Omega Corporation a mature company on the Beverage and Food Industry, with stable earnings expects to have earnings per share (EPS) of $5 dollars in the coming year and its current stock price is 120 dollars. The management must decide between the following alternatives: (1.) Pay all its earnings as Dividends and abandon the new investment project in Missoula, Montana or (2.) Cut its Dividend Payout Rate to 75% and implement the Missoula, Montana Project. If the second policy is followed there is a divergence in the estimation of the Return on the New Investment. (1.) Pay all its earnings as Dividends: Because of the status of the company and its strength in the market, the CEO believes that cash flow from operations is enough to continue to reinvest in growth, though must abandon the Missoula, Montana Project for next year, and decided to pay out all its earnings to investors. Besides that, current economic conditions are weak due to the financial crisis, and the CEO is more willing to pay dividends than to enter a program of share repurchases In addition to this, there is a favorable tax environment since the passage of the 2003 Dividend Reinvestment Act, that has significantly changed the tax treatment of corporate dividends for most taxpayers. Questions: (1.) What is the dividend yield and the growth rate of the firm? (2.) Calculate the required rate of return. (3.) What is the firm's P/E ratio? (2.) Cut its Dividend Payout rate to 75%: On the other hand, Omega's CEO has formed negative expectations regarding the recent financial crisis and advise to cut dividends even if this is not consistent with its long-run growth in earnings. He believes that it is better to reinvest some of the earnings to open new stores in Missoula, Montana a project that will last 2 years and hence, it is advisable to safeguard its financial reserves for future expenses. If the firm follows this program the return on investment is expected to be 19%. Suppose that the required rate of return is the same as calculated in Question (2.) above: Questions: (4.) What effect would this policy have on the company's stock price? (5.) Justify the dividend policy of the firm for both cases (1.) and (2.) respectively. (6.) What would be the total return of a stockholder under conditions (2)? (3.) Expected Return on New investment is 9% rather than 19%. Financial crisis is severe and persists for a long time period. The CEO of the company estimates that in this case the return on the new investment will be 9% rather than 19%. Assume EPS-56 dollars and the required rate of return is unchanged. Questions: (7.) What effect would this change have on the company's stock price? (8.) Should the company implement the new investment project and open new stores in Dubai? (9.) What do you advise the firm given the above scenarios, firm's conditions, and economic situation? (4.) Taking into consideration the Market's Systematic Risk. Omega firm has a beta factor (systematic risk) quite low, equal to 0.67. This is expected as our firm belongs to Beverage and Food industry. The economy's risk-free rate is 3% and the market's return is 12%. Questions: (10.) Estimate the risk premium. (11.) Estimate the required rate of return using the CAPM model. (12.) Estimate the price of the stock under alternative (2.) using your answer to Q (11). How do you explain the difference in price found in Question 4? (13.) What should be your final estimation of the firm's stock price? Question 2: (15 marks) 1. Outline and carefully analyze Porter's generic determinants of Strategy. 2. Analytically explain the concept of Scale and Scope Economies. Question 3: (15 marks) 1. Analytically explain the Vernon Smith's Product Cycles. What kind of Strategy would you implement in the various phases of the cycle using the 2X2 Matrix of Strategic Competiveness? 2. Outline and carefully analyze the VRIO strategy components. Omega Corporation a mature company on the Beverage and Food Industry, with stable earnings expects to have earnings per share (EPS) of $5 dollars in the coming year and its current stock price is 120 dollars. The management must decide between the following alternatives: (1.) Pay all its earnings as Dividends and abandon the new investment project in Missoula, Montana or (2.) Cut its Dividend Payout Rate to 75% and implement the Missoula, Montana Project. If the second policy is followed there is a divergence in the estimation of the Return on the New Investment. (1.) Pay all its earnings as Dividends: Because of the status of the company and its strength in the market, the CEO believes that cash flow from operations is enough to continue to reinvest in growth, though must abandon the Missoula, Montana Project for next year, and decided to pay out all its earnings to investors. Besides that, current economic conditions are weak due to the financial crisis, and the CEO is more willing to pay dividends than to enter a program of share repurchases In addition to this, there is a favorable tax environment since the passage of the 2003 Dividend Reinvestment Act, that has significantly changed the tax treatment of corporate dividends for most taxpayers. Questions: (1.) What is the dividend yield and the growth rate of the firm? (2.) Calculate the required rate of return. (3.) What is the firm's P/E ratio? (2.) Cut its Dividend Payout rate to 75%: On the other hand, Omega's CEO has formed negative expectations regarding the recent financial crisis and advise to cut dividends even if this is not consistent with its long-run growth in earnings. He believes that it is better to reinvest some of the earnings to open new stores in Missoula, Montana a project that will last 2 years and hence, it is advisable to safeguard its financial reserves for future expenses. If the firm follows this program the return on investment is expected to be 19%. Suppose that the required rate of return is the same as calculated in Question (2.) above: Questions: (4.) What effect would this policy have on the company's stock price? (5.) Justify the dividend policy of the firm for both cases (1.) and (2.) respectively. (6.) What would be the total return of a stockholder under conditions (2)? (3.) Expected Return on New investment is 9% rather than 19%. Financial crisis is severe and persists for a long time period. The CEO of the company estimates that in this case the return on the new investment will be 9% rather than 19%. Assume EPS-56 dollars and the required rate of return is unchanged. Questions: (7.) What effect would this change have on the company's stock price? (8.) Should the company implement the new investment project and open new stores in Dubai? (9.) What do you advise the firm given the above scenarios, firm's conditions, and economic situation? (4.) Taking into consideration the Market's Systematic Risk. Omega firm has a beta factor (systematic risk) quite low, equal to 0.67. This is expected as our firm belongs to Beverage and Food industry. The economy's risk-free rate is 3% and the market's return is 12%. Questions: (10.) Estimate the risk premium. (11.) Estimate the required rate of return using the CAPM model. (12.) Estimate the price of the stock under alternative (2.) using your answer to Q (11). How do you explain the difference in price found in Question 4? (13.) What should be your final estimation of the firm's stock price? Question 2: (15 marks) 1. Outline and carefully analyze Porter's generic determinants of Strategy. 2. Analytically explain the concept of Scale and Scope Economies. Question 3: (15 marks) 1. Analytically explain the Vernon Smith's Product Cycles. What kind of Strategy would you implement in the various phases of the cycle using the 2X2 Matrix of Strategic Competiveness? 2. Outline and carefully analyze the VRIO strategy components