Financial Management Case Analysis
Campus Deli Inc.
Case Analysis
Prepared by:
Angelica Kristine Gaco
Rizza Carla Ramos
Campus Deli Inc
Assume that you have just been hired as business manager of Campus Deli (CD), which is located adjacent to the campus. Sales were $1,100,000 last year; variable costs were 60% of sales; and fixed costs were $40,000. Therefore, EBIT totaled
$400,000. Because the university’s enrollment is capped, EBIT is expected to be constant over time.
Because no expansion capital is required, CD pays out all earnings as dividends. Assets are $2 million, and 80,000 shares are outstanding. The management group owns about 50% of the stock, which is traded in the over-the-counter market.
CD currently has no debt—it is an allequity firm—and its 80,000 shares outstanding sell at a price of $25 per share, which is also the book value. The firm’s federal-plus-state tax rate is 40%. On the basis of statements made in your finance text, you believe that CD’s shareholders would be better off if some debt financing were used. When you suggested this to your new boss, she encouraged you to pursue the idea, but to provide support for the suggestion.
In today’s market, the risk-free rate, r RF, is
6% and the market risk premium, RPM, is 6%.
CD’s unlevered beta, bU, is 1.0. CD currently has no debt, so its cost of equity (and WACC) is 12%.
If the firm were recapitalized, debt would be issued and the borrowed funds would be used to repurchase stock. Stockholders, in turn, would use funds provided by the repurchase to buy equities in other fast-food companies similar to CD. You plan to complete your report by asking and then answering the following questions.
I. TIME CONTEXT
The time context of this case
will be based on the present time, with particular emphasis on today’s market.
II. VIEWPOINT
The viewpoint that will be adopted in
this case is the view of the manager of Campus Deli (CD). As stated in the case we will be adopting this stand in answering the various questions
Case Analysis
Prepared by:
Angelica Kristine Gaco
Rizza Carla Ramos
Campus Deli Inc
Assume that you have just been hired as business manager of Campus Deli (CD), which is located adjacent to the campus. Sales were $1,100,000 last year; variable costs were 60% of sales; and fixed costs were $40,000. Therefore, EBIT totaled
$400,000. Because the university’s enrollment is capped, EBIT is expected to be constant over time.
Because no expansion capital is required, CD pays out all earnings as dividends. Assets are $2 million, and 80,000 shares are outstanding. The management group owns about 50% of the stock, which is traded in the over-the-counter market.
CD currently has no debt—it is an allequity firm—and its 80,000 shares outstanding sell at a price of $25 per share, which is also the book value. The firm’s federal-plus-state tax rate is 40%. On the basis of statements made in your finance text, you believe that CD’s shareholders would be better off if some debt financing were used. When you suggested this to your new boss, she encouraged you to pursue the idea, but to provide support for the suggestion.
In today’s market, the risk-free rate, r RF, is
6% and the market risk premium, RPM, is 6%.
CD’s unlevered beta, bU, is 1.0. CD currently has no debt, so its cost of equity (and WACC) is 12%.
If the firm were recapitalized, debt would be issued and the borrowed funds would be used to repurchase stock. Stockholders, in turn, would use funds provided by the repurchase to buy equities in other fast-food companies similar to CD. You plan to complete your report by asking and then answering the following questions.
I. TIME CONTEXT
The time context of this case
will be based on the present time, with particular emphasis on today’s market.
II. VIEWPOINT
The viewpoint that will be adopted in
this case is the view of the manager of Campus Deli (CD). As stated in the case we will be adopting this stand in answering the various questions