FIN501 SLP1,2,3,4,5 & FIN501 Case #3

This assignment is broken down to 5 different papers so please make sure each section you do, you mark every section because I need to give them in at separate times. Each module is a different section and its two page per module (total of 5 pages) Please make sure not to mix any section up with each other. You could pick any company which is easy for you to research if you have any question email me. The directions for each section are pretty clear. Thank you so much Module 1 - SLP Initial public offerings: The session long project (SLP) for the course will be performed using information on a company that is listed on the New York Stock Exchange (NYSE). You are to choose a company that is publicly traded in the stock market. If you are unsure which company to choose, you can look through this list of companies in the the S&P 500. The company can't be a financial institution such as a bank, insurance company or a trust company. The company that you choose will be 'your SLP Company' for the entire course. Please state the name of that company in each of the Session Long Project reports. You are to search for the company's web site, approach the section called "Investors relations" in order to obtain the financial information of the company over the past several years. Your deliverables for the first Module are to write a two page paper with the following: 1. Provide a brief description of the company you chose, its main business and operational activities and a short synopsis of the main developments of the company over the past few years of the company. Include some financial information such as the stock price, its profitability, and other financial information you find relevant. 2. Explain why you chose this company, i.e. what makes it interesting to you personally. 3. This is the main part of the assignment. Find out what you can about your SLP company's IPO. If it is a newer corporation, this should not be too difficult. But if it is an older company this might be difficult. So if you cannot find any information about your company's IPO, instead discuss how you would go about taking your company public using what you've learned from the background materials. Session Long Project Expectations This paper will be graded with the following criteria in mind: A. Provide a direct answer to all three assignment questions, focus only on these three questions. B. Reference all of your sources of information, both within the text as well as with a bibliography at the end. C. For question 3, you should apply your knowledge of IPOs from reading the background materials. Cite at least some of background material sources in your paper. D. Your paper should be two pages in length. these are the backround readinds below: Required Readings A good place to start is this link from the government - click on the other links once you reach this page: U.S. Securities and Exchange Commission (n.d.), Initial Public Offerings, retrieved August 2009 at: http://www(dot)sec(dot)gov/answers/ipo.htm Kamlet, A., & Rini, W. (1995). Stocks: Initial Public Offerings, retrieved August 2009 at: http://invest-faq(dot)com/cbc/stock-ipo.html Investopedia (2008) IPO Basics: Introduction, retrieved August 2009 at: http://www(dot)investopedia(dot)com/university/ipo/ Case Assignment Readings eBay Press Release (April, 2009). eBay Inc. Announces Plan for 2010 Initial Public Offering of Skype. Retrieved August, 2009, from http://files(dot)shareholder(dot)com/downloads/ebay/676142613x0x287046/ 95ba0c30-057d-4a67-859c-8cac8e7be234/EBAY_News_2009_4_14_General.pdf Carter, A. (2005, January 10, 2005). Morningstar Follows Google's Lead. Retrieved October 22, 2007, from http://www(dot)businessweek(dot)com/bwdaily/dnflash/jan2005/nf20050110_8372_db035.htm tm Module 2 - SLP Time value of money Your task for this module is to apply the concept of present value to your chosen SLP company. Suppose your company is selling a bond that will pay you $1000 in one year from today. Keep in mind that if your company has financial difficulties in one year you might not get your full $1000 back. Given that a dollar one year from now is always worth less than a dollar today, you most certainly would not pay a full $1000 for this bond. If you are highly risk averse or strongly prefer having money today to having money tomorrow, then you would pay significantly less than $1000 for this bond. Higher inflation or high interest rates would also lead you to pay less for the bond. Also, the greater the chance of bankrupty of your company the less you should be willing to pay for the bond. Given the concepts of the time value of money, answer the following questions in a two to three page paper: 1. How much would you pay for this bond today? Take into consideration your own personal risk preferences, interest rates, inflation, and the probability your company will not be able to pay you back in one year. Note: no need for any math equations for this part. Just explain how much you would personally pay for a $1000 bond from this company. 2. Based on your answer to the previous question, what would be your discount rate for this bond? Use the present value formulas from the background materials and show your work. 3. Pick two other companies in the same industry as your SLP company. One should be one that you would pay less for a $1000 bond than you would from your SLP company and another one that you would pay more for a $1000 bond from your SLP company. Explain why you would pay more or less for their bonds. Session Long Project Expectations This paper will be graded with the following criteria in mind: A. Provide a direct answer to all three assignment questions, focus only on these three questions. B. Reference all of your sources of information, both within the text as well as with a bibliography at the end. C. For all calculations, show all of your work and demonstrate that you understand the steps. D. Your paper should be two pages in length. Module 3 - SLP Risk and return, portfolio diversification and the Capital Asset Pricing Model; The cost of equity In this section of the Session Long Project you'll estimate the cost of equity or the rate of return that your company's shareholders 'require'. This is an important piece of information that every top manager must be able to estimate because it will be an important input in any effort to determine whether any particular course of action by the company will or will not add value to the shareholders. We are going to use the Capital Asset Pricing Model (CAPM) in order to estimate the rate of return that our shareholders require on their investment. This is the minimum rate of return that these shareholders require. As stated above - we call this rate 'the cost of equity' and it is expressed in percentages or in a decimal format. The CAPM states the following equilibrium relationship between the (excess) rate of return that shareholders of a particular company "j" require (or actually in some sense 'deserve' if they fully diversify their investments) and the (excess) expected rate of return on the market portfolio: Rj - RF = j [RM - RF] It follows that the rate of return that shareholders require or expect to earn on their investment in the shares of the company, or 'the cost of equity' is: Rj = RF + j [RM - RF] In order to estimate the cost of equity for your company you need to obtain an estimate of the company's 'beta' or systematic risk coefficient, on the annual rate of return on a risk-free investment, and on the expected rate of return on the 'market portfolio'. You can easily find that information by going to the following web site: http://finance(dot)yahoo(dot)com and insert the name of your company. The beta of the company is reported on that web site. Click on the "key statistics" link on the left hand side of the screen to find the beta and other information. First out what is the present Yield to Maturity (YTM) on a US Government bond that matures in one year. That rate is the 'risk-free rate'. Next, tt is customary to assume that the difference between the expected rate of return on the 'market portfolio' and the risk-free rate rate of return is about 7.0%. This is the expression [RM - RF] . So if for example the risk-free rate of interest is, say, 3% per year, than the expected rate of return on the 'market portfolio', RM, is 10%. So, multiply the 'beta' of your SLP Company by 7.0%. That will be the equivalent of your company's j [RM - RF] . Then add to that number the current yield to maturity on a US Government bond [see step (1) above]. You are free to try to research and find more up to date values of RM and RF, but to simplify this assignment you can also assume that RF = 3, RM =10 and [RM - RF]= 7. The above procedure provides you with an estimate of the rate of return that the shareholders of your SLP Company require on their investment. This rate is called the cost of equity of your company. After going through these calculations, write a two page paper with the following information: 1. Show your work to used to obtain the cost of equity for your SLP company. 2. Is this cost of equity higher or lower than you expected? The average cost of capital for a firm in the S&P 500 is 10.2 percent. Would you think your firm should have a lower or a higher cost of capital than the average firm? 3. Look up the betas for some of the other companies that you compared your SLP company to for your Module 2 SLP. These are the companies that you had to explain had a higher or lower discount rate than your SLP company. Using these betas, compute the cost of equity for these firms. How do they compare to your SLP company? Are you surprised that some firms have a higher or lower ost of equity than your SLP company? 4. How would you go about finding the cost of equity using the dividend growth model or the arbitrage pricing theory for your SLP company? Don't worry, you don't actually have to do any calculations - just explain how you would go about doing these calculations and explain what kind of additional information you might need. Session Long Project Expectations This paper will be graded with the following criteria in mind: A. Provide a direct answer to all four assignment questions, focus only on these four questions. B. Reference all of your sources of information, both within the text as well as with a bibliography at the end. C. For all calculations, show all of your work and demonstrate that you understand the steps. D. Your paper should be two pages in length. Module 4 - SLP The capital structure decision and the cost of capital Balance Sheet and Market Value of Your Company's Liabilities and Equity Refer to your company's most recent balance sheet. Review the 'liabilities and equity side' of the balance sheet. (a) Short term liabilities (or debt) and long term liabilities Find our from the balance sheet of the company the total of the short term liabilities (also called 'short term debt') and long term liabilities (also called 'long term debt') (b) Equity The market value of equity is by definition equal to the number of shares outstanding times the market price per share. Find out the number of shares outstanding and the recent price per share. Then multiply one by the other in order to find the market value of equity of your company. If you have a problem finding our the number of shares outstanding you may go to http://finance(dot)google(dot)com and insert the name of your company. The market value of equity of your company is what is called 'Mkt Cap' (that is, Market Capitalization) that is market capitalization. An alternative site is http://finance(dot)yahoo(dot)com where again you insert your company's name and get the market capitalization. Once you have this information, prepare a two page paper with the following: 1. Compute the debt ratio of your company (total liabilities divided by the total liabilities plus equity) and the debt to equity ratio, (total liabilities divided by total equity). Also, show these two ratios for short-term liabilities only and for long-term liabilities only (instead of total liabilities use just short-term liabilities and long-term liabilities). Show all of your work and calculations. 2. Give your recommendation as to whether or not you consider these ratios to be too small or too large. Should your SLP company increase its debt or take steps to pay off its debt? 3. Compute the debt to equity ratios to two other companies in the same industry as your SLP company. Which of these three companies has the highest debt to equity ratio, and why do you think it chose to have a relatively high ratio? Which of these three companies has the lowest debt to equity ratio, and why do you think it chose to have a relatively lower ratio? Session Long Project Expectations This paper will be graded with the following criteria in mind:A. Provide a direct answer to all three assignment questions, focus only on these three questions.B. Reference all of your sources of information, both within the text as well as with a bibliography at the end.C. For all calculations, show all of your work and demonstrate that you understand the steps.D. Your paper should be two pages in length. Module 5 - SLP Mergers and acquisitions For this SLP, think about your SLP company and the possibility of it merging with another company. Write a two page paper answering the following questions: 1. If you were to pick one company for your SLP company to merge with, what would it be? Explain your choice with respect to possible benefits of this merger and why you would choose this company over any other choice for a potential. 2. How would you finance a takeover of this chosen corporation? Explain your reasoning. 3. What would your second and third choices be for a merger with your SLP company? Again, explain your reasoning for wanting to merge with these companies, and why they would be second or third choices rather than your first choice. Remember to make use of the background materials in your analysis as well as additional research. Please reference all of your main sources of information, and use multiple references in your analysis. Session Long Project Expectations This paper will be graded with the following criteria in mind: A. Provide a direct answer to all three assignment questions, focus only on these three questions. B. Reference all of your sources of information, both within the text as well as with a bibliography at the end. C. Your paper should be two pages in length. This need to be five pages: Module 3 - Case Risk and return, portfolio diversification and the Capital Asset Pricing Model; The cost of equity The cost of equity capital and the CAPM Review the background material on the capital asset pricing model, the material on the dividend growth model, and arbitrage pricing theory and do some of your own research using internet search engines and the CyberLibrary as well. These models provide some insights and tools to estimate the rate of return that investors in our company 'require' in the sense that if they don't see the possibility that they'll earn that rate of return they'll sell the shares and that of course will lower the market price per share. These models use a set of assumptions that are not necessarily tenable. You are asked by your board of directors to write a report explaining the challenge of estimating or coming with a good 'feel' for the "cost of equity capital" or the rate of return that you feel your company investors require as the minimum rate of return that they expect of require your company to earn on their investment in the shares of the company. There are several asset pricing models used to estimate the cost of equity capital that you have read about for this module in the background materials. After reading through the background materials, write a report to the board of directors (of your SLP Company) in a five page paper addressing the following issue: Which of the three models (dividend growth, CAPM, or APT) is the best one for estimating the required rate of return (or discount rate) of your company? In your paper include discussion of the following issues: 1. Ease of use of these three models 2. Accuracy of each of these three models 3. How realistic the assumptions of each model are For this paper you need to take a clear stand and pick one of these three models to defend to the Board of Directors. You cannot tell the Board of Directors that "I like all three models", they want you to come to them with a decisive choice of just one model. Case Assignment Expectations In the grading of your assignment, you will be assessed on the following items: 1. The use of multiple references including both references in the background materials as well as references you find from your own research internet search engines. 2. Your paper from beginning to end on the precise assignment question. No need for lengthy background information. Your very first paragraph should include a direct answer to the assignment question, with the body of your paper focused on defending your answer. See the attached Tips for Good Writing for more detail on these expectations. This is the tips for good writing page:Tips for Good Writing When writing a narrative academic paper there is a basic style you need to comply with. Along with the TUI style guide you have in your introductory information, I have certain expectations. There is more to writing than simply formatting the document properly and making your footnotes conform to a specific standard. There is more to writing than simply meeting the MLA guide to style and having decent grammar and spelling. Learning the basics of academic writing will give you the foundation you need to create a successful dissertation or published article. The methods presented below are universal and fundamental. These principles are true for good writing in any form. But the requirements are basic. In time you will outgrow this simple formula. But for now, I want to make sure that we can meet the basic standards for clarity of expression and rigor in argumentation. A good paper has three parts: I. Introduction II. Body III. Conclusion This sounds simple, I know, but it is rarely presented the first time. The old saying "tell me what you are going to say, say it, tell me what you said" is the hallmark of basic writing skills. Now let's take each element in turn. I. Introduction: In the introduction you need to have three elements: the problem, your answer, and how you will prove it. First, tell me what the problem is; what are we talking about? I need to know the surrounding issue. Second, what is your answer to the question? In one sentence, answer the question you were asked. This is the most important part of your paper. Everything else depends on it. You cannot ask yourself too many times, what is my point? Everything in your paper is there for one reason only, that is, to prove that your thesis is correct. Third, tell me how you will prove that your point is correct. In order of importance, tell me what your major reasons are for believing your thesis to be true. At the end of your introduction I should be able to stop, and know what the problem is, what your answer to the problem is, and how you are going to prove it. II. Body In the body of your paper I want you to argue for why your answer to the question is correct. Discuss one point at a time and explain each point thoroughly. Use the material you have researched, facts you have compiled, personal experience, speculation if you must. I want to see you prove your answer to be correct. One point per paragraph! In each paragraph you will have a thesis statement at the outset. What is the point of that paragraph? The point of each paragraph (you may have more than one paragraph per point, although not the other way around) must be clear in how it proves your thesis to be correct. A good paragraph has three elements: the point; the explanation; the conclusion. In each paragraph I want to know what point you are making, you must explain it thoroughly, and say how it proves your thesis to be correct. Detail your explanations and clearly show how they prove that you are right. III. Conclusion A good conclusion is a simple matter. Simply sum up how you proved your thesis to be correct. Follow these basic guidelines and you will produce a good basic paper. Once you have mastered the fundamental style of argument we can work on making you the next Marcel Proust. Be patient! 3. Your paper should be at least five pages in lengths. 4. Your paper should include proper referencing, both with a bibliography and references within your text.