Below You Will Find The Questions For Each Case Please Answe

Below You Will Find The Questions For Each Case Please Answer Each Qu

Below you will find the questions for each case. Please answer each question (does not need to be in APA) and submit each case in a separate document. Case 1: Nike Inc and the Cost of Capital Here we will discuss how to approach this case and apply some of the cost of capital methodology covered earlier. This will be a running discussion culminating in the completion and submission of this case as one of your required case studies. 1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? 2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions. 3. Calculate the costs of equity using CAPM, the dividend discount model, and the earnings capitalization ratio. What are the advantages and disadvantages of each method? 4. What should Kimi Ford recommend regarding an investment in Nike? Case 2: Teletech Corporation Case 1. How does Teletech Corporation currently use the hurdle rate? 2. Please estimate the segment WACCs for Teletech (see the worksheet in case Exhibit 1). As you do this, carefully note the points of judgment in the calculation. 3. Interpret Rick Phillips’s graph (see Figure 2 in the case). How does the choice of constant versus risk-adjusted hurdle rates affect the evaluation of Teletech’s two segments? 4. What are the implications for Teletech’s resource-allocation strategy? Do you agree that “all money is green”? What are the implications of that view? What are the arguments in favor? What are the arguments against it? 5. Is Helen Buono right that management would destroy value if all the firm’s assets were redeployed into only the telecommunications business segment? Why or why not? Please prepare a numerical example to support your view. 6. Has Products and Systems (P+S) destroyed value? What evidence or illustrations can you give to support your opinion? 7. What should Teletech say in response to Victor Yossarian? Case 3: The Investment Detective Case 1. Before doing any calculations, can we rank the projects simply by inspecting the cash flows? 2. What analytical criteria can we use to rank the projects? How do you define each criterion? Put the numbers up on the board. 3. Which of the two projects, 7 or 8, is more attractive? How sensitive is our ranking to the use of high discount rates? Why do NPV and IRR disagree? 4. What rank should we assign to each project? Why do payback and NPV not agree completely? Why do average return on investment and NPV not agree completely? Which criterion is best? 5. Are those projects comparable on the basis of NPV? Because the projects have different lives, are we really measuring the “net present” value of the short-lived projects? Case 4: Worldwide Paper Company Case 1. What yearly cash flows are relevant for this investment decision? Do not forget the effect of taxes and the initial investment amount. 2. What discount rate should Worldwide Paper Company (WPC) use to analyze those cash flows? Be prepared to justify your recommended rate and the assumptions that you used to estimate it. 3. What is the net present value (NPV) and internal rate of return (IRR) for the investment?

Paper For Above instruction

The provided cases share a common focus on fundamental financial decision-making tools such as the Weighted Average Cost of Capital (WACC), hurdle rates, project ranking criteria, and investment valuation metrics like NPV and IRR. Analyzing each case requires a comprehensive understanding of financial concepts and the ability to apply these tools within specific contexts to guide strategic decisions.

Case 1: Nike Inc and the Cost of Capital

The core concept in this case centers on calculating and interpreting WACC, which serves as a benchmark for evaluating investment opportunities and overall corporate valuation. WACC reflects the average rate a firm expects to pay to finance its assets through equity and debt, weighted according to their respective proportions in the capital structure. Its importance lies in serving as a discount rate for evaluating project viability and firm valuation, making it crucial for investment decision-making.

Joanna Cohen’s WACC calculation provides a specific estimate based on her assumptions and data. Whether I agree depends on the inputs she used, such as market values of debt and equity, and her risk premiums. If her assumptions align with current market conditions and the company's true capital structure, her WACC might be accurate; otherwise, adjustments may be necessary.

If discrepancies are identified, I would calculate my own WACC using up-to-date market data. This involves estimating the cost of equity—via the Capital Asset Pricing Model (CAPM), dividend discount model, and earnings capitalization ratio—and the cost of debt, factoring in the firm's debt-equity ratio and market interest rates. Justification of assumptions includes evaluating beta, market risk premiums, dividend growth prospects, and debt levels.

Calculating costs of equity through different approaches offers various insights: CAPM considers market risk and equity volatility, the dividend discount model captures investor expectations for dividend growth, and the earnings capitalization ratio reflects current earnings yields. Each has advantages and disadvantages; for instance, CAPM’s simplicity versus its reliance on beta accuracy, dividend models’ sensitivity to growth assumptions, and earnings ratios’ susceptibility to accounting earnings manipulation.

Based on this analysis, Kimi Ford should recommend whether Nike’s investment aligns with its cost of capital and strategic goals, ensuring that expected returns exceed the firm’s WACC to create value.

Case 2: Teletech Corporation

Teletech’s current use of hurdle rates involves setting a minimum required return for project acceptance, possibly varying by segment or risk profile. Accurate estimation of segment WACCs involves assessing each segment’s risk characteristics, capital structure, and cash flow patterns, with judgment points including the cost of capital assumptions and risk adjustments.

Rick Phillips’s graph illustrates how adopting constant versus risk-adjusted hurdle rates influences project evaluations. Constant hurdle rates can oversimplify risk distinctions, potentially leading to suboptimal resource allocation, while risk-adjusted rates better match project risk profiles but require more nuanced judgment.

This approach impacts resource allocation strategies by possibly prioritizing higher-return, lower-risk segments, but risks neglecting value-generating projects with higher risk profiles if hurdle rates aren’t appropriately adjusted.

The view that “all money is green” suggests that capital source origin (internal or external) is less relevant than project opportunity, implying a unified valuation framework. Arguments for include simplified decision-making and focus on expected returns, while arguments against highlight the importance of funding costs, risk perceptions, and capital constraints.

Managerial decisions, such as redeploying assets into the telecommunications segment, must consider whether such shifts enhance or destroy firm value. Numerical examples show that if assets are reallocated without regard to segment profitability or risk, value can be destroyed, supporting Buono’s caution.

Evidence of value destruction in P+S can emerge from declining profitability, increased costs, or poor strategic fit. The firm should respond by reassessing strategic fit, segment performance, and alignment with core competencies.

Case 3: The Investment Detective

Initial project ranking may be tempting to base solely on cash flow magnitudes, but this ignores time value of money, risk, and project lifespan considerations. Appropriate criteria include NPV, IRR, payback period, accounting rate of return, and comparable measures adjusted for project length.

Ranking projects 7 and 8 involves analyzing their NPVs and IRRs, noting the sensitivity of rankings to discount rate changes. NPV and IRR may conflict when cash flow patterns or project durations differ, with IRR sometimes giving multiple or misleading signals in non-conventional cash flows.

Assigning ranks involves balancing these considerations, recognizing that payback periods may favor shorter projects while NPV captures value creation more comprehensively. Comparing projects with different lives involves techniques like equivalent annual annuity or discounted payback to ensure fair comparisons.

Case 4: Worldwide Paper Company

The relevant cash flows for investment decisions include after-tax operating cash flows, considering initial capital expenditure and any working capital changes. This involves adjusting accounting profits for non-cash items and tax effects.

The discount rate should reflect the firm’s cost of capital, adjusted for project risk. Justification involves analyzing market data, industry risk, and firm-specific factors. The WACC, adjusted for project risk, often serves as an appropriate rate.

Calculating NPV and IRR provides metrics for evaluating whether the project creates value: positive NPV indicates acceptability, and IRR exceeding the discount rate confirms profitability.

References

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