Case-1
Stock Valuation at Oxen, Inc.
Oxen, Inc., was founded nine years ago by
other and sister Ca
ington and Genevieve Oxen.
The company manufactures and installs commercial heating, ventilation, and cooling (HVAC)
units. Oxen, Inc., has experienced rapid growth because of a proprietary technology that
increases the energy efficiency of its units. The company is equally owned by Ca
ington and
Genevieve. The original partnership agreement between the siblings gave each 50,000 shares
of stock. In the event either wished to sell stock, the shares first had to be offered to the other
at a discounted price. Although neither sibling wants to sell, they have decided they should
value their holdings in the company. To get started, they have gathered the following
information about their main competitors:
Expert HVAC Corporation’s negative earnings per share were the result of an accounting
write-off last year. Without the write-off, earnings per share for the company would have
een $1.06. Last year, Oxen, Inc., had an EPS of $4.54 and paid a dividend to Ca
ington and
Genevieve of $63,000 each. The company also had a return on equity of 25 percent. The
siblings believe that 20 percent is an appropriate required return for the company.
Oxen, Inc. Competitors
QUESTIONS XXXXXXXXXXAssuming the company continues its cu
ent growth rate, what is the value
per share of the company’s stock?
Q2. To verify their calculations, Ca
ington and Genevieve have hired Josh Schlessman as a
consultant. Josh was previously an equity analyst and covered the HVAC industry. Josh has
examined the company’s financial statements, as well as examining its competitors. Although
Oxen, Inc., cu
ently has a technological advantage, his research indicates that other
companies are investigating methods to improve efficiency. Given this, Josh believes that the
company’s technological advantage will last only for the next fi ve years. After that period,
the company’s growth will likely slow to the industry growth average. Additionally, Josh
elieves that the required return used by the company is too high. He believes the industry
average required return is more appropriate. Under this growth rate assumption, what is your
estimate of the stock price?
Q3. What is the industry average price–earnings ratio? What is the price–earnings ratio for
Oxen, Inc.? Is this the relationship you would expect between the two ratios? Why?
Case-2
Titlas Gold Mining
Seth Titals, the owner of Titals Gold Mining, is evaluating a new gold mine in South
Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine
site. He has estimated that the mine would be productive for sixteen years, after which
the gold would be completely mined. Dan has taken an estimate of the gold deposits
to Alma Ga
ett, the company’s financial officer. Alma has been asked by Seth to
perform an analysis of the new mine and present her recommendation on whether the
company should open the new mine. Alma has used the estimates provided by Dan
to determine the revenues that could be expected from the mine. She has also
projected the expense of opening the mine and the annual operating expenses. If the
company opens the mine, it will cost $200000 today, and it will have a cash outflow of
33000 in sixteen years from today in costs associated with closing the mine and
eclaiming the area su
ounding it. She has spend $100000 for testing the soil. The
expected cash flows each year from the mine are shown in the table. Titals Mining has
a 18 percent required return on all of its gold mines.
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QUESTIONS
1. Construct a spreadsheet to calculate the payback period, internal rate of return,
modified internal rate of return, and net present value of the proposed mine.
2. Based on your analysis, should the company open the mine?
3. The company was given an option to receive consultancy fee XXXXXXXXXXper year for
sixteen years or to engage in gold mining. Do you think you should include this
evenue while estimating the cost of investment? Discuss?
Case-3
The Pasty company produced a full line of cakes, and its specialties included chess
cake, lemon pound cake, and double iced, double-chocolate cake. The couple formed
the company as an outside interest, and both continued to work at their cu
ent jobs.
Doc did all the baking, and Say handled the marketing and distribution. With good
product quality and a sound marketing plan, the company grew rapidly. In early 2018,
the company was featured in a widely distributed entrepreneurial magazine. Later that
year, the company was featured in
Mary Desserts, a leading specialty food magazine. After the article appeared in Mary
Desserts, sales exploded, and the company began receiving orders from all over the
world. Because of the increased sales, Doc left his other job, followed shortly by Say.
The company hired additional workers to meet demand. Unfortunately, the fast growth
experienced by the company led to cash fl ow and capacity problems. The company
is cu
ently producing as many cakes as possible with the assets it owns, but demand
for its cakes is still growing. Further, the company has been approached by a national
supermarket chain with a proposal to put four of its cakes in all of the chain’s stores,
and a national restaurant chain has contacted the company about selling McGee
cakes in its restaurants. The restaurant would sell the cakes without a
and name.
Doc and Say have operated the company as a sole proprietorship. They have
approached you to help manage and direct the company’s growth. Specifically, they
have asked you to answer the following questions.
QUESTIONS
1. What are the advantages and disadvantages of changing the company organization
from a sole proprietorship to an LLC?
2. What are the advantages and disadvantages of changing the company
organization from a sole proprietorship to a corporation?
3. Ultimately, what action would you recommend the company undertake? Why?
Case-1
Stock Valuation at Oxen, Inc.
Oxen, Inc., was founded nine years ago by
other and sister Ca
ington and Genevieve Oxen.
The company manufactures and installs commercial heating, ventilation, and cooling (HVAC)
units. Oxen, Inc., has experienced rapid growth because of a proprietary technology that
increases the energy efficiency of its units. The company is equally owned by Ca
ington and
Genevieve. The original partnership agreement between the siblings gave each 50,000 shares
of stock. In the event either wished to sell stock, the shares first had to be offered to the other
at a discounted price. Although neither sibling wants to sell, they have decided they should
value their holdings in the company. To get started, they have gathered the following
information about their main competitors:
Expert HVAC Corporation’s negative earnings per share were the result of an accounting
write-off last year. Without the write-off, earnings per share for the company would have
een $1.06. Last year, Oxen, Inc., had an EPS of $4.54 and paid a dividend to Ca
ington and
Genevieve of $63,000 each. The company also had a return on equity of 25 percent. The
siblings believe that 20 percent is an appropriate required return for the company.
Oxen, Inc. Competitors
QUESTIONS XXXXXXXXXXAssuming the company continues its cu
ent growth rate, what is the value
per share of the company’s stock?
Q2. To verify their calculations, Ca
ington and Genevieve have hired Josh Schlessman as a
consultant. Josh was previously an equity analyst and covered the HVAC industry. Josh has
examined the company’s financial statements, as well as examining its competitors. Although
Oxen, Inc., cu
ently has a technological advantage, his research indicates that other
companies are investigating methods to improve efficiency. Given this, Josh believes that the
company’s technological advantage will last only for the next fi ve years. After that period,
the company’s growth will likely slow to the industry growth average. Additionally, Josh
elieves that the required return used by the company is too high. He believes the industry
average required return is more appropriate. Under this growth rate assumption, what is your
estimate of the stock price?
Q3. What is the industry average price–earnings ratio? What is the price–earnings ratio for
Oxen, Inc.? Is this the relationship you would expect between the two ratios? Why?
Case-2
Titlas Gold Mining
Seth Titals, the owner of Titals Gold Mining, is evaluating a new gold mine in South
Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine
site. He has estimated that the mine would be productive for sixteen years, after which
the gold would be completely mined. Dan has taken an estimate of the gold deposits
to Alma Ga
ett, the company’s financial officer. Alma has been asked by Seth to
perform an analysis of the new mine and present her recommendation on whether the
company should open the new mine. Alma has used the estimates provided by Dan
to determine the revenues that could be expected from the mine. She has also
projected the expense of opening the mine and the annual operating expenses. If the
company opens the mine, it will cost $200000 today, and it will have a cash outflow of
33000 in sixteen years from today in costs associated with closing the mine and
eclaiming the area su
ounding it. She has spend $100000 for testing the soil. The
expected cash flows each year from the mine are shown in the table. Titals Mining has
a 18 percent required return on all of its gold mines.
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