CAPITAL BUDGETING CASE.
Case 1: Nike Inc and the Cost of Capital
Here we will discuss how to approach this case and apply some of the cost of capital methodology covered earlier. This will be a running discussion culminating in the completion and submission of this case as one of your required case studies.
1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not?
2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions.
3. Calculate the costs of equity using CAPM, the dividend discount model, and the earnings capitalization ratio. What are the advantages and disadvantages of each method?
4. What should Kimi Ford recommend regarding an investment in Nike?
Case 2: Teletech Corporation Case
1. How does Teletech Corporation currently use the hurdle rate?
2. Please estimate the segment WACCs for Teletech (see the worksheet in case Exhibit 1). As you do this, carefully note the points of judgment in the calculation.
3. Interpret Rick Phillips’s graph (see Figure 2 in the case). How does the choice of constant versus risk-adjusted hurdle rates affect the evaluation of Teletech’s two segments?
4. What are the implications for Teletech’s resource-allocation strategy? Do you agree that “all money is green”? What are the implications of that view? What are the arguments in favor? What are the arguments against it?
5. Is Helen Buono right that management would destroy value if all the firm’s assets were redeployed into only the telecommunications business segment? Why or why not? Please prepare a numerical example to support your view.
6. Has Products and Systems (P+S) destroyed value? What evidence or illustrations can you give to support your opinion?
7. What should Teletech say in response to Victor Yossarian?
Case 3: The Investment Detective Case
1. Before doing any calculations, can we rank the projects simply by inspecting the cash flows?
2. What analytical criteria can we use to rank the projects? How do you define each criterion? Put the numbers up on the board.
3. Which of the two projects, 7 or 8, is more attractive? How sensitive is our ranking to the use of high discount rates? Why do NPV and IRR disagree?
4. What rank should we assign to each project? Why do payback and NPV not agree completely? Why do average return on investment and NPV not agree completely? Which criterion is best?
5. Are those projects comparable on the basis of NPV? Because the projects have different lives, are we really measuring the “net present” value of the short-lived projects?
Case 4: Worldwide Paper Company Case
1. What yearly cash flows are relevant for this investment decision? Do not forget the effect of taxes and the initial investment amount.
2. What discount rate should Worldwide Paper Company (WPC) use to analyze those cash flows? Be prepared to justify your recommended rate and the assumptions that you used to estimate it.
3. What is the net present value (NPV) and internal rate of return (IRR) for the investment?