Value Enhancement

2

Value enhancement or not?

Which of the following actions is a “value enhancing” action? A stock split Amortizing goodwill Changing depreciation methods in reporting but not in tax books Issuing tracking stock on your “social media” business None of the above

Could any of these actions be price enhancing? Explain why.

3

Divestitures and consequences

A large multi-business company has four divisions and you are the new CEO.Division Return on Capital Cost of CapitalA 20% 10%B 15% 9%C 8.5% 8.5%D 3% 7.5%You are thinking about selling one of these divisions. Which one, if divested, is likely to create the most value enhancement? Why?

4

Financing decisions and value…

XYZ company has $ 200 million in debt and $ 800 million in equity. It’s optimal debt ratio is 20%. The CFO is convinced that there is no potential for lowering the cost of capital through financing choices, since she is at the optimal. Is this true? Yes No

Explain why.

5

Cash, buybacks and value..

Google has $60 billion as a cash balance. If it decides to return $45 billion in cash in stock buybacks, will that leave you as investor in Apple better off or worse off?

a. Better offb. Worse offc. Unaffected

Explain why.