Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

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

You have been asked to observe advise and act as a

You have been asked to observe, advise and act as a Consultant to the Sales Director of a medium - sized company operating in the pharmaceutical sector of the UK economy. The company is about to launch a new product that ...

My strategic plan nd mission statements retrieved from

My Strategic Plan. (n.d.). Mission Statements. Retrieved from http://onstrategyhq.com/resources/mission-statements/#Defining%20Your%20Mission The resource link Forgot to attach it with the mail Evaluating Mission Stateme ...

Analyse the following case study which can be found in

Analyse the following case study, which can be found in Grant et al., (2014) Contemporary Strategic Management: An Australian Perspective, 2nd edn, Wiley. The Australian Supermarket Industry (See p.440) Using the case st ...

Strategic planstrategic plan assignmentthe ability to think

Strategic Plan Strategic Plan Assignment The ability to think strategically and make choices based on solid analysis and evaluation, in order to capitalize on achieving optimal results when applying limited resources of ...

Q1 define the term strategy explain the concept of

Q1. Define the term 'strategy'. Explain the concept of 'strategic window'. Q2. The essence of business continuity is that businesses need to be planned not only for today, but also for tomorrow, that is, for the future. ...

It is reporting to the venture capitalist purchasing your

It is reporting to the Venture Capitalist purchasing your company. Note: Recommendations about the retention of the CEO team would be dependant on this report! The main aim of this report and the presentation is to provi ...

Servant leadership leadership communication and

SERVANT LEADERSHIP, LEADERSHIP COMMUNICATION, AND ORGANIZATIONS AS SYSTEMS Background In the movie Peaceful Warrior, the character "Socrates" (as played by Nick Nolte) says, "There's no greater purpose than service to ot ...

Enterprises architecture case studythe enterprises

Enterprises Architecture Case Study The (enterprises architecture) EA process can be a time and resource intensive exercise that requires a deep understanding of the organization's strategy, strong technical experience, ...

Introductionin this assignment you need to prepare a

Introduction: In this assignment you need to prepare a research report which will categorise and critique a topic from games. Your research will appreciate how this topic applies to video game design and development. Thi ...

Exercise - what strategies should hershey pursue in

EXERCISE - What Strategies Should Hershey Pursue in 2017? Purpose In performing strategic management case analysis, you can find information about the respective company's actual and planned strategies. Comparing what is ...

  • 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

A cola-dispensing machine is set to dispense 9 ounces of

A cola-dispensing machine is set to dispense 9 ounces of cola per cup, with a standard deviation of 1.0 ounce. The manuf

What is marketingbullwhat is marketing think back to your

What is Marketing? • "What is marketing"? Think back to your impressions before you started this class versus how you

Question -your client david smith runs a small it

QUESTION - Your client, David Smith runs a small IT consulting business specialising in computer software and techno

Inspection of a random sample of 22 aircraft showed that 15

Inspection of a random sample of 22 aircraft showed that 15 needed repairs to fix a wiring problem that might compromise

Effective hrmquestionhow can an effective hrm system help

Effective HRM Question How can an effective HRM system help facilitate the achievement of an organization's strate