Company Analysis:

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 stocks equity and bond valuations. Dan has sufficient alternative assets and doesnt need to sell his ABCD stock or bonds, but he is becoming concerned about increasing inflation and is reviewing all of his holdings.

Economic Environment:

The risk-free rate is at 4.2%. The economy is just coming out of a recession, but Alphabet is in an early cycle industry and is already recovering (after a downturn in 2007). Alphabets 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

Period Ending		2010	2009	2008
Total Revenue		45,000,000	37,500,000	34,000,000
Cost of Revenue		22,000,000	18,750,000	18,700,000
Gross Profit		23,000,000	18,750,000	15,300,000
Operating Expenses
	Research Development	1,800,000	800,000	750,000
	Selling General and Administrative	7,800,000	6,750,000	6,300,000
	Total Operating Expenses	9,600,000	7,550,000	7,050,000
EBIT		13,400,000	11,200,000	8,250,000
	Interest Expense	950,000	1,350,000	1,400,000
EBT		12,450,000	9,850,000	6,850,000
	Income Tax Expense	3,975,000	2,950,000	2,050,000
Net Income Applicable To Common Shares (EAT)		$8,475,000	$6,900,000	$4,800,000
Dividend per share		$.385	$.31	$.20

Alphabet Corp Balance Sheet

Period Ending		2010	2009	2008
Assets
Current Assets
	Cash And Cash Equivalents	2,500,000	3,200,000	2,200,000
	Net Receivables	9,000,000	5,500,000	3,400,000
	Inventory	5,500,000	5,000,000	4,000,000
Total Current Assets		17,000,000	13,700,000	9,600,000
Long Term Investments		3,000,000	4,000,000	4,000,000
Property Plant and Equipment		7,750,000	8,500,000	8,500,000
Goodwill		1,250,000	1,350,000	1,400,000
Total Assets		29,000,000	27,550,000	23,500,000
Current Liabilities
	Accounts Payable	4,500,000	3,800,000	3,500,000
	Other Current Liabilities	900,000	750,000	800,000
	LT Debt Due	-	3,000,000	-
Total Current Liabilities		5,400,000	7,550,000	4,300,000
Long Term Debt		8,000,000	8,000,000	11,000,000
Total Liabilities		13,400,000	15,550,000	15,300,000
Stockholders' Equity
Preferred Stock		-	-	-
Common Stock (11 MM shares @ 1.00)		11,000,000	11,000,000	11,000,000
Retained Earnings		4,600,000	1,000,000	-2,800,000
Total Stockholder Equity		15,600,000	12,000,000	8,200,000

LT Debt 3 MM at 11% maturing 2015, 5 MM at 8% maturing 2020.

QUESTION 16

Year	After-tax Cashflows	Synergistic Savings
1	$150,000	$40,000
2	$340,000	$40,500
3	$420,000	$50,000
4	$500,000	$50,000
5	$600,000	$50,000
6-10	$640,000	$30,000

Synergistic gains often occur when two companies are merged. The combination may result in net savings from duplication of staffing in accounting and administrative, legal, distribution, etc. Based on both the 10-years of after-tax cashflows and synergistic savings does this merger make sense based on an internal rate of return of 8% and a positive net present value?

		Yes, the net present value of the acquisition is positive and the IRR% is greater than the required 8% return on investment rate.
		Yes, the net present value of the acquisition is negative but the IRR% of the acquisition is positive
		No, the net present value of the acquisition is negative and the IRR% is less than the required 8% return on investment
		No, the net present value of the acquisition is negative but the IRR% of the acquisition is positive

QUESTION 17

The CFO of Alphabet is a little nervous about the acquisition and the calculations assumptions. What are some ways that she might build in a margin of safety?

(1) Increase the discount rate

(2) Decrease the discount rate

(3) Increase the cashflow assumptions

(4) Decrease the cashflow assumptions

	a.	2 and 3
	b.	1 and 4
	c.	1 and 3
	d.	2 and 4

QUESTION 18

Alphabet is considering making an even larger acquisition for $8,000,000, but first needs to compute its current Weighted Average Cost of Capital. Alphabet will be using only debt and equity, and wants to keep its ratio of LT Debt to Equity constant. The price of Alphabet stock is $13, and the expected growth rate is 10%. Assuming no additional issuance costs, what is the WACC?

		9.87%
		11.56%
		10.86%
		13.50%

QUESTION 19

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

		All of the answer choices.
		1, 2 and 3
		2, 3 and 4
		1 and 3

QUESTION 20

Dan has come across an opportunity to buy an apartment building for $1,250,000, but isnt sure. He can get a loan for 80% of the buildings value at 8%, but because of the risks Dans own required return is 12%. Given the following annual cash flows, what is the building worth to Dan?

Gross Rents 210,000

Expected vacancy 7%

Utilities, Insurance, taxes 48,000

Interest 24,000

Maintenance 10,800

Capital Repair Fund 10,000

Mgt. Fees 12,000

Depreciation 32,000

		$1,037,500
		$1,020,833
		$1,556,250 (50% credit)
		$ 754,166