Dan no longer works for Alphabet, but he has a relatively large amount of his personal wealth tied up in both company stock and debt. Consequently, he would like an objective review of the company today and its future prospects. He would also like an opinion on the stockâ€™s equity and bond valuations. Dan has sufficient alternative assets and doesnâ€™t need to sell his ABCD stock or bonds, but he is becoming concerned about increasing inflation and is reviewing all of his holdings.
The risk-free rate is at 4.2%. The economy is just coming out of a recession, but Alphabet is in an â€˜early cycleâ€™ industry and is already recovering (after a downturn in 2007). Alphabetâ€™s earnings are expected to grow 12%. Inflation is running at 3%, but both Dan and economists are concerned that inflation could rise to 6% within five years.
Alphabet Corp – Income Statement
Alphabet Corp â€“ Balance Sheet
LT Debt â€“ 3 MM at 11% maturing 2015, 5 MM at 8% maturing 2020
The Board of Directors is reviewing executive compensation. Which of the following are viable alternatives that would align the CEO with the shareholders?
(1) A combination of quarterly ROE and ROI
(2) A combination of yearly EVA and MVA measures
(3) Bonuses based on 5 year financial performance
(4) A compensation package that is transparent to shareholders
1, 2 and 3
1 and 3
2, 3 and 4
All of the answer choices.
Dan has come across an opportunity to buy an apartment building for $1,250,000, but isnâ€™t sure. He can get a loan for 80% of the buildingâ€™s value at 8%, but because of the risks Danâ€™s own required return is 12%. Given the following annual cash flows, what is the building worth to Dan?
Gross Rents â€“ 210,000
Expected vacancy â€“ 7%
Utilities, Insurance, taxes â€“ 48,000
Interest â€“ 24,000
Maintenance â€“ 10,800
Capital Repair Fund â€“ 10,000
Mgt. Fees â€“ 12,000
Depreciation â€“ 32,000
$1,556,250 (50% credit)