Aspeon Solution
Case 10
Aspeon Sparkling Water, Inc.
Capital Structure Policy
CASE INFORMATION
Purpose
This case, which in all aspects is identical to Case 9, illustrates the capital structure decision for a firm that starts with zero debt. Either Case 9 or Case 10, but not both, should be assigned. The primary analytical tool is valuation analysis, although the case briefly introduces the Modigliani and Miller (MM) with corporate taxes and Miller models. The case also illustrates financial risk by looking at the impact of leverage on ROE.
Time Required
The case requires 3-4 hours of preparation, plus an additional hour if the case has to be handed in.
Complexity
B--intermediate complexity.
Flexibility
The case illustrates many of the concepts associated with the use of debt financing, and hence provides an ideal vehicle for summarizing that section of the course.
MODEL INFORMATION
Description
The case model (filename CASE-10I) has two major sections. The first section constructs partial income statements to illustrate the effect of financial leverage on ROE, while the second part conducts the valuation analysis, where stock price, EPS, and WACC are calculated on the basis of capital cost relationships. The INPUT DATA and KEY OUTPUT sections are shown below:
INPUT DATA: KEY OUTPUT: Operating Data: Impact on ROE: Total assets $120,000,000 All equity: Cost of debt 13.0% Expected ROE 16.0% EBIT $32,000,000 SD of ROE 7.8% Tax rate 40% No. of shares 10,000,000 50/50 mix: Expected ROE 24.2% Capital Cost Data: SD of ROE 15.6% D kd Valuation Analysis: -----------
Aspeon Sparkling Water, Inc.
Capital Structure Policy
CASE INFORMATION
Purpose
This case, which in all aspects is identical to Case 9, illustrates the capital structure decision for a firm that starts with zero debt. Either Case 9 or Case 10, but not both, should be assigned. The primary analytical tool is valuation analysis, although the case briefly introduces the Modigliani and Miller (MM) with corporate taxes and Miller models. The case also illustrates financial risk by looking at the impact of leverage on ROE.
Time Required
The case requires 3-4 hours of preparation, plus an additional hour if the case has to be handed in.
Complexity
B--intermediate complexity.
Flexibility
The case illustrates many of the concepts associated with the use of debt financing, and hence provides an ideal vehicle for summarizing that section of the course.
MODEL INFORMATION
Description
The case model (filename CASE-10I) has two major sections. The first section constructs partial income statements to illustrate the effect of financial leverage on ROE, while the second part conducts the valuation analysis, where stock price, EPS, and WACC are calculated on the basis of capital cost relationships. The INPUT DATA and KEY OUTPUT sections are shown below:
INPUT DATA: KEY OUTPUT: Operating Data: Impact on ROE: Total assets $120,000,000 All equity: Cost of debt 13.0% Expected ROE 16.0% EBIT $32,000,000 SD of ROE 7.8% Tax rate 40% No. of shares 10,000,000 50/50 mix: Expected ROE 24.2% Capital Cost Data: SD of ROE 15.6% D kd Valuation Analysis: -----------