You currently own 5,000 shares of Java Inc. preferred stoc - 35717

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  1. As a recent MBA graduate you have been hired as a financial analyst by a private equity firm.  Your firm along with the management of Costco Wholesale Corporation is investigating the possibility of taking the company private, i.e. your firm and Costco Wholesale Corporation’s management will buy all of the shares.


You have been assigned to address the issues found below.  The information that you provide will be used by the decision makers to determine a price per share for the stock.  For the computations use the information found in the Yahoo! Finance web pages for Costco Wholesale Corporation (COST). The numbers used would be for the financials of September 1, 2013 and September 2, 2012.  Other computations which require more current information will be found on these webpages as well.


For discussion questions a good source of information is found in the company’s fiscal year 2012 Annual Report.  The link to the Company’s official website can be found at the bottom of the Profile page for Costco Wholesale Corporation on Yahoo! Finance.


(10 pts) a)        Discuss Costco Wholesale Corporation in the context of the forces considered in performing an environmental scan.


(10 pts) b)        Discuss the risks that Costco Wholesale Corporation needs to consider in conducting its operations.


 (6 pts) c)         Explain whether you believe that the company can take on more debt.  Use some computations to support your conclusion.


(10 pts) d)       Compare Costco Wholesale Corporation’s inventory holding period to that of Wal-Mart Stores, Inc. (WMT) and Target Corp. (TGT)  Discuss results.


 (12 pts) e)       Construct the DuPont Identity for COST, WMT, and TGT. Explain your results.


  (5 pts) f)        Determine the MVA for COST and discuss the results.


  (5 pts) g)        Determine the EVA for COST and discuss the results. Assume that COST’s cost of capital is eight percent.  COST’s tax rate is 30 percent.


(10 pts) h)        Determine COST’s free cash flow. For fiscal year ended September 1,

2013. Discuss the significance of free cash flow.


(15 pts) 2.        Assume that the 10 Year US Treasury bond rate is 3 percent and that the market risk premium is 5 percent.  Answer the following questions in the context of Costco Wholesale Corporation Assume that the expected rate of return for COST is 6 percent with a standard deviation of 4 percent.




a)      What is the required rate of return for Costco’s common stock?

b)      Can you relate any of your discussion in problem one (in particular, that concerning an environmental scan and risks for Costco) to Costco’s beta.

c)      What is the probability of earning a return greater than the required rate of return?

d)     What is the probability of earning a return greater than zero?

e)      Based on your answers in problem, and this problem, do you believe that purchasing the common stock of Costco would be a good investment?


(15 pts) 3.        Go to YouTube and find the video clip “Warren Buffet Value Formula separates weak industries from strong ones.” The clip is three minutes and forty-eight seconds. After watching the clip, apply the metrics that are mentioned in the clip and indicate whether you think that Costco, Wal-Mart, and Target are good investments. Support your position with computations.



(10 pts)  4.       The Kayla Corporation has two different bonds currently outstanding.  Bond A has a face value of $40,000 and matures in 20 years. The bond makes no payments for the first five years and then pays $2,000 semiannually for the subsequent ten years, and finally pays $2,500 semiannually for the last five years.  Bond B also has a face value of $40,000 and a maturity of 20 years; it makes no coupon payments over the life of the bond.  If the required rate of return is 12 percent compounded semiannually, what is the current price of Bond A and Bond B?

(10 pts) 5.        Assume that it is now January 1, 2013.  Kappa Corporation has just developed a solar panel capable of generating 200 percent more electricity than any solar panel currently on the market.  As a result, Kappa is expected to experience a 30 percent annual growth rate for the next 3 years, followed by three years when the growth rate is expected to be 17 percent.  By the end of 5 years, other firms will have developed comparable technology, and Kappa’s growth rate will slow to 4 percent per year indefinitely.  Stockholders require a return of 14 percent on Kappa’s stock.  The most recent annual dividend (Do), which was paid yesterday, was $2.00 per share. Determine the price of Kappa’s stock as of today.



(7 pts)   6.        You currently own 5,000 shares of Java Inc. preferred stock. The stock is an 8.45%, cumulative preferred stock. The par value of this stock is $100. The stock is currently yielding a return of 10.25 percent. Determine the current market price on Java’s preferred stock. Explain the fundamental reason as to why the preferred   stock is selling for an amount that is different than its par value.

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