Case 2 – HILLSHIRE & ARDENT,(a) Estimate the current values of WACC for the following 2 companies:,i. Hillshire Brands Company (food company),,ii. Ardent Healthcare Services (a private(!) operator of healthcare facilities),Utilize information from the newspapers (such as Wall Street Journal), the class notes, and,the Internet. Do not repeat Bloomberg’s Calculations,Hints,(i) Cost of Equity: To get a full credit, you have to (briefly) explain your logic for choice of,relevant parameters and provide the source of the parameter values. To estimate the value,of Market Risk Premium, use the information from the Lecture Notes. DO NOT estimate,the values of betas!!! Instead, rely on the information found on the Internet. These days,,many corporate profiles at respectable websites provide beta values for every of the,tracked companies. To get a full credit, you have to disclose your source of information,regarding betas, so that I can verify it! (Most preferably, provide a link for each of the,company betas) or screen shots.,Note that in case of Ardent, you probably won’t be able to find company’s own beta,Some useful sites:,Microsoft Investor: http://moneycentral.msn.com/investor/home.asp,Damodaran Online: http://damodaran.com,Yahoo Finance: http://finance.yahoo.com/,Value Line: http://www.valueline.com/,Bloomberg: http://bloomberg.com/,(ii) Cost of Debt:,- Assume that the typical maturity for Ardent Healthcare Services loans is 5 years.,Some useful sites:,- Standard&Poors NetAdvantage:,http://www.netadvantage.standardandpoors.com.libproxy.,radford.edu/NASApp/NetAdvantage/index.do,- http://www.bondsonline.com,- Bloomberg,(iii) Weights:,- Explain your logic for the choice of relevant values. Did you have to make any,simplifications? Why? (at most 3 sentences),Use the above-mentioned websites or EDGAR database of SEC,(http://www.sec.gov/edgar/searchedgar/webusers.htm) to get the most recent financial,statements.,- Use the values of long-term debt and short-term debt to estimate the value of debt. Do,not consider non-interest bearing liabilities (such as accounts payable) a form of debt,(basically, “if it doesn’t say ‘debt’, it ain’t debt.”) Also, disregard “Other Non-Current,Liabilities” when computing the value of debt.,- Deferred Taxes and Minority Interests (if significant) could be considered a form of,equity investment (despite being usually listed under liabilities).,- Disregard preferred stocks in computation of WACC,Extra hint for Ardent Healthcare Services:,Assume that a “typical” healthcare company finances its assets with 15% of debt and 85%,of equity,(b) Explain (in 2-3 sentences) why WACC of Hillshire Brands Company and WACC of,Ardent differ (financial reasons, not math-driven explanation!),(c) Based on the magnitudes of WACCs ONLY, either:,i. explain which company provides a better investment opportunity (2-3,sentences) or,ii. explain why you can’t decide based on WACCs only about which company,provides a better investment opportunity (2-3 sentences),(Extra hints for Ardent:,(i) I want you to indeed give me the “numbers”, i.e. the actual best estimates you can find, but:,I still want to keep the question simple and I understand that giving me the most precise answer,would require a lot of time + an access to huge financial databases covering many companies and,many accounting items for each of the companies. Therefore – you will be able to earn a perfect,score, if you provide:,a) either a pretty comprehensive analysis of the cost of capital for this company (almost,impossible to do) or,b) (far more easier way) “some” number that would make sense + a really good explanation,of what errors/biases “your number” may contain and what would you do (what,additional data you would collect, what additional factors you would pay attention to) IF,you had more time, better access to comprehensive financial databases, etc. This,“excuse” should not be more than one paragraph long (for me to see that you know what,you are talking about).,(ii) My “ideal” solution does not require any difficult statistical analysis (such as regressions).,Plus, you don’t need to become an expert on Ardent operations. Some information about the,company can be found here: http://www.ardenthealth.com/,However, the public sites mentioned above (especially http://www.damodaran.com if you know,what you are looking for) contain all the necessary data to get the “right” answer. In fact, it,shouldn’t take more than 10-15 minutes to get all the data + another 10-15 minutes to write a,“good excuse”. All I am looking for is for you to show me that you understand factors,influencing required rate of return on capital of a private healthcare company.),Case
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