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Corporate Finance
East Coast Yachts I
My time horizon is long-run. I would want a diversified portfolio, but can afford to take the risk of equities. So the first decision is to go with 100% equities. I am not interested in company stock at the moment, because I want a diversified portfolio and I only want liquid securities with values set by the market. The company stock does not meet those criteria.
In that case, I would emphasize the Small Cap fund for its growth characteristics -- 50%, and a further 50% in the S&P index fund. The Index Fund has a substantially lower MER than the Large Company fund. The Large Cap has outperformed the market lately, but cannot be expected to do that every year, and it has a lower Sharpe ratio so is a riskier fund that the S&P -- it should outperform. On a risk-adjusted basis, net of the MER, I feel that the Index Fund is a better investment than the Large Cap. Thus 50% in Index Fund, 50% in Small Cap.
East Coast Yachts II
Sarah should point...
The first is that a portfolio should have a higher degree of diversification to insulate against adverse performance of a single asset. If anything were to happen to East Coast Yachts, the retirement fund could be wiped out, something that would not happen if I had a more diversified portfolio.
Indeed, since my income is tied to this company today, it makes no sense for my retirement to also be tied to the fortunes of the same company, if I am not the CEO and calling the shots. Sarah should point out that the retirement fund should insulate me from adverse conditions at any one company, and should therefore be diversified to achieve that goal. She should offer one or more funds as a means of supplementing the company stock, so that the portfolio has a high level of diversification.
Goff Computer
1. The capital structure of Dell (as of December 2009) is 83.9% debt and 16.1% equity.
2. Dell's beta is 1.41. The risk-free rate…
0.839*(2.2*.65) + (.161)(8.74) = 1.1977 + 1.407 = 2.60%
This is assuming book value weights. With market value weights, Dell has $36.86 billion in debt, so the weight of debt is 59.7% and equity is 40.3%. The weighted average cost of capital in that case is 0.85 + 3.52 = 4.37%
6. Dell is a poor comparable. Dell does not own its own stores. It might have a similar manufacturing model, but it is almost entirely online, and it is also a much larger company at $62 billion in sales versus $95 million. Moreover, Dell sells mainly to institutional (business) clients, in apparent contrast with Goff. Goff also has a much different capital structure, so is a less risky company. These differences are not insignificant -- the similarities with Dell are more superficial. A better comparable would be a niche electronics retailer, even if that means looking at a company outside the computer industry.
Ratios In general East Coast Yachts has below average financial performance compared to its industry peers. With respect to solvency and liquidity, the company has a current ratio of 1.12 and a quick ratio of 0.66. Both of these lie below the median for the industry but are comfortably above the lower quartile. The debt ratio is 35.8% and the debt/equity ratio is 91.9%. These figures are also in the second
Finance One difference between industries with high leverage and low leverage is a split between the need for fixed assets (high leverage) and a reliance on intellectual capital (low leverage). Airlines need planes, construction companies need equipment, and communications and hotel companies need infrastructure capacity. This compares with computers, drugs, biological products, educational services and electronics, all of which rely heavily on intellectual property to derive value. The conclusion that one
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