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Case 1::: Marriott Corp.: The Cost of Capital (Abridged) (Case# 289047-PDF-ENG)
1. How does Marriott use its estimate of its cost of capital? Does this make sense?
2. What is the weighted average cost of capital for Marriott Corporation?
- what risk-free rate and risk premium did you use to calculate the cost of equity?
- How did you measure Marriott’s cost of debt?
3. What type of investment would you value using Marriott’s WACC?
4. If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines
of business, what would happen to the company over time?
5. What is the cost of capital for the lodging, restaurant and services divisions of Marriott?
- What risk-free rate and premium did you use for the cost of equity for each division? Why?
- How did you measure the cost of debt for each division? Why?
- How did you measure beta of each division?
Case 2::: Ford Motor Co.'s Value Enhancement Plan (Case# 201079-PDF-ENG)
1. Does Ford have too much cash? Why or why not?
2. How does the VEP work? Explain all elements and steps of the Plan.
3. What are the alternatives for distributing cash?
4. What problem is the VEP plan designed to solve? Does it seem to be an effective or weak solution to
you? Explain why.
5. As a shareholder, how would you approve the VEP? Why or why not? Would you elect cash or shares?
Team 3:
Case 2::: Midland Energy Resources, Inc.: Cost of Capital (Brief Case) (Case# 4129-PDF-ENG)
1. How are Mortensen’s estimates of Midland’s cost of capital used? How, if at all, should these anticipated
uses affect the calculations?
2. Calculate Midland’s corporate WACC. Which assumptions did you make about various inputs to the
calculations? Is Midland’s choice of EMRP appropriate? If not, what recommendations would you make and
why?
3. Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of its
divisions? Why or why not?
4. Compute a separate cost of capital for the E&P and Marketing and Refining divisions. What causes them
to differ from one another?
5. How would you compute a cost of capital for the Petrochemical division?
Team 4:
Case 1::: Teuer Furniture (A): Discounted Cash Flow Valuation (Case# KEL778-PDF-ENG)
You need to estimate the value of Teuer Furniture using a discounted cash flow approach. Prepare a
memo detailing the value of Teuer and the key assumptions underlying your valuation. The memo
should specify what Teuer is worth per share and why. Support your answer with the logic and the facts
from the case. The items below should guide your analysis.
1. Construct pro forma financials: to value Teuer Furniture you need to construct pro forma income
statement and balance sheet. Use the assumptions and data from case.
2. Value the firm using discounted cash flow method by constructing the cash flow from assets for six years
(2013 to 2018). You should not include the 2012 cash flows. You will need to include a terminal value in
your valuation. Initially, assume that the long-term growth rate of Teuer Furniture’s cash flows is 3.5%
and that the firm’s cost of capital is 12.1%. What is the value of Teuer Furniture on a per-share basis?
3. Evaluate the key assumptions. The value of Teuer that you determined is a function of the assumptions
made by you. Your base case valuation should be built upon the forecasts of Jerabek’s team. Discounted
cash flow analysis depends upon a large number of assumptions. You can change the assumptions where
you think it is appropriate. If you do make changes, explain the reasons you did so – especially with the
most crucial assumptions/factors. An assumption may be considered crucial when it is both empirically
relevant (i.e., your valuation result will change substantially) and cannot be precisely measured.
2. Calculate Teuer’s multiples. Let’s say, the value of Teuer derived using DCF methodology is $32.00,
calculate the sales, net income and cash flow from assets multiples for Teuer at the end of 2012. Why do
the three ratios differ from each other? Calculate the three multiples at the end of 2018. If they are
expected to change between 2012 and 2018, explain why. Consider what each ratio is measuring and
thus what assumptions you are making about comparability when you use each ratio.
3. Comparable firms. When you value a firm using a multiples approach, you only use firms that are
comparable to Teuer (the target firm). On what dimensions should the firm be comparable to target firm?
Each of nine possible firms is in the same industry as Teuer. Based on the information in the case, pick a
set of firms that you consider to be comparable to Teuer in the important dimensions. You will need to
be explicit about which dimensions are important.
4. Value Teuer using a multiples approach. Based on the set of firms that you consider comparable,
calculate the relevant multiple and value Teuer (price per share). If your multiples valuation differs from
DCF valuation given in Question 2 above, explain why.