1. As a recent MBA graduate, you have been hired as a financial analyst by a private equity firm. Your firm is investigating the possibility of acquiring either Lululemon Athletica Inc. (LULU) or Michael Kors Holdings Limited (KORS).
Your assignment is to address the issues found below. The decision makers determine a price per share for the stock in part based on the information that you provide. (You will not actually determine a price.) For the computations, use the information found on the Yahoo! Finance web pages, Guruficus.com, or Morningstar.com for the two companies. The numbers used would be for the financials of January 28, 2018 for LULU and March 31, 2018 for KORS (fiscal year 2017) and January 29, 2017 for LULU and April 1, 2017 for KORS (fiscal year 2016). Other computations and issues, which require information that is more current, is found on these webpages.
For discussion questions, a good source of information is found in the 2017 Annual Report, as well as recent articles concerning LULU and KORS. The link to the companies’ official web sites can be found in the Profile page on Yahoo! Finance. Your grade for the qualitative answers depends on the quality and quantity of relevant information, as well as the quality of writing.
a) Discuss either LULU or KORS in the context of the forces considered in performing an environmental scan.
b) Discuss for either LULU or KORS the risks that the company needs to consider in conducting its operations.
c) Indicate the Beneisch M-Score and Piotroski F-Score for both LULU and KORS. Explain the significance of these financial metrics.
d) For both LULU and KORS explain whether you believe if they can take on more debt. Use computations to support your conclusion.
e) Compare the inventory positions of LULU and KORS.
f) Construct the DuPont Identity for both LULU and KORS. Explain your results.
g) Determine the MVA for LULU and KORS and discuss the results.
h) Determine the EVA for both LULU and KORS and discuss the results. Assume that LULU’s cost of capital is 4 percent and 5 percent for KORS. Use a tax rate of 25 percent for LULU and 28 percent for KORS. Discuss the results.
i) Determine the free cash flow for 2017 for both LULU and KORS. Comment on the results.
j) Compare and discuss the PE ratios for LULU and KORS.
k) Discuss the overall financial health of LULU and KORS.
l) After the final price is determined for LULU and KORS, do you believe that this is evidence of an efficient or inefficient market? Explain.
2. Your stockbroker has called has called you about Netflix, Inc. (NFLX). She tells you that Netflix is selling for $370.00 per share and that she expects the price in one year to be $395.00. The expected return on NFLX has a standard deviation of 20 percent. The market risk premium for the S & P 500 has averaged 6.0 percent. The beta for NFLX is 1.14. The ten-year Treasury bond rate is 3 percent. NFLX does not pay a cash dividend.
a) Determine the probability that you would earn a positive return on an investment in NFLX.
b) Determine the probability that you would earn more than your required rate of return on an investment in NFLX.
c) Explain why you would or would not buy NFLX.
3. Suppose that Amazon.com, Inc. (AMZN) common stock is selling for $2,025.00. Analysts believe that the growth rate for AMZN will be 25% for the next two years, 20% for the following 5 years, and thereafter the growth rate will be 7% indefinitely. Due to its growth, AMZN will not pay a cash dividend until three years from now. At that time, the dividend per share will be $15.00. Thereafter the dividend will grow by the same rate as the company. Stockholders require a return of 15 percent on Amazon’s stock.
a) Based on the above assumptions, determine the price of Amazon’s common stock.
b) Explain whether an investor should buy the stock.
4. Jasper Inc.’s preferred stock is selling for $125 per share in the market. This preferred stock has a par value of $100 and a dividend rate of 9 percent.
a) What is the current yield on the stock?
b) If an investor has a required rate of return of 7 percent, what is the value of the stock for that investor?
c) Should the investor acquire the stock? Explain.
d) Explain why preferred stock is referred to as a hybrid security.
5. On September 1, 2008, Casper, Inc. sold a $500 million bond issue to finance the purchase of a new manufacturing facility. These bonds were issued in $1,000 denominations with a maturity date of September 1, 2038. The bonds have a coupon rate of 10.00% with interest paid semiannually.
a) Determine the value today, September 1, 2018 of one of these bonds to an investor who requires a 4 percent return on these bonds. Why is the value today different from the par value?
b) Assume that the bonds are selling for $1,215. Determine the current yield and the yield-to-maturity. Explain what these terms mean.
c) Explain what layers or textures of risk play a role in the determination of the required rate of return on Casper’s bonds.
These solutions may offer step-by-step problem-solving explanations or good writing examples that include modern styles of formatting and construction of bibliographies out of text citations and references. Students may use these solutions for personal skill-building and practice. Unethical use is strictly forbidden.QUESTION 1:
a. Lulu is a ‘designer, distributor, and retailer’ of healthy lifestyle inspired athletic apparel and accessories. This being the case, there are a lot of forces to consider when doing an environmental scan for purposes of conducting a PESTEL analysis. From the political-economic environments, as a U.S. company, Lulu may have to monitor the impacts of the Trump administration’s trade tariff policies. For instance, China, which has aggressively retaliated on the tariffs, may impose tariffs (if not already) on Lulu products that are sold in the Chinese market. Next, the socio-cultural environment offers some of the most decisive or critical opportunity and risk factors to the company. As a business selling lifestyle products, Lulu necessarily has to keep track of the changes in tastes and preferences of customers. The technological environment has also either opportunities or threats to offer. The company boasts of innovative products, which are only realizable as actual goods (or services) if the company invests in technology (design, manufacturing, etc.). The natural environment (or E of PESTEL) is ever-ready to throw at Lulu challenges on conducting sustainable operations; such operations should be concerned with the company’s carbon footprint, greenhouse gas emissions, etc. Lastly, the U.S. legal environment may be tricky to operate in as a business. The tax cuts offered by the current government to businesses should be taken advantage of by Lulu. However, management of the company shouldn’t forget about the challenges that foreign legal environments have to offer the company.
b. Lulu has explicitly identified at least 30 risk factors, which its executive management has to respond to accordingly for the company to have successful operations year after year. Some of these include demand seasonality, macro-economic conditions that directly impact on customer discretionary spending, intense competition in the retail industry both locally and internationally, demand for products may be affected by the company’s overall value and reputation of the company brand, and smooth relationship with suppliers that has direct impacts on sustainability of supplies (raw materials). These risk factors are found on pages 6-14 of the company’s most...
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