...Unit V Case Study Corey Reed Columbia Southern University BBA 4951, Business Policy and Strategy Professor Don Jernigan, MBA McDonald’s Case Study V McDonald’s perceived product positioning maps in comparison to their corporate strategy do line up to what is expected. There are areas for improvement in relation to their direct competition in every town. In reference to EPS/EBIT, it is relevant to their strategy implementation. McDonald’s product positioning maps do line up with their corporate strategy. Their strategy or motto is “Plan to Win”. When I think of a fast food restaurant winning, I think of winning over the masses of customer traffic. They certainly do this well. What makes up this strategy is; continued growth in the US and abroad, being a sustainable company, new items, new designs of business models, and remaining very competitive (NMINM's University, "n.d."). There is nothing about being the best quality, friendliest customer service, healthiest option, or most comfortable atmosphere. In these categories, I feel that they want to just do better than they have in the past with continued improvements. When you take a look at these product positioning maps, they tend to fall on the lower ends and very conservative in many fields such as atmosphere, quality, healthy choices, and limited choices (NMINM's University, "n.d."). Areas they tend to do better than some of their competition is speed of service, taste, and price (NMINM's University, "n.d."). This...
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...Chapter1 Essay Questions 101. Compare and contrast strategic planning with strategic management. Strategic planning is more often used in the business world, whereas strategic management is often used in academia. Sometimes, strategic management is used to refer to strategy formulation, implementation and evaluation, with strategic planning referring only to strategy formulation. The purpose of strategic management is to exploit and create new and different opportunities for tomorrow; long-range planning, in contrast, tries to optimize for tomorrow the trends of today. Page: 5 102. Which stage in the strategic-management process is most difficult? Explain why. Strategy implementation is the most difficult stage in the strategic-management process because it requires personal discipline, commitment and sacrifice. Successful strategy implementation hinges upon managers’ ability to motivate employees, which is more of an art than a science. Page: 6 103. Explain the relationship between strategic management and competitive advantage for firms. How can a firm achieve sustained competitive advantage? Ans: Strategic management is all about gaining and maintaining competitive advantage. Competitive advantage is anything a firm does especially well compared to rival firms. When a firm can do something that rival firms cannot do, or owns something that rival firms desire, that can represent a competitive advantage. Getting...
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...Intelligence Warfighting Functions: EP3E-ARIES II Emily R. Fannin ALC NCO Academy Intelligence Warfighting Functions: EP3E-ARIES II The establishment and utilization of Military Intelligence can be traced as far back as 1775, during the founding of the Continental Army. The Military Intelligence mission and main focus is to provide timely and accurate intelligence to tactical and strategic unit commanders in order to portray the image of the battlefield. There are several intelligence disciplines utilized to fulfill this requirement such as Human Intelligence, Geospatial Intelligence, Measurement and Signature Intelligence, and many more. There is however, one discipline which features an exploitation system of interest that falls under Electronic Intelligence, a category of Signals Intelligence (SIGINT). This platform is known as the EP3E-ARIES II. According to Naval Air Systems Command (2009), the design of the EP3E-ARIES II was originally based off the P-3 Orion that was introduced to the United States Navy in 1960. After modifications were made to the P-3 Orion in the 1960’s and early 1970’s, the EP3E-ARIES II was finally completed and presented to the Navy in 1997, which currently poses 11 of the land-based aircrafts in their inventory. The Airborne Reconnaissance Integrated Electronics System are at the moment being utilized by both the Navy’s Atlantic and Pacific Fleets in areas such as Washington, Texas, Florida, California, and Japan (Boltinghouse, 2001)...
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...financial institutions and other sources or debentures or bonds) can be obtained at a cost lower than the firm’s rate of return on net assets. So, when the difference between the earnings generated by assets financed by the fixedcharges funds and costs of these funds is distributed to the shareholders, the earnings per share (EPS) (or return on equity, ROE) increases. EPS is calculated by dividing profits after tax (PAT) (net of preference dividend) by the number of shares outstanding. Example: All-equity Debt-equity 1. Investment 500,000 500,000 2. Equity capital 500,000 250,000 3. Debt capital @ 15% 0 250,000 4 EBIT 120,000 120,000 5. Less: Interest 0 37,500 6. PBT 120,000 82,500 7. Less: Taxes @ 50% 60,000 41,250 ------------8. PAT 60,000 41,250 9. No. of equity shares 50,000 25,000 10. EPS (5 ÷ 6) 1.20 1.65 This indicates that EPS increases as debt in introduced in the capital structure. Q.2. A.2. Does financial leverage always increase the earnings per share? Illustrate your answer. The earnings per share will increase if return on assets is higher than the interest cost, and EPS will reduce if return on assets is lower than the interest cost. The EPS will not be affected by the level...
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... 302 Part 4 Long-Term Financial Decisions (b) Graphic Operating Breakeven Analysis 3000 Profits Breakeven Point Sales Revenue Total Operating Cost 2500 2000 Cost/Revenue ($000) Losses 1500 1000 500 Fixed Cost 0 0 4000 8000 12000 16000 20000 24000 Sales (Units) P12-4. LG 1: Breakeven Analysis Intermediate (a) Q = $73, 500 = 21, 000 CDs ( $13.98 − $10.48) (b) Total operating costs = FC + (Q × VC) Total operating costs = $73,500 + (21,000 × $10.48) Total operating costs = $293,580 (c) 2,000 × 12 = 24,000 CDs per year. 2,000 records per month exceeds the operating breakeven by 3,000 records per year. Barry should go into the CD business. (d) EBIT = (P × Q) − FC − (VC × Q) EBIT = ($13.98 × 24,000) − $73,500 − ($10.48 × 24,000) EBIT = $335,520 − $73,500 − $251,520 EBIT = $10,500 Chapter 12 Leverage and Capital Structure 303 P12-5. LG 1: Breakeven Point–Changing Costs/Revenues Intermediate Q = $40,000 ÷ ($10 − $8) = 20,000 books (a) Q = F ÷ (P − VC) = 22,000 books (b) Q = $44,000 ÷ $2.00 = 16,000 books (c) Q = $40,000 ÷ $2.50 = 26,667 books (d) Q = $40,000 ÷ $1.50 (e) The operating breakeven point is directly related to fixed and...
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... (08EM-028) Varun Sharma (08EM-051) Anushree Singh (08EM-012) Paras Sharma (08EM-027) Suneet Sharma (08EM-047) Raunaq Singh (08EM-034) Contents 1) Introduction 3 a) Nestle India 3 2) EPS Calculation 3 a) EPS Break-up 3 3) D/E Calculation 4 a) Debt and Equity Values 4 4) Interest Coverage Ratio 5 a) EBIT - Interest Values 5 5) Project Financing 6 a) EPS 6 b) D/E 7 c) Coverage Ratio 7 d) Equity- Debt 8 e) Equity- Preference Shares 8 6) Conclusion 10 Introduction Nestle India Nestle India is a subsidiary of Nestle S.A. of Switzerland. Nestle India manufactures a variety of food products such as infant food, milk products, beverages, prepared dishes & cooking aids, and chocolates & confectionary. Some of the famous brands of Nestle are NESCAFE, MAGGI, MILKYBAR, MILO, KIT KAT, BAR-ONE, MILKMAID, NESTEA, NESTLE Milk, NESTLE SLIM Milk, NESTLE Fresh 'n' Natural Dahi and NESTLE Jeera Raita. EPS Calculation EPS Break-up | |Dec, 2007 | |Total Income |35297.94 | |Total Expenditure |28244.06 | |EBIT |7053.88 | |Interest |8.55 | |Depreciation |759.19 | |EBT ...
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...determined to some extent by the character of the firm's industry, but each of them is also controllable to some degree through the firm's strategic operating decisions. The second source of risk is financial risk. This risk is related to the firm’s financial policies, specifically the use of debt in financing operations. The use of debt obligates a firm to make interest and principal payments, regardless of profit levels. These fixed financial expenses compound fluctuations in operating income (EBIT) and introduce additional risk to stockholders. Separating business and financial risk convenient illustrates the division between firm operating and financial policies. Both are important and poor management in one area can easily undo good management in the other. Operating Leverage Business risk depends in part on the extent to which a firm builds fixed costs into its operations. If fixed costs are high, even a small change in sales can result in a large change in EBIT. The measure of a firm's operating risk is called operating leverage. If a high percentage of a firm's operating costs is fixed, the firm will have a...
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... Consider the EPS-EBIT chart. a. Why do the lines for the stock plan and the bond plan have different slopes? What’s the significance of this difference? Because the calculation of EPS is net income divided by outstanding shares, two lines for the stock plan and bond plan have different slope. The significant difference is that two variables are different on bond and stock plan. If we assume two plans have same EBIT, a net income shows different value on two plans due to the interest expense of bond, which is 5.0 million dollar in every year till maturity. Another compounding that used to calculate EPS is outstanding shares that also differ on two plans. On bond plan, outstanding shares would be 4.5 million whereas for stock plan is 7.5 million. b. Why are EPS equal under the two plans at an EBIT of $12.5 million? Which plan would produce the higher EPS at $10 million? At $15 million? Although the stock and bond plans have a same EPS at an EBIT of $12.5 million, equation is different. The equation is shown below: Bond plan: EPS=(Net income-Dividends on preffered stock)/(Average outstanding shares)=$4'500'000/4'500'00=$1.0 Stock plan:EPS= $7'500'000/7'500'000=$1.0 According to the graph and equation, If EBIT increases above $12.5 million, bond plan will produce higher EPS because increasing debt affects to increase leverage. If EBIT decrease below $12.5 million, stock plan will produce higher EPS. Exact values are shown below. EBIT Bond Plan / EPS/ Higher Stock plan...
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...specified) a). Opening Profit (EBIT) = 1,60,000 Less 10% debenture of Rs.5,00,000 =50,000 b) EBT = 1,10,000 Less 55% tax =60,500 c). EAT =49,500 Less 12% preference share of 1,00,000 =12,000 d). EAES(Earning available to equity share holder) =37,500 e). No. of share =4,000 f). EPS (EAES/No.of share) =9.375 (Ans: i) g). 30% increase in EBIT =2,08,000 Less 10% debenture of Rs.5,00,000 =50,000 h). EBT = 1,58,000 Less 55% tax =86,900 i). EAT =71,100 Less 12% preference share of 1,00,000 =12,000 j). EAES (Earning available to equity share holder) =59,100 k).EPS(with 30% increase in EBIT) =14.775 l). % change in EPS (14.775-9.375)*100/9.375 =57.60% (Ans-ii) m). 30% decrease in EBIT =1,12,000 Less 10% debenture of Rs.5,00,000 =50,000 n). EBT = 62,000 Less 55% tax of EBT =34,100 o). EAT =27,900 Less 12% preference share of 1,00,000 =12,000 p). EAES (Earning available to equity share holder) =15,900 q).EPS(with 30% decrease in EBIT) =3.975 r). % change in EPS (3.975-9.375)*100/9.375 =(-)57.60% (Ans-ii) s). Degree of Financial Leverage (DFL)= % CHANGE IN EPS/% CHANGE IN EBIT t). when 30% increase in EBIT, DFL (57.6/30) =1.92(Ans-iii) u). when 30% decrease in EBIT, DFL (-57.6/-30) =1.92(Ans-iii) Q2: SOLUTION: (all figure in INR, if not specified, other than numbers) a). No. of share = 50,000 b). Addl Capital requirement = 2,50,000 c). Op. Profit (EBIT) = 80,000 PLAN-I:...
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...from the presence of fixed financing costs such as interest. Concepts that enhance our understanding of risk... 1) Operating Leverage - affects a firm’s business risk. 2) Financial Leverage - affects a firm’s financial risk. Operating Leverage The use of fixed operating costs as opposed to variable operating costs. A firm with relatively high fixed operating costs will experience more variable operating income if sales change. So it is the responsiveness of the firm’s EBIT to fluctuations in sales. Costs • Suppose the firm has both fixed operating costs (administrative salaries, insurance, rent, property tax) and variable operating costs (materials, labor, energy, packaging, sales commissions). Total Revenue Rs }EBIT Total Cost + Breakeven point Q1 Quantity { - FC Operating Leverage • What happens if the firm increases its fixed operating costs and reduces (or eliminates) its variable costs? Total Revenue Rs + FC } Q1 EBIT Total Cost = Fixed { New Breakeven Point with FC Old Breakeven Point with VC &FC Quantity With high operating leverage, an increase in sales produces a relatively larger increase in operating income. Trade-off: the firm has a higher breakeven point. If sales are not high enough, the firm will not meet its fixed expenses! Breakeven Calculations Breakeven point (units of output): BEP (Q) = F/(P – V) F = total anticipated fixed costs. P = sales price per unit...
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...CHAPTER 14 CAPITAL STRUCTURE: BASIC CONCEPTS Answers to Concept Questions 1. Assumptions of the Modigliani-Miller theory in a world without taxes: 1) Individuals can borrow at the same interest rate at which the firm borrows. Since investors can purchase securities on margin, an individual’s effective interest rate is probably no higher than that for a firm. Therefore, this assumption is reasonable when applying MM’s theory to the real world. If a firm were able to borrow at a rate lower than individuals, the firm’s value would increase through corporate leverage. As MM Proposition I states, this is not the case in a world with no taxes. 2) There are no taxes. In the real world, firms do pay taxes. In the presence of corporate taxes, the value of a firm is positively related to its debt level. Since interest payments are deductible, increasing debt reduces taxes and raises the value of the firm. 3) There are no costs of financial distress. In the real world, costs of financial distress can be substantial. Since stockholders eventually bear these costs, there are incentives for a firm to lower the amount of debt in its capital structure. This topic will be discussed in more detail in later chapters. 2. False. A reduction in leverage will decrease both the risk of the stock and its expected return. Modigliani and Miller state that, in the absence of taxes, these two effects exactly cancel each other out and leave the price of the stock and the overall value...
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...Capital Structure What is the primary goal of financial managers? Maximize stockholder wealth We want to choose the capital structure that will maximize stockholder wealth We can maximize stockholder wealth by maximizing the value of the firm or minimizing the WACC 3 How does leverage affect the EPS and ROE of a firm? When we increase the amount of debt financing, we increase the fixed interest expense If we have a really good year, then we pay our fixed cost and we have more left over for our stockholders If we have a really bad year, we still have to pay our fixed costs and we have less left over for our stockholders Leverage amplifies the variation in both EPS and ROE 4 The Effect of Leverage Example: Financial Leverage, EPS and ROE – Part I We will ignore the effect of taxes at this stage What happens to EPS and ROE when we issue debt and buy back shares of stock? ABC is a company with no debt in its current capital structure. The financial managers are proposing to restructure the company by issuing debts and buying back some of the outstanding shares. Note that the EBIT is not...
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... |$800,000.00 | |Less: Fixed Costs |$600,000.00 | |Earning before Interest & Taxes (EBIT) |$200,000.00 | |Interest Expenses |$80,000.00 | |Earnings before Taxes (EBT) |$120,000.00 | |Income Tax expense (30%) |$36,000.00 | |Earnings After taxes (EAT) |$84,000.00 | Given This Income Statement, Compute the Following: a. Degree of Operating Leverage (DOL) b. Degree of Financial Leverage (DFL) c. Degree of Combined Leverage (DCL) d. Break-even Point in Units, & BEP in Dollar Solution:1 Requirement "a": Degree of Operating Leverage (DOL): DOL = Contribution EBIT DOL = $800,000 $200,000 = 4 Times Requirement "b": Degree of...
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...(Weighted average cost of capital) The target capital structure for QM Industries is 45% common stock, 6% preferred stock, and 49% debt. If the cost of common equity for the firm is 17.9%, the cost of preferred stock is 10.6%, the before-tax cost of debt is 8.9%, and the firm’s tax rate is 35%, what is QM’s weighted average cost of capital? QM’s WAAC is _%? 2).(Weighted average cost of capital)Crypton Electronics has a capital structure consisting of 45% common stock and 55% debt. A debt issue of $1,000 par value, 6.1% bonds that mature in 15 years and pay annual interest will sell for $980. Common stock of the firm is currently selling for $29.76 per share and the firm expects to pay a $2.29 dividend next year. Dividends have grown at the rate of 5.3% per year and are expected to continue to do so for the foreseeable future. What is Crypton’s cost of capital where the firm’s tax rate is 30%? Crypton’s cost of capital is _%? 3). (Weighted average cost of capital)The target capital structure for Jowers Manufacturing is 51% common stick, 18% preferred stock, and 31% debt. If the cost of common equity for the firm is 19.3%, the cost of preferred stock is 12.9% and before-tax cost of debt is 10.4%, what is Jowers’ cost of capital? The firm’s tax rate is 34% Jowers’ WACC is _% 4).(Weighted average cost of capital) As a member of the finance Department of Ranch Manufacturing, your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase...
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... In order to sustain continuous growth in revenues and income, management has decided that key acquisitions need to be made. The top contender, Midland Freight, Inc., a common carrier company would expand CCI’s route system. The prospect company also demonstrated congruence with the type of marketing and cost reduction programs that ushered CCI’s growth. The owners of Midland agreed to sell it for $50 million in cash. Since the stipulation was for cash, the funds would have to be acquired externally so as to prevent cash flow problems that would disrupt operations for CCI. One of the primary considerations was that the pending merger would provide additional $8.4 million annually in Earnings before interest and taxes (EBIT) making it easy for management to seek external funds. Another serious consideration was that CCI has always had a consistent policy of having no long-term debt in its capital structure. In 1988, the current year, the company’s capital structure was purely composed of common stock and surplus. In addition, most of the common stock was being held by management. Furthermore, there is no dominant interest except that of management. Ms. Thorp, the CCI treasurer proposed 2 options. The first proposal included an issuance of 3 million shares of new common stock, in line with the no long-term debt policy of the company. However, Ms. Thorp and president, Mr. Evans had not been satisfied with the performance of the common stock of the...
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