Case 04 (Old) - Can One Size Fit All

 

BUS 330: Corporate Finance I

Case #04

Can One Size Fit All? The Oceanic Corporation, a Chesapeake, VA based company, was established in 1994. Glenn Roders Rod ers !!! "o#nded "o#nded the corporati corporation, on, whic which h was pri$atel pri$ately y owned owned at the time, time, a"ter a"ter his his retirement "rom %orentech Corporation. The Oceanic Corporation was oriinally "ormed to pro$ide ship repair ser$ices and &#ickly earned a 'epartment o" 'e"ense ('O') certi"ied Alteration *oat Repair (A*R) desination. Amon its specialties were str#ct#ral str#ct#r al weldin, pipin system in installatio stallation n and rrepairs, epairs, electrical,  paintin, riin, machinery machinery and dry+lock work, as well as c#stom sheet metal "abrication. "abrication. Other di$isions o" The Oceanic incl#ded abitability !nstallation, !nd#strial Contractin, and Alteration-!nstallation Teams (A!T). ith its initial s#ccess and ood ret#rn on in$estment the "irm opened and operated "acilities in Cali"ornia, %ew /ersey, 0lorida, aryland, 2ennsyl$ania and ashinton. !n 1993, the company went p#blic and its initial p#blic o""erin was $ery s#ccess"#l. The stock  price had risen "rom its initial initial $al#e o" 15 to its c#rrent le$el o" 67 per share. There were c#rrently 7 million shares o#tstandin. !n 1999, the company iss#ed 65+year bonds at par, with a "ace $al#e o" 1555 and a co#pon rate o" 158 per year, and manaed to raise 45 million "or epansion. C#rrently, the AA+rated bonds had :7 years le"t #ntil mat#rity and were bein &#oted at 91.78 o" par. O$er the past year, the Oceanic Corporation #tili;ed a new method "or "abricatin composite materials that the "irmtone, a senior enineer, to head the A Gro#p. =arry also had an *A "rom a prestiio#s #ni$ersity #nder his belt. ?pon @oinin Oceanic, =arry reali;ed that most pro@ects were bein appro$ed on a #t "eelB approach. There were no "ormal acceptance criteria in place. ?p #ntil then, the company had  been l#cky in that most o" its pro@ects had been well selected s elected and it had bene"ited "rom ood relationsh relat ionships ips with clients clients and s#ppliers. s#ppliers. This This has to chane,B chane,B said =arry to his assistant assistant >tephanie, we canecond, she ass#med that the "irm wo#ld contin#e raisin capital "or "#t#re pro@ects by #sin the same taret proportions as determined by the book $al#es o" debt and e&#ity (see Table 1 "or recent  balance sheet). Third, she ass#med that the e&#ity beta (1.7) wo#ld be the same "or all the di$isions. 0o#rth, she ass#med that the rowth rates o" earnins and di$idends wo#ld contin#e at their historical rate (see Table :, "or earnins and di$idend history). 0i"th, she ass#med that the corporate ta rate wo#ld be 648 and "inally, she ass#med that the "lotation cost "or debt wo#ld be 78 o" the iss#e price and that "or e&#ity wo#ld be 158 o" sellin price. The 1+year Treas#ry bill yield yield was 48 and the epected rate o" ret#rn on the market port"olio was 158.

 

BUS 330: Corporate Finance I

Case #04

Questions:

F1.

hy hy do yo# yo# think think =arry =arry >tone >tone wants wants to estimate estimate the the "irm< "irmho#ld >ho#ld it it be ad@#s ad@#sted ted "or taesD 2lease, eplain.

F.. F

Calc Calc#l #lat atee the "ir "irm< m