About 350 Words for each question
Question 1: Next Gen, Inc. is a publicly-traded firm that manufacturers 3D printers. First, explain which financial statements can be found in Next Gen, Inc’s 10-K filing. Second, between 2013 and 2014, Next Gen, Inc. used $5 million in cash and $5 million in new long-term debt to purchase a building valued at $10 million – explain which line items in Next Gen’s balance sheet will be affected (and by how much) and discuss why the book value of Next Gen’s equity will not change.
Question 2: Ms. Barnacles is Octopod Inc.’s President and Chief Executive Officer. She is wondering how to evaluate whether to undertake a new project, called Project GUP-X, which requires a $1 million upfront investment and will generate a stream of cash flows in the future. She asks you how you would analyze the potential investment. Describe how you would respond to her. In your response, be sure to reference the specific investment criteria as well as the specific type of data and steps you would need to take in order to undertake the analyses you propose to her.
Question 3: Lighthouse Battery, a firm whose stock is currently trading on NASDAQ, has a stock price of $52.66 and an EPS (earnings per share) of $3.20. A competitor to Lighthouse Battery, Sunshine Battery has an EPS of $2.49. Explain what a P/E Ratio (price to earnings ratio) is, whether a firm with a lower P/E Ratio is a better investment, and explain how you would use the above information and data to provide an estimate of the value of a share of Sunshine Battery stock.
Question 4: Discuss the different types of risk and, for each, provide a new example (i.e., an example not used in class materials or discussion) being sure to explain why the example illustrates that type of risk. Discuss how diversification reduces risk and explain when investors will demand a risk premium.
Question 5: You are one of a few owners of a privately-held charter airline. You are wondering how much your company is worth. In order to value your airline, you are reviewing the data in the table below on publicly-traded charter airlines. Explain what “multiples” are and how to use multiples in valuation. Based on your review of the information below, discuss some of the challenges of using multiples in this specific situation.
EV/Sales EV/EBITDA EV/EBIT P/E
CharterJetOne 0.7x 15.0x 8.0x 4.0x
Go Jet 0.4x 12.5x 16.1x 2.0x
Jets-R-US 1.1x 10.4x 2.5x 9.1x
UR Jet 1.3x 21.7x 8.8x 7.7x
Charter Me 0.5x 1.7x 5.0x 3.0x
JetAway 0.2x 6.6x 12.1x 6.0x
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