FINANCE QUESTIONS AND ANSWERS

Q40
1. Estimate the Economic Value Added (EVA) for your company over the last 3 years, and do the same for at least one of the competitors. Note: While this is not entirely accurate, feel free to assume that the WACC did not change in the last 3 years to simplify the calculations (that is, use the current WACC for these calculations). You still need the historical balance sheet and income statements to compute EVA. B. Discuss the implications of your results in the last question. C . Describe your company’s capital structure over the last 3 years. 2) Describe your competitor(s)’ capital structure over the last 3 years. 3) Compare the capital structures of your company’s and your competitor(s)’. Note: You should analyze mostly leverage ratios in this question (you may already have done some of this analysis for ACR 1). Remember to use the market value of equity to calculate leverage ratios. I would focus mostly on the leverage ratio defined as total debt / (total debt + market value of equity). For this question, you will need historical data on the market value of equity for your companies. The video describing the assignment gives some guidelines on how to do this. D. Is the amount of debt that your company has compatible with the trade-off theory of capital structure? 2) Explain why or why not. In your explanation, a) consider the median leverage ratio of 30% that we discussed in the lecture, and also the specific characteristics of your company and competitors; and b) think about risk, profitability, collateral, the benefits of reducing taxes using interest tax shields, and growth opportunities.
Q41
UCBS7037 Financial Management Assessment
You have been asked by your 60-year-old uncle Isaac to help him assess a new venture. It is
Friday night, and he needs the work finished by Sunday, in preparation for an early Monday
morning meeting, so you know that he will not be able to give you any more information than
he already has (and you will be unable to contact him over the weekend), and therefore you may
need to rely on your own assumptions and estimates for some of the analysis where appropriate.
Isaac lives near Toronto in Canada and recently took early retirement (from a soft drinks
company he joined 25 years ago), leaving the company with a lump sum (after tax) payment of
CAD 800,000. Surprisingly, rather than being depressed by his new state of independence, he is
tired of the bureaucratic life and excitedly contemplating a new career as a retailer of a range of
German fine handmade chocolate. He is confident that he can set up a business to import the
chocolate from Lindau and sell it in Canada. His wife, who he met at business school, is pleased
with his passion for this possible new venture but concerned that it might turn into a financial
disaster. She has suggested that he develop a financial plan to evaluate the venture and its
viability.

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