1. Consider the recent article (copied below) "Why Loblaw Companies Limited (TSE:L) Is A Dividend Rockstar" from the financial news: Note: do not use or refer to events after the time of the case. a) What type of investor is Loblaw trying to attract with a "long payment history"? b) What does a company hope to achieve with a "buyback equivalent to around 3.7% of its market capitalization"? c) What might Loblaw consider when setting its earnings payout policy (payout ratio)? d) How is Loblaw risk exposure due to debt measured? e) What method (and why) from Chapter 8 is best to use for Loblaw Stock valuation? One page maximum please. Avoid paraphrasing the article. Chapter 8: 2. Pomelo Servers just paid a dividend of D0=$1.00. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on Pomelo's stock is 9.00%. What is the best estimate of the stock's current intrinsic value? 3. Complete problem 24: Assume that today is December 31, 2015, and the following information applies to Pacific Sky Airline: After-tax operating profit (EBIT(1-T), also called NOPAT) for 2016 is expected to be $500 million. The net capital expenditures for 2016 are expected to be $100 million (depreciation has already been deducted to arrive at the $100 million). - No change is expected in net operating working capital. - The free cash flow is expected to grow at a constant rate of 6% per year. - The required rate of return on equity is 14%. - The WACC is 10%. - The market value of the company's debt is $3 billion. - 200 million shares of stock are outstanding. Using the free cash flow approach, what should the company's intrinsic stock price be today? (Note: Chapter 2 discussed how to calculate free cash flow.) Chapter 9: 4. To help finance a major expansion, Peter Development Company sold a non-callable bond several years ago that now has 15 years to maturity. This bond has a 10.25% annual coupon, paid semiannually, it sells at a price of $1,025, and it has a par value of $1,000. If Peter's tax rate is 40%, what component cost of debt should be used in the WACC calculation? 5. Schadler Systems is expected to pay a $3.50 dividend at year end (D1=$3.50), the dividend is expected to grow at a constant rate of 6.50% a year, and the common stock currently sells for $62.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 40% debt and 60% common equity. What is the company's WACC if all equity is from retained eamings? 6. Malitz Inc. recently hired you as a consultant to estimate the company's WACC. You have obtained the following information: - Malitz's noncallable bonds mature in 25 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,075.00. - The company's tax rate is 40%. - The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock's beta is 1.20. - The target capital structure consists of 35% debt and the balance as common equity. Malitz uses the CAPM to estimate the cost of equity, and it does not expect to issue any new common stock. What is its WACC? 7. Georgian Lumber Company hired you to help estimate its cost of capital. You were provided with the following data: D1=$1.10;P0=$27.50;g=6.00% (constant); and F=5.00%. What is the cost of equity raised by selling new common stock? Chapter 10: 8. Mills Corp. is considering two mutually exclusive machines. Machine A requires an up-front expenditure at t=0 of $450,000, has an expected life of two years, and will generate positive after-tax cash flows of $350,000 per year (all cash flows are realized at the end of the year) for two years. At the end of two years, the machine will have zero salvage value, but every two years the company can purchase a replacement machine with the same cost and cash inflows. Altematively, it can choose Machine B, which requires an expenditure of $1 million at t=0, has an expected life of four years, and will generate positive after-tax cash flows of $350,000 per year (all cash flows are realized at year end). At the end of four years, Machine B will have an after-tax salvage value of $100,000. The cost of capital is 10%. Calculate the equivalent annual annuity (EAA) for both machines and identify the most profitable machine. 9. a) Singh Inc. is considering a project that has the following cash flows: The company's WACC is 10%. What are the project's payback, IRR, and NPV? b) Explain the financial life cycle of a capital asset such as an oil refinery. Why does project management focus on the three critical metrics of scope, time and cost ("the triple imperative")? 10. See-more Associates is considering two mutually exclusive projects that have the following cash flows: At what cost of capital do the two projects have the same NPV? (That is, what is the crossover rate?) Why Loblaw Companies Limited (TSE:L) Is A Dividend Rockstar By Simply Wall St Published March 04, 2020 Today we'll take a eloser look at Loblaw Companies Limited (TSE:L) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter. A 1.8% yield is nothing to get excited about, but investors probably think the long payment history suggests Loblaw Companies has some staying power. During the year, the company also conducted a buyback equivalent to around 3.7% of its market capitalisation. There are a few simple ways to reduce the risks of buying Loblaw Companies for its dividend, and we'll go through these below. Payout ratios Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Loblaw Companies paid out 42% of its profit as dividends, over the trailing twelve month period. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend. In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Loblaw Companies' cash payout ratio last year was 17%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It's positive to see that Loblaw Companies' dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut. Is Loblaw Companies' Balance Sheet Risky? As Loblaw Companies has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). Loblaw Companies has net debt of 1.87 times its EBITDA, which we think is not too troublesome. Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. With EBIT of 3.17 times its interest expense, Loblaw Companies' interest cover is starting to look a bit thin. Dividend Volatility From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Loblaw Companies has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was CA\$0.84 in 2010 , compared to CA\$1.26 last year. This works out to be a compound annual growth rate (CAGR) of approximately 4.1% a year over that time. Slow and steady dividend growth might not sound that exciting, but dividends have been stable for ten years, which we think is seriously impressive. Dividend Growth Potential Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. It's good to see Loblaw Companies has been growing its earnings per share at 84% a year over the past five years. Earnings per share have rocketed in recent times, and we like that the company is retaining more than half of its earnings to reinvest. However, always remember that very few companies can grow at double digit rates forever. Conclusion Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. It's great to see that Loblaw Companies is paying out a low percentage of its earnings and cash flow. We like that it has been delivering solid improvement in its earnings per share, and relatively consistent dividend payments. All these things considered; we think this organisation has a lot going for it from a dividend perspective