1. Tell me about the company's current weighted average cost of capital (WACC). Isn't it obvious...

     

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1. Tell me about the company's current weighted average cost of capital (WACC). Isn't it obvious that debt is a cheaper cost of funds? Why pay 8% on equity when you can borrow at 4% ? (10 Points) 2. How do the financial statements for M&M Pizza vary with the proposed repurchase plan in a world without taxes? To do this use the excel template (sheet 1-no taxes) provided under the Week # 6 tab. 3. What impact does the repurchase plan have on M&M's weighted-average cost of capital (WACC)? (These metrics can be obtained through the excel template in question # 2) 4. What are the debt and equity claims worth under the alternative scenarios? You may note that the present value of a perpetual cash flow stream is equal to the expected payment divided by the associated required return. (These metrics can be obtained through the excel template in question # 2) 5. Which proposal is best for investors? What do you recommend that Miller do? 6. How would your analysis in questions 2 and 3 and recommendation in question 5 change if the new tax law is implemented? Please note that, with corporate taxes, the expected debt-to-equity ratio under the share repurchase plan is 0.588, and the number of remaining shares outstanding is 39.4 million. To do this use the excel template (sheet 2 - with taxes) provided. 1 2 3 4 5 6 7 8 A 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 B 9 10 Income Statement Ready Corporate tax rate Interest rate M&M PIZZA Estimates of Cost of Capital and Valuation Effects of Recapitalization in No-Corporate-Tax Environment (in millions of Franco dollars, except per-share figures) Revenue Operating expenses Operating profit Interest payments Taxes Net profit Dividends Shares outstanding Dividends per share Cost of Capital Cost of debt Beta Cost of equity WACC C Accessibility: Good to go 0.0% 4.0% **** Debt Capitalization **** Debt-0 Debt-500 No Tax Temp. Tax Temp. E + Remains constant Remains constant Remains constant Debt * 4.0% No corporate tax = OpProfit - IntPay -Net profit Footnote 1 Dividends / Shares outstanding G Remains constant since no default 0.80 (1+ (1 - 0 %) * Debt/Equity) from Footnote -4.0%+ Beta 5.0% D/V* Kd (1 t) + (1 - D/V) * Ke F19 27 28 Cash flows 29 30 31 34 35 36 37 A 32 33 Value 38 39 40 41 42 43 44 45 46 47 48 49 552 50 51 52 Ready Debt holders Equity holders Free cash flow Debt Equity Total X✓ fx B Share price 1 Share price 2 Value of Firm D/E D/V 66°F Cloudy No Tax Temp. Tax Temp. Accessibility: Good to go Footnote 1 C O E - Interest payments - Dividend payments Op profit H = Int payments/Kd Div payments / Ke Sum or FCF/WACC = Equity / Shares outstanding - DPS / Ke - Value of unlevered + Tax shield = D/(V-D) = D/V OLO C9 8 9 10 14 15 16 17 A 11 Income Statement 12 13 225 26 B Ready M&M PIZZA Estimates of Cost of Capital and Valuation Effects of Recapitalization in Corporate tax rate Interest rate 18 19 20 21 22 23 Cost of Capital 24 Cost of debt fx **** Debt Capitalization **** E (in millions Revenue Operating expenses Operating profit Interest payments Taxes Net profit Dividends Shares outstanding Dividends per share Beta Cost of equity No Tax Temp. Accessibility: Good to go Corporate Tax Environment of Franco dollars, except per-share figures) 20.0% 4.0% **** Debt Capitalization **** Debt-500 Debt 0 Tax Temp. Q Remains constant Remains constant Remains constant Debt 4.0% -20% (OpProf - IntPay) OpProfit - IntPay - Taxes -Net Profit Via Case - Dividends/Shares outstanding Remains constant since no default -0.80 (1+(1-20%) * Debt/Equity) from Footnote 2 4.0%+Beta 5.0% 9 G C9 39 40 41 27 28 29 Cash flows 30 31 32 33 34 Value 35 36 37 38 42 43 44 45 46 -48 49 50 A 51 52 WACC Ready Debt holders Equity holders. Free cash flow Debt Equity Total B Share price 1 Share price 2 D/E D/V fx Value of firm Value of gov. stake No Tax Temp. Accessibility: Good to go **** Debt Capitalization**** C D Tax Temp. E F -D/V Kd (1 t) + (1 - D/V) * Ke Note V is calculated below as Vu+tD M Interest payments Dividend payments Op Profit Int payments/Kd - Div payments / Ke -Sum or FCF/ WACC - Stock price no debt + Tax shield/Shares no debt - DPS / Ke Value of unlevered + Tax shield Taxes / Ke Number -D/(V-D) -D/V G 1. Tell me about the company's current weighted average cost of capital (WACC). Isn't it obvious that debt is a cheaper cost of funds? Why pay 8% on equity when you can borrow at 4% ? (10 Points) 2. How do the financial statements for M&M Pizza vary with the proposed repurchase plan in a world without taxes? To do this use the excel template (sheet 1-no taxes) provided under the Week # 6 tab. 3. What impact does the repurchase plan have on M&M's weighted-average cost of capital (WACC)? (These metrics can be obtained through the excel template in question # 2) 4. What are the debt and equity claims worth under the alternative scenarios? You may note that the present value of a perpetual cash flow stream is equal to the expected payment divided by the associated required return. (These metrics can be obtained through the excel template in question # 2) 5. Which proposal is best for investors? What do you recommend that Miller do? 6. How would your analysis in questions 2 and 3 and recommendation in question 5 change if the new tax law is implemented? Please note that, with corporate taxes, the expected debt-to-equity ratio under the share repurchase plan is 0.588, and the number of remaining shares outstanding is 39.4 million. To do this use the excel template (sheet 2 - with taxes) provided. 1 2 3 4 5 6 7 8 A 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 B 9 10 Income Statement Ready Corporate tax rate Interest rate M&M PIZZA Estimates of Cost of Capital and Valuation Effects of Recapitalization in No-Corporate-Tax Environment (in millions of Franco dollars, except per-share figures) Revenue Operating expenses Operating profit Interest payments Taxes Net profit Dividends Shares outstanding Dividends per share Cost of Capital Cost of debt Beta Cost of equity WACC C Accessibility: Good to go 0.0% 4.0% **** Debt Capitalization **** Debt-0 Debt-500 No Tax Temp. Tax Temp. E + Remains constant Remains constant Remains constant Debt * 4.0% No corporate tax = OpProfit - IntPay -Net profit Footnote 1 Dividends / Shares outstanding G Remains constant since no default 0.80 (1+ (1 - 0 %) * Debt/Equity) from Footnote -4.0%+ Beta 5.0% D/V* Kd (1 t) + (1 - D/V) * Ke F19 27 28 Cash flows 29 30 31 34 35 36 37 A 32 33 Value 38 39 40 41 42 43 44 45 46 47 48 49 552 50 51 52 Ready Debt holders Equity holders Free cash flow Debt Equity Total X✓ fx B Share price 1 Share price 2 Value of Firm D/E D/V 66°F Cloudy No Tax Temp. Tax Temp. Accessibility: Good to go Footnote 1 C O E - Interest payments - Dividend payments Op profit H = Int payments/Kd Div payments / Ke Sum or FCF/WACC = Equity / Shares outstanding - DPS / Ke - Value of unlevered + Tax shield = D/(V-D) = D/V OLO C9 8 9 10 14 15 16 17 A 11 Income Statement 12 13 225 26 B Ready M&M PIZZA Estimates of Cost of Capital and Valuation Effects of Recapitalization in Corporate tax rate Interest rate 18 19 20 21 22 23 Cost of Capital 24 Cost of debt fx **** Debt Capitalization **** E (in millions Revenue Operating expenses Operating profit Interest payments Taxes Net profit Dividends Shares outstanding Dividends per share Beta Cost of equity No Tax Temp. Accessibility: Good to go Corporate Tax Environment of Franco dollars, except per-share figures) 20.0% 4.0% **** Debt Capitalization **** Debt-500 Debt 0 Tax Temp. Q Remains constant Remains constant Remains constant Debt 4.0% -20% (OpProf - IntPay) OpProfit - IntPay - Taxes -Net Profit Via Case - Dividends/Shares outstanding Remains constant since no default -0.80 (1+(1-20%) * Debt/Equity) from Footnote 2 4.0%+Beta 5.0% 9 G C9 39 40 41 27 28 29 Cash flows 30 31 32 33 34 Value 35 36 37 38 42 43 44 45 46 -48 49 50 A 51 52 WACC Ready Debt holders Equity holders. Free cash flow Debt Equity Total B Share price 1 Share price 2 D/E D/V fx Value of firm Value of gov. stake No Tax Temp. Accessibility: Good to go **** Debt Capitalization**** C D Tax Temp. E F -D/V Kd (1 t) + (1 - D/V) * Ke Note V is calculated below as Vu+tD M Interest payments Dividend payments Op Profit Int payments/Kd - Div payments / Ke -Sum or FCF/ WACC - Stock price no debt + Tax shield/Shares no debt - DPS / Ke Value of unlevered + Tax shield Taxes / Ke Number -D/(V-D) -D/V G