I.

Point of View

This case shall be displayed as a simulation where the presenter shall act as
financial analysts and consultants. Financial analysts are the ones who prepare the firm’s
financial plans and budgets with other duties includes, which are not limited to, financial
forecasting, determine financial comparisons and in close proximity with accounting.
(Gitman & Sutter, 2015) In this case, Inez Marcus hired us as consultants in order to
predict stock prices in the future. In order for us to do so, Inez gathered the information
needed in order for us to conduct the analysis. Mainly, she provided the annual dividends
for the common stockholders from years 2002 to 2006 and the rates of growth and return
based on her research. Our job is to check her proposed course of action if it is acceptable
or otherwise yet as the chief financial officer, she has the authority to accept or reject our
proposals.

II. Statement of the Problem

What will be the group’s recommendation to Inez Marcus?

As the hired consultants, it is up to us to devise recommendations that will benefit

Suarez Manufacture. Thus, we should be vigilant in choosing courses of action that will
confer advantages to the firm. As stated above, being outsourced consultants, our
decisions will serve as options for Inez Marcus to choose and thus, we will only display
the options with their respective advantages and disadvantages.

III. Objectives

First, we will predict using the stock valuation techniques to discern the stock
prices for Suarez Manufacture in the near future by basing our findings from existing data
we got from Inez Marcus beforehand. Second objective is to help Inez make the proper
decision regarding this risky investment. She supplied the necessary data for the analysis
and came up with the rates of growth and return from her research, it is up to us to use
the mentioned valuation techniques in order to devise the courses of action for her as
options to consider.

IV. Areas of Consideration

As financial analysts to Suarez Manufacturing, the background unknown, there are
certain things to put into consideration before pushing through with the impending risky
investment so as to assess its impact on the company, specifically to its stock value.

With data already provided for the past 5 years by the CFO, Inez, four factors have
been identified to be detrimental to the said investment. Namely, current value of common
stock, per share dividends at the end of the year, required rate of return, and dividend
growth rate. All of which pertains to Suarez Manufacturing.

Current value of common stock should not be overlooked because the common
stock’s fair value changes if one invests. Comparing the fair value of the stocks of different
companies or situation will help you in identifying which option will incur you the least
cost. As the investor, the current value of the common stock is the cost of your investment.

On the other hand, per share dividends, is the return to your firm which can be
seen as an income as well. Considering the biggest per share dividend among the
situations will lead to a wiser and better investment decision. It will give you an idea
whether or not the dividends given by the company are worth it. However, one should
also consider the cost of these situations.

Required rate of return is a big factor for the firm because if the returns exceed the
expected, it is a sign that the return is positive thus giving an income. In short, it gives us
a picture whether a loss or a gain was incurred.

Dividend growth rate shows the changes in the dividends of the firm through the
years. This is recognized annually to express the growth rate of your dividends at the
beginning of the year and at the end of the year.

The factors stated above will help the financial analysts suggest to the CFO the
better alternative between the courses of action suggested.
V. Alternative courses of action

Ultimately, we have reached our conclusion of the options. It is the

recommendation whether Inez should invest and otherwise. Given these two
 Recommend To Invest
 Recommend Not to Invest

VI. Analysis
A. SWOT Analysis

With Investment

Strengths Weaknesses

 Increase value of common stock per  Uncertainty

share

 Cash Payout
 More appealing to investors

Opportunities Threats

 Possible Higher Investment Turnout  Risky Decision

 Possible Negative perception of

investors to the company
 Without Investment

Strengths Weaknesses

 Safe  No room for growth

 Predictability of Stock Value

Opportunities Threats

 No risk factor towards the company  No unique selling point towards

investors

B. Discussions
With Investments
Strengths
If the company decides to invest, there is a probability for the value of common
stock per share to increase. This may be considered as a strength for the company for it
is meeting its goal of making its stockholders wealthy. It shows the strength of the
company making it appealing to investors.
Also, one strength in making this risky investment would be making the company
appealing to investors. With that image of the company, it would be easier for it to transact
with other companies (ex. banks, other corporations).

Weakness
A weakness of making this risky investment would be its uncertainty. It is not sure
if the risk is worth the take. If this risky investment would not end up with a positive result,
it may cause losses leading to the weakness of the company.
 Another weakness of this decision would be the need for a cash payout. This
investment would need the company to shed out money thus the greater risk in intakes
for it is not sure if the money that the company shed out would return to them.

Opportunities
One great opportunity in taking this risky investment is the possible high return to
the company. Greater risk may lead to great loss but may also lead to higher returns. This
is seen as an opportunity for the result of the investment is affected not only by the
company’s internal ways of working but also what is happening around them externally.

Threats
One major threat regarding this decision would be it being a risky decision and if it
does not result positively, it may give a negative perception towards investors. This poses
as a threat to the company for if investors look at the company negatively, it may find it
hard to expand if no one would want to invest in it anymore or it may shut down if current
investors would pull-out their investments.

Without Investments
Strengths
One strength of not taking the risky investment is that it puts the company in its
safe zone. Not taking this risky investment allows the company to work within boundaries
that it already knows thus the company can use their historical data to make decisions
easily without the need to consider so much uncertainty. Having less uncertainty to
consider, it may be considered as a strength because the value of the company’s stocks
will be easily determined.
The predictability of the company’s stock value may be viewed as a strength
because it shows the stability of the company. It is a strength of the company for a stable
company may be considered as a competitive advantage compared to their competitors.
 Weakness
A weakness in not investing is having no room for growth. It may be safe for the
company to decide on not to invest on the risky investment but lessens the chance of the
company to expand. There is minimum improvement in the company since no action is
being done to make it grown thus not investing gives this weakness to the company.

Opportunities
Not making this risky investment gives no risk factor towards the company. It is an
opportunity the company can bank on because changes externally that could have
possibly affected that investment would not affect them. Due to this, the company may
focus in improving their ways of working internally and focus on that over keeping watch
of the trends externally that could have affected them.

Threats
One threat of not investing is that the company would not have a unique selling
point especially to risk taking investors. It may be stable but it does not show signs of
major growth thus investors who would want their stocks to grow may look for other
companies to invest in. It poses as a threat for investors who would want to foresee a
high return in their investments may be driven away due to the fact that the company in
terms of returns may not standout compared to other companies.

C. Financial Analysis

𝐷
𝑃0 =
𝑟𝑠 − 𝑔
Without Investment With Investment
1.90 g=13%
g=1.30 = 1.415 = 4 years = 10%

D=2.09 D=2.15

Rs=14% Rs=16

2.09 2.15
𝑃0 = 𝑃0 =
0.14 − 0.10 0.16 − 0.13
𝑃0 = 71.67
𝑃0 = 52.25
 In order to get the dividend growth rate for the year 2002 through 2007, the
proportion of the latest dividends per share and the earliest dividends per share are
needed. Dividends per share of 1.90 is exhibited on the latest year of 2006 and 1.30 on
the year of 2002 resulting to 1.415 dividends per share. According to the future table value
of single dollar of 4 years, 10% is the closest rate applicable for the value.

The current value per share of the Suarez Manufacturing’s common stock is from
the proportion of expected dividends per share for 2017 and the difference between the
return rate and the dividends growth rate from 2002 through 2007. Considering that the
dividends per share for 2007 is at 2.09, return rate of 14% and dividend growth rate of
10%, the value for common stock will give the result of 52.25 per share for not investing.

If the company decides to invest, with the dividends per share for 2007 increased
to 2.15, expected increase of 2% to the return rate, making it 16% and an increase of
dividends growth rate of 13%, gives the value of common stock at 71.67 per share.

VII. Recommendations and Conclusion

Upon considering the results, the consultants highly recommend the action of
taking the risky investment. The risky investment reaps a higher current value at 71.67
dollars versus the 52.25 prior the proposed investment.

The important points of consideration for the decision of accepting the investment
are the benefits associated with it. Indeed, there is a greater risk. However, moving past
the constraint and looking at the whole picture, the investment brings 2% increase in the
required rate of return and a 13% dividend growth rate compared to a 10% constant
without the investment.

As consultants of Inez Marcus, we think of how companies can exceed their past
performance. Luckily, this risky investment came at the right time. It is deemed as an
opportunity because it can raise the value of Suarez Manufacture. A higher current value
of common stock not only encourage more investors for the company but it also creates
a good corporate image. The current investors are assured that the company can deliver
positive results.