Solution of JC Penny Case (B)

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
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
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
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.
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.
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.
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 its 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
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 companys
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
firms 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 firms current and potential position by examining internally
and externally.
Internal: to find out the firms strength & weakness within the organization.
External: opportunities and threats outside the firm and within the economy & industry.
In here weve executed the SWOT analysis to find out J.C.Penney Cos 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:
Weve considered three risk factors here.
Business Risk
Financial Risk
Credit Risk or Bankruptcy possibility.
Business Risk: uncertainty of operating income caused by the firms 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.
Thats why business risk is low.
Costs of Sales Variability:

Volatility of Costs = f (Coefficient of Variation of Costs)
:
to the mean

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)
:
to the mean

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
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 weve 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
Weve calculated Altman Z score for last two years due to the lack required information. Last
two year z core indicates thats 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 managements policy in managing liquidity position of the firm. Internal
liquidity ratios indicate the firms ability to quickly generate cash versus the firms 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 firms 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
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 firms 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 firms 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
analysts 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 firms 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:
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
Market Price
$150.00
Coupon
17.175
Period
7
$157.2
0
Market Price
Coupon
17.175
Period
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,
2973
3374
% of Sales
24.62
%
25.08
%
35
266.00
350.00
% Growth
2.20%
2.60%
11292.
00
EBIT
Income Taxes
% of EBIT
Income Before unconsolidated
Subsidiaries
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%

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.
Assumptions:
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.
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,
2973
3374
% of Sales
24.62
%
25.08
%
266.00
350.00
% Growth
2.20%
2.60%
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
% of EBIT
Subsidiaries
subsidiaries
Growth Rate
7.69%

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
1.14
1.20
54.70%
59.92%
Debt to Asset Ratio
53.34%
55.78%
199.27
4557.27
2284.27
42
OPTION 03: ISSUING ZERO COUPON BONDS WITH A FACE VALUE OF

$200 MILLION SOLD AT 44.75% WITH A FESS OF .5%
Assumptions:
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
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%
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%
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
Subsidiaries
subsidiaries
Growth Rate
7.69%
44

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
1.14
1.20
54.70%
59.94%
Debt to Asset Ratio
53.34%
55.79%
200
4558
2285
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:
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,
% of Sales
% Growth
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
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%

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
Base Case
1% Decrease
Face Value
Yield
100
11.61%
Coupon Rate
11.375%
Coupon
11.375
Period
Face Value
Yield
Coupon Rate
Coupon
1% Increase
100
10.61%
11.375%
11.375
Period
Face Value
100
Yield
12.61%
Coupon Rate
Coupon
11.375%
11.375
Period
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
1.14
1.17
54.70%
57.29%
Debt to Asset Ratio
53.34%
54.55%
98.92
4456.92
2183.92
50
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.
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
%

expense
2973
3374
% of Sales
24.62
%
25.08
%
266.00
350.00
2.20%
2.60%

% 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
% of EBIT
Subsidiaries
subsidiaries
Growth Rate
7.69%

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
1.14
1.17
54.70%
57.30%
Debt to Asset Ratio
53.34%
54.56%
99.4
4457.4
2184.4
54
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:
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
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%
266.00
350.00
360.50
402.20
448.72
Sales
Sales Growth
Costs and Expenses
COGS
COGS % of Sales
expense
500.63
558.54
% Growth
2.20%
2.60%
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
Subsidiaries
subsidiaries
Growth Rate
7.69%

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
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
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:
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
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%
266.00
350.00
360.50
402.20
448.72
Sales
Sales Growth
Costs and Expenses
COGS
COGS % of Sales
expense
500.63
558.54
% Growth
2.20%
2.60%
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
Subsidiaries
subsidiaries
Growth Rate
7.69%

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
1.14
1.16
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.
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:
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
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
%

expense
2973
3374
% of Sales
24.62
%
25.08
%
266.00
350.00
% Growth
2.20%
2.60%
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
Subsidiaries
subsidiaries
Growth Rate
7.69%

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
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.
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:
Cost of Equity
Cost of Debt
Premium
Cost of Equity
2.50%
19.64%
11.39%
8.25%
19.64%
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%
266.00
350.00
360.50
402.20
448.72
Sales
Sales Growth
Costs and Expenses
COGS
COGS % of Sales
expense
500.63
558.54
% Growth
2.20%
2.60%
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
Subsidiaries
subsidiaries
Growth Rate
7.69%

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
98.39
98.39
4456.39
2183.39
1.1432
1.1690
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.
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:
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
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%
266.00
350.00
360.50
402.20
448.72
Sales
Sales Growth
Costs and Expenses
COGS
COGS % of Sales
expense
500.63
558.54
% Growth
2.20%
2.60%
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
Subsidiaries
subsidiaries
Growth Rate
7.69%

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
100
4458
100
2185
1.1432
1.1695
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.
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
1.14
1.20
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

Solution of JC Penny Case (B)

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Solution of JC Penny Case (B)

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Report on

Case analysis of J.C. PENNY (B)

J.C. PENNEY COMPANY, INC.

Technology based communication, infrastructures developments

SNAPSHOT OF PESTEL ANALYSIS (IMPLICATION, MARKET DRIVER, KEY

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

Snapshot and Action Assessment of the Porter Five Forces Model

Threat of New Entrants

Attractive Marketing &

Rivalry among Existing

Wide product and service offerings through multiple retail channel

It shows the extent of variability in relation to mean of the population.

Costs of Sales Variability:

It shows the extent of variability in relation to mean of the population.

3.cost of sales Volatility

It shows the extent of variability in relation to mean of the population.

BUSINESS RISK ON SUBJECTIVE JUDGMENT

PREDICTING BANKRUPTCY RISK:

Z score bankruptcy model:

Net profit margin

Gross Profity Margin

Gross Profity Margin

Net Profit Margin

ASSET UTILIZATION RATIO

Asset Utilization Ratio

Total Asset Turnover

Total Asset Turnover

Fixed Asset turnover

Debt Asset ratio

Debt Eqity ratio

Debt Asset ratio

We can summarize all of these relationships as follows;

From the analysis we found that;

Net Profit AT/Sales

Total Assets/Stockhldrs. Equity

VALUATION OF J.C PENNY:

Average Tax rate

Interest Expense Net

Total Cost and Expense

Per Share Value

We have valued each options to determine the best option.

OPTION 01: ISSUING MEDIUM OR LONG TERM FIXED RATE DOLLAR

Average Growth Rate

Average Growth Rate

Average Growth Rate

Average Tax rate

Option 01:Raising $150 Million

Interest Expense Net

Total Cost and Expense

Income from continuing

Per Share Value

Long Term Debt

Debt to Equity Ratio

Long Term Debt to Equity Ratio

Debt to Asset Ratio

Average Growth Rate

Average Growth Rate

Average Growth Rate

Average Tax rate

Option 02:Raising $200 Million

Total Cost and Expense

Interest Expense Net

Income from continuing