FINANCIAL MANAGEMENT (MBA104)

CASE STUDY # 1
In your role as a consultant at a wealth management firm, you have been assigned a very powerful client
who holds one million shares of Cisco Systems, Inc. purchased on February 28, 2019. In researching
Cisco, you discovered that they are holding a large amount of cash. Additionally, your client is upset that
the Cisco stock price has been somewhat stagnant as of late. The client is considering approaching the
Board of Directors with a plan for half of the cash the firm has accumulated, but can’t decide whether a
share repurchase or a special dividend would be best. You have been asked to determine which
initiative would generate the greatest amount of money after taxes, assuming that with a share
repurchase your client would keep the same proportion of ownership. Because both dividends and
capital gains are taxed at the same rate (15%), your client has assumed that there is no difference
between the repurchase and the dividend. To confirm, you need to “run the numbers” for each
scenario.

1. Go to http://finance.yahoo.com, enter the symbol for Cisco (CSCO), and click “Key Statistics.”

a) Record the current price and the number of shares outstanding.

b) Click on “Balance Sheet” under “Financials.” Copy and paste the balance sheet data into Excel.

2. Using one-half of the most recent cash and cash equivalents reported on the balance sheet (in
thousands of dollars), compute the following:

a. The number of shares that would be repurchased given the current market price.
b. The dividend per share that could be paid given the total number of shares outstanding.

3. Go to http://finance.yahoo.com to obtain the price at which your client purchased the stock on
February 28, 2019.

a. Enter the symbol for Cisco and click “Get Quotes.”

b. Click “Historical Prices,” enter the date your client purchased the stock as the start date and the
end date, and hit “Enter.” Record the adjusted closing price.

4. Compute the total cash that would be received by your client under the repurchase and the dividend
both before taxes and after taxes.

5. The calculation in Step 4 reflects your client’s immediate cash flow and tax liability, but it does not
consider the final payoff for the client after any shares not sold in a repurchase are liquidated. To
incorporate this feature, you first decide to see what happens if the client sells all remaining shares of
stock immediately after the dividend or the repurchase. Assume that the stock price will fall by the
amount of the dividend if a dividend is paid. What are the client’s total after-tax cash flows (considering
both the payout and the capital gain) under the repurchase of the dividend in this case?

6. Under which program would your client be better off before taxes? Which program is better after
taxes, assuming the remaining shares are sold immediately after the dividend is paid?
7. Because your client is unlikely to sell all 1 million shares today, at the time of dividend/repurchase,
you decide to consider two longer holding periods: Assume that under both plans the client sells all
remaining shares of stock 5 years later, or the client sells 10 years later. Assume that the stock will
return 10% per year going forward. Also assume that Amazon will pay no other dividends over the next
10 years.

a. What would the stock price be after 5 years or 10 years if a dividend is paid now?
b. What would the stock price be after 5 years or 10 years if Amazon repurchases shares
now?
c. Calculate the total after-tax cash flows at both points in time (when the dividend
payment or the share repurchase takes place, and when the rest of the shares are sold)
for your client if the remaining shares are sold in 5 years under both initiatives. Compute
the difference between the cash flows under both initiatives at each point in time.
Repeat assuming the shares are sold in 10 years.

8. Repeat Question 7 assuming the stock will return 20% per year going forward. What do you notice
about the difference in the cash flows under the two initiatives when the return is 20% and 10%?

9. Calculate the NPV of the difference in the cash flows under both holding period assumptions for a
range of discount rates. Based on your answer to Question 8, what is the correct discount rate to use?
 FINANCIAL MANAGEMENT (MBA104)
ANSWER CASE STUDY # 1
1. a. Current Price : 40.00
b. Number of Shares Outstanding: 4,110,000,000

2. .
 a. Number of Shares that would be repurchased at current market price
= ½ of Cash and Cash Equivalent
_______________________________
Current Market Price

= 7,079,000 x ½
______________
40

= 3,539,500 / 40

= 88,487

b. Dividend per share that could be paid given the total number of shares
outstanding
= Additional Retained Earnings from Shares Repurchase
Less: Negative Retained Earnings
Retained Earnings after repurchase
Less: Tax Rate (15%)
Retained Earnings for Dividends Payment
Divide: Number of Shares Outstanding after Repurchase
Dividends per Share

Additional Retained Earnings from Shares Repurchase 3,539,500

Less: Negative Retained Earnings 1,319,000
Retained Earnings after repurchase 2,220,500
Less: Tax Rate (15%) 333,075
Retained Earnings for Dividends Payment 1,887,425
Divide: Number of Shares Outstanding after Repurchase 4,021,513
Dividends per Share 0.47

3. a. Data for February 28, 2022 empty once retrieved.

b. Adjusted Closing Price : 46.47

4. Cash to be received
Cash from Repurchase 3,539,500
Cash from Dividends 428,411
Cash to be received before Taxes 3,967,911
Tax (15%) (595,187)
Cash to be received after Taxes 3,372,724

5. Total after tax cash flows if remaining shares are sold at dividends rate
Cash after tax (Repurchase & Dividends) 3,372,724
Cash from Sale of Remaining Shares 428,411
Total After Tax Cash Flows 3,801,135

6. The program which is much better off before taxes would be the stock repurchase.
On the other hand, the program which is much better off after taxes, assuming
the remaining shares are sold immediately after the dividend is paid would still
be the stock repurchase.

7. a. Stock Price after 5 year or 10 years if a dividend is paid now (10%)

Particulars Amount of Outstanding Stock Price

Shares Shares
Beginning Stocks 42,714,000 4,110,000 10.39
Stock Price in Year 1 46,985,400 4,110,000 11.43
Stock Price in Year 2 51,683,940 4,110,000 12.57
Stock Price in Year 3 56,852,334 4,110,000 13.83
Stock Price in Year 4 62,537,567 4,110,000 15.22
Stock Price in Year 5 68,791,324 4,110,000 16.74
Stock Price in Year 6 75,670,456 4,110,000 18.41
Stock Price in Year 7 83,237,502 4,110,000 20.25
Stock Price in Year 8 91,561,252 4,110,000 22.28
Stock Price in Year 9 100,717,377 4,110,000 24.50
Stock Price in Year 10 110,789,115 4,110,000 26.95

b. Stock Price after 5 year or 10 years if Amazon repurchases shares now

Particulars Amount of Outstanding Stock Price
Shares Shares
Beginning Stocks 41,794,620 4,021,513 10.39
Stock Price in Year 1 45,974,082 4,021,513 11.43
Stock Price in Year 2 50,571,490 4,021,513 12.57
Stock Price in Year 3 55,628,639 4,021,513 13.83
Stock Price in Year 4 61,191,503 4,021,513 15.22
Stock Price in Year 5 67,310,653 4,021,513 16.74
Stock Price in Year 6 74,041,718 4,021,513 18.41
Stock Price in Year 7 81,445,890 4,021,513 20.25
Stock Price in Year 8 89,590,479 4,021,513 22.28
Stock Price in Year 9 98,549,527 4,021,513 24.50
 Stock Price in Year 10 108,404,480 4,021,513 26.95

c. Shares are sold in 5 years

Dividend Program
Cash after tax on Dividends 364,149
Cash from Sale of Shares 16,740,000
Total After Tax Cash Flows 17,104,149

Repurchase Program
Cash after tax on Repurchase 3,008,575
Cash from Sale of Shares 15,258,728
Total After Tax Cash Flows 18,267,303

Shares are sold in 10 years

Dividend Program
Cash after tax on Dividends 364,149
Cash from Sale of Shares 26,950,000
Total After Tax Cash Flows 27,314,149

Repurchase Program
Cash after tax on Repurchase 3,008,575
Cash from Sale of Shares 24,565,275
Total After Tax Cash Flows 27,573,850

8. a. Stock Price after 5 year or 10 years if a dividend is paid now (20%)

Particulars Amount of Outstanding Stock Price

Shares Shares
Beginning Stocks 42,714,000 4,110,000 10.39
Stock Price in Year 1 51,256,800 4,110,000 12.47
Stock Price in Year 2 61,508,160 4,110,000 14.96
Stock Price in Year 3 73,809,792 4,110,000 17.95
Stock Price in Year 4 88,571,750 4,110,000 21.54
Stock Price in Year 5 106,286,100 4,110,000 25.85
Stock Price in Year 6 127,543,320 4,110,000 31.02
Stock Price in Year 7 153,051,984 4,110,000 37.22
Stock Price in Year 8 183,662,381 4,110,000 44.67
Stock Price in Year 9 220,394,857 4,110,000 53.61
Stock Price in Year 10 264,473,829 4,110,000 64.33

b. Stock Price after 5 year or 10 years if Amazon repurchases shares now

Particulars Amount of Outstanding Stock Price
Shares Shares
Beginning Stocks 41,794,620 4,021,513 10.39
 Stock Price in Year 1 50,153,544 4,021,513 12.47
Stock Price in Year 2 60,184,252 4,021,513 14.96
Stock Price in Year 3 72,221,103 4,021,513 17.95
Stock Price in Year 4 86,665,324 4,021,513 21.54
Stock Price in Year 5 103,998,388 4,021,513 25.85
Stock Price in Year 6 124,798,066 4,021,513 31.02
Stock Price in Year 7 149,757,679 4,021,513 37.22
Stock Price in Year 8 179,709,215 4,021,513 44.67
Stock Price in Year 9 215,651,059 4,021,513 53.61
Stock Price in Year 10 258,781,270 4,021,513 64.33

c. Shares are sold in 5 years

Dividend Program
Cash after tax on Dividends 364,149
Cash from Sale of Shares 25,850,000
Total After Tax Cash Flows 26,214,149

Repurchase Program
Cash after tax on Repurchase 3,008,575
Cash from Sale of Shares 23,562,611
Total After Tax Cash Flows 26,571,186

Shares are sold in 10 years

Dividend Program
Cash after tax on Dividends 364,149
Cash from Sale of Shares 64,330,000
Total After Tax Cash Flows 64,694,149

Repurchase Program
Cash after tax on Repurchase 3,008,575
Cash from Sale of Shares 58,637,631
Total After Tax Cash Flows 61,646,206

9. NPV for both holding periods

NPV = Cash flow - initial investment
(1+i)t

5 Years Holding Period at 10%

NPV = 26,077,324 - 4,110,000

(1+0.10)5
= 26,077,324 - 4,110,000

(1.61051)
 = 16,191,966 – 4,110,000
= 12,081,966

10 Years Holding Period at 10%

NPV = 68,075,115 - 4,110,000

(1+0.10)10
= 68,075,115 - 4,110,000

(2.59374)
= 26,245,928 – 4,110,000
= 22,135,928

5 Years Holding Period at 20%

NPV = 62,203,768 - 4,110,000

(1+0.20)5

= 62,203,768 - 4,110,000
(2.48832)
= 24,998,299 – 4,110,000
= 20,888,299

10 Years Holding Period at 20%

NPV = 216,986,650 - 4,110,000

(1+0.20)10
= 216,986,650 - 4,110,000
(6.19173)

= 35,044,591 – 4,110,000
= 30,934,591
The correct discount rate to use is at 10%, it is more realistic than the 20% discount
rate.
 FINANCIAL MANAGEMENT (MBA104)
ANSWER CASE STUDY # 2

1. Balance Sheet
Income Statement
 Cash Flow Statements

2. Free Cash Flow for New Product

Free Cash Flow = Sales Revenue – (Operating Cost + taxes) – Required
Investment
Year Expected Operating Cost Free Cash
Revenue Cost Investment Flow
Initial 525,900 -
investment
1 2,718,630 1,957,413 52,590 182,727
2 3,126,424 2,251,025 28,599 846,800
3 3,439,067 2,476,128 6,070 956,869
4 3,611,020 2,599,934 6,131 1,004,955
5 3,791,571 2,729,931 6,192 1,055,448
TOTAL 16,686,712 12,014,431 625,482 4,046,799

a. Free Cash Flow using 2019 EBITDA/Sales Profit Margin

Year Expected Operating Cost Free Cash
Revenue Cost Investment Flow
0 525,900 (525,900)
1 2,718,630 1,957,413 52,590 708,627
2 3,126,424 2,251,025 28,599 846,800
3 3,439,067 2,476,128 6,070 956,869
4 3,611,020 2,599,934 6,131 1,004,955
5 3,791,571 2,729,931 6,192 1,055,448
 TOTAL 16,686,712 12,014,431 625,482 4,046,799
b. Annual Depreciation
Cost of Project (New Type of Tablet Computer)
Straight Line Method = Cost – Salvage Value
Useful Life

= 625,482 – 0
5 years

= 625,482
5 years

= 125,096.40

c. Tax Rate using income tax rate of 2019

Income Tax Paid / Net Income or Gross Profit

= 747,000 / 25,053,000
= 3%
d. Net Working Capital
Current Asset (Cash, AR and Inventory) – Current Liabilities (Accounts
Payable)
= (9,676,000+12,371,000 + 3,649,000) – 19,213,000
= 25,696,000 – 19,213,000
=6,483,000

2019 NWC / Sales

= 6,483,000 / 90,621,000
= 7%

e.
Year Expected Operating Cost Change in Free Cash
Revenue Cost Investment NWC Flow
0 - - (525,900) - (525,900)
1 2,718,630 (1,957,413) (52,590) (453,810) 254,817
2 3,126,424 (2,251,025) (28,599) (485,577) 361,223
3 3,439,067 (2,476,128) (6,070) (519,567) 437,302
4 3,611,020 (2,599,934) (6,131) (555,937) 449,018
5 3,791,571 (2,729,931) (6,192) (594,852) 460,596
Total 16,686,712 (12,014,431) (625,482) (2,609,743) 1,437,056

f. Net Present Value and Internal Rate of Return (NPV and IRR)
Cost of Capital: 12%
Net Present Value using Excel Formula = NPV(Rate, Value 1, Value 2…)
Year Cash Flow
 0 (525,900)
1 254,817
2 361,223
3 437,302
4 449,018
5 460,596

Net Present Value using Excel Formula = P 756,746.84

Internal Rate of Return using Excel Formula = IRR(Cash Flow, guess)

= IRR (Cash Flow Year 0-5)

IRR = 59%

g. Sensitivity Analysis
Assumptions:
1. 1st Year sales will equal 4% of Dell’s revenues
2. Cost of capital is 15%
3. Revenue growth is constant after the first year at 10%
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue 3,624,840 3,987,324 4,386,056 4,824,662 5,307,128
Cost of
Capital 543,726 598,099 657,908 723,699 796,069
Gross
Profit 3,081,114 3,389,225 3,728,148 4,100,963 4,511,059