Gillette Company [G], a company that manufactures and sells consumer

Gillette Company [G], a company that manufactures and sells consumer products, uses only debt and to finance the firm. The firm’s EBIT and interest expense have fluctuated during the past five years. Answer the following questions about Gillette:
a. What is the degree of financial leverage (DFL) for Gillette in each of the past five years?
b. How has the change in EBIT from year to year affected Gillette’s earnings per share in each of the past five years?
c. Choose two of Gillette’s industry peers that do not have preferred stock in their capital structures and compare these companies with Gillette in regard to their degree of financial leverage? Explain what your comparison means.

One way to measure whether a firm can meet its

One way to measure whether a firm can meet its short-term debt obligations is to analyze the firm’s liquidity. Firms that are growing rapidly often find themselves in a liquidity crisis. Cisco Systems Inc. [CSCO] is a technology firm that manufactures and sells networking and communication products. Answer the following questions:
a. What have been Cisco’s current and quick ratios during the past three years?
b. What has been the trend in Cisco’s liquidity position during the threeyear time period?
c. Why is there a difference between the current ratio and the quick ratio?
d. How has Cisco compared with peer firms in its industry group with regard to liquidity as measured by the quick and current ratios? Be specific in your answer.
e. Compare the current and quick ratios of Cisco to those of Boeing Company [BA], a more mature defense company. What conclusions can you make about the ability of young technology firms such as Cisco to meet their short-term debt obligations as compared with more mature firms like those in the defense industry?

Compare the dividend payouts of McDonald’s Corporation [MCD], a quickservice

Compare the payouts of McDonald’s [MCD], a quickservice restaurant firm, and its peers, as denoted by SIC code. Answer the following questions:

a. What was the yearly yield during the past five years for McDonald’s?
b. How much did McDonald’s pay out in dividends to shareholders in each of the five years? State your answer both in total dollars and on a pershare basis.
c. How did McDonald’s average compare with that of its peers?
d. If you analyze the total paid and the yield over the five-year period, would McDonald’s or one of its peers be the best investment if you are concerned only with the income generated by the investment?

Family Dollar Stores [FDO], a firm operating discount retail stores,

Family Dollar Stores [FDO], a firm operating discount retail stores, has no long-term debt in its capital structure, even though the use of financial leverage in the form of long-term debt might increase the firm’s earnings per share. Answer the following questions about Family Dollar:

a. What was the EBIT—that is, operating income—of Family Dollar for the past three years?

b. Calculate the firm’s net income and earnings per share for the past three years.
c. What was the average earnings per share during the past three years?
d. If the firm borrows $740 million in long-term debt at 10 percent to help finance its operations during the first year, what would be the earnings per share in each year?
e. Should Family Dollar start using long-term debt? Explain your answer.
f. Based on your findings, make an argument for and against using long-term debt in a firm’s capital structure.

Compare the capital structures of the following firms and answer

Compare the capital structures of the following firms and answer the related questions: General Motors [GM], an automobile manufacturing and financing firm; Walt Disney Company [DIS], an entertainment and information company; and Amazon Inc. [AMZN], an online retail sales firm.
a. What is the percentage of long-term debt, common stock, retained earnings, and preferred stock in each firm’s capital structure? Set up a table to illustrate your answer.
b. Which firm has the highest, and lowest, relative amount of long-term debt? Common equity? Retained earnings?
c. In one paragraph, describe how you would calculate the weighted average for each firm.
d. Where does each firm stand in relation to its industry peers with regard to the percentages of debt, common equity, preferred stock, and retained earnings in its capital structure?

Imagine you hold a portfolio of three stocks: Coca Cola

Imagine you hold a of three stocks: Coca Cola Company [KO], a manufacturer and distributor of soft drinks; Dell Inc. [DELL], a manufacturer of personal and enterprise computers; and Fifth Third Bank [FITB], a large bank that offers commercial banking, retail banking, and investment advisory services. Each of these companies is preparing to launch a new project. Coca Cola is launching a new version of Coca Cola with increased caffeine. Dell has produced a new, very low cost personal computer to deliver the basic functions of e-mail, web browsing, and word processing for individuals who do not need all the ‘‘bells and whistles.’’ Fifth Third Bank has shifted its investment in marketable securities so as to earn higher returns; this shift has increased the riskiness associated with the bank’s investment following betas were estimated by the companies for the new projects:

Company………………………………………………. Project Beta
Coca Cola………………………………………………………. 1.19
Dell………………………………………………………………… 2.01
Fifth Third Bank……………………………………………… 1.20

Using the Thomson ONE database, answer these questions:
a. What is the current beta of the three firms? (Click on Price/Interactive Charts.)
b. If the new project causes the corporate beta to rise, how will this impact the company’s risk and the shareholders’ required rate of return?
c. Can you use the pure play method to determine a more accurate project beta for any or all of these firms? Why or why not?

Cisco Systems Inc. [CSCO], which is located in San Jose,

Cisco Systems Inc. [CSCO], which is located in San Jose, California, manufactures and sells networking and communication products and provides related services. Cisco is a growing company that makes large capital outlays for plant and equipment to produce its inventory. Cisco’s customer base includes corporations, telecommunication corporations, public institutions, and commercial enterprises. Using the Thomson ONE database, analyze from a point of view Cisco’s capital expenditures compared with its cash flows during the past three years. Answer the following questions:
a. What are Cisco’s total cash flows for each of the past three years? (Hint: You can find this information by clicking on Price/Worldscope Market Data/Market Data Snapshot.)
b. How much did Cisco spend on capital expenditures in each of the past three years? (Hint: Click on Financials/Thomson Financial Annual Financial Statements.)
c. If you make the assumption that Cisco’s cost of acquiring capital is 10 percent, determine the present value of the cash flows.
d. Calculate the (NPV) of Cisco’s capital expenditures.
e. Is the NPV positive or negative? What does this result mean for Cisco Systems and its decisions during the past three years Explain.

Wachovia [WB] is a financial services company that is often

Wachovia [WB] is a financial services company that is often held in the portfolios of investors who are interested in earning income. These investors are interested in the expected growth rate in dividends for such companies because they often rely on dividends as part of their annual income.
a. Find the last paid by Wachovia. [Hint: Click on Overview/Full Reports/Thomson Reports/Stock Section.]
b. Calculate the growth rate of the expected dividends for Wachovia using the forecasted figures for the next two years. [Hint: Click on Estimates and Consensus Estimates.]
c. If you are a Wachovia stockholder and your required rate of return is 8 percent, what is the intrinsic value of the stock?
d. What does the term intrinsic value mean?
e. Bank of America [BAC] is a competitor of Wachovia. Calculate the growth rate of the expected dividends for Bank of America using the last the company paid.
f. Would you rather own Wachovia or Bank of America if you are primarily concerned with the expected growth in future dividends? Explain.

The Dow Jones Industrial Average (DJIA), which is an index

The Dow Jones Industrial Average (DJIA), which is an index that includes the 30 largest industrial firms in the United States, is one of the most quoted financial market indexes in the world. Many investors use the DJIA as a barometer of the performance of the U.S. financial markets because it provides an indication as to how the U.S. economy is performing at any point in time. As stated in the chapter, U.S. stock markets accounted for approximately two-thirds of the value of the world markets in 1970. Today, however, U.S. markets account for less than 45 percent of the total value of worldwide stock markets. One reason the U.S. markets account for a lower proportion of the value of all stock markets in the world is because emerging markets have expanded significantly in recent years. Countries along the Pacific Rim, including China and Korea, as well as South American countries and India, are responsible for much of the recent growth in world financial markets. Using the Thomson ONE database, compare the major market indexes of the following countries with regard to their changes in value during the past 12 months:

Argentina………………………………………..  [ARGMERV]
France………………………………………………. [FRCAC40]
Germany…………………………………………… [DAXINDX]
Japan…………………………………………………… [NIKI300]
South Korea…………………………………….. [KORCOMP]
United States…………………………………………… [DJIND]
Go to the Thomson ONE database and click on Indices in the upper left corner of the screen. Enter the ticker symbols one at a time and find the change in price (index value) for the past 12 months. Compare the change in value for each market index and write a paragraph about the growth in the market in each country.

Starbucks Corporation [SBUX] does much more than make great latte.

Starbucks [SBUX] does much more than make great latte. The company purchases, roasts, and markets coffee beans. Starbucks also sells such products as premium teas and coffee-related accessories through its retail stores. Imagine you are one of Starbucks’ shareholders and you would like to estimate how much the stock will earn per share over the next three years. Using the Thomson ONE database, find the earnings estimates for Starbucks for the next three years, and then answer the following questions:
a. Calculate the present value of the mixed stream of cash flows you pulled from the database. Assume you own one share of the stock. In this case, the cash flows are the earnings per share (EPS) estimates, and the interest rate is 3 percent.
b. What is the present value of the cash flows if you own 100 shares of Starbucks stock?
c. If you own 100 shares of Starbucks stock and you want to hold the stock only if you expect to earn more than $3 in earnings per share over a three-year period, would you buy more of the stock or sell the shares you already own?
d. Calculate the present value of the cash flows if the interest rate rises to 5 percent.
e. Why does the present value change when the interest rate rises?