Dr. P.V. Viswanath

pviswanath@pace.edu

Firm Valuation
Group Assignments, Summer 2009

• Due June 24 before class:
• Compute the capitalized value of Operating Leases for the years ended 12/31/2007 and 12/31/2007 (you will need the 10K for the previous year, which can be obtained from Mergent Online
• Compute the financial ratios for CAKE for the years ended 12/31/2007 and 12/31/2007
• Due June 26 before class:
• Written report followed later by five minute presentation (per group) on CAKE versus its competitors based on financial ratio analysis -- look only at SNS (Steak n Shake), BOBE (Bob Evans Farms) and PFCB (PF Chang’s China Bistro).
• Consider the following questions in your presentation
  • What are the sources of competitive advantage in the restaurant industry?
  • How does CAKE’s ROIC look compared to its competitors over time?
  • What are the available economies of scale?  Which of them does CAKE use?
  • Product Differentiation?  To what extent is this imitable?
  • Cost Advantages – does CAKE have any cost advantages?
  • Does CAKE have any monopolies?
  • Is CAKE helped in any way by government regulation?  Any other firms have such an advantage?
• Due July 1:
• Presentations regarding forecasts of Cashflow components and cashflows -- each group will focus on a different aspect; use textbook for guidance; you can also come see me.

1. Revenues
   • Determinants of Revenues – Disposable Income, Competitors for Disposable Dollars, trends in eating habits, immigration (see NetAdvantage on Industry Survey)
2. Cost of Goods Sold
• Cost of inputs (see Net Advantage on Industry Survey), trends in input prices, competition in input industries
3. Current Assets
• Accounts Receivable – determinants of A/R, secular changes in A/R turnover, competition in purchasing industries – who are these (presumably not people who come to the restaurants, or maybe it’s also credit card debt, though the credit card co should pay that off directly)
4. Current Liabilities
• Accounts Payable – determinants of A/P, secular changes in Inventory turnover, A/P turnover etc.
5. Capital Expenditures
• Ratio of Capex to Sales, what are the determinants of Capex?  Secular trends in Asset Use Efficiency in the industry and in CAKE
6. Growth Rate in Terminal Period
• Prediction of growth rates in the economy and in the restaurant industry, secular trends
7. Capital Structure
• Are there ways to increase value by changing capital structure?

• For the exam/quiz on July 2:
  1. What items in Current Assets may be classified as non-operating? Justify your answer.
  2. What items in Current Liabilities may be classified as non-operating? Justify your answer.
  3. Why are cashflows more important than Net Income in valuing a firm?
  4. How does ROE differ from the holding period return to a stockholder?
  5. Why do we use ratios in financial analysis? For example, why would we look at ROE rather than at Net Income?
  6. What are some liquidity ratios? Explain any one of them.
  7. What are some asset utilization ratios? Explain any one of them.
  8. When computing ROE, which is defined as Net Income/Stockholder Equity, why do we take the average of Stockholder Equity for the current year and the previous year for the denominator, yet we only use this year's Net Income in the numerator?
  9. Inventory Turnover is defined as Cost of Goods Sold/ Average Inventory. A firm that you are investigating has a low value for Inventory Turnover; explain how this can be both good or bad! Give an example.
  10. What are the determinants of Accounts Receivables?
  11. What are the determinants of Cost of Goods Sold? How would you proceed to forecast COGS for the next three years?
  12. Which is greater, ROA or ROE? Why? (Assume that the firm has positive Net Income.)
  13. What are the determinants of the growth rate in the firm's earnings?
  14. Explain how firms trade-off lower values of Profit Margin for higher values of Asset Turnover Ratio? Give an example of an actual firm.
  15. What are the determinant's of a stock's beta? Relate your answer to the restaurant industry.
  16. Why is diversifiable risk not relevant in computing the required rate of return on a firm's securities?
  17. How would you compute the required rate of return on a firm's debt?
  18. Why is ROIC better than ROA as a measure of the rate of return on operating assets?
  19. Is ROIC greater or less than WACC? Explain.
  20. How would you value a share of stock using the Enterprise DCF method?
  21. How would you go about determining who are the competitors of a firm?
  22. Which is more stable, Free Cash Flow or Net Income? Explain.
  23. What are the determinants of Capital Expenditures?
  24. How would you use Porter Analysis in forecasting a firm's revenues?
  25. Here's a paragraph from Pepsico's annual report:
      It is not our business practice to enter into off-balance-sheet arrangements, other than in the normal course of business.
      However, at the time of the separation of our bottling operations from us various guarantees were necessary to facilitate the transactions. We have guaranteed an aggregate of $2.3 billion of Bottling Group, LLC’s long-term debt ($1.0 billion of which matures in 2012 and $1.3 billion of which matures in 2014).
      In the fourth quarter of 2008, we extended our guarantee of $1.3 billion of Bottling Group, LLC’s long-term debt in connection with the refinancing of a corresponding portion of the underlying debt. The terms of our Bottling Group, LLC debt guarantee are intended to preserve the structure of PBG’s separation from us and our payment obligation would be triggered if Bottling Group, LLC failed to perform under these debt obligations or the structure significantly changed. At December 27, 2008, we believe it is remote that these guarantees would require any cash payment.
      Since these guarantees are not required to be shown on the company's balance-sheet, they are irrelevant. True or False? Explain.
  26. What is Economic Value Added (EVA)? When would you consider using EVA?