CASE QUESTIONS Cash Flows and Value. Cost of Capital Case 1: Hop-In Food Stores, Inc. 1. Determine the correct price for this particular IPO. Use several methods to do this and compare them. 2. What extra information would you try to acquire in a real life situation? Case 2: Chem-Cal Corporation 1. How do you calculate the WACC for this firm? 2. What is the cost of capital of the debt, preferred stock, and common stock (assume the equity beta is 1.22)? 3. Calculate the WACC. How can a WACC be used? 4. Which projects should be selected? (State your assumptions) 5. How should the projects be financed? Analyze all other issues in the case. Case 3: Marriot Corporation 1. What is the Weighted Average Cost of Capital for Marriott Corporation? 2. What is the cost of capital for the lodging and restaurant divisions of Marriot? 3. If Marriot uses a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time? Case 4: Tom.Com 1. Size up Tom.com Ltd. Assess Tom’s business model, revenue model, growth potential, risks, and major shareholders. 2. Consider the valuation of Internet stocks versus ‘traditional’ firms. What are the similarities? What are the differences? 3. Apply the implied average annual revenue growth rate approach to Tom as suggested by Perkins, as well as any other valuation approaches. Clearly state and be prepared to defend any assumptions. What is Tom’s worth compared to the suggested IPO price? 4. What would you recommend to Andy Lau and EuroGlobal regarding the purchase of Tom shares?
Capital Structure Case 5: AT&T 1. Review AT&T’s past financial policies and financing choices. Were these appropriate for the nature of its business? In what fundamental ways will its business change in the near future? What are the implications for financial policy? 2. What is the range of AT&T’s financial needs for the next 5 years? 3. In view of AT&T’s changing strategic and...
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