Copyright
Beta Management Co.
Harvard Business School Case #292-122
Case Software #XLS-132
Copyright © 2010 President and Fellows of Harvard College. No part of this product may be reproduced, stored in a retrieval system or transmitted in any form or by any means—electronic, mechanical, photocopying, recording or otherwise—without the permission of Harvard Business School.
Beta_Management
Table 1 Investment Return Data
MONTH Vanguard Index 500 Trust California REIT Brown Group
1989 - January 7.32% -28.26% 9.16%
Fe
uary -2.47% -3.03% 0.73%
March 2.26% 8.75% -0.29%
April 5.18% -1.47% 2.21%
May 4.04% -1.49% -1.08%
June -0.59% -9.09% -0.65%
July 9.01% 10.67% 2.22%
August 1.86% -9.38% 0.00%
September -0.40% 10.34% 1.88%
October -2.34% -14.38% -7.55%
November 2.04% -14.81% -12.84%
December 2.38% -4.35% -1.70%
1990 - January -6.72% -5.45% -15.21%
Fe
uary 1.27% 5.00% 7.61%
March 2.61% 9.52% 1.11%
April -2.50% -0.87% -0.51%
May 9.69% 0.00% 12.71%
June -0.69% 4.55% 3.32%
July -0.32% 3.48% 3.17%
August -9.03% 0.00% -14.72%
September -4.89% -13.04% -1.91%
October -0.41% 0.00% -12.50%
November 6.44% 1.50% 17.26%
December 2.72% -2.56% -8.53%
Mean 1.10% -2.27% -0.67%
Variance 0.21% 0.85% 0.67%
Std.var 4.61% 9.23% 8.17%
Slope Function 1 XXXXXXXXXX XXXXXXXXXX
Beta_Management
Return to Vanguard Index
Return to California REIT
y = 0.15x XXXXXXXXXX
Return to Vanguard Index
Return to Brown Group
y = 1.16x XXXXXXXXXX
Exhibit 1 MMDC
New Heritage Doll Company: Capital Budgeting
Exhibit 1 Selected Operating Projections for Match My Doll Clothing Line Expansion
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenue 4,500 6,860 8,409 9,082 9,808 10,593 11,440 12,355 13,344 14,411
Revenue Growth 52.4% 22.6% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Production Costs
Fixed Production Expense (excl depreciation) 575 575 587 598 610 622 635 648 660 674
Variable Production Costs 2,035 3,404 4,291 4,669 5,078 5,521 6,000 6,519 7,079 7,685
Depreciation 152 152 152 152 164 178 192 207 224 242
Total Production Costs 0 2,762 4,131 5,029 5,419 5,853 6,321 6,827 7,373 7,963 8,600
Selling, General & Administrative 1,250 1,155 1,735 2,102 2,270 2,452 2,648 2,860 3,089 3,336 3,603
Total Operating Expenses 1,250 3,917 5,866 7,132 7,690 8,305 8,969 9,687 10,462 11,299 12,203
Operating Profit (1,250) 583 994 1,277 1,392 1,503 1,623 1,753 1,893 2,045 2,209
Working Capital Assumptions:
Minimum Cash Balance as % of Sales 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Days Sales Outstanding 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x
Inventory Turnover (prod. cost/ending inv.) 7.7x 8.3x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x
Days Payable Outstanding (based on tot. op. exp.) 30.8x 30.9x 31.0x 31.0x 31.0x 31.0x 31.0x 31.0x 31.0x 31.0x
Capital Expenditures 1,470 952 152 152 334 361 389 421 454 491 530
Working Capital
Cash 135 206 252 272 294 318 343 371 400 432
Receivables 730 1,113 1,364 1,473 1,591 1,718 1,855 2,004 2,164 2,337
Inventory 360 500 396 427 461 498 538 581 627 677
Payables 317 484 593 640 692 747 807 871 941 1016
Net working capital 800 907 1,335 1,419 1,532 1,654 1,787 1,930 2,084 2,251 2,431
Change in Net Working capital 107 428 84 113 123 132 143 154 167 180
Tax Rate 40%
Constant g 3%
Discount rate 8%
Period 0 1 2 3 4 5 6 7 8 9 10
EBIT * (1-t) -750 350 596 766 835 902 974 1,052 1,136 1,227 1,325
Depreciation 152 152 152 152 164 178 192 207 224 242
Capex (952) (152) (152) (334) (361) (389) (421) (454) (491) (530)
Δ in NWC (107) (428) (84) (113) (123) (132) (143) (154) (167) (180)
FCFF (750) (558) 169 682 541 583 630 680 735 793 857 16,344
-750 -514 144 535 392 390 388 387 385 384 382 7296
PV of FCF 2123
PV of TV 7296
PV 9418
Initial Outlay -2270
NPV 7148
NPV with zero TV -147
IRR 22% -3020 -558 169 682 541 583 630 680 735 793 857 16344 Do not use the discounted values for IRR
Payback period Year 7.4 -3020 -3578 -3409 -2727 -2186 -1603 -973 -292 442 1236 2092
Profitability Index (look up in textbook)
Exhibit 2 DYOD
New Heritage Doll Company: Capital Budgeting
Exhibit 2 Selected Operating Projections for Design Your Own Doll
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenue 0 6,000 14,360 20,222 21,435 22,721 24,084 25,529 27,061 28,685
Revenue Growth 139.3% 40.8% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Production Costs
Fixed Production Expense (excl depreciation) 0 1,650 1,683 1,717 1,751 1,786 1,822 1,858 1,895 1,933
Variable Production Costs 0 2,250 7,651 11,427 12,182 12,983 13,833 14,736 15,694 16,712
Depreciation 0 310 310 310 436 462 490 520 551 584
Total Production Costs 0 4,210 9,644 13,454 14,369 15,231 16,145 17,113 18,140 19,229
Selling, General & Administrative 1,201 0 1,240 2,922 4,044 4,287 4,544 4,817 5,106 5,412 5,737
Total Operating Expenses 1,201 0 5,450 12,566 17,498 18,656 19,775 20,962 22,219 23,553 24,966
Operating Profit (1,201) (261) 550 1,794 2,724 2,779 2,946 3,123 3,310 3,509 3,719
Working Capital Assumptions:
Minimum Cash Balance as % of Sales 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Days Sales Outstanding 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x
Inventory Turnover (prod. cost/ending inv.) 12.2x 12.3x 12.6x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x
Days Payable Outstanding (based on tot. op. exp.) 33.7x 33.8x 33.9x 33.9x 33.9x 33.9x 33.9x 33.9x 33.9x
Capital Expenditures 4,610 0 310 310 2,192 826 875 928 983 1,043 1,105
Working Capital
Cash 180 431 607 643 682 723 766 812 861
Receivable 973 2,328 3,278 3,475 3,683 3,904 4,139 4,387 4,650
Inventory 346 786 1065 1130 1197 1269 1345 1426 1512
Payable 474 1135 1598 1694 1796 1904 2018 2139 2267
NWC 1000 1,024 2,410 3,352 3,553 3,766 3,992 4,232 4,486 4,755
Change in NWC 1,000 24 1,386 942 202 213 226 240 254 269
Net working capital
Change in Net Working capital
Tax Rate 40%
Constant g 3%
Discount rate 9%
Year 0 1 2 3 4 5 6 7 8 9 10
EBIT * (1-t) -720.6 -156.6 330.18 1076.58 1634.22 1667.52 1767.48 1873.56 1986.06 XXXXXXXXXX 2231.4
Depreciation 0 0 310 310 310 436 462 490 520 551 584
Capex 4,610 0 310 310 2,192 826 875 928 983 1,043 1,105
Δ in NWC 0 1000 24 1386 942 202 213 226 240 254 269
FCFF (5,331) (1,157) 306 (309) (1,190) 1,076 1,141 1,210 1,283 1,359 1,441 24,738
PV -5330.6 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
PV of FCF XXXXXXXXXX
PV of TV XXXXXXXXXX
NPV XXXXXXXXXX
Initial Outlay
NPV
NPV with zero TV XXXXXXXXXX
IRR 17% (5,331) (1,157) 306 (309) (1,190) 1,076 1,141 1,210 1,283 1,359 1,441 24,738 Do not use the discounted values for IRR
Pay back period Year 10 (5,331) (6,487) (6,181) (6,490) (7,680) (6,603) (5,462) (4,252) (2,969) (1,610) (169) 24,569
Profitability Index
Copyright
Ma
iott Corp./Cost A
idged
Harvard Business School Case #289-047
Case Software #XLS069
Copyright © 2010 President and Fellows of Harvard College. No part of this product may be reproduced, stored in a retrieval system or transmitted in any form or by any means—electronic, mechanical, photocopying, recording or otherwise—without the permission of Harvard Business School.
Table A
Table A Market-Value Target-Leverage Ratios and Credit Spreads for Ma
iott and Its Divisions
Debt Percentage in Capital Fraction of Debt at Floating Fraction of Debt at Fixed Debt Rate Premium Above Government
Ma
iott 60% 40% 60% 1.30%
Lodging 74% 50% 50% 1.10%
Contract services 40% 40% 60% 1.40%
Restaurants 42% 25% 75% 1.80%
Beta on floating rate debt is zero
Table B
Table B U.S. Government Interest Rates in April 1988
Maturity Rate
30-year 8.95%
10-year 8.72%
1-year 6.90%
Exhibit 1
Exhibit 1 Financial History of Ma
iott Corporation (dollars in millions, except per share amounts)
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987
Summary of Operations
Sales 1,174.1 1,426.0 1,633.9 1,905.7 2,458.9 2,950.5 3,524.9 4,241.7 5,266.5 6,522.2
Earnings before interest expense and income taxes 107.1 133.5 150.3 173.3 205.5 247.9 297.7 371.3 420.5 489.4
Interest expense 23.7 27.8 46.8 52.0 71.8 62.8 61.6 75.6 60.3 90.5
Income before income taxes 83.5 105.6 103.5 121.3 133.7 185.1 236.1 295.7 360.2 398.9
Income taxes 35.4 43.8 40.6 45.2 50.2 76.7 100.8 128.3 168.5 175.9
Income from continuing operationsa 48.1 61.8 62.9 76.1 83.5 108.4 135.3 167.4 191.7 223
Net income 54.3 71.0 72.0 86.1 94.3 115.2 139.8 167.4 191.7 223
Funds provided from cont. operationsb 101.2 117.5 125.8 160.8 203.6 272.7 322.5 372.3 430.3 472.8
Capitalization and Returns
Total assets 1,000.3 1,080.4 1,214.3 1,454.9 2,062.6 2,501.4 2,904.7 3,663.8 4,579.3 5,370.5
Total capitalc 826.9 891.9 977.7 1,167.5 1,634.5 2.007.5 2,330.7 2,861.4 3,561.8 4,247.8
Long-term debt 309.9 365.3 536.6 607.7 889.3 1,071.60 1,115.3 1,192.3 1,662.8 2,498.8
Percent to total capita 37.5% 41.0% 54.9% 52.1% 54.4% 53.4% 47.9% 41.7% 46.7% 58.8%
Shareholders’ equity 418.7 413.5 311.5 421.7 516 628.2 675.6 848.5 991.0 810.8
Per Share and Other Data
Earnings per share:
Continuing operationsa 0.25 0.34 0.45 0.57 0.61 0.78 1.00 1.24 1.40 1.67
Net income 0.29 0.39 0.52 0.64 0.69 0.83 1.04 1.24 1.40 1.67
Cash dividends 0.026 0.034 0.042 0.051 0.063 0.076 0.093 0.113 0.136 0.17
Shareholders’ equity 2.28 2.58 2.49 3.22 3.89 4.67 5.25 6.48 7.59 6.82
Market price at year end 2.43 3.48 6.35 7.18 11.70 14.25 14.7 21.58 29.75 30.00
Shares outstanding (in millions) 183.6 160.5 125.3 130.8 132.8 134.4 128.8 131.0 130.6 118.8
Return on avg. shareholders’ equity 13.9% 17.0% 23.8% 23.4% 20.0% 20.0% 22.1% 22.1% 20.6% 22.2%
Source: Company reports.
aThe company’s theme-park operations were discontinued in 1984.
bFunds provided from continuing operations consist of income from continuing operations plus depreciation, defe
ed income taxes, and other items not cu
ently affecting working capital.
cTotal capital represents total assets less cu
ent liabilities.
Exhibit 2
Exhibit 2 Financial Summary of Ma
iott by Business Segment, XXXXXXXXXXdollars in millions)
1982 1983 1984 1985 1986 1987
Lodging:
Sales $1,091.7 $1,320.5 $1,640.8 $1,898.4 $2,233.1 $2,673.3
Operating profit 132.6 139.7 161.2 185.8 215.7 263.9
Identifiable assets 909.7 1,264.6 1,786.3 2,108.9 2,236.7 2,777.4
Depreciation 22.7 27.4 31.3 32.4 37.1 43.9
Capital expenditures 371.5 377.2 366.4 808.3 966.6 1,241.90
Contract Services:
Sales 819.8 950.6 1,111.3 1,586.3 2,236.1 2,969.0
Operating profit 51.0 71.1 86.8 118.6 154.9 170.6
Identifiable assets 373.3 391.6 403.9 624.4 1,070.2 1,237.7
Depreciation 22.9 26.1 28.9 40.2 61.1 75.3
Capital expenditures 127.7 43.8 55.6 125.9 448.7 112.7
Restaurants:
Sales 547.4 679.4 707.0 757.0 797.3 879.9
Operating profit 48.5 63.8 79.7 78.2 79.1 82.4
Identifiable assets 452.2 483.0 496.7 582.6 562.3 567.6
Depreciation 25.1 31.8 35.5 34.8 38.1 42.1
Capital expenditures 199.6 65.0 72.3 128.4 64.0 79.6
Source: Company reports.
Exhibit 3
Exhibit XXXXXXXXXXInformation on Comparable Hotel and Restaurant Companies
Arithmetica Average Return Equityb Beta Marketc Leverage 1987 Revenues ($ billions) Equity Leverage Debt to Equity Unlevered Asset beta Relever beta @ 60% D/E Risk Free Equity Risk Premium Required Return on equity Return on debt WACC
MARRIOTT CORPORATION 22.4% 1.11 41% 6.52 59% 0.69 0.78 1.96 8.95% 7.43% 23.5% 10.25% 13.1%
(Owns, operates, and manages hotels, restaurants, and
airline and institutional food services.)
Hotels:
HILTON HOTELS CORPORATION 13.3 0.76 14% 0.77 86% 0.16 0.65 1.63 21.1% 12.1%
(Owns, manages, and licenses hotels. Operates casinos.)
HOLIDAY CORPORATION 28.8 1.35 79% 1.66 21% 3.76 0.28 0.71 14.2% 9.4%
(Owns, manages, and licenses hotels and restaurants. Operates casinos.)
LA QUINTA MOTOR INNS -6.4 0.89 69% 0.17 31% 2.23 0.28 0.69 14.1% 9.3%
(Owns, operates, and licenses motor inns.)
RAMADA INNS, INC. 11.7 1.36 65% 0.75 35% 1.86 0.48 1.19 17.8% 10.8%
(Owns and operates hotels and restaurants.)
Restaurants:
CHURCH’S FRIED CHICKEN -3.2 1.45 4% 0.39 96% 0.04 1.39 3.48 34.8% 17.6%
(Owns and franchises restaurants and gaming businesses.)
COLLINS FOODS INTERNATIONAL 20.3 1.45 10% 0.57 90% 0.11 1.31 3.26 33.2% 17.0%
(Operates Kentucky Fried Chicken franchise and moderately priced restaurants.)
FRISCH’S RESTAURANTS 56.9 0.57 6% 0.14 94% 0.06 0.54 1.34 18.9% 11.3%
(Operates and franchises restaurants.)
LUBY’S CAFETERIAS 15.1 0.76 1% 0.23 99% 0.01 0.75 1.88 22.9% 12.9%
(Operates cafeterias.)
McDONALD’S 22.5 0.94 23% 4.89 77% 0.30 0.72 1.81 22.4% 12.6%
(Operates, franchises, and services restaurants.)
WENDY’S INTERNATIONAL 4.6 1.32 21% 1.05 79% 0.27 1.04 2.61 28.3% 15.0%
(Operates, franchises, and services restaurants.)
Source: Casewriter estimates.
aCalculated over the five-year period XXXXXXXXXX.
bEstimated using five years of monthly data over the XXXXXXXXXXperiod.
cBook value of debt divided by the sum of the book value of debt plus the market value of equity.
Tax rate 0.4
Target D/E 2.5 60% D/E
Exhibit 4
Exhibit 4 Annual Holding-Period Returns for Selected Securities and Market Indexes, XXXXXXXXXX
Years Arithmetic Average Standard Deviation
Short-term Treasury bills:
1926-87 3.54% 0.94%
1926-50 1.01% 0.40%
1951-75 3.67% 0.56%
1976-80 7.80% 0.83%
1981-85 10.32% 0.75%
1986 6.16% 0.19%
1987 5.46% 0.22%
Long-term U.S. government bond returns:
1926-87 4.58% 7.58%
1926-50 4.14% 4.17%
1951-75 2.39% 6.45%
1976-80 1.95% 11.15%
1980-85 17.85% 14.26%
1986 24.44% 17.30%
1987 -2.69% 10.28%
Long-term, high-grade corporate bonds returns:
1926-87 5.24% 6.97%
1926-50 4.82% 3.45%
1951-75 3.05% 6.04%
1976-80 2.70% 10.87%
1981-85 18.96% 14.17%
1986 19.85% 8.19%
1987 -0.27% 9.64%
Standard & Poor’s 500 Composite Stock Index returns:
1926-87 12.01% 20.55%
1926-50 10.90% 27.18%
1951-75 11.87% 13.57%
1976-80 14.81% 14.60%
1981-85 15.49% 13.92%
1986 18.47% 17.94%
1987 5.23% 30.50%
Source: Casewriter estimates based on data from the University of Chicago’s Center for Research in Security Prices.
Exhibit 5
Exhibit 5 Spreads between S&P 500 Composite Returns and Bond Rates
Years Arithmetic