Business & Finance homework help

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Business & Finance homework help. Case 30: M&M Pizza
 

  1. What is going on at M&M Pizza? How do the financial statements for M&M Pizza vary with the proposed repurchase plan? Do the alternative policies improve the expected dividends per share?
  2. What impact does the repurchase plan have on M&M’s weighted-average cost of capital? Complete the table below and explain your results.
Income Statement Debt = 0 Debt = 500
Revenue 1500 1500
Operating expenses 1375 1375
  Operating profit 125 125
Interest payments 0
Taxes 0 0
  Net profit 125
Dividends 125
Shares outstanding 62.5
Dividends per share 2
Cost of Capital
Cost of debt 4.00% 4.00%
Beta 0.8 Levered Beta
Cost of equity CAPM
WACC = D /V* Kd (1 – t) + (1 – D/V) * Ke

 

  1. What are the debt and equity claims worth under the alternative scenarios, complete the table below and explain your results? 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. Which proposal is best for investors? What do you recommend that Miller do?
Cash flows Debt = 0 Debt = 500
Debt holders  = Interest payments
Equity holders  = Dividend payments
Free cash flow  = Op profit
Value
Debt  = Int payments / Kd
Equity  = Div payments / Ke
Total  = Sum or FCF / WACC
Share price 1  = Equity / Shares outstanding
Share price 2  = DPS / Ke
Value of Firm  = Value of unlevered + Tax shield
D/E  = D / (V – D)
D/V   = D / V

 
 

  1. How would your analysis in questions 2 and 3 and recommendation in question 4 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. Complete the same table as in question 2 and 3 with a tax rate of 20%.

 

Business & Finance homework help