factories, develop new products. Primary = new securities are created and first traded. 2015 had 169 companies go public (down year) (one of )best performing ipo (shake shack) - went up 105% Worst performing ipo (biotech) - down over 75% Equity is lest desirable - bond is first choice if possible compensation to management stock options. Secondary - buy and sell from other investors. A lot of wealth in the world held in stocks and bonds. Organized exchange - a physical location where stocks trade. Over-the -counter market - stocks that don"t trade on exchanges. pink sheets - usually penny stocks, fewer regulations.

Related Questions

Please read the article and answer these questions:

1. How did a government loan guarantee contribute to Solyndra's bankruptcy?

2. How did capital budgeting decisions contribute to Solyndra's bankruptcy?

3. How did changes in the industry contribute to Solyndra's bankruptcy?

4. Does the Solyndra bankruptcy indicate that government loan guarantees for private businesses are a bad idea?

___________

Solyndra Inc. was supposed to be a marquee example of how private and public capital, brought together, could vault innovative companies to commercial success.

Instead, the $535 million government loan guarantee so prized by the solar-panel maker may have ultimately contributed to the company's undoing, say investors with knowledge of the company's operations.

The new factory built with Department of Energy funds foisted fixed costs on a company already struggling through an industry shake-out, they say. What's more, the debt paradoxically made raising more money difficult. Once the government demanded priority in the event of failure, private investors were less likely to prop up the company.

One Solyndra investor said that, in retrospect, "the worst thing that happened to Solyndra was the loan."

The Fremont, Calif.-based company is now in Chapter 11 bankruptcy protection. It is now the target of federal inquiries, including a congressional probe and a criminal investigation by the Justice Department centering on whether the company misled the government in applying for the loans. Republicans, citing emails, say the White House pushed to get the loan approved for political reasons, which the White House denies. Solyndra didn't return calls for comment on that point but has said previously it was cooperating with the investigation.

Behind the political firestorm lies a company with a business case that never quite added up, owing to a fundamental cost problem that quickly got worse after the infusion of taxpayers' money that began in 2009, according to investors, analysts and people familiar with the company.

The company, founded in 2005, was blessed early on with influential backers. They would ultimately pump nearly $1 billion into the company.

Solyndra's largest backer was the family foundation of George Kaiser, a billionaire whose family had made a fortune from natural gas. Other venture-capital luminaries piled in, attracted with the help of Goldman Sachs Group Inc., GS 0.13% Solyndra's financial adviser. Investors included Madrone Capital Partners, which manages money for the Walton family of Wal-Mart Stores Inc. and the Virgin Green Fund, which includes investments from Richard Branson.

The start-up's lure was a clever technology. Solyndra's name, with the play on "cylinder," illustrated its productânot a flat panel but multiple long and thin tubes covered in material to absorb the sun's rays. Other panels relied on a heavy, then-expensive material called polysilicon to turn the sunlight into electricity. Solyndra's product was lighter and potentially easier and cheaper to install.

As subsidies in Europe fueled demand and oil prices soared during 2008, the solar industry seemed poised to take off. But by 2009, the industry was undergoing severe growing pains, and Solyndra was hit hard. Polysilicon prices were in the midst of an 80% dive. That made Solyndra's product less competitive with rivals that used polysilicon.

Solyndra's costs stayed relatively high because of the tricky manufacturing process. In late 2009, Solyndra's tubes cost $4 for every watt of power output to produce, according to company securities filings. The problem was the company could sell them for only $3.24 per watt. One reason for the losses: the company often had to throw out defective or test panels, according to one former production executive.

As it was losing money, competition was getting worse. China's solar panels were dropping in price. U.S. rival First Solar Inc., FSLR 1.86% was making panels at less than a quarter of Solyndra's cost then and today produces panels at about 75 cents per watt. In 2009, Solyndra lost $172.5 million on revenue of $100.5 million.

"The change in expectations was pretty dramatic," said David Miller, spokesman for Solyndra, about the pricing of its panels. He said analysis of what went wrong and what should have been done is easier in retrospect.

The company still exuded optimism. In a July 2009 press release, it said it had a "contractual backlog of more than $2 billion" in orders. The figure was based not on firm orders, however, but largely on "framework agreements" that allowed customers to walk away or renegotiate, according to a filing for an initial public offering from 2010. Its main customer, Phoenix Solar AG, renegotiated in its favor in early 2009, according to Murray Cameron, chief operating officer at the German installer.

In mid-2009, Solyndra had a choice: It could hunker down with its existing factory and try to slash costs to meet competition, drawing on additional private capital as needed, according to the people familiar with the company. Or, with a loan from Uncle Sam, it could gamble and build a brand-new, bigger factory in a bid to gain economies of scale and dominate the market.

The Obama administration was eager to help. The loan-guarantee program dated to the George W. Bush administrationâit was created in a 2005 energy lawâand now was swimming in funds from the economic-stimulus package.

Solyndra's founder and chief executive at the time, Chris Gronet, decided to go for the gamble. "Chris was really a hard driver," said the former executive involved in the production of the solar panels. "The faster you solve problems, the faster you build your infrastructure, the quicker you are to market. You spend money to solve problems."

There was another motivatorâSolyndra's management and investors had an eye on an initial public offering.

"There was a perceived halo around the loan," said an investor with knowledge of the company. "If we get the loan, then we can definitely go public and cash out."

In December 2009, Solyndra made its initial IPO filing, with Goldman Sachs and Morgan Stanley MS -0.47% as lead underwriters.

The company brought in 3,000 workers to build the factory taxpayers had funded, but it quickly realized it had far too much capacity. The old factory alone could be outfitted to produce each year panels with power output of 110 megawatts each year. And the new factory would add another 500 megawatts. Yet sales for 2010 ultimately reached only 65 megawatts.

"The mindset of the management was if we make it, people will buy it," said the former executive. But the new factory added heavy fixed costs such as payroll, lease payments, and utility bills. At the same time, projected revenue wasn't coming in, magnifying the monthly drain of cash, the former executive said.

In June 2010, only weeks after President Barack Obama visited the company, the Solyndra board gave up the IPO plans. The following month Mr. Gronet left his CEO post and became chairman. The new CEO, Brian Harrison, shut down the old factory.

Unruly Campaign Tag : WSJ : Chase INK - Jan 2017

That didn't work either, as the tricky cylinder manufacturing equipment continued to keep costs high. Messrs. Gronet and Harrison couldn't be reached for comment.

And Solyndra realized, too late, that it was a mistake to sell its product mainly through distributors, according to one of the investors and the executive. They say Solyndra could have better pitched its product's advantages, such as a lower installation cost, by speaking directly to customers.

In March, Mr. Harrison said the company made a mistake of not focusing enough on market development. He said it was important to communicate directly to customers, rather than to just resell through distributors.

The new panels also were harder to finance because their performance was difficult to forecast accurately, said Arno Harris, chief executive of solar-project developer Recurrent Energy. He said his team considered purchasing Solyndra panels several times but decided that neither the economics nor the technical design made sense for his company.

Earlier this year, private backers advanced another $75 million in a loan to Solyndra, and, unusually, got ahead of the federal government in the event of a liquidation. This August, Solyndra needed still more money. The government was in talks to restructure its loan but eventually declined.

With no options in sight, the company pulled the plug, filing for bankruptcy and laying off about 1,100 employeesâleaving investors to rue what might have been.

"We had a perfectly good factory," said one of the investors. "That would have been a better size for the market."

rosetermite517

International Research Journal of Applied Finance ISSN 2229 â 6891

Vol. VI Issue â 8 August, 2015 Case Study Series

A Stock Valuation Case: An Application of the âMethod of Comparablesâ for Macyâs Shares

Halil D. Kaya* ,Julia S. Kwok

Abstract

The primary focus of this case is the application of the âMethod of Comparablesâ in the estimation of the value of a security. An investment decision will be made based on the comparison of the selling price and the estimated value. A security will be good for purchase if the estimated value is higher than the market price. This method utilizes basic financial ratios that are commonly provided by financial web sites. First, using Yahoo Finance website, the pricing, sales, book value of equity and shares outstanding data are collected for both the target firm and the competitor firms. Then, the pricing multiples (i.e. price earnings ratio, price to sales ratio and price to book ratio) of the competitors are calculated. After that, those multiples along with the target firmâs earnings, sales, book value and shares outstanding data are used to estimate target firmâs share value. The case also examines the impact of treating ânegativesâ in the data. Students will learn that replacing negative earnings with zeros tend to induce less bias in target firmâs value estimation than excluding the ânegativeâ data altogether.

Introduction

March 14, 2015 was a sunny day. Mary took advantage of the nice weather to have lunch at the Mall. On her way back to work, she walked by Susanâs investment office. Susan was Maryâs college roommate. They both liked shopping together to find new fashionable clothes. Looking at her watch, Mary realized she had half an hour to spend. She thought she would drop by and say hello to Susan.

The Performance of Macyâs

âHi, Susan, how are you?â How is your business?â said Mary. Susan was a recent finance graduate. Susan replied, âI am doing fine. Thank you. After so many years, the market is still recovering from the mortgage crisis; many investors have been buying back stocks that they have sold during the crisis. What are you up to?â âI want to start my investment in securities, too. I have a couple thousand dollars, would Macyâs be a good stock to invest in now? That was our favorite store to shop among all of the department stores,â Mary exclaimed. She added, âAlso, I read from Motleyâs Foolâs article on Macyâs today about its earnings per share growth for the last 16 quartersâ (Zahid Waheed, 2014).

In response to Maryâs questions, Susan checked the monthly adjusted returns of Macyâs in Yahoo Finance. She found that, since March 2010, Macyâs stock price had an average annual increase of 23.5% over the last 5 years. The stock rose from $19.98 to $57.38. Susan then told Mary that Macyâs was indeed a growing stock. She added that its success could be attributed to the omni-channel integration, e-commerce and magic selling strategies which allowed merging of sales channels, online shopping and better customer care. Since investment strategy 101 is to buy low, and sell high, given Macyâs stock price had been going up, Susan was not sure whether Macyâs was currently overvalued or undervalued by the market.

The Method of Comparables

Susan remembered her class lecture on the two types of valuation of stocks, namely absolute and relative evaluation. The absolute evaluation focuses on finding the intrinsic value of the security based on fundamentals. That involves more complicated models of discounting cash flows from dividends, operations and residual income.

On the other hand, relative evaluation is quick and easy to use. It assumes two similar securities should sell for one price in an efficient market, i.e. âLaw of One Price.â So an analyst can estimate its stock price by multiplying target companyâs specific earnings, sales and equity value data by the earning, sales and equity âper shareâ financial multiples of its competitors.

Since Mary was not familiarized with financial models, Susan decided to use the easy-toperform-and-analyze âComparables Methodâ to estimate the relative value of Macyâs stock.

The Financial Data

Dillards, JC Penney and Nordstrom were selected as competitors of Macyâs as they were all in retail department store business. Susan would need some financial data regarding these companies. She went to SECâs (i.e. Securities and Exchange Commission) website and downloaded these companiesâ most recent balance sheet and income statement data. Out of those statements, she knew that she would need the EPS (i.e. earnings per share), the sales number, the number of outstanding shares, and the book value of equity. She also knew that she would need the current share price for each company. After some work, she had found all the necessary information to run the analysis. Below were the data that she had gathered:

All data are in US$ except for the number of outstanding shares. The share price as of March 15, 2014 is shown in the first column. The âEarnings per shareâ is shown in the second column. The third column reports the book value of equity. The last column shows the number of outstanding shares.

Firm	P ($)	EPS ($)	Sales ($)	BV of equity ($)	# of shares
Macy's	58.58	3.93	27,931 mil.	6,249 mil.	378.3 mil.
Dillard's	90.61	7.10	6,532 mil.	1,992 mil.	45.6 mil.
JC Penney	8.71	-5.57	11,859 mil.	3,087 mil.	249.3 mil.
Nordstrom	61.33	3.77	12,166 mil.	2,080 mil.	194.5 mil.

The Decision

Susan thinks that the following steps would be necessary to perform the analysis:

1.Based on the data above, calculate Sales per share, BV of equity/share values of all firms. Note that EPS is directly given.

2.Calculate P/E, P/Sales, and P/B for all of Macyâs competitors based on the data obtained.

3.Find the average of the P/E, P/Sales, and P/B multiples for the three competitors.

4.Multiply those averages calculated in step 3 with Macyâs EPS, Sales per share, and BV of equity/share values, respectively to get three value estimates for Macyâs shares.

5.The average of the three estimates would then be Susanâs best estimate of Macyâs value per share.

answer # 1-5 please

pearotter934

I need help find the Weighted Average Cost of Capital as well as the Weighted Average Flotation Costs

COST OF CAPITAL EXERCISE

The Stone Meat Corporation is a mediumâsized agricultural products company headquartered in Ogden, Utah. Its primary products are beef, pork and poultry and include packaged deli meats to half animals sold directly to in-store butcher markets in the retail grocery stores. They also supply their own butcher packs to various retail outlets including grocery stores, big box stores, and restaurants. In addition, they have their own factory store. The firm's products are well recognized within the markets in terms of quality and food safety.

During the 2000's and the early 2010's sales and earnings had grown rapidly. Sales in 2002 were approximately $60 million, but had reached $180 million by 2012. Per share earnings and dividends more than kept pace. The relevant figures are contained in Exhibit 1.

In order to support the firm's expansion, substantial expenditures on plant and equipment were required during the period indicated. The majority of funds came from retained earnings and the private placement of debentures with insurance companies. In 2004, however, the company was forced to sell additional common stock because it felt that the debt level, which would ensue from trying to borrow the money to keep up its expansion program, would be excessive. In particular, possible adverse effects in its stock price were feared since, at the time, the firm's ratio of debt to total capitalization was already somewhat above the industry average of 30 percent. The firm's balance sheet as of December 31, 2012 is shown in Exhibit 1.

Originally, the company's Board of Directors had established a policy of paying out half its annual earnings as dividends. The actual percentage varied from year to year because an attempt was made to stabilize the dividends despite fluctuating profit. By the late 2000's, this policy had been revised to set oneâthird of earnings as the target payâout ratio due to the continuing need for capital. At their last annual meeting, the Directors announced that the 2012 dividend would be 60 cents per share, payable quarterly in 15 cent installments. The company's stock is listed on the AMEX and trades actively. The range of yearly stock prices is included in Exhibit 1. The closing price on June 30, 2012 was $24.

Market data indicated that Stone was somewhat less risky than the market as a whole with a beta of .80. Returns on the market were averaging approximately 12% and risk free borrowing was still low following the financial meltdown of 2008. These rates averaged 3.5%. Preferred stock, which had been issued many years ago as a part of a financial deal, was selling at $90 per share. Tax rates had averaged 30% over the last few years.

Early in 2012, the treasurer of Stone was reviewing its investment and financing strategies with an eye toward improving both. The question as to an appropriate cutâoff ratio of return on new investments was of special concern. The treasurer was of the opinion that many capital expenditures had been made in the past without proper analysis. He wanted a figure he could justify to the firm's managers as a cost of capital in order to achieve a more accurate capital budgeting procedure throughout the organization. He felt this was an especially timely move in view of an article he had just read in the WSJ and which is reproduced in Exhibit Ill. Stone's own longârange planning group had earlier forecast a trend not unlike that indicated in the Journal.

The treasurer was well aware that financing did not come free and that the costs of issuance of preferred stock would cost 8%, bonds would cost 4% and equity 12%. He thought it important to determine how such costs would inflate the costs of any proposed projects the company might pursue in the futures. Thus he wanted to determine what the total cost of a $1,000,000 investment would be after considering any financing costs.

Year	Sales in MillionsOf Dollars	EPS	DPS	Stock Price Range
2002	60	0.560	0.30	6-10
2003	63	0.500	0.30	5-9
2004	68	0.710	0.35	5-10
2005	85	0.880	0.40	8-12
2006	97	0.820	0.45	9-14
2007	119	0.940	0.45	12-20
2008	130	1.110	0.45	11-18
2009	145	1.350	0.45	15-24
2010	164	1.300	0.50	17-27
2011	173	1.600	0.50	20-30
2012	180	1.750	0.60	24-32

Exhibit II

Balance Sheet As of 12/31/2012 (figures in millions)

Cash	20
Accounts Receivable	10
Inventories	30
Plant and Equipment, net	60

Total Assets	120

Accounts Payable	20
Misc Accruals	10
Preferred Stock (5%)	10
Long term Debt	24
Common Stock (2.5 million shares)	12
Capital Surplus	4
Retained Earnings	40

Total Liabilities and Equity	120

The firm's bonds carried a 6% coupon, (paid semi-
annually) a 12/31/2022 maturity and were selling for
$960 as of 6/30/2012.

EXHIBIT III

Article taken form the February 7, 2012 issue of the Wall Street Journal.

Meat Processing Industry To Be Hurt by Increasing Prices?

Decimated Life stock Herds Also Contribute to Price Increases.

Kansas (AP) â The ConAgra Corporation, in a recent annual meeting announcement, forecast a trailing off of sales in its meat processing division. That division, which had been growing at a rate equivalent to three times the CPI growth rate throughout the 2000's and early 2010's, may be hit by decreases in household expenditures as the effects of the most recent financial crisis are still lingering for the decimated middle class. Retail outlets such as restaurants and grocery stores are reporting that sales of beef and pork products are declining in response to price pressures. Disease that swept through beef and pork herds, are also having a telling effect. Other sources close to the industry confirm the ConAgra prognosis. They estimate the best forecasts that their economists can come up with indicate a decline of about five percent in the growth rate which had been experienced in the last 12 to 15 years. ConAgra is curtailing several plant expansions in its meat processing division which were on the drawing board for the midâ2010's." We are moderately pessimistic," a company spokesman indicated, "and are going to adopt a wait and see attitude for the next year or so."

Hints

Create the Cost of Capital

Number of shares can be determined by taking the book value and dividing by the par value of the securities.

Market value is shares X price.

Average the two possible ways to calculate the cost of equity

Remember the tax rate.

Assume the bonds are semi - annual

The term to maturity is from 6/30/2012 to 12/31/2022 or 10.5 years. This info is in the footnote to Exhibit II

The growth rate should be determined from the EPS data and the adjustment to the growth rate is in Exhibit III

Create the Weighted Average Flotation Cost

What is the cost of equity using the dividend growth model? (Decimal answer to the fourth decimal place)

Given the $1,000,000 cost of the investment, what is the total cost of the investment including flotation costs? (Round to whole numbers)

FIN 2984 Lecture 8: Class 8

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