Ask Strategic Management Expert

You recently joined ‘Arigato’, a Japanese company which owns a chain of sushi restaurants across the state.

The company’s stock is hundred percent owned by its two cofounders and the current market price of each of the 1 million shares of stock is $20.

One of your first big assignments at work was working in a team with a few other employees of the company on assessing the level of risk of the company and compare it with that of its competitors in the restaurant business. Your team recognized four main competitors, also owned fully by their respective cofounders: Todai, Yamashiro, Sakana and Mika. The sizes of the four competing companies are comparable to the size of your company. You have found out that the risk of ‘Arigato’ reflects the average risk of the competitors. In your role of financial analysts, you applied your sophisticated finance knowledge and get the following information regarding different financial investments:

237_financial investments.jpg

Your most recent assignment is to assess the profitability of a new investment project: opening a new sushi restaurant in Pomona. You were asked to examine the projected revenues and costs and advise the board of directors on the company’s future financial planning. Below is the information about the project:

272_project information.jpg

Corporate income tax rate is 34%. The project equipment (that is, the initial investment) will depreciate on the straight line over 4-years to zero salvage value.

Based on the above information, answer the given problems:

problem 1: Compute the Betas of T-bills, S&P500 and the four competitors. Which one of such has the highest total risk (describe what total risk means)? The highest systematic risk (describe what systematic risk means)? Compute and describe all calculations.

problem 2: You analyzed the company’s performance and made a report for your boss regarding the relative riskiness of the company’s and also of its competitors’ stock returns. In this report you concluded that the expected return on the company’s stock correctly reflects its systematic risk. Based on this, find out the annual rate of return on equity that investors need? Compute and describe.

problem 3: What is the weighted average cost of capital for the proposed investment project? Is the project as risky as the company? Compute both and elucidate your calculations.

problem 4: Would you propose your boss to accept or reject the new sushi restaurant project? Compute the net present value of the proposed project. Describe all calculations.

problem 5: How would the systematic risk of the company change if the project got accepted? For that you can use the information given earlier regarding the company’s current capital structure and the fact that the other $2,000,000 worth of additional equity was raised to cover the initial cost of the project.

problem 6: You and your company’s co-owners decided to do an additional research regarding the possible debt financing of the project. You did some additional computations and came to conclusion that paying for the initial investment of the project with equity alone is not optimal. You believe that financing half of the total initial investment by debt and only half by equity would be a good target debt-equity ratio and that by using it would maximize the value of the new sushi restaurant project. The debt is risk-free and therefore has the same expected return as the risk-free asset. It is interest-only loan that means that it will need annual interest payments for four years, and the principal will be fully repaid at the end of the fourth year.

a) What is the present value of the project by using the Adjusted Present Value (APV) approach? Compute and describe.
b) What is the present value of the project by using the Cash Flow-to-Equity (FTE) approach? Compute and describe.
c) Finally, what would be the present value of the project based on the Weighted Average Cost of Capital (WACC) approach? Compute and describe.

problem 7: Would your answers to problem 6-(a), (b), (c) change if the debt instead looked like a four-year amortizing loan, with fixed total annual payments in all four years? (You can review what amortizing loans appear like in Ross, Westerfield, Jordan textbook which you used in FRL300 class, or you can use other sources.) Describe and show all computations and also what changes in your answers to 6-(a), (b), and (c), where essential.

Strategic Management, Management Studies

  • Category:- Strategic Management
  • Reference No.:- M92987

Have any Question?


Related Questions in Strategic Management

Question - the discussion thread is centered on the

Question - The discussion thread is centered on the resource-based view of the firm as espoused by Jay Barney. In the section on Human Resources in your text, Barney's focus on the correlation between superior financial ...

Please use enterprise rent a car for organizationcreate the

Please use ENTERPRISE RENT A CAR for organization Create the Final Strategic Plan. The Final Strategic Plan contains the elements of all the previous weeks' components and incorporates instructor feedback. The strategic ...

Strategic management assignment - authentic research

Strategic Management Assignment - Authentic Research Portfolio This assignment focuses on your understanding and appreciation of Strategic Management Inputs. You are required to identify a corporation in the Agribusiness ...

Business strategy assignment - business strategy

Business Strategy Assignment - Business Strategy: Telecommunication Sector (UK) Purpose of this assignment - This assignment is designed to develop students' awareness of the different kinds of strategy which could be us ...

Assignment -case - real-world cases wipro and

Assignment - CASE - Real-World Cases: Wipro and MBH Self-service is a very valuable tool. HR departments can use an integrated ERP self-service design to provide employees and consumers with a user-friendly interface for ...

Assessment - blog and learning reflectionsassessment

Assessment - Blog and Learning Reflections Assessment Criteria - Demonstrate regular use of the weekly blog by providing clear cross-referencing between report and at least 8 time-stamped meaningful blog entries THROUGHO ...

Complete a value chain analysis of an organization from ksa

Complete a value chain analysis of an organization from KSA. For this assignment, complete the following: - Explain the concept of value chain. Identify and discuss value chain strategies in your present organization or ...

What is related diversification what is unrelated

What is related diversification? What is unrelated diversification? Provide examples of each and compare and contrast the two types.

Question choose an organization according to the

Question: Choose an organization according to the following: • Current employer • Most recent or former employer • Place of business that you have patronized or have been familiar with over a long period of time. - Avoid ...

Question a rental company owns a building from which it

Question: A rental company owns a building from which it leases out multiple offices. During the year it received the following advance rental payments for one-year leases from separate tenants: $24,000 in June, $36,000 ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As