Report on

Case analysis of J.C. PENNY (B)
Course (506): Cases in Financial Decision Making

Submitted To:
Department of Finance
University of Dhaka

SUMITTED BY:
MBA 14th Batch
Department of Finance
University of Dhaka

Date of Submission
February 02, 2013

1

TABLE OF CONTENTS
Origin of the Report ................................................................................................. Error! Bookmark not defined.
Objectives ................................................................................................................................................................6
Methodology ............................................................................................................................................................6
Limitations ................................................................................................................................................................6
Case Overview ............................................................................................................................................................8
J.C. Penney Company, Inc. .......................................................................................................................................9
Economic Analysis ......................................................................................................................................................9
PESTEl Analysis: ....................................................................................................................................................9
Snapshot of PESTEL Analysis (Implication, Market Driver, Key SuccessFactors, Strategy Response) .10
Industry Analysis .......................................................................................................................................................11
Company Analysis: ...................................................................................................................................................13
Strengths, Weaknesses, Opportunities and Threats (SWOT) .......................................................................13
Risk Analysis: ........................................................................................................................................................15
Financial Risk ........................................................................................................................................................19
Business Risk on Subjective Judgment .........................................................................................................19
Predicting Bankruptcy Risk: ................................................................................................................................20
Ratio Analysis ............................................................................................................................................................21
Liquidity Ratio: .......................................................................................................................................................23
Profitability Ratio ...................................................................................................................................................24
Asset Utilization Ratio ..........................................................................................................................................25
Leverage Ratio ......................................................................................................................................................26
DuPont Analysis ....................................................................................................................................................27
Valuation of J.C Penny: ................................................................................................................................................30
Sources of Finance: ..............................................................................................................................................33
Option 01: Issuing medium or long term fixed rate dollar financing of $150 million at cost of 11.45%. ...34
Option 02: Issuing $200 million 7 year notes at par with a coupon of 11.75% and fees of 0.65% ...........38

2

Option 03: Issuing zero coupon bonds with a face value of $200 million sold at 44.75% with a fess of
.5% ..........................................................................................................................................................................43
Option 04_01: ..........................................................................................................................................................47
Option 04_02: ..........................................................................................................................................................51
Option 05_01: ..........................................................................................................................................................56
Option 05_02: ..........................................................................................................................................................60
Option 06_01: ..........................................................................................................................................................64
Option 06_02: ..........................................................................................................................................................68
Option 07: ................................................................................................................................................................72
Recommendation ........................................................................................................................................................76
Appendix: .....................................................................................................................................................................77

3

Executive Summary
This case is on J.C. Penney Company, Inc. was a major retail operation providing
merchandise and services to consumers through its stores and catalog operations
across the U.S. and in Belgium. Penney marketed family apparel, home furnishings,
leisure lines, drug merchandise, and insurance. In addition , JC Penny is the largest
general merchandise catalog retailer in the US. The company primarily operates in
the US and is head quartered in Plano, Texas and employs 147,000 people.
The company had a $2.5 billion capital expenditures program, primarily aimed at
modernizing the over 1,900 retail stores across the United States. During 1983 and
1984, capital expenditures had totaled $948 million, and approximately 350 stores had
been refurbished. Capital expenditures for 1985 were expected to exceed $500 million
and the remainder of the $2.5 billion program would be spent through the end of the
decade.
The company considering various proposals from its investment bankers ranging from
common and preferred equity to short-, intermediate, and long-term debt financing. they
were focusing on $100 million to $150 million of 7-year, fixed-rate dollar financing. In the
domestic debt market, the company was considering straight and discount debt and, in
the Eurodollar market, the possibilities of intermediate-term notes or notes with debt
warrants. Also, several non-dollar issues had been proposed which could be hedged or
swapped into fixed-rate dollar debt. As a totally different approach, the company noted
that other major U.S. companies had obtained medium-term, fixed-rate financing by
issuing additional commercial paper and executing interest-rate swaps to convert the
floating rate liability to a fixed rate. Furthermore, with more financing planned within the
next few months, the company was trying to find the right way how they could hedge
against a significant rise in interest rates over that period.

4

5

OBJECTIVES
The objectives of this report are:
 To fulfill the partial requirement of MBA degree.
 To be able to use theoretical knowledge into practice to determine the optimum
corporate restructuring.
 To develop our skill in using analytical tools and techniques.
 To develop our interpersonal views and concept through sharing among every member
of the group that is reflected in this report.

METHODOLOGY
The information for the report was collected from secondary sources that are from the case and
also from different published articles, books, prospectus and journals. The basic method that is
used to analyze the data is quantitative analysis based on these data.

LIMITATIONS
Although efforts made to make the report was as comprehensive as possible, nevertheless, the
following limitations are identified at the time of preparing the report:
A lot of information regarding industry, economy, and company were required.
We had put our optimum effort to formulize the available information.
Inefficiency in some field of analysis.
Non-availability of information for more relevant analysis.
Many analytical techniques and tools were needed to apply to get appropriate result but due to
our lack of practical knowledge our analysis may not be a highly efficient one.

6

7

CASE OVERVIEW
In 1983, J.C. PENNEY COMPANY, INC. had announced a $2.5 billion capital expenditures
program, primarily aimed at modernizing the over 1,900 retail stores across the United States.
During 1983 and 1984, capital expenditures had totaled $948 million, and approximately 350
stores had been refurbished. Capital expenditures for 1985 were expected to exceed $500
million and the remainder of the $2.5 billion program would be spent through the end of the
decade.
The company considering various proposals from its investment bankers ranging from common
and preferred equity to short-, intermediate, and long-term debt financing. they were focusing on
$100 million to $150 million of 7-year, fixed-rate dollar financing. In the domestic debt market,
the company was considering straight and discount debt and, in the Eurodollar market, the
possibilities of intermediate-term notes or notes with debt warrants. Also, several non-dollar
issues had been proposed which could be hedged or swapped into fixed-rate dollar debt. As a
totally different approach, the company noted that other major U.S. companies had obtained
medium-term, fixed-rate financing by issuing additional commercial paper and executing
interest-rate swaps to convert the floating rate liability to a fixed rate. Furthermore, with more
financing planned within the next few months, the company was trying to find the right way how
they could hedge against a significant rise in interest rates over that period.

8

J.C. PENNEY COMPANY, INC.
J.C. Penney Company, Inc. was a major retail operation providing merchandise and services to
consumers through its stores and catalog operations across the U.S. and in Belgium. Penney
marketed family apparel, home furnishings, leisure lines, drug merchandise, and insurance. In
addition , JC Penny i s t h e largest general merchandise catalog retailer in the US. The
company primarily operates in the US and is head quartered in Plano, Texas and employs
147,000 people.

ECONOMIC ANALYSIS
PESTEL ANALYSIS:
POLITICAL FACTORS
 Parliamentary democratic practices /constitution-based federal strong democracy.
 Political scenario of USA is much stable and it’s favorable for business proliferation and
development.
 Well established Legal framework

ECONOMIC FACTORS
 One of the largest & influential economies in the world.
 Low inflation rates and high real rate of returns.
 Free market economy.
 Increasing per capita GDP

Social factors
 Slow population growth rate.
 High standards of living.
 High immigration rate in USA.
 Diversified demographic factors

Technological Factors
 High growth of Technological advancement & Innovation.
 Efficient national infrastructure

9

 Technology based communication, infrastructures developments

Environmental factors
 Adverse effects from using forest products.
 Environmental concerns.

Legal factors
 Well established legal framework.
 Good taxation Policy.
 Efficient market and well recognized laws & orders

SNAPSHOT OF PESTEL ANALYSIS (IMPLICATION, MARKET DRIVER, KEY
SUCCESSFACTORS, STRATEGY RESPONSE)

Assessment of the PESTEL Analysis and Finding out the possible Inclusion and
Consideration on Valuation
Favorable economic conditions and rapid increase of GNP growth will ensure higher
demand of products and service. This high demand should be considered in valuation
assumption in the form of high initial growth rate.
Stable political economy will provide us strength to assume growth of the firm.
Rapid technological innovation will cause firm to concentrate on innovative and cost
reducing process and this will cause more Research and Development cost in the future.
The existence of the host of positive demand factors will be a supporting point for
assuming high growth in the initial stage of the valuation process.

10

INDUSTRY ANALYSIS
In 1902, James Cash Penney opened the first J. C. Penney in the town of Kemmerer, Wyoming
under the name the Golden Rule. It has become one of the largest department and discount
retail chains in America. Its target market consists of middle-income families who want the
convenience of shopping for a variety of goods at affordable prices without sacrificing quality.

Existing firms compete for market share based on economies of scale, tight cost controls, and
investments in brand image. This competition nearly eliminates any possibility of new entrants
entering into the industry. The majority of products found within this industry are similar; the
threat of substitute products is moderate and the switching costs for buyers are moderate. Many
of the companies within this industry compete on price while trying to maintain a certain level of
quality in their products. Firms within this industry try to differentiate their product lines. J. C.
Penney is a prime example of how this marketing strategy can help increase a company’s
market share within the retail industry. However, differentiation does not come without a price.
Because of the contracts and patents that come with this process, the bargaining power of a
firm’s suppliers jumps from a low to a moderate level. The key success factors within this
particular industry play an important role in gaining a competitive advantage. The key success
factors within the department store retail industry are economies of scale, lower input costs, and
investment in brand image. Staying on top of these key success factors allows a company to
stay one step ahead of the competition, thus maintaining and even
gaining more market share.
• Rivalry Among Existing Competitors ------------------Very high
• Threats of New Entrants --------------------------------Low
• Threats of Substitutes-------------------------------------Moderate
• Bargaining Power of Buyers -----------------------------Moderate

11

Bargaining Power of Suppliers--------------------------Moderate

Snapshot and Action Assessment of the Porter Five Forces Model
Analysis
Force Checked

Threat of New Entrants

Threat

Low

Impact to
Profitability

Action/ Response

High
Profitability

Concentrate on
reducing
administrative costs

Check

Bargaining Power of
Suppliers

Moderate Moderate
to low
Profitability

Increase Capital
Expenditures.

Bargaining Power of
Buyers

Moderate

Attractive Marketing &
Promotional Strategy

Threat of Substitutes

Moderate

Moderate
Profitability
Moderate
Profitability

Rivalry among Existing
Competitors

Very
High

Moderate
Profitability

Attractive Offering
and High Advertising

Pursuing Mgt.
Strategy

Assessment of the Porter Five Forces Model Analysis and Finding out
the possible Inclusion and Consideration on Valuation
Low threat of new entry ensures the growth of the industry at moderate rates. That
means the industry is not still in the matured stage.
Moderate bargaining power of the supplier ensures an average profitability to the
existing players. So the existing players may concentrate on the more Research and
Development expenditure.
High rivalry among the competitors in a concentrated industry.

12

COMPANY ANALYSIS:
STRENGTHS, WEAKNESSES, OPPORTUNITIES AND THREATS (SWOT)
SWOT analysis is helpful to evaluate firm’s current and potential position by examining internally
and externally.
Internal: to find out the firm’s strength & weakness within the organization.
External: opportunities and threats outside the firm and within the economy & industry.
In here we’ve executed the SWOT analysis to find out J.C.Penney Co’s major strengths,
weakness, opportunities and threats.

Strenghts

• Wide product and service offerings through multiple retail channel
• Customer FIRST initiative
• Balanced brand portfolio

13

Weaknesses
• Strong decline in comparable store sales
• Continuous product recalls
• Increase in Operating expense

Opportunities
• Focus on expansion of stores.
• Launching new exclusive and private label brands.
• Investment in online format.

Threats
• Huge Competition.
• Moderate new store opening

14

RISK ANALYSIS:
We’ve considered three risk factors here.
Business Risk
Financial Risk
Credit Risk or Bankruptcy possibility.
Business Risk: uncertainty of operating income caused by the firm’s industry.

Sales Variability:
Volatility of Sales = f (Coefficient of Variation of Sales)
The coefficient of variation (CV) is defined as the ratio of the standard deviation
mean :

to the

It shows the extent of variability in relation to mean of the population.
Sales variability of the J.C.Penney Company of last 2 years is calculated as follows:

Revenue
14000
13500
13000
12500

Revenue

12000
11500
11000
1984

1985

15

1. Sales Volatility

Revenue

1984

1985

12078

13451

Changes

0.113677761

Mean

12764.5

STD

970.8576106

CV

0.076059196

Since the coefficient of variation of Sales (0.076) is lower than 0.50, the volatility of Sales is low.
That’s why business risk is low.

Costs of Sales Variability:
Volatility of Costs = f (Coefficient of Variation of Costs)
The coefficient of variation (CV) is defined as the ratio of the standard deviation
:

to the mean

It shows the extent of variability in relation to mean of the population.
Earnings variability is calculated as follows.

Cost of sales
9200
9000
8800
8600
8400
8200
8000
7800
7600
7400

Cost of sales

1984

1985

16

3.cost of sales Volatility

Cost of sales

1984

1985

8053

9030

Changes

Mean

10.82%
8541.5

STD

690.8433

CV

0.080881

Since the coefficient of variation of .0808 is lower than 0.50, the volatility of costs is high.

Earnings Variability:
Volatility of Earnings = f (Coefficient of Variation of earnings)

The coefficient of variation (CV) is defined as the ratio of the standard deviation
:

to the mean

It shows the extent of variability in relation to mean of the population.
Earnings variability of is calculated as follows:

17

EBIT
1079
1078
1077
1076

EBIT

1075
1074
1073
1984

1985

2. EBIT Volatility
1984
1078

EBIT
Changes

Mean
STD
CV

1985
1075
0.002790698

1076.5
2.121320344
0.001970572

Since the coefficient of variation of Earnings .00197 is lower than 0.50, the volatility of
Earnings is low.
Degree of Operating Leverage:
Operating Leverage
YEAR

1984

1985

% change
in EBIT

-0.28%

% change
in Sales

11.37%

Operating
leverage

-0.02448088

The average DOL of the J.C.penney Company is referring very low business risk.

18

FINANCIAL RISK
Degree of Financial Leverage
DFL indicates low financial risk.

Financial leverage
YEAR

1984

1985

EBIT

1,078

1,075

Interest

266

350

Financial
leverage

1.33

1.48

Financial leverage
1.50
Financial
leverage
1.00

Financial leverage
1

2

BUSINESS RISK ON SUBJECTIVE JUDGMENT
Significances of political Risk: stable and democratic practice reduce the possibility of
adverse political impacts and indicates low business risk.
Sensitivity of Economic Change: no major downturns or bad economic consequences have
been observed. So it is low.
Technological Obsolesce: This business activity is not too much technology based. So it is
low.
Regulatory Risk: Well-functioning markets, flexible taxation policy and good legal framework
keep regulatory risk at low level.
Overall risk analysis we’ve concluded that it holds the low business risk.

19

PREDICTING BANKRUPTCY RISK:
Altman Z-score
Original z-score component definitions variable definition weighting factor
X1 = Working Capital / Total Assets
X2 = Retained Earnings / Total Assets
X3 = Earnings before Interest and Taxes / Total Assets
X4 = Market Value of Equity / Total Liabilities
X5 = Sales/ Total Assets

Z score bankruptcy model:
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + .999X5

Zones of Discrimination:
Z > 2.99 -“Safe” Zones
1.81 < Z < 2.99 -“Grey” Zones
Z < 1.81 -“Distress” Zones

Altman Z score

1984

1985

4.300

4.083

We’ve calculated Altman Z score for last two years due to the lack required information. Last
two year z core indicates that’s J.C.Penney holds safe position. That means it has low
probability to become bankrupted because it scored 4.3 & 4.083 that are higher than 2.99 score.

20

RATIO ANALYSIS
Ratio analysis is the starting point in developing the information desired by the analyst. It
provides only a single snapshot, the analysis being for one given point or period in time. In the
ratio analysis it is possible to define the company ratio with a standard one. Ratios are more
informative than raw numbers. Through the ratio analysis one can easily understand that
whether the company is progressing or declining. It also helps to estimate future performance.
To show the overall financial position of J.C.Penny Company we have done four types of ratio
analysis for the year 1984& 1985. These are shown in the bellow:
We have conducted the following four types of ratio analysis:
A) Liquidity ratio
B) Profitability ratio
C) Asset Utilization ratio
D) Leverage ratio

Ratios
Liquidity Ratio

Profitability
Ratio

1985
Current Ratio

2.40566

1984
2.19989

Cash ratio

0.02338

0.03387

Gross profit
margin

7.78381

8.71005

Net profit margin

3.0258

3.65127

ROA

5.32%

6.28%

21

Asset
Utilization
Ratio

Leverage Ratio

ROE

11.41%

13.12%

Total asset
turnover

1.64639

1.62382

Fixed Asset
turnover

3.59076

3.47468

Debt to equity
Ratio

0.54696

0.48019

Debt to asset
ratio

0.2552

0.22977

22

LIQUIDITY RATIO:

Liquidity ratio measures the ability of the firm to meet its obligations. These ratios
establish relation between cash and other current assets and current liabilities.
Creditors to evaluate the creditworthiness of the firm use these ratios. These ratios also
provide revels management’s policy in managing liquidity position of the firm. Internal
liquidity ratios indicate the firm’s ability to quickly generate cash versus the firm’s need
for cash on short notice.. The higher the ratio, the more liquid the firm is said to be.
In order to assess the liquidity position,. we have determined the following two liquidity
ratios:
1.

Current ratio

2.

Cash ratio

Liquidity Ratio

2.5
2
1.5
1

Cash Ratio

0.5
0

Cureent Ratio

Cureent Ratio

1985
2.405655247

1984
2.199888951

Cash Ratio

0.023382273

0.033870072

Current ratio is the ratio of current assets to current liabilities. Current ratio increased
slightly in the year 1985 compared to the yea 1984. Cash ratio is the most conservative
liquidity ratio. This is the ratio of cash to current liabilities. Cash ratio decreased in the
year 1985 compared to the year 1984. So we can say that overall liquidity position of
the company is not so much outperforming.

23

PROFITABILITY RATIO

Profitability ratios focus on the firm’s earnings. It measures how well management is
operating a business in terms of rate of profit on revenue and percentage return on
capital. The higher the ratio, the more profitable the firm is said to be.

Profitability Ratio
10
5

ROE
ROA
Net Profit Margin

0

Gross Profity Margin
1985

1984

Gross Profity Margin

1985
7.783807895

1984
8.710051333

Net Profit Margin

3.025797338

3.651266766

ROA

5.32%

6.28%

ROE

11.41%

13.12%

Net profit margin is the ratio of EBIT to net sales. ROA ROE measures how much profit
is generated for each dollar of assets and capital respectively. Here the profitability ratio
shows a downward trend for the company and the ROA and ROE is also decreasing
throughout the years.

24

ASSET UTILIZATION RATIO

It shows how efficiently the management is utilizing its assets to generate revenue. The
higher the ratio, the more efficient the firm is said to be.

Asset Utilization Ratio
4
3
2
Fixed Asset turnover

1
0

Total Asset Turnover
1985
1984

Total Asset Turnover

1985
1.646389229

1984
1.623823608

Fixed Asset turnover

3.590763481

3.474683544

Total Asset Turnover and Fixed Asset Turnover is the ratio of revenue to average total
asset and average fixed asset respectively. The upward trend is shown in the case of
Total Asset Turnover and Fixed Asset Turnover in two years. Overall we can say that
the company is efficiently utilizing its assets.

25

LEVERAGE RATIO
Leverage ratio provides the insights of the firm’s credit profile. The higher leverage ratio means
that Total Asset Turnover and Fixed Asset Turnover is the ratio of revenue to average total
asset and average fixed asset respectively. The upward trend is shown in the case of Total
Asset Turnover whereas Fixed Asset Turnover is decreased in the last year. Overall we can say
that the company is efficiently utilizing its assets. The company is bearing higher amount of
debt.

Leverage Ratio
1
0

Debt Asset ratio
Debt Eqity ratio
1985

1984

Debt Eqity ratio

1985
0.546956978

1984
0.480191065

Debt Asset ratio

0.255201958

0.229766066

Both of the Debt to Equity and Debt to Total Assets shows that the company is not improving its
credit condition day by day. Because both Debt to Total Assets and Debt to equity ratio has an
upward slope.

26

DUPONT ANALYSIS
To understand the factors affecting a firm’s ROE, particularly its trend over the time and its
performance relative to competitors, analysts often decompose ROE into the product of a series
of ratios. Each component ratio is in itself meaningful, and the process serves to focus the
analyst’s attention on the separate factors influencing performance. This kind of decomposition
of ROE is often called the DuPont analysis.
Decomposition of ROE is;

We can summarize all of these relationships as follows;

From the analysis we found that;
Year
Du Pont

1985
0.114

1985

1984
0.131

1984

Net Profit AT/Sales

0.03234

0.038665

Sales/Total Assets

1.646389

1.623824

ROA

0.053244

0.062786

Total Assets/Stockhldrs. Equity

2.143232

2.089913

ROE

0.114113

0.131217

27

Du Pont
0.140
0.120
0.100
1985

1984
Du Pont

ROE has decreased that means the company is not effectively employing the funds invested by
the firm’s shareholders to generate return.
From the DuPont analysis we can say that financial leverage is highly influencing the ROE. On
the other hand profit margin has the least contribution on ROE.

28

29

VALUATION OF J.C PENNY:
J.C Penny has good amount of equity and cash flow with some subsidiaries. Now
valuation needs to be done for determining the original value of the J. C. Penny.

Assumptions:
Terminal Growth Rate
Cost of Equity

2.00%
18.82%

Cost of Debt

11.32%

Premium

7.50%

Cost of Equity

66.90%

Average Growth
Rate

24.85%

Average Growth
Rate

2.40%

Average Growth
Rate

42.75%

Average Tax rate

18.82%

The cost of equity is calculated using the Bond Yield plus premium method. In this
method the cost of bond is determined by the previous bond issue and their maturity
period. Using the IRR method the cost of bond is determined. After determining the cost
of debt a premium which is determined based on the judgment is added to find the cost
of equity.

30

The growth rates are found using the average growth rate of two years. And for
projections sales driven strategy are used.
Calculation of Free Cash Flow to Equity
Projections
Particulars
Sales

Jan-84

Jan-85

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

12078

13451

14980.
08

16682.
981

18476.
402

20342.51
858

22275.
06

11.37%

11.37%

10.75%

10.10%

9.50%

10022.
235

11161.
54

12361.
406

13609.90
792

14902.
85

3722.4
5

4145.6
1

4591.2
6

5054.98

5535.2
0

Sales Growth
Costs and Expenses
COGS

8053

9030

COGS % of Sales

66.67
%

67.13%

Selling, General,
Administrative expense

2973

3374

% of Sales

24.62
%

25.08%

Interest Expense Net

266.00

350.00

359.85

400.76

443.84

488.67

535.09

% Growth

2.20%

2.60%

Total Cost and Expense

11292.
00

12754.00

14104.
53

15707.
91

17396.
51

19153.55

20973.
14

EBIT

786

697

875.55

975.08

1079.9
0

1188.97

1301.9
2

Income Taxes

345

290

374.30

416.85

461.66

508.28

556.57

43.89
%

41.61%

Income Before un
consolidated Subsidiaries

441

407

501.25

558.23

618.24

680.68

745.35

Income of unconsolidated
subsidiaries

26

28

30.15

32.47

34.97

37.66

40.56

7.69%

7.69%

7.69%

7.69%

7.69%

435

531.40

590.70

653.21

718.34

% of EBIT

Growth Rate
Income from continuing
operations

467

785.91

31

Net Income

467

435

Number of Shares

74.7

74.7

Per Share

6.25

5.82

Cash Flows

467

Depreciation

897

CWNC
Capital Expenditure
Cash Flow

1364

531.40

590.70

653.21

718.34

785.91

435

531.40

590.70

653.21

718.34

785.91

1015

1112.4

1219.2

1336.3

1464.6

1605.2

-123

387.75

445.91

512.80

589.72

678.18

250

276.51

305.82

338.24

374.11

413.77

1323

979.59

1058.2
0

1138.4
5

1219.08

1299.1
2
7723.6
69

Terminal Value
Total Cash Flow

979.59

1058.2
0

1138.4
5

1219.08

9022.7
9

Present Value

824.43

749.53

678.65

612

3809.7
2

Firm Value

6673.94

Add: Cash

43.00

FCFE

6716.94

Number of Shares

74.7

Per Share Value

89.92

Here the value per share is $89.92 which is quite good. Now J. C. Penny needs to have
some finance to improve their value.

32

SOURCES OF FINANCE:
There are some sources of finance which is available to J. C Penny. These are
Issuing medium or long term fixed rate dollar financing of $150 million at cost of
11.45%.
Issuing $200 million 7 year notes at par with a coupon of 11.75% and fees of
.65%
Issuing zero coupon bonds with a face value of $200 million sold at 44.75% with
a fess of .5%
Issuing Eurodollar bond of $100 million 7 year bond at 99.875% with a coupon
of 11.375% and fees of 1.875% with a call option at 101% of par at the
beginning of the fifth year.
Issuing Eurodollar bond of $100 million 7 year bond at 99.875% with a coupon
of 11.375% and fees of 1.875% with a option to issue bond warrant.
Raising Swiss Franc 200 million with a coupon of 5.375% and fees of 2.065%.
Using the SWAP contract with a major US bank paying US dollars 11.95% and
receiving Swiss Franc at 6.00%
Raising Yen 25 billion with a coupon of 6.75% and fees of 1.875%. Using the
SWAP contract with a major US bank paying US dollars 11.95% and receiving
Yen at 7.10%
Issuing Commercial paper total about $800 million which will be redeemed after
every 6 months and can be swapped with a fixed exchange rate of
11.95%.(yearly)
Issuing Commercial paper total about $800 million which will be redeemed after
every month and can be swapped with a fixed exchange rate of 11.95% (yearly).
Intermediate term debt financing of $100 million with a 10 year issue in march
using the options to hedge against the interest rate risk.

We have valued each options to determine the best option.

33

OPTION 01: ISSUING MEDIUM OR LONG TERM FIXED RATE DOLLAR
FINANCING OF $150 MILLION AT COST OF 11.45%.
The assumptions are as follows:
Assumptions:
Terminal Growth Rate

2.50%

Cost of Equity

Cost of Debt
Premium
Cost of Equity

19.33%

11.33%
8.00%
19.33%

66.90%

Average Growth Rate

24.85%

Average Growth Rate

2.40%

Average Growth Rate

42.75%

Average Tax rate

The cost of equity is found through the method described previously. Here the terminal
growth rate is assumed to be 2.50% and cost of equity is 19.33% which is found by
using the Bond yield plus risk premium method.

34

Sensitivity Analysis:
The bond is valued using the Yield and sensitivity analyses are made.

Base Case
Face Value

1% Decrease
150

Face Value

1% Increase
150

Face Value

150

Yield

11.45%

Yield

10.45%

Yield

12.45%

Coupon Rate

11.45%

Coupon rate

11.45%

Coupon Rate

11.45%

Coupon

17.175

Period

7

Market Price

$150.00

Coupon

17.175

Period

7
$157.2
0

Market Price

Coupon

17.175

Period

7

Market Price

$143.2
5

Option 01:Raising $150 Million
Projections
Particulars
Sales

Jan-84

Jan-85

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

12078

13451

15047.3
35

16833.1
19

18830.8
35

21065.
64

23565.
66

11.87
%

11.87%

11.87%

11.87%

11.87
%

10067.2
31

11261.9
88

12598.5
35

14093.
7

15766.
31

3739.16

4182.92

4679.33

5234.6
7

5855.9
1

Sales Growth
Costs and Expenses
COGS

8053

9030

COGS % of Sales

66.67
%

67.13
%

Selling, General,
Administrative expense

2973

3374

% of Sales

24.62
%

25.08
%

Interest Expense Net

35

266.00

350.00

% Growth

2.20%

2.60%

Total Cost and Expense

11292.
00

EBIT
Income Taxes
% of EBIT
Income Before unconsolidated
Subsidiaries
Income of unconsolidated
subsidiaries

361.47

404.36

452.35

506.04

566.09

12754.
00

14167.8
6

15849.2
7

17730.2
2

19834.
41

22188.
31

786

697

879.48

983.85

1100.61

1231.2
3

1377.3
5

345

290

375.98

420.60

470.51

526.35

588.82

43.89
%

41.61
%

441

407

503.50

563.25

630.10

704.88

788.53

26

28

30.15

30.15

30.15

30.15

30.15

Growth Rate

7.69%

Income from continuing
operations

467

435

533.65

593.41

660.25

735.03

818.69

Net Income

467

435

533.65

593.41

660.25

735.03

818.69

Number of Shares

74.7

74.7

Per Share

6.25

5.82

Cash Flows

467

435

533.65

593.41

660.25

735.03

818.69

Depreciation

897

1015

1163.21

1333.07

1527.72

1750.8
1

2006.4
6

-123

452.38

531.54

624.56

733.86

862.28

250

286.51

328.34

376.29

431.23

494.20

1323

957.99

1066.59

1187.13

1320.7
5

1468.6
6

CWNC
Capital Expenditure
Total Cash Flow

1364

8726.4
58

Terminal Value
Total Cash Flow

957.99

1066.59

1187.13

1320.7
5

10195.
12

Present Value

802.80

749.03

698.63

651.36

4213.5
1

Firm Value

7115.3
4

Add: Cash

43.00

36

7158.3
4

FCFE
Number of Shares

74.7

Per Share Value

95.83

Solvency Ratios:
Amount

New Debt

Total

Total Debt

4358

150

4508

Equity

3812

3812

Total Assets

8170

8170

Long Term Debt

2085

Debt to Equity Ratio

1.14

1.18

Long Term Debt to Equity Ratio

54.70%

58.63%

Debt to Asset Ratio

53.34%

55.18%

150

2235

37

Simulation Analysis:

In this simulation we can see that the mean is 7164.89 million and with a standard
deviation of 4438.24 million. The distribution follows a normal distribution.
OPTION 02: ISSUING $200 MILLION 7 YEAR NOTES AT PAR WITH A
COUPON OF 11.75% AND FEES OF 0.65%

Here we can see that using the debt of $150 million the value per share can increase to
$95.83 this is all because of the leverage effect. The debt-equity ratio is quite good and
stable.
The assumptions are as follows:
Assumptions:
Terminal Growth Rate
Cost of Equity

2.50%
19.62%

38

Cost of Debt
Premium

11.37%
8.25%

Cost of Equity

19.62%

66.90%

Average Growth Rate

24.85%

Average Growth Rate

2.40%

Average Growth Rate

42.75%

Average Tax rate

Here the terminal growth rate is assumed to be 2.50% and cost of equity is 19.62%
which is found by using the Bond yield plus risk premium method.

Sensitivity Analysis:
Base Case
Face Value

1% Decrease
200

Face Value

1% Increase
200

Face Value

200

Yield

11.83%

Yield

10.83%

Yield

12.83%

Coupon Rate

11.75%

Coupon Rate

11.75%

Coupon Rate

11.75%

Coupon
Period
Market Price

23.5
7
$199.27

Coupon
Period
Market Price

23.5
7
$208.72

Coupon
Period
Market Price

23.5
7
$190.40

39

Option 02:Raising $200 Million
Projections
Particulars
Sales

Jan-84

Jan-85

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

12078

13451

15988.9
05

19005.6
55

22591.6

26854.
13

31920.
91

18.87
%

18.87%

18.87%

18.87%

18.87
%

10697.1
77

12715.4
96

15114.6
28

17966.
42

21356.
29

3973.13

4722.78

5613.86

6673.0
7

7932.1
3

384.08

456.55

542.69

645.09

766.80

Sales Growth
Costs and Expenses
COGS

8053

9030

COGS % of Sales

66.67
%

67.13
%

Selling, General,
Administrative expense

2973

3374

% of Sales

24.62
%

25.08
%

266.00

350.00

% Growth

2.20%

2.60%

Total Cost and Expense

11292.
00

12754.
00

15054.4
0

17894.8
3

21271.1
8

25284.
58

30055.
22

EBIT

786

697

934.51

1110.83

1320.42

1569.5
5

1865.6
9

Income Taxes

345

290

399.50

474.88

564.48

670.98

797.58

43.89
%

41.61
%

441

407

535.01

635.95

755.94

898.57

1068.1
1

26

28

30.15

30.15

30.15

30.15

30.15

Interest Expense Net

% of EBIT
Income Before unconsolidated
Subsidiaries
Income of unconsolidated
subsidiaries
Growth Rate

7.69%

Income from continuing
operations

467

435

565.16

666.10

786.09

928.72

1098.2
6

Net Income

467

435

565.16

666.10

786.09

928.72

1098.2
6

Number of Shares

74.7

74.7

40

Per Share

6.25

5.82

Cash Flows

467

435

565.16

666.10

786.09

928.72

1098.2
6

Depreciation

897

1015

1163.19

1333.02

1527.64

1750.6
7

2006.2
7

-123

478.23

566.70

671.54

795.77

942.99

250

291.51

339.90

396.33

462.13

538.86

1323

958.62

1092.52

1245.86

1421.4
9

1622.6
9

CWNC
Capital Expenditure
Total Cash Flow

1364

9478.3
14

Terminal Value
Total Cash Flow

958.62

1092.52

1245.86

1421.4
9

11101.
00

Present Value

801.39

763.52

727.88

694.27

4532.5
6

Firm Value

7519.6
1

Add: Cash

43.00

FCFE
Number of Shares
Per Share Value

7562.6
1
74.7
101.24

The value per share is $101.24. The price increased because of using debt of $200
which magnifies the income and value.

41

Solvency Ratios:
Amount

New Debt
199.27

Total

Total Debt

4358

Equity

3812

3812

Total Assets

8170

8170

Long Term Debt

2085

Debt to Equity Ratio

1.14

1.20

Long Term Debt to Equity Ratio

54.70%

59.92%

Debt to Asset Ratio

53.34%

55.78%

199.27

4557.27

2284.27

Simulation Analysis:

In this simulation we can see that the mean is 7582.62 million and with a standard
deviation of 3054.38 million. The distribution follows a normal distribution.

42

OPTION 03: ISSUING ZERO COUPON BONDS WITH A FACE VALUE OF
$200 MILLION SOLD AT 44.75% WITH A FESS OF .5%
The assumptions are as follows:
Assumptions:
Terminal Growth Rate

2.50%

Cost of Equity

Cost of Debt
Premium
Cost of Equity

19.16%

11.41%
7.75%
19.16%

66.90%

Average Growth Rate

24.85%

Average Growth Rate

2.40%

Average Growth Rate

42.75%

Average Tax rate

Here the terminal growth rate is assumed to be 2.50% and cost of equity is 19.16%
which is found by using the Bond yield plus risk premium method.

43

Option 03:Raising $89.053 Million by issuing $200 million zero coupon bonds
Projections
Particulars

Jan-84

Jan-85

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

12078

13451

15006.9
82

16742.9
56

18679.7
43

20840.
57

23251.
37

11.57%

11.57%

11.57%

11.57%

11.57%

8053

9030

10040.2
34

11201.6
65

12497.4
49

13943.
13

15556.
04

66.67%

67.13%

2973

3374

3729.13

4160.51

4641.79

5178.7
4

5777.8
1

% of Sales

24.62%

25.08%

Interest Expense Net

266.00

350.00

360.50

402.20

448.72

Sales
Sales Growth
Costs and Expenses
COGS
COGS % of Sales
Selling, General, Administrative
expense

500.63

558.54

% Growth

2.20%

2.60%

Total Cost and Expense

11292.
00

12754.
00

14129.8
6

15764.3
7

17587.9
6

19622.
50

21892.
38

EBIT

786

697

877.12

978.58

1091.78

1218.0
8

1358.9
8

Income Taxes

345

290

374.97

418.34

466.74

520.73

580.96

43.89%

41.61%

441

407

502.15

560.24

625.04

697.35

778.02

26

28

30.15

30.15

30.15

30.15

30.15

% of EBIT
Income Before unconsolidated
Subsidiaries
Income of unconsolidated
subsidiaries
Growth Rate

7.69%

44

Income from continuing
operations

467

435

532.30

590.39

655.20

727.50

808.17

Net Income

467

435

532.30

590.39

655.20

727.50

808.17

Number of Shares

74.7

74.7

Per Share

6.25

5.82

Cash Flows

467

435

532.30

590.39

655.20

727.50

808.17

Depreciation

897

1015

1132.74

1264.14

1410.78

1574.4
3

1757.0
6

-123

413.60

479.78

556.54

645.59

748.88

250

281.51

316.98

356.93

401.91

452.56

1323

969.94

1057.77

1152.51

1254.4
4

1363.7
9

CWNC
Capital Expenditure
Total Cash Flow

1364

8186.0
34

Terminal Value
Total Cash Flow

969.94

1057.77

1152.51

1254.4
4

9549.8
3

Present Value

813.98

744.96

681.17

622.19

3975.0
5

Firm Value

6837.3
5

Add: Cash

43.00

FCFE

6880.3
5

Number of Shares

74.7

Per Share Value

92.11

The value per share is quite less than the previous one. This is because using the zero
coupon bonds to raise fund generates fewer cash flows than issuing bonds.

45

Solvency Ratios:

Amount

New Debt
200

Total

Total Debt

4358

Equity

3812

3812

Total Assets

8170

8170

Long Term Debt

2085

Debt to Equity Ratio

1.14

1.20

Long Term Debt to Equity Ratio

54.70%

59.94%

Debt to Asset Ratio

53.34%

55.79%

200

4558

2285

Simulation Analysis:

In this simulation we can see that the mean is 7008.01 million and with a standard
deviation of 2454.88 million. The distribution follows a normal distribution.

46

OPTION 04_01:

Issuing Eurodollar bond of $100 million 7 year bond at 99.875%
with a coupon of 11.375% and fees of 1.875% with a call option at
101% of par at the beginning of the fifth year.

Assumptions:
Terminal Growth Rate

2.50%

Cost of Equity First 4 Years

19.08%

Cost of Equity Fifth Year

19.04%

Redemption of the Bonds

30%

For the First 4 Years
Cost of Debt
Premium
Cost of Equity

11.33%
7.75%
19.08%

From the 5th Year
Cost of Debt
Premium
Cost of Equity

11.29%
7.75%
19.04%

47

66.90%

Average Growth Rate

24.85%

Average Growth Rate

2.40%

Average Growth Rate

42.75%

Average Tax rate

Here the terminal growth rate is assumed to be 2.50% and cost of equity is 19.08% for
1st 4 years & 19.04 for 5th year which is found by using the Bond yield plus risk
premium method.

Option 04:Raising $100 form Euro Dollar Bonds
Projections
Particulars
Sales

Jan-84

Jan-85

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

12078

13451

15006.981
57

16742.9
56

18679.7
43

20840.
57

23251.
37

11.57
%

11.57%

11.57%

11.57%

11.57
%

8053

9030

10040.233
53

11201.6
65

12497.4
49

13943.
13

15556.
04

66.67%

67.13
%

2973

3374

3729.13

4160.51

4641.79

5178.7
4

5777.8
1

24.62%

25.08
%
402.20

448.72

500.63

558.54

Sales Growth
Costs and Expenses
COGS
COGS % of Sales
Selling, General,
Administrative expense
% of Sales
Interest Expense Net
% Growth
Total Cost and Expense
EBIT

266.00

350.00

360.50

2.20%

2.60%

11292.0
0

12754.
00

14129.86

15764.3
7

17587.9
6

19622.
50

21892.
38

786

697

877.12

978.58

1091.78

1218.0
8

1358.9
8

48

Income Taxes
% of EBIT
Income Before
unconsolidated Subsidiaries
Income of unconsolidated
subsidiaries

345

290

43.89%

41.61
%

441
26

Growth Rate

374.97

418.34

466.74

520.73

580.96

407

502.15

560.24

625.04

697.35

778.02

28

30.15

30.15

30.15

30.15

30.15

7.69%

Income from continuing
operations

467

435

532.30

590.39

655.20

727.50

808.17

Net Income

467

435

532.30

590.39

655.20

727.50

808.17

Number of Shares

74.7

74.7

Per Share

6.25

5.82

Cash Flows

467

435

532.30

590.39

655.20

727.50

808.17

Depreciation

897

1015

1,611.
43

1,808.
83

CWNC
Capital Expenditure
Total Cash Flow

1364

1,139.34

1,278.9
1

1,435.5
7

-123

420.06

488.32

567.68

659.92

767.16

250

282.76

319.80

361.70

409.10

462.70

1323

968.82

1061.17

1161.39

1269.9
2

1387.1
5
8386.6
09

Terminal Value
Redemption Of Bonds

30.3

Total Cash Flow

968.82

1061.17

1161.39

1239.6
2

9773.7
5

Present Value

813.59

748.36

687.80

616.50

4088.8
1

Firm Value

6955.0
5

Add: Cash

43.00

FCFE

6998.0
5

Number of Shares

74.7

Per Share Value

93.68

49

Sensitivity Analysis:
Base Case

1% Decrease

Face Value
Yield

100
11.61%

Coupon Rate

11.375%

Coupon

11.375

Period

7

Face Value
Yield
Coupon Rate
Coupon

1% Increase
100
10.61%

11.375%
11.375

Period

7

Face Value

100

Yield

12.61%

Coupon Rate
Coupon

11.375%
11.375

Period

7

Market Price

$98.91

Market Price

$103.65

Market Price

$94.47

Option Value

0.0022203

Option Value

0.0335278

Option Value

0.000688

Bond Value

$98.91

Bond Value

$103.62

Bond Value

$94.47

Solvency Ratios:
Amount

New Debt
98.92

Total

Total Debt

4358

Equity

3812

3812

Total Assets

8170

8170

Long Term Debt

2085

Debt to Equity Ratio

1.14

1.17

Long Term Debt to Equity Ratio

54.70%

57.29%

Debt to Asset Ratio

53.34%

54.55%

98.92

4456.92

2183.92

50

Simulation Analysis:

In this simulation we can see that the mean is 6979.60 million and with a standard
deviation of 4485.49 million. The distribution is close to normal distribution.
OPTION 04_02:

Issuing Eurodollar bond of $100 million 7 year bond at 99.875%
with a coupon of 11.375% and fees of 1.875% with a option to
issue bond warrant.
The assumptions are as follows:
Terminal Growth Rate

2.50%

Cost of Equity First 4 Years

19.08%

Cost of Equity Fifth Year

19.07%

Redemption of the Bonds
Issuance of New bonds with

30%
100%, with a fees of 1%,

51

warrant
First 4 Years
Cost of Debt

11.33%

Premium

7.75%

Cost of Equity

19.08%

From Fifth Year
Cost of Debt

11.32%

Premium

7.75%

Cost of Equity

19.07%

Option 04:Raising $100 form Euro Dollar Bonds
Projections
Particulars
Sales

Jan84

Jan85

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

12078

13451

15006.9
82

16742.9
56

18679.7
43

20840.
57

23251.
37

11.57
%

11.57%

11.57%

11.57%

11.57%

10040.2
34

11201.6
65

12497.4
49

13943.
13

15556.
04

3729.13

4160.51

4641.79

5178.7
4

5777.8
1

360.50

402.20

448.72

Sales Growth
Costs and Expenses
COGS

8053

9030

COGS % of Sales

66.67
%

67.13
%

Selling, General, Administrative
expense

2973

3374

% of Sales

24.62
%

25.08
%

266.00

350.00

2.20%

2.60%

Interest Expense Net
% Growth

500.63

558.54

52

11292.
00

12754.
00

14129.8
6

15764.3
7

17587.9
6

19622.
50

21892.
38

EBIT

786

697

877.12

978.58

1091.78

1218.0
8

1358.9
8

Income Taxes

345

290

374.97

418.34

466.74

520.73

580.96

43.89
%

41.61
%

441

407

502.15

560.24

625.04

697.35

778.02

26

28

30.15

30.15

30.15

30.15

30.15

Total Cost and Expense

% of EBIT
Income Before unconsolidated
Subsidiaries
Income of unconsolidated
subsidiaries
Growth Rate

7.69%

Income from continuing
operations

467

435

532.30

590.39

655.20

727.50

808.17

Net Income

467

435

532.30

590.39

655.20

727.50

808.17

Number of Shares

74.7

74.7

Per Share

6.25

5.82

Cash Flows

467

435

532.30

590.39

655.20

727.50

808.17

Depreciation

897

1015

1,611.4
3

1,808.8
3

CWNC
Capital Expenditure
Total Cash Flow

1364

1,139.3
4

1,278.9
1

1,435.5
7

-123

420.06

488.32

567.68

659.92

767.16

250

282.76

319.80

361.70

409.10

462.70

1323

968.82

1061.17

1161.39

1269.9
2

1387.1
5
8371.4
2

Terminal Value
Redemption Of Bonds

30.3

Issuance of New bonds with
warrant

29.7

Total Cash Flow

968.82

1061.17

1161.39

1269.3
2

9758.5
7

Present Value

813.59

748.36

687.80

631.27

4077.3
2

Firm Value

6958.3
3

53

Add: Cash

43.00
7001.3
3

FCFE
Number of Shares

74.7

Per Share Value

93.73

Solvency Ratios:

Amount

New Debt
99.4

Total

Total Debt

4358

Equity

3812

3812

Total Assets

8170

8170

Long Term Debt

2085

Debt to Equity Ratio

1.14

1.17

Long Term Debt to Equity Ratio

54.70%

57.30%

Debt to Asset Ratio

53.34%

54.56%

99.4

4457.4

2184.4

54

Simulation Analysis:

In this simulation we can see that the mean is 6900.79 million and with a standard
deviation of 4468.34 million. The distribution is close to normal distribution.

55

OPTION 05_01:

Raising Swiss Franc 200 million with a coupon of 5.375% and
fees of 2.065%. Using the SWAP contract with a major US bank
paying US dollars 11.95% and receiving Swiss Franc at 6.00%
The assumptions are:

Assumptions:
Terminal Growth Rate
Cost of Equity

Cost of Debt
Premium
Cost of Equity

2.50%
19.43%

11.18%
8.25%
19.43%

66.90%

Average Growth Rate COGS

24.85%

Average Growth Rate S & A expenses

2.40%
42.75%

Average Growth Rate Interest rate
Average Tax rate

Here the terminal growth rate is assumed to be 2.50% and cost of equity is 19.43%
which is found by using the Bond yield plus risk premium method.

56

Option 05: Raising $75.12 Million from Swiss Market issuing Sfr 200 million
Projections
Particulars

Jan-84

Jan-85

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

12078

13451

15006.9
82

16742.9
56

18679.7
43

20840.
57

23251.
37

11.57%

11.57%

11.57%

11.57%

11.57%

8053

9030

10040.2
34

11201.6
65

12497.4
49

13943.
13

15556.
04

66.67%

67.13%

2973

3374

3729.13

4160.51

4641.79

5178.7
4

5777.8
1

% of Sales

24.62%

25.08%

Interest Expense Net

266.00

350.00

360.50

402.20

448.72

Sales
Sales Growth
Costs and Expenses
COGS
COGS % of Sales
Selling, General, Administrative
expense

500.63

558.54

% Growth

2.20%

2.60%

Total Cost and Expense

11292.
00

12754.
00

14129.8
6

15764.3
7

17587.9
6

19622.
50

21892.
38

EBIT

786

697

877.12

978.58

1091.78

1218.0
8

1358.9
8

Income Taxes

345

290

374.97

418.34

466.74

520.73

580.96

43.89%

41.61%

441

407

502.15

560.24

625.04

697.35

778.02

26

28

30.15

30.15

30.15

30.15

30.15

% of EBIT
Income Before unconsolidated
Subsidiaries
Income of unconsolidated
subsidiaries
Growth Rate

7.69%

Income from continuing
operations

467

435

532.30

590.39

655.20

727.50

808.17

Net Income

467

435

532.30

590.39

655.20

727.50

808.17

Number of Shares

74.7

74.7

Per Share

6.25

5.82

Cash Flows

467

435

532.30

590.39

655.20

727.50

808.17

57

Depreciation

897

CWNC
Capital Expenditure
Total Cash Flow

1364

1015

1132.74

1264.14

1410.78

1574.4
3

1757.0
6

-123

413.60

479.78

556.54

645.59

748.88

250

281.51

316.98

356.93

401.91

452.56

1323

969.94

1057.77

1152.51

1254.4
4

1363.7
9
8055.4
83

Terminal Value
Total Cash Flow

969.94

1057.77

1152.51

1254.4
4

9419.2
8

Present Value

812.14

741.59

676.56

616.59

3876.5
9

Firm Value

6723.4
7

Add: Cash

43.00
6766.4
7

FCFE
Number of Shares

74.7

Per Share Value

90.58

Solvency Ratios:
Amount

New Debt
58.1

Total

Total Debt

4358

Equity

3812

3812

Total Assets

8170

8170

Long Term Debt

2085

Debt to Equity Ratio

1.14

1.16

Long Term Debt to Equity
Ratio

54.70%

56.22%

Debt to Asset Ratio

53.34%

54.05%

58.1

4416.1

2143.1

58

Simulation Analysis:

In this simulation we can see that the mean is 6770.88 million and with a standard
deviation of 4451.34 million. The distribution follows a normal distribution.

59

OPTION 05_02:

Raising Yen 25 billion with a coupon of 6.75% and fees of 1.875%.
Using the SWAP contract with a major US bank paying US dollars
11.95% and receiving Yen at 7.10%
The Assumptions are:
Assumptions:
Terminal Growth Rate
Cost of Equity

Cost of Debt
Premium
Cost of Equity

66.90%

Average Growth Rate

24.85%

Average Growth Rate

2.40%

Average Growth Rate

42.75%

2.50%
19.59%

11.34%
8.25%
19.59%

Average Tax rate

Here the terminal growth rate is assumed to be 2.50% and cost of equity is 19.49%
which is found by using the Bond yield plus risk premium method.

60

Option 05: Raising $96.99 Million from Euro Yen Market issuing Yen 25 Billion
Projections
Particulars

Jan-84

Jan-85

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

12078

13451

15006.9
82

16742.9
56

18679.7
43

20840.
57

23251.
37

11.57%

11.57%

11.57%

11.57%

11.57%

8053

9030

10040.2
34

11201.6
65

12497.4
49

13943.
13

15556.
04

66.67%

67.13%

2973

3374

3729.13

4160.51

4641.79

5178.7
4

5777.8
1

% of Sales

24.62%

25.08%

Interest Expense Net

266.00

350.00

360.50

402.20

448.72

Sales
Sales Growth
Costs and Expenses
COGS
COGS % of Sales
Selling, General, Administrative
expense

500.63

558.54

% Growth

2.20%

2.60%

Total Cost and Expense

11292.
00

12754.
00

14129.8
6

15764.3
7

17587.9
6

19622.
50

21892.
38

EBIT

786

697

877.12

978.58

1091.78

1218.0
8

1358.9
8

Income Taxes

345

290

374.97

418.34

466.74

520.73

580.96

43.89%

41.61%

441

407

502.15

560.24

625.04

697.35

778.02

26

28

30.15

30.15

30.15

30.15

30.15

% of EBIT
Income Before unconsolidated
Subsidiaries
Income of unconsolidated
subsidiaries
Growth Rate

7.69%

Income from continuing
operations

467

435

532.30

590.39

655.20

727.50

808.17

Net Income

467

435

532.30

590.39

655.20

727.50

808.17

Number of Shares

74.7

74.7

Per Share

6.25

5.82

Cash Flows

467

435

532.30

590.39

655.20

727.50

808.17

61

Depreciation

897

CWNC
Capital Expenditure
Total Cash Flow

1364

1015

1132.74

1264.14

1410.78

1574.4
3

1757.0
6

-123

413.60

479.78

556.54

645.59

748.88

250

281.51

316.98

356.93

401.91

452.56

1323

969.94

1057.77

1152.51

1254.4
4

1363.7
9
7980.0
66

Terminal Value
Total Cash Flow

969.94

1057.77

1152.51

1254.4
4

9343.8
6

Present Value

811.05

739.61

673.84

613.29

3819.9
0

Firm Value

6657.7
0

Add: Cash

43.00
6700.7
0

FCFE
Number of Shares

74.7

Per Share Value

89.70

Solvency Ratio:
Amount New Debt
79.82

Total

Total Debt

4358

Equity

3812

3812

Total Assets

8170

8170

Long Term Debt

2085

Debt to Equity Ratio

1.14

1.16

Long Term Debt to Equity Ratio

54.70%

56.79%

Debt to Asset Ratio

53.34%

54.32%

79.82

4437.82

2164.82

62

The long term debt to equity ratio just increased by 2% after taking the Japanese yen
Loan. This loan also gives a gain in exchange term basis.

Simulation Analysis:

In this simulation we can see that the mean is 6690.24 million and with a standard
deviation of 4528.90 million. The distribution follows a normal distribution.

63

OPTION 06_01:

Issuing Commercial paper total about $800 million which will be
redeemed after every 6 months and can be swapped with a fixed
exchange rate of 11.95%. (Yearly)

Assumptions:
Terminal Growth Rate

2.50%

Cost of Equity

19.60%

Cost of Debt

11.35%

Premium

8.25%

Cost of Equity

19.60%

66.90%

Average Growth Rate

24.85%

Average Growth Rate

2.40%

Average Growth Rate

42.75%

Average Tax rate

Here the terminal growth rate is assumed to be 2.50% and cost of equity is 19.60%
which is found by using the Bond yield plus risk premium method.

64

Option 06: Commercial Paper Swap of $800 Million
Projections
Particulars
Sales

Jan-84

Jan-85

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

12078

13451

15006.9
82

16742.9
56

18679.7
43

20840.
57

23251.
37

11.57
%

11.57%

11.57%

11.57%

11.57
%

10040.2
34

11201.6
65

12497.4
49

13943.
13

15556.
04

3729.13

4160.51

4641.79

5178.7
4

5777.8
1

360.50

402.20

448.72

500.63

558.54

Sales Growth
Costs and Expenses
COGS

8053

9030

COGS % of Sales

66.67
%

67.13
%

Selling, General, Administrative
expense

2973

3374

% of Sales

24.62
%

25.08
%

266.00

350.00

% Growth

2.20%

2.60%

Total Cost and Expense

11292.
00

12754.
00

14129.8
6

15764.3
7

17587.9
6

19622.
50

21892.
38

EBIT

786

697

877.12

978.58

1091.78

1218.0
8

1358.9
8

Income Taxes

345

290

374.97

418.34

466.74

520.73

580.96

43.89
%

41.61
%

441

407

502.15

560.24

625.04

697.35

778.02

26

28

30.15

30.15

30.15

30.15

30.15

Interest Expense Net

% of EBIT
Income Before unconsolidated
Subsidiaries
Income of unconsolidated
subsidiaries
Growth Rate

7.69%

Income from continuing
operations

467

435

532.30

590.39

655.20

727.50

808.17

Net Income

467

435

532.30

590.39

655.20

727.50

808.17

Number of Shares

74.7

74.7

65

Per Share

6.25

5.82

Cash Flows

467

435

532.30

590.39

655.20

727.50

808.17

Depreciation

897

1015

1132.74

1264.14

1410.78

1574.4
3

1757.0
6

-123

413.60

479.78

556.54

645.59

748.88

250

281.51

316.98

356.93

401.91

452.56

1323

969.94

1057.77

1152.51

1254.4
4

1363.7
9

CWNC
Capital Expenditure
Total Cash Flow

1364

7975.0
73

Terminal Value
Commercial Paper Repayment

$89.26

$88.02

$86.68

$88.44

$90.86

Total Cash Flow

880.68

969.76

1065.83

1166.0
0

9248.0
1

Present Value

736.35

677.95

623.00

569.85

3779.0
2

Firm Value

6386.1
7

Add: Cash

43.00
6429.1
7

FCFE
Number of Shares

74.7

Per Share Value

86.07

Solvency Ratios:
Amount

New Debt
88.65

Total

Total Debt

4358

Equity

3812

3812

Total Assets

8170

8170

Long Term Debt

2085

Debt to Equity Ratio

1.143

1.166

Long Term Debt to Equity
Ratio

54.70%

57.02%

Debt to Asset Ratio

53.34%

54.43%

88.65

4446.65

2173.65

66

Debt to equity ratio is 1.166 after taking the new debt. It shows that the debt is higher
than the equity.

Simulation Analysis:

In this simulation we can see that the mean is 6595.55 million and with a standard
deviation of 4691.25 million. The distribution follows a normal distribution.

67

OPTION 06_02:

Issuing Commercial paper total about $800 million which will be
redeemed after every month and can be swapped with a fixed
exchange rate of 11.95%. (Yearly)

Assumptions:
Terminal Growth Rate
Cost of Equity

Cost of Debt
Premium
Cost of Equity

2.50%
19.64%

11.39%
8.25%
19.64%

Here the terminal growth rate is assumed to be 2.50% and cost of equity is 19.64%
which is found by using the Bond yield plus risk premium method.

68

Option 06: Commercial Paper Swap of $800 Million
Projections
Particulars

Jan-84

Jan-85

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

12078

13451

15006.9
82

16742.9
56

18679.7
43

20840.
57

23251.
37

11.57%

11.57%

11.57%

11.57%

11.57%

8053

9030

10040.2
34

11201.6
65

12497.4
49

13943.
13

15556.
04

66.67%

67.13%

2973

3374

3729.13

4160.51

4641.79

5178.7
4

5777.8
1

% of Sales

24.62%

25.08%

Interest Expense Net

266.00

350.00

360.50

402.20

448.72

Sales
Sales Growth
Costs and Expenses
COGS
COGS % of Sales
Selling, General, Administrative
expense

500.63

558.54

% Growth

2.20%

2.60%

Total Cost and Expense

11292.
00

12754.
00

14129.8
6

15764.3
7

17587.9
6

19622.
50

21892.
38

EBIT

786

697

877.12

978.58

1091.78

1218.0
8

1358.9
8

Income Taxes

345

290

374.97

418.34

466.74

520.73

580.96

43.89%

41.61%

441

407

502.15

560.24

625.04

697.35

778.02

26

28

30.15

30.15

30.15

30.15

30.15

% of EBIT
Income Before unconsolidated
Subsidiaries
Income of unconsolidated
subsidiaries
Growth Rate

7.69%

Income from continuing
operations

467

435

532.30

590.39

655.20

727.50

808.17

Net Income

467

435

532.30

590.39

655.20

727.50

808.17

Number of Shares

74.7

74.7

Per Share

6.25

5.82

Cash Flows

467

435

532.30

590.39

655.20

727.50

808.17

69

Depreciation

897

CWNC
Capital Expenditure
Total Cash Flow

1364

1015

1132.74

1264.14

1410.78

1574.4
3

1757.0
6

-123

413.60

479.78

556.54

645.59

748.88

250

281.51

316.98

356.93

401.91

452.56

1323

969.94

1057.77

1152.51

1254.4
4

1363.7
9
7958.9
23

Terminal Value
Commercial Paper Repayment

$100.02

$98.14

$100.90

$95.56

$97.32

Total Cash Flow

869.92

959.64

1051.61

1158.8
8

9225.4
0

Present Value

727.14

670.48

614.15

565.72

3764.3
2

Firm Value

6341.8
1

Add: Cash

43.00
6384.8
1

FCFE
Number of Shares

74.7

Per Share Value

85.47

Solvency Ratios:
Amount

New Debt

Total

Total Debt

4358

Equity

3812

3812

Total Assets

8170

8170

Long Term Debt

2085

Debt to Equity Ratio

98.39

98.39

4456.39

2183.39

1.1432

1.1690

Long Term Debt to Equity Ratio

54.70%

57.28%

Debt to Asset Ratio

53.34%

54.55%

70

Here the solvency ratio is quite good and although it has good amount of debt but it
does not reach to high level of debt. This is a very good sign for the company.

Simulation Analysis:

In this simulation we can see that the mean is 6298.07 million and with a standard
deviation of 4541.85 million. The distribution follows a normal distribution.

71

OPTION 07:

Intermediate term debt financing of $100 million with a 10-year
issue in March using the options to hedge against the interest
rate risk.

Assumptions:
Terminal Growth Rate

2.50%

Cost of Equity

19.61%

Cost of Debt

11.36%

Premium
Cost of Equity

8.25%
19.61%

66.90%

Average Growth Rate COGS

24.85%

Average Growth Rate S& A expenses

2.40%
42.75%

Average Growth Rate Interest rate
Average Tax rate

Here the terminal growth rate is assumed to be 2.50% and cost of equity is 19.61%
which is found by using the Bond yield plus risk premium method.

72

Option 07: Intermediate Bond issue of $100 Million
Projections
Particulars

Jan-84

Jan-85

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

12078

13451

15006.9
82

16742.9
56

18679.7
43

20840.
57

23251.
37

11.57%

11.57%

11.57%

11.57%

11.57%

8053

9030

10040.2
34

11201.6
65

12497.4
49

13943.
13

15556.
04

66.67%

67.13%

2973

3374

3729.13

4160.51

4641.79

5178.7
4

5777.8
1

% of Sales

24.62%

25.08%

Interest Expense Net

266.00

350.00

360.50

402.20

448.72

Sales
Sales Growth
Costs and Expenses
COGS
COGS % of Sales
Selling, General, Administrative
expense

500.63

558.54

% Growth

2.20%

2.60%

Total Cost and Expense

11292.
00

12754.
00

14129.8
6

15764.3
7

17587.9
6

19622.
50

21892.
38

EBIT

786

697

877.12

978.58

1091.78

1218.0
8

1358.9
8

Income Taxes

345

290

374.97

418.34

466.74

520.73

580.96

43.89%

41.61%

441

407

502.15

560.24

625.04

697.35

778.02

26

28

30.15

30.15

30.15

30.15

30.15

% of EBIT
Income Before unconsolidated
Subsidiaries
Income of unconsolidated
subsidiaries
Growth Rate

7.69%

Income from continuing
operations

467

435

532.30

590.39

655.20

727.50

808.17

Net Income

467

435

532.30

590.39

655.20

727.50

808.17

Number of Shares

74.7

74.7

Per Share

6.25

5.82

Cash Flows

467

435

532.30

590.39

655.20

727.50

808.17

73

Depreciation

897

CWNC
Capital Expenditure
Total Cash Flow

1364

1015

1139.33
75

1278.90
63

1435.57
24

1611.4
3

1808.8
3

-123

413.60

479.78

556.54

645.59

748.88

250

282.76

319.80

361.70

409.10

462.70

1323

975.29

1069.72

1172.53

1284.2
5

1405.4
2
8214.0
52

Terminal Value
Cash flow for Option payment

0.12

0.17

0.22

0.32

0.42

Total Cash Flow

975.17

1069.55

1172.31

1283.9
3

9619.0
6

Present Value

815.29

747.59

685.08

627.29

3929.1
2

Firm Value

6804.3
7

Add: Cash

43.00

FCFE

6847.3
7

Number of Shares

74.7

Per Share Value

91.66

74

Solvency Ratios:
Amount

New Debt

Total

Total Debt

4358

Equity

3812

3812

Total Assets

8170

8170

Long Term Debt

2085

Debt to Equity Ratio

100

4458

100

2185

1.1432

1.1695

Long Term Debt to Equity Ratio

54.70%

57.32%

Debt to Asset Ratio

53.34%

54.57%

The solvency ratio so J C Penny is quite good and moderate. Although JC Penny has
good amount of debt but it has good risk capacity level to control over the debt.

Simulation Analysis:

In this simulation we can see that the mean is 6842.69 million and with a standard
deviation of 4553.64 million. The distribution follows a normal distribution.

75

RECOMMENDATION

We, the finance team of the J. C. Penny will recommend the way of raising the $200
million from the US domestic debt market which is 7 year notes at par with a coupon of
11.75% and fees of .65%. Issuing debt will increase the cost of the J.C Penny and also
increase the debt to equity ratio, debt to asset ratio, long term debt to asset ratio etc.
We believe that as the business is facing moderate business risk through low sales risk,
high cost risk etc J. C Penny can take Moderate or Higher Moderate risk and take debt
amount of $200. The solvency ratios are as follows:

Amount

New Debt
199.27

Total

Total Debt

4358

Equity

3812

3812

Total Assets

8170

8170

Long Term Debt

2085

Debt to Equity Ratio

1.14

1.20

Long Term Debt to Equity Ratio

54.70%

59.92%

Debt to Asset Ratio

53.34%

55.78%

199.27

4557.27

2284.27

The firm value will also improve and it will rise to
Firm Value

7519.61

Add: Cash

43.00

FCFE
Number of Shares
Per Share Value

7562.61
74.7
101.24

76

APPENDIX:
:
Base Case
Assumption:
Working Capital Growth

15.00%

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

2585

2972.75

3418.66

3931.46

4521.18

5199.36

-123

387.75

445.91

512.80

589.72

678.18

Jan-84

Jan-85

Current Assets

3962

4424

Current Liabilities

1254

1839

Working Capital

2708

CNWC

Properties

2358

2608

Growth

10.60%

CAPEX

250

276.51

305.82

338.24

374.11

413.77

1015

1112.44

1219.23

1336.28

1464.56

1605.16

Depreciation

897

Growth CAPEX

9.60%

Option 01

Working Capital Growth
Jan-86

Jan-87

Jan-88

Jan-89

2585

3037.38

3568.92

4193.48

4927.33

-123

452.38

531.54

624.56

733.86

Jan-84

Jan-85

Current Assets

3962

4424

Current Liabilities

1254

1839

Working Capital

2708

CNWC

Properties

2358

17.50%

2608

77

Growth

14.60%

CAPEX

250

286.51

328.34

376.29

431.23

1015

1163.21

1333.07

1527.72

1750.81

Depreciation

897

Growth CAPEX

14.60%

Option 02

Working Capital
Growth
Jan84

Jan-85

Current Assets

3962

4424

Current Liabilities

1254

1839

Working Capital

2708

2585
-123

CNWC

Properties

2358

Jan-86

18.50%
Jan-87

Jan-88

Jan-89

Jan-90

3063.23

3629.9
2

4301.4
6

5097.2
3

6040.2
1

478.23

566.70

671.54

795.77

942.99

2608

Growth

16.60
%

CAPEX

250

291.51

339.90

396.33

462.13

538.86

1015

1163.19

1333.0
2

1527.6
4

1750.6
7

2006.2
7

Depreciation
Growth CAPEX

897

14.60
%

78

Option 03

Working Capital
Growth
Jan84

Jan-85

Current Assets

3962

4424

Current Liabilities

1254

1839

Working Capital

2708

2585
-123

CNWC

Properties

2358

16.00%

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

2998.60

3478.38

4034.92

4680.50

5429.38

413.60

479.78

556.54

645.59

748.88

2608

Growth

12.60%

CAPEX

250

281.51

316.98

356.93

401.91

452.56

1015

1132.74

1264.14

1410.78

1574.43

1757.06

Jan-87

Jan-88

Jan-89

Jan-90

Depreciation

897

Growth CAPEX

11.60%

Option 04

Working Capital
Growth
Jan-86

16.25%

Jan84

Jan-85

Current Assets

3962

4424

Current Liabilities

1254

1839

Working Capital

2708

2585

3005.06

3493.39

4061.06

4720.98

5488.14

-123

420.06

488.32

567.68

659.92

767.16

CNWC

Properties

2358

2608

Growth

13.10%

CAPEX

250

282.76

319.80

361.70

409.10

462.70

1015

1139.34

1278.91

1435.57

1611.43

1808.83

Depreciation
Growth CAPEX

897

12.25%

79

Option 07

Working Capital
Growth
Jan84

Jan-85

Current Assets

3962

4424

Current Liabilities

1254

1839

Working Capital

2708

2585
-123

CNWC

Properties

2358

Jan-86

16.00%
Jan-87

Jan-88

Jan-89

Jan-90

2998.60

3478.38

4034.92

4680.50

5429.38

413.60

479.78

556.54

645.59

748.88

2608

Growth

13.10%

CAPEX

250

282.76

319.80

361.70

409.10

462.70

1015

1139.34

1278.91

1435.57

1611.43

1808.83

Depreciation
Growth CAPEX

897

12.25%

80