Assessment Task:
Second Round Electronics Case Study Accounting and Finance Assessment Answer

Task 1: Corporate Finance

Select two real companies of your choice (excluding Amazon, British Airways, Home Depot, Nokia, Philips and Toyota) for which detailed, annual financial information (capital structure, dividend policy, number of shares outstanding, etc) and daily market information (stock prices or returns, bond yields, etc) for 2010 to 2019 are available. Good sources of information for historical financial statements are the companies’ homepages on the www. Market data can be found on Factset, Yahoo Finance or similar websites as used during the course for some of the finance tasks. Collect this information and use it to answer the following questions:

(1.1) (a) For each company, describe its capital structure: What has been the company’s capital structure in each of the available years? Make sure to calculate these capital structure measures yourself from raw data (for example for the firm’s financial statements) and provide several different measures of capital structure.

(b)    Compare the capital structures of the two companies: How do the capital structures of the two companies differ? In which ways are they similar? Can the similarities and differences be explained by theory such as taxes,

asymmetric information, bankruptcy cost, etc?

(1.2) (a) For each company, describe its payout policy: What has been the company’s dividend policy in each of the available years? Has the company used any other form of payout such as share repurchases?

(b)    Compare the payout policies of the two companies: How do the dividend policies of the two companies differ? In which ways are they similar? Can the similarities and differences be explained by theory such as asymmetric information, agency cost, clienteles, etc?

Answer questions (1.3)(a) to (d) for one of the two companies:

(1.3) (a) Using the firm’s historic, daily stock returns and other relevant data such as market returns and risk free rate, calculate the company’s beta. How do you interpret this beta? How does it relate to betas of other firms in the same industry?

(b)    What is the company’s cost of debt?

(c)    Based on the results of (1.3)(a), (1.3)(b) and (1.1)(a) calculate the company’s cost of capital.

(d)    How would the firm’s cost of capital change if the firm increased its debt by 50%? (Example: If the firm has a debt-to-capital ratio of 40%, a 50% increase would lead to a new debt-to-capital ratio of 60%.) Explain in detail, how the cost of equity and the cost of debt change. Regarding the change in the cost of debt, you can use the information in the table “Key Financial Ratios by Rating
Class” included in task 5 (see this year’s course manual).

Make sure to clearly indicate the sources for all your data. Also describe all calculations in detail.


Task 2: Financing Structure & Options

Review the “Boston Chicken, Inc.: 4 1/2% Convertible Subordinated Debentures Due 2004” case and provide a written answer to the 9 tasks given to Pao in the case. You can find the case study in chapter 33 of the book “Case studies in finance: managing for corporate value creation” by Robert F. Bruner (3rd edition, McGraw Hill) available in the library’s reference section at SF HF 5908 (Inner city library: learning and resource centre SBE, for reference only, publication is not available for loan).

Task 3: Evaluating Accounting Choices

Solve the case “Second Round Electronics: A case for critical thinking”. (Reference: Johnstone, Mackintosh, and Philips (2013) Second Round Electronics: A case for critical thinking, Issues in Accounting Education, Vol. 28, No. 4, pp. 983-1007). 

 

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  • Posted on : December 03rd, 2018

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