Fin500 Case 3 37252

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Question

This case assignment is focused on Bond valuation and stock valuation concepts and procedures.

 

1. You were hired as a consultant to Quigley Company, whose target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of common from retained earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new common stock. What is Quigley’s WACC?

 

2. You were recently hired by Scheuer Media Inc. to estimate its cost of common equity. You obtained the following data: D1 = $1.75; P0 = $42.50; g = 7.00% (constant); and F = 5.00%. What is the cost of equity raised by selling new common stock?

 

 

3. S. Bouchard and Company hired you as a consultant to help estimate its cost of common equity. You have obtained the following data: D0 = $0.85; P0 = $22.00; and g = 6.00% (constant). The CEO thinks, however, that the stock price is temporarily depressed, and that it will soon rise to $40.00. Based on the DCF approach, by how much would the cost of common from retained earnings change if the stock price changes as the CEO expects?

 

4. Bolster Foods’ (BF) balance sheet shows a total of $25 million long-term debt with a coupon rate of 8.50%. The yield to maturity on this debt is 8.00%, and the debt has a total current market value of $27 million. The balance sheet also shows that the company has 10 million shares of stock, and the stock has a book value per share of $5.00. The current stock price is $20.00 per share, and stockholders’ required rate of return, rs, is 12.25%. The company recently decided that its target capital structure should have 35% debt, with the balance being common equity. The tax rate is 40%. Calculate WACCs based on book, market, and target capital structures.

 

5. Daves Inc. recently hired you as a consultant to estimate the company’s WACC. You have obtained the following information. (1) The firm’s noncallable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,050.00. (2) The company’s tax rate is 40%. (3) The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock’s beta is 1.20. (4) The target capital structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of common stock, and it does not expect to issue any new shares. What is its WACC?

 

6. Current Design Co. is considering two mutually exclusive, equally risky, and not repeatable projects, S and L. Their cash flows are shown below. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what’s the chosen NPV versus the maximum possible NPV? Note that (1) “true value” is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost.

 

WACC: 7.50%
Year 0 1 2 3 4
CFS -$1,100 $550 $600 $100 $100
CFL -$2,700 $650 $725 $800 $1,400

7. Projects S and L, whose cash flows are shown below, are mutually exclusive, equally risky, and not repeatable. Hooper Inc. is considering which of these two projects to undertake. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the project with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method is used.

 

WACC: 10.25%
Year 0 1 2 3 4
CFS -$2,050 $750 $760 $770 $780
CFL -$4,300 $1,500 $1,518 $1,536 $1,554

 

 

8. Shannon Co. is considering a project that has the following cash flow and WACC data. What is the project’s discounted payback?

WACC: 10.00%
Year 0 1 2 3 4
Cash flows -$950 $525 $485 $445 $405

 

 

 

9. Westwood Painting Co. is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s MIRR can be less than the WACC (and even negative), in which case it will be rejected.

WACC: 12.25%
Year 0 1 2 3 4
Cash flows -$850 $300 $320 $340 $360

 

 

10. Last month, Standard Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project took place, the Federal Reserve changed interest rates and therefore the firm’s WACC. The Fed’s action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project’s forecasted NPV? Note that a project’s expected NPV can be negative, in which case it should be rejected.

Old WACC: 10.00% New WACC: 11.25%
Year 0 1 2 3
Cash flows -$1,000 $410 $410 $410
 
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Simulation Checkpoint – Economics

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ECO 201 Project Template

 

[Throughout this template, replace the content in bracketed text with your own responses, and deleted any bracketed instructions (including these).]

 

[The Introduction section of your report is provided and should remain standard in all submissions.]

 

[The placeholders for your data visualizations (e.g., charts, graphs, and tables) should be replaced with the appropriate indicated images in each case. To create an isolated image from the simulation data, it is recommended that you use a snipping tool to copy and paste your data visualizations into this template. See How to Use the Snipping Tool (Beginner’s Guide) for more information if you use a PC. A captioned version of this video is available: How to Use the Snipping Tool (Beginner’s Guide) (CC). Or, see Is There a Snipping Tool for Mac?.]

 

Memo

To: My Business Partner

From: [Insert your name]

Date: [Insert date]

Re: Microeconomics Simulations

 

Introduction

 

This memorandum report identifies and explains key microeconomic principles using a set of simulation games. The outcome of these games illustrate how microeconomic principles can be applied within real-life situations to help us make better business decisions. This report is a summary of the simulations I played and their results, which include the key takeaways and their significance, for your review and reference. It is divided into the following sections:

 

1. Comparative Advantage

2. Competitive Markets and Externalities

3. Production, Entry, and Exit

4. Market Structures (including the Price Discrimination and Cournot simulations)

5. Conclusions

6. References

Comparative Advantage

 

[Replace this area with the Production Decisions graph.]

Figure 1.1

 

[Replace this area with the Production and Trade graph.]

Figure 1.2

 

[Insert your responses to the following questions: How does this simulation demonstrate how individuals evaluate opportunity costs to make business decisions? Use the Production Decisions graph from the simulation as a reference to explain what role the production-possibility frontier (PPF) has in the decision-making process.]

 

[Explain how comparative advantage impacts a firm’s decision to engage in trade. Would a business’s decision to trade cause a change to its PPF? Provide specific reasoning to support your claims.]

 

Competitive Markets and Externalities

 

[Replace this area with the Supply and Demand chart.]

Figure 2.1

 

[Replace this area with the Outcomes by Market table.]

Figure 2.2

 

[Insert your responses to the following questions: What impact do policy interventions have on the supply and demand equilibrium for a product? Provide specific examples from the simulation to illustrate.]

 

[What are the determinants of price elasticity of demand? Identify at least three examples. Based on the outcome of the simulation, explain how price elasticity can impact pricing decisions and total revenue of the firm.]

 

[Based on the results of the simulation, can policy market interventions cause consumer or producer surplus? Explain why using specific reasoning.]

 

 

Production, Entry, and Exit

 

[Replace this area with the Aggregate Outcomes chart.]

Figure 3.1

 

[Insert your responses to the following questions: Analyze a business owner’s decision making regarding whether to enter a market. For example, what factors determined the driver’s entry and exit into the market in the simulation? Use economic models to support your analysis.]

 

[How does a business owner applying the concept of marginal costs decide how much to produce? For example, how did the driver determine how many hours to drive each day? Use economic models to explain.]

 

[How does the impact of fixed costs change production decisions in the short run and in the long run? Use the average-total-cost (ATC) model included in the module reading chapters to demonstrate this impact.]

 

Market Structures

 

[Complete the table by selecting the appropriate response from the drop-down select menu within each cell, except for the final column in which you will enter your text-based response.]

 

Market Structure Number of Firms Type of Product Sold Price Taker? Price Formula Freedom of Entry? Short-run Profit? Long-run Profit? Industry Examples
Perfect Competition Choose an item. Choose an item. Choose an item. Choose an item. Choose an item. Choose an item. Choose an item. [Insert two to three example industries that meet the criteria of the market structure.]
Monopolistic Competition Choose an item. Choose an item. Choose an item. Choose an item. Choose an item. Choose an item. Choose an item. [Insert two to three example industries that meet the criteria of the market structure.]
Monopolies Choose an item. Choose an item. Choose an item. Choose an item. Choose an item. Choose an item. Choose an item. [Insert two to three example industries that meet the criteria of the market structure.]
Oligopolies Choose an item. Choose an item. Choose an item. Choose an item. Choose an item. Choose an item. Choose an item. [Insert two to three example industries that meet the criteria of the market structure.]

 

Table 4.1

 

[Insert your responses to the following questions: Explain what market inefficiencies derive from monopolies and monopolistic competition. Use examples from the textbook to support your claims.]

 

[How do firms in an oligopolistic market set their prices? Use specific examples from the simulations or from the textbook to support your claims.]

 

[Explain how firms that compete in the four different market structures determine profitability. Use specific examples from the simulations or the textbook to support your claims.]

 

Conclusions

 

[Insert your overall conclusions about the relevance and significance of microeconomics. How will microeconomics principles impact your business decisions moving forward? Provide recommendations to your business partner for your future business venture.]

 

References

 

Mankiw, N. G. (2021). Principles of microeconomics (#9 edition). Cengage.

 

[Add other citations, as needed, in APA format].

 
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Assignment: Strategizing For Sun City Boards

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Prologue

Why does a business need to define its mission and engage in planning?

Dan Smith is a management consultant with the firm Business Advisors. He’s sitting in his office one day when the telephone rings. He picks it up and hears the voice of Tom Wilson, an old high school friend. “Hi Dan. This is Tom Wilson from Southside High. Remember me?” They discuss old times for a few minutes, and then Tom gets down to business.

“Dan, I need your help. I started a business several years ago, and we’re in trouble.”

Dan quickly searches his memory and recalls that Tom started a business called Sun City Boards several years ago selling high-end surfboards on the West Coast. Last Dan had heard, the business was doing well. “Yeah Tom. I remember when you started your shop, but I thought the business was growing successfully.”

Tom replies, “We did well the first couple of years, but things haven’t been good for a while now. We’re losing money, and I’m not sure how much longer I can keep the doors open.”

Dan assures Tom that he is happy to help and asks him to send a few items over to prepare for a trip to visit his operations. “Just send me a copy of your current business plan, financial forecasts, and annual operating budget.”

There’s a pause on the other end of the line, and then Tom says, “Well, I can send you our bank statements and invoices. We don’t have any of the other documents you’re asking about.”

Based on that response, Dan already has a good idea of the organization’s problem: an obvious lack of planning that never bodes well for a business.

In this module, you learned the importance of an organization establishing a clear vision and mission and how they guide the business planning cycle. The business plan is the roadmap that guides the organization to success.

Epilogue

Dan traveled to Tom’s operations on the West Coast and confirmed his suspicions that the problems the organization is facing are due to a lack of planning. Dan is meeting with Tom to report on his findings and to submit his recommendations.

“OK Tom, I’ve spent the last several days going through your operations and records, and I’m confident that there are actions you can take that will help turn around the business.”

Tom lets out a long sigh and says, “Dan, you have no idea how glad I am to hear that. So at a high level, what’s the problem?”

“In a nutshell, the problem with Sun City Boards is that you have lost your focus and there is no clear plan for moving forward.” Tom looks confused, so Dan explains. “When you started the business, what was your vision?”

Tom answers, “ To set people free from the earth … free to ride the waves .” [Vision statement]

“Perfect!” Dan responds. “And how were you going to do that?”

Tom thinks for a moment and then emphatically declares, “ We will strive to provide the absolute best in high-end surfboard design and production! ” [Mission statement]

Dan tells Tom that he has just created the vision and mission statements for Sun City Boards. He further explains:

“You have to start creating a focused plan that will help the organization deliver on its vision and mission. The reason your company is struggling is that there is no clear roadmap to success.”

Tom asks, “What do you mean?”

Dan continues, “When you started the company you were very successful because you focused on one key thing—making the best surfboards anyone had seen. As a result, everything your business did revolved around that core idea.”

Tom interrupts, “OK Dan, I think I see where you’re headed. When we started making money in the early days, I began to start expanding into other areas without a lot of thought. I listened to salespeople who came in and told me that I should branch out into low-end surf gear, then swimwear, then camping gear. Customers don’t know what we’re all about any more. And neither do my managers and employees.”

Dan can see Tom is getting his arms around the concept of vision and mission, so he moves on.

Next, he presents his recommendation that Tom and his key leaders should come together regularly to create, review and update Sun City’s business plan. This is new to the team, so he gives them a quick example:

  1. Define Objectives: Sun City Boards should look to reduce noncore product lines and associated inventory. Minimum margin target is 35 percent across all remaining product lines.
  2. Develop Premises: Monitor competitor’s plans to implement a new polymer board and determine potential impact to Sun City’s sales.
  3. Evaluate Alternatives: Evaluate opportunity of opening new retail outlets along the West Coast. Also, explore international sales options for high-end surf boards.
  4. Identify Resources: Analyze the level of capital necessary to achieve expansion goals and incorporate plan to close financial gaps in the annual budget.
  5. Plan and Implement Tasks: Create a Gantt chart or other project planning tool that outlines the actions necessary to reach the goals outlined earlier.
  6. Determine Tracking and Evaluation Methods: Create SMART goals for both managers and employees that align with direction the overall business plan provides.

Finally, Dan reminds Tom that the planning process is only a tool and that the plan should be regularly reviewed and updated. Dan warns him that planning is no substitute for taking action, but it is a guide for him and his team as to what actions should be taken.

This consulting project has reminded Dan how important it is for an organization to have a clear vision and mission to know where it’s headed. Likewise, the planning process is critical to know how it’s going to get there. The alternative is like trying to take a cross-country trip without a map—you don’t know where you might end up!

Preparation

Carefully read the background story of Sun City Boards presented above and review Module 4 Learning Unit: Introduction to PlanningLinks to an external site. before beginning this assignment.

In this assignment, you’ll apply what you learned about planning to Sun City Boards and the management challenges its owner, Tom Wilson, faces. You’ll advise Tom on strategic management steps he and Sun City Boards should take to develop and implement their new strategy.

Module 4 Learning Unit: Introduction to PlanningLinks to an external site. introduced several strategic planning tools to use at different stages of the strategic management process. As an advisor for Sun City Boards, your assignment is to select one of the following strategic management tools (SWOT analysis; PESTEL analysis, or Porter’s Five Forces) described in the module, explain how it works, and explain why it will be of value to Sun City Boards.

Your Task

Write a 300-word report describing the strategic management tool you chose and why you selected it. Explain how the tool works and why it will be of value. Your essay must include three properly referenced and defined terms from the module reading. Additionally, address the following questions:

  • What is the purpose of the tool? What conclusions will it help Sun City Boards draw?
  • How does the tool work? How does it measure the relevant factors, or how does it derive importance from them?
 
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Effect of Market Segmentation on Financial Performance for Technology Firms

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Running head: RESEARCH PROPOSAL 1

 

RESEARCH PROPOSAL 9

 

Effect of Market Segmentation on Financial Performance for Technology Firms

Submitted to Northcentral University

Graduate Faculty of the School of Business in Partial Fulfillment of the Requirements for the Degree of

Choose an item.

 

 

by Author

 

 

 

San Diego, CA

[Publish Date]

 

 

Table of Contents

Introduction 3

Statement of the Problem 4

Purpose of the Study 5

Research Questions 5

Hypotheses 5

Brief Review of the Literature 6

Market segmentation criteria 6

Research Method 6

Measurement 7

Summary 7

References…………………………………………………………………………………8

 

 

Introduction

The technology industry is one among the most important industries in the world presently. Indeed, electronic devices have become an integral part of human life especially since the turn of the 21st Century. Besides electronics, technological improvements in areas like medicine have led to better and more effective treatment procedures for previously difficult diseases. Against this background, one can conclude that technology companies are essential in the present and future human existence. Similar to any other companies, technology companies face the need to adopt certain strategies that will enable them to exploit their full potential in terms of sales and revenue generation. One such strategy is market segmentation.

Venter, Wright and Dibb (2018) defined market segmentation as the dividing of “a target market” into smaller and better defined segments. For example, a technology company could divide its customer base along the lines of demographics, location, and needs. This way, the company is able to make better decisions for better customer satisfaction. In their analysis of market segmentation, Dolnicar, Grün and Leisch (2018) noted four types of market segmentation.

In the first place, there is demographic market segmentation such as in terms of age, income, location, annual income and more. The second type of market segmentation is psychographic segmentation. This entails segmentation of the market based on personality traits, values, lifestyles, priorities, attitudes and more. The third type is behavioral segmentation that entails purchasing habits, brand interactions, user status, and spending habits. Lastly, there is geographic segmentation, which entails segmenting markets in terms of ZIP code, country, climate, and whether the customers are urban or rural.

Market segmentation, according to Cross, Belich and Rudelius (2014) is especially crucial for marketing managers. The marketing department of an organization is responsible for pushing sales, and in turn, it influences the organization’s financial performance. In particular, marketing managers use the market segmentation strategy to create marketing messages that are stronger, as well as building a deeper customer affinity. In the end, the organization is able to service its customer base better, which leads to better financial performance. This assertion is in line with an analysis by Belás and Gabčová (2016) that established a positive correlation between customer satisfaction and financial performance of organizations.

Statement of the Problem

The financial performance of organizations is critical to their existence, and as Rodriguez-Fernandez (2016) noted, it speaks volumes about the nature and effectiveness of the organization’s governance. However, many organizations find it difficult to understand the meaning and impact of market segmentation on their financial performance. Organizations are torn between using market segmentation to increase their competitive advantage or to use sub-markets to promote products/services such that they cater to the needs of different customer groups (Bruwer, Roediger & Herbst, 2017).

Organizations encounter various variables, some of them being controllable while others being uncontrollable. Controllable variables include price, advertisement, and product/service. The uncontrollable variables include consumer behavior, the economy, competition, and other extraneous variables. In the technology industry, market segmentation is essential for better financial performance. Technology firms identify segments in the market, the composition of the segments, as well as their needs. To this end, the technology firms encounter problems such as if market segmentation allows them to develop certain products/services. Another problem that organizations encounter is whether they should develop a promotional message for each market segment or not.

Purpose of the Study

The purpose of this quantitative study is to establish the effect of market segmentation on financial performance for technology firms. Specifically, the study will focus on technology companies in the United States. Simple random sampling and document review will be used to collect quantitative data. The data that will be used in the study include financial statements of the selected companies in the 2018/2019 financial year and the market strategies that the companies use. The study will adopt a descriptive research design because it is ideal for describing phenomena (Bell, Bryman & Harley, 2018). Besides, a descriptive study does not require a researcher to manipulate any of the variables.

Research Questions

To examine the topic, two research questions will be guide the researcher during the study.

i. What kind of relationship exists between market segmentation and financial performance of technology firms in the United States?

ii. What effect does market segmentation has on the profitability of technology firms in the United States?

Hypotheses

The following hypotheses will guide this study:

H10.

: There is a positive relationship between market segmentation and financial performance.

H10.: Technology firms that adopt a market segmentation strategy are more profitable than the ones that do not adopt this strategy.

 

Brief Review of the Literature

Market segmentation criteria

According to Venter et al (2018), organizations perform market segmentation differently based on certain criteria. Depending on the criteria, the primary outcome desired is the ability to avoid the risks ineffective business strategies. Organizations such as technology firms divide their market based on certain characteristics that are key to better performance. Such organizations might create a generic strategy that is then replicated across all segments (Liu, Liao, Huang & Liao, 2019).

Specifically, dividing the customer base into smaller segments enables organizations to target the customers better and to respond to changes in tastes and preferences. Liu et al (2019) argued that the best criteria for market segmentation takes a multiple criteria approach. To this end, organizations combine “preference analysis and segmentation decision” to identify the best approach that will enable them to achieve the set objective such as financial performance.

Research Method

The proposed method for this study is descriptive in nature. Since the goal of the study is to establish the effect of market segmentation on the financial performance of technology firms in the United States, the researcher will use available information like financial statements, earnings calls, and market sentiment to describe the phenomenon. In particular, the study will choose a specific technology company using a random sampling technique for use as a case study. The need for a random sampling technique is to ensure that the study achieves internal validity.

Data will be collected via questionnaires and by reviewing relevant documents. The need for questionnaires is to obtain information about the company’s strategy. In addition, the choice of questionnaires is because they are cheap to prepare and to administer. On the other hand, document review is the easiest way to get relevant information. The choice of this data collection method is also based on the fact that many American tech companies are publicly traded and that their financial information is easily retrievable from the internet.

Measurement

The study will collect data primarily through document review and questionnaires. For the purposes of analysis, the study will use simple statistical analysis techniques as well as statistical analysis software.

Summary

This study intends to find out the effect of market segmentation on financial performance of technology firms based in the United States. The proposed research method is quantitative, with a descriptive study approach. The study will collect data through questionnaires and review of publicly available documents that have relevant information.

 

References

Belás, J., & Gabčová, L. (2016). The relationship among customer satisfaction, loyalty and financial performance of commercial banks. E+M Ekonomie a Management, 19(1), 132-147. doi:10.15240/tul/001/2016-1-010

Bell, E., Bryman, A., & Harley, B. (2018). Business research methods. Oxford university press.

Bruwer, J., Roediger, B. & Herbst, F. (2017). Domain-specific market segmentation: a wine-related lifestyle (WRL) approach. Asia Pacific Journal of Marketing and Logistics, Vol. 29 No. 1, pp. 4-26. https://doi.org/10.1108/APJML-10-2015-0161

Cross, J. C., Belich, T. J., & Rudelius, W. (2014). How marketing managers use market segmentation: An exploratory study. Proceedings of the 1990 Academy of Marketing Science (AMS) Annual Conference, 531-536. doi:10.1007/978-3-319-13254-9_107

Dolnicar, S., GrĂĽn, B. & Leisch, F. (2018). Market Segmentation Analysis. In: Market Segmentation Analysis. Management for Professionals. Springer, Singapore

Liu, J., Liao, X., Huang, W., & Liao, X. (2019). Market segmentation: A multiple criteria approach combining preference analysis and segmentation decision. Omega, 83, 1–13. doi: 10.1016/j.omega.2018.01.008

Rodriguez-Fernandez, M. (2016). Social responsibility and financial performance: The role of good corporate governance. BRQ Business Research Quarterly, 19(2), 137-151. doi:10.1016/j.brq.2015.08.001

Venter, P., Wright, A., & Dibb, S. (2018). Performing market segmentation: A performative perspective. Marketing Performativity, 62-83. doi:10.4324/9781315300238-4

 
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