Question One
Profitability. In terms of profitability, Hansson Enterprise’s EBITDA multiple is 7.0×. This makes it the third most competitive company after Women’s Care Company and Skin Care Enterprises, whose EBITDA multiples are 10.5× and 10.1×, respectively. But it is more competitive than Cathleen Sinclair and General Health & Beauty whose EBITDA Multiples are 6.4× and 6.2×, respectively.
Size. In terms of size, Hansson Enterprise’s book value is $514.5 million. This makes it the most competitive in the industry because it has the highest financial capability to expand its operations. Meanwhile, the book values of Skin Care Enterprises; General Health & Beauty; Women’s Care Company and Cathleen Sinclair are $316.2 million, $204.2 million, $43.7 million and -$1,112.8 million respectively.
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Leverage. In terms of leverage, Hansson Enterprise has the least dept.-to-value ratio (9.7%) which makes it the most competitive. This means that it incurs the least interest expenses compared to other companies.
Question Two
Advantages of Expanding
The following are the advantages that Hansson Enterprise will gain from expanding/venturing into the new project. Firstly, it will be able to grow its relationship with both domestic and international customers which will garner it acceptable payback. Expansion is also likely to increase Hansson Enterprise’s competitiveness since very few private firms will be able to expand to its level.
Disadvantages of Expanding
However, venturing in the new project would increase Hansson Enterprise’s debts thus raising its fixed costs (interest expense). As a result, its sales will decline significantly, especially if it decides to increase prices. Also, venturing into new project is more likely to reduce its demand in the long run, since most of its sells will be accounted by its current loyal customers. Simply put, there is no guarantee that the number of customers will increase.
Question Three
Using Robert’s Assumptions,
| Period |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
NET PRESENT VALUE | NPV/FIRST CASH FLOW |
| discount | 1/(1-0.0375) power 0 | 1/(1-0.0375) power 1 | 1/(1-0.0375) power 2 | 1/(1-0.0375) power 3 | 1/(1-0.0375) power 4 | 1/(1-0.0375) power 5 | 1/(1-0.0375) power 6 | 1/(1-0.0375) power 7 | 1/(1-0.0375) power 8 | 1/(1-0.0375) power 9 |
1776% |
|
| Discount |
1 |
1.04 |
1.08 |
1.12 |
1.17 |
1.21 |
1.26 |
1.31 |
1.36 |
1.41 |
||
| Net benefit |
60,469.06 |
69720.75 |
96917.04 |
81051.43 |
87858.22 |
95216.51 |
96588.4 |
97,971.49 |
99363.38 |
100761.8 |
||
| cash flow |
60469.06 |
72509.58 |
104670.4 |
90777.6 |
102794.1 |
115212 |
121701.4 |
128342.7 |
135134.2 |
142074.1 |
1073685 |
Gates projections are not true since the net present value is found to be 1776% higher than the capital, yet according to the 10-year treasury it should be 103.75%
Cash Flow and Net Present Value Using 3%
| Period |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
NET PRESENT VALUE | NPV/FIRST CASH FLOW |
| discount | 1/(1-0.03) power 0 | 1/(1-0.03) power 1 | 1/(1-0.03) power 2 | 1/(1-0.03) power 3 | 1/(1-0.03) power 4 | 1/(1-0.03) power 5 | 1/(1-0.03) power 6 | 1/(1-0.03) power 7 | 1/(1-0.03) power 8 | 1/(1-0.03) power 9 |
1715% |
|
| Discount |
1 |
1.03 |
1.1 |
1.12 |
1.13 |
1.16 |
1.2 |
1.24 |
1.28 |
1.32 |
||
| Net benefit |
60,469.06 |
69720.75 |
96917.04 |
81051.43 |
87858.22 |
95216.51 |
96588.4 |
97,971.49 |
99363.38 |
100761.8 |
||
| cash flow |
60469.06 |
71812.37 |
106608.7 |
90777.6 |
99279.79 |
110451.2 |
115906.1 |
121484.6 |
127185.1 |
133005.5 |
1036980 |
Gates projections are still not realistic since the net present value is found to be 1715%, higher than the capital, yet according to the 10-year treasury it should be 103.75%
Question Four
Cost of equity = rf + predicted equity beta × (market risk premium – risk free premium
In this case, cost of equity is equal to average cost of equity = 8.72% =0.0872
Market risk premium =5%=0.05
Predicted beta of equity= average beta =1.29
0.0872 = rf + (1.28×0.05) – (1.28×rf)
0.0872=rf+0.064 – 1.28rf
0.0232=-0.28rf
rf=-0.083 = -8.3%
I would chose -8.3% because that is the discount rate that fulfils Dowling’s projections.
Question Five
| Period |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
NET PRESENT VALUE |
| discount | 1/(1-0.0375) power 0 | 1/(1-0.0375) power 1 | 1/(1-0.0375) power 2 | 1/(1-0.0375) power 3 | 1/(1-0.0375) power 4 | 1/(1-0.0375) power 5 | 1/(1-0.0375) power 6 | 1/(1-0.0375) power 7 | 1/(1-0.0375) power 8 | 1/(1-0.0375) power 9 | |
| Discount |
1 |
1.04 |
1.08 |
1.12 |
1.17 |
1.21 |
1.26 |
1.31 |
1.36 |
1.41 |
|
| Net benefit |
60,469.06 |
69720.75 |
96917.04 |
81051.43 |
87858.22 |
95216.51 |
96588.4 |
97,971.49 |
99363.38 |
100761.8 |
|
| cash flow |
60469.06 |
72509.58 |
104670.4 |
90777.6 |
102794.1 |
115212 |
121701.4 |
128342.7 |
135134.2 |
142074.1 |
1073685 |
If I was in a position to, I would invest in Hansson Enterprise’s new project since it has a high positive Net Present Value, meaning it is a profitable venture.
References
Stafford, E., Heilprin, L.J., & Devolver, J, (2010). Hansson Private Lebel,Inc.: Evaluating an Investment in Expansion. Harvard Business School . 4021.
