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Section I: Corporate Governance & Stockholder Analysis Task 1: Chief Executive Officer Analysis 1. Who is the CEO of the company? How long has he been CEO? Peter L Lynch since 2004 2. If your firm is a family-run company, is the CEO part of the family? If not, what career path did the CEO take to get to the top? (Did he or she come from within the organization or from outside? ) Winn-Dixie began as a family-run company, but with huge amounts of growth the company has outgrown its initial family roots.

Mr. Lynch was an outside acquisition to the Winn-Dixie family. Mr.

Lynch’s career path took him through various other grocery organizations. He served as President and Chief Operation Officer for Albertsons Inc. from 2000 to 2003 (Companies, 2009). 3. How much did the CEO make last year? What form did the compensation take (breakdown by salary, bonus and option components)? Base Salary: $1,250,000. 00 Cash Bonus: $1,344,875. 00 Deferred Comp:$ 318,733. 00 Total: $2,857,005. 00 (Equilar) 4. How much stock and options in the company does the CEO own? 400,000 (Forbes) Task 2: Board of Directors Analysis 1.

Is this a company where there is a separation between management and ownership?

If so, how responsive is management to stockholders? According to Business Week, the shareholder’s of Winn Dixie own a larger percent of the organization than shareholder’s of other grocery’s. As such, Winn Dixie’s ownership’s goals align with the goals of their shareholders. The 347,339 shares they control represents 1. 78% of the total outstanding shares (Business Week, 2009). 2. Who is on the board of directors of the company? How long have they served as directors? Peter Lynch – Chairman of the board 5 years, Evelyn Follit 4 years, Charles Garcia 4 years, Jeff Girard 4 years, Yvonne Jackson years, Gregory Josefowicz 4 years, Terry Peets, Richard Rivera, and James Olson 4 years (Winn-dixie). 3. How many of the directors are “inside” directors (i. e. , employees or managers of the company)? The only inside director is Peter Lynch the CEO 4. How many of the directors have other connections to the firm (as suppliers, clients, customers)? None 5. How many of the directors are CEOs of other companies? 4 (Winn-dixie). 6. Do any of the directors have large stock holdings or represent those who do? The directors have large stock holdings (Yahoo Finance). Task #3: Stockholder Analysis 1.

How many stockholders does the company have? 54. 5 million (Reuters) 3. What percent of the stock is held by: (1) institutional investors; (2) employees (including employee pension plans); and (3) insiders (where, besides the managers and directors, anyone with more than 5% is treated as an insider)? Major Holder breakdown. Shares Held by Insiders: 1% Institutional & Mutual Fund Owners: 86% (Yahoo Finance). 4. Who are the insiders in this company, and what role do they play in running the company? The insider within Winn Dixie is Peter Lynch the CEO Have the insiders been buying or selling stock in this company in the most recent year?

No selling or buying transactions were noted. 4. Are there differences in voting rights across shares? No, each share is allowed one vote (Money) If so, do incumbent managers own a disproportionate share of the voting shares? Task #4: Bondholder Concerns: 1. Does the firm have any publicly traded debt? Winn Dixie does not have any current publicly traded debt (Quicktake). 2. Are there any bond covenants (that you can uncover) that have been imposed on the firm as part of the Borrowing? No 3. Do any of the bonds issued by the firm come with special protections against stockholder expropriation?

No bonds currently issued Section II: Financial Statement Analysis Objective The objective of this section is to assess the financial condition of the company. Key Questions 1. What is your assessment of the firm’s ability to meet its short-term and long-term obligations? 2. How efficiently or intensively is the firm using its assets to generate sales and profits? 3. What is the market price of the firm’s stock, relative to its earnings, sales, and book value? Task List Task #1: Calculate the Firm’s Financial Ratios (Year 2007; 2005 & 2006 if available) 1.

Calculate the short-term solvency (liquidity) ratios, asset management (turnover) ratios, long-term solvency (financial leverage) ratios, profitability ratios, and market value ratios described in Module 1 and *Short-term solvency ratios: Current ratios: $758. 6/$402. 4= 1. 89 Quick Ratio : ($758. 6- $476)/$402. 4= 0. 70 Cash Ratio : $149. 9/$402. 4 = 0. 37 *Asset Management ratios: Inventory turnover: $5,264. 8/ $476 = 11. 06 Receivables Turnover: $7,201. 2 / 133= 54. 15 Days’ sales in receivables: 365/54. 15 = 6. 74 NWC Turnover: $7,201. 2/($758. 6-$402. 4) =20. 22 *Long-term solvency ratios: Total debt ratio: ($1,670. -$796. 9)/$1,670. 9= 0. 52 Debt-equity ratio: $. 52/$. 48 = 1. 08 Equity multiplier: $1/$. 48 = 2. 08 Long-term debt ratio: $18. 6/ $18. 6+$796. 9 = 0. 02 times Task #2: Evaluate the Ratios Using Time Trend Analysis and/or Peer-Group Analysis Time Trend Analysis | 2009| 2008| 2007| Current Ratio| 954. 3/ 659. 2=1. 45| 979. 4/ 665. 3=1. 47| 758. 6/$402. 4= 1. 89| Peer-Group Analysis | Whole Foods| Safeway| Kroger| Current Ratio| 668. 0/ 784. 5=. 85| 4,007. 5/ 5,136. 4=. 78| 6,755/ 7,581=. 89| 1. Examine the trend (if any) in the ratios over the last three years (if available) and identify any areas of concern.

Winn Dixie has had a slight decrease since 2007, however they still show plenty of assets to cover liabilities and may be using being using cash and short term assets in a more efficient method. 2. Identify a peer group of firms and compare the ratios for your firm to the average ratios for the peer group. In general, the peer group would consist of firms that compete in the same markets, have similar assets, and operate in similar ways. Based on Peer-group analysis Winn Dixie appears to be in a stronger position as their peers have less asset and more liabilities. Section III: Risk & Return Analysis

Objective To develop a risk profile for your company, estimate its risk parameters, and use these parameters to estimate the costs of equity and capital for the firm. Key Questions 1. What is the risk profile of your company (i. e. , how much overall risk is there in the firm, and where is it coming from – the market, firm, or industry)? 2. How risky is this company’s equity? What is its cost of equity? 3. How risky is this company’s debt? What is its cost of debt? 4. What is the company’s current cost of capital? Task List Task #1: Find a Service Beta (If Available) 1.

Check one or more of the financial websites (www. valueline. com, www. finance. yahoo. com, or www. morningstar. com) to see if there is a published beta for your firm. 1. 02 (Yahoo Finance) Task #2: Estimating Historical Risk Parameters (Top Down Betas) 1. Run a regression of returns on your firm’s stock against returns on a market index, preferably using monthly data and five years of observations; OR if you have access to Bloomberg terminal, go into the beta calculation page and print off the page (after setting return intervals to monthly and using five years of data). 2.

What is the intercept of the regression, and what does it tell you about the performance of this company’s stock during the period of the regression? 3. What is the slope of the regression, and what does it tell you about the risk of the stock? How precise is this estimate of risk? Provide a range for the estimate. 4. What portion of this firm’s risk can be attributed to market factors and what portion can be attributed to firmspecific factors? Why is this important? 5. How much of the risk for this firm is due to business factors and how much is due to financial leverage? Task #3: Comparing to Sector Betas (Bottom up Betas) . Break down your firm by business components, and estimate a business beta for each component. 2. Attach reasonable weights to each component and estimate an unlevered beta for the business. 3. Using the current leverage of the company, estimate a levered beta for each component. Task #4: Choosing Between Betas 1. Which of the betas you have estimated for the firm (top-down or bottom-up) do you view as more reliable? Why? 2. Using the beta that you have chosen, estimate the expected return on an equity investment in this company to an investor. As a manager in this firm, how would you use this expected return?

Task #5: Estimating Default Risk and Cost of Debt If your company is rated: 1. What is the most recent rating for the firm? 2. What is the default spread and interest rate associated with this rating? 3. If your company has bonds outstanding, what is the yield to maturity on a long-term bond? 4. What is the company’s marginal tax rate? If your company is not rated: 1. Does it have any recent borrowings? If yes, what interest rate did the company pay on these borrowing? 2. Can you estimate a “synthetic” rating? If yes, what interest rate would correspond to this rating?

Task #6: Estimating Cost of Capital 1. What is the market value of equity? 2. Estimate a market value for debt. 3. What are the weights of debt and equity? 4. What is the cost of capital for the firm? Section IV: Measuring Investment Returns Objective To analyze the quality of the firm’s existing projects and get a sense of the quality of future projects. Key Questions 1. How good or bad is the firm’s existing project portfolio? 2. Does this firm earn excess returns on its existing projects? Task List Task #1: Analysis of Accounting Returns on Projects 1. What is the return on equity earned by the firm?

Return of Equity: Net Income $28. 46 / Equity $796. 90 = 4% Based upon this return, is the firm picking good projects? Based on the return Winn Dixie is profiting $. 04 for every dollar of equity in the company. As such, it would appear that Winn Dixie is choosing good projects when their negative earnings from the previous year is taken into consideration. 3. What is the return on capital earned by the firm? Return of Capital= EBIT(1-t)/Debt+Equity Return on Capital = $45. 49 (. 63)/ (24. 9+$796. 9) = 28. 66/$821. 8 = 3% Based upon this return, is the firm picking good projects?

Considering that Winn Dixie is just emerging into solvency a 3% ROC appears to suggest that Winn Dixie is now beginning to choose good projects. 4. Are there any trends in the accounting returns, and if so, what do they tell you about future projects? As this is the first year in a few years that Winn Dixie has posted positive earnings there really are no trends to speak of at this time. Task #2: Estimating Economic Value Added 1. Compute the book value of equity invested in this company and compute the equity economic value added. 2007 Book Value of Equity: 796. 9 Return on Equity: 0. 4 Return on Capital: 0. 03 E/V: (796. 9/ 794. 8) =1 D/V: (24. 9/794. 8) =. 03 Cost of Debt: (1-0. 37)*. 03 =. 02 WACC(Cost of Capital) (1 x 0. 03) + [0. 03 x 0. 02(1-0. 37)] = 0. 03 Equity Economic Value Added: (0. 04 – 0. 03) * 796. 9 = 7. 969 What, if anything, does this tell you about this company? 2. Compute the book value of capital invested in this company and compute the economic value added. Book Value Of Capital: $24. 9+$796. 9 = $821. 8 Economic Value Added: (. 03-. 03)*$796. 9 = 0 What, if anything, does this tell you about this company? . Why might a comparison based upon economic value added lead you to different conclusions than one based upon the return differences in the earlier section? Section V: Capital Structure Choices Objective To analyze the tradeoff between debt and equity for the firm and to examine whether it favors the use of debt. Key Questions 1. How large, in qualitative or quantitative terms, are the advantages to this company from using debt? 2. How large, in qualitative or quantitative terms, are the disadvantages to this company from using debt? 3. Does the firm seem to have too much or too little debt?

Task List Task #1: Analysis of the Benefits of Debt 1. What marginal tax rate does this firm face and how does this measure up to the marginal tax rates of other firms? 2. Does this company have high free cash flows (that is, EBITDA/Firm Value)? $85. 9/796. 9= 3. Has the company taken and does it continue to have good investment projects (see Section IV)? 4. How responsive are the company’s managers to stockholders (see Section I)? Will there be an advantage to using debt in this firm as a way of keeping managers in line or do other (cheaper) mechanisms exist? Task #2: Analysis of the Costs of Debt . How high are the current cash flows of the firm (to service the debt) and how stable are these cash flows? (Look at the variability in the operating income over time. ) 2. How easy is it for bondholders to observe what equity investors are doing (see Section I)? 3. If it is not easy for bondholders to observe what equity investors are doing, what are the costs in terms of monitoring stockholders or in terms of bond covenants? 4. How well can this firm forecast its future investment opportunities and needs? How much does it value flexibility? Section VI. Optimal Capital Structure Objective

To estimate the optimal mix of debt and equity for your firm, and to determine the effect on firm value and best method of moving to that optimal mix. Key Questions 1. Based on the cost of capital approach, what is the optimal debt ratio for your firm? 2. Bringing reasonable constraints into the decision process, what would your recommended debt ratio be for this firm? 3. Does your firm have too much or too little debt, relative to the industry in which it operates? 4. If the firm has too much or too little debt, what mechanism should it use to move to the optimal capital structure? Task List

Task #1: Finding the Optimal Capital Structure Using the Cost of Capital Approach 1. What is the current cost of capital for the firm (see Section III)? .1213 2. What happens to the cost of capital as the debt ratio is changed? 3. At what debt ratio is the cost of capital minimized and firm value maximized? Re= Rf + b (Rm – Rf) 0. 0787454 = 0. 05 + 1. 2498(0. 073 – 0. 05) 1. 236795 = 1. 2498/ (1+(1 -. 37)(18. 2/$1,090. 4564) Cost of Equity | D to Ratio %=DR /(1 – DR)| BetaBl=1. 236795[(1+(1-t) (D/E)| Cost of Equity(%)Re=Rf+b(Rm-Rf)| 0%| 0| 1. 236795| 7. 84%| 10%| 11. 11| 1. 314713| 8. 2%| 20%| 25. 00| 1. 392631| 8. 20%| 30%| 42. 86| 1. 47055| 8. 38%| 40%| 66. 67| 1. 548468| 8. 56%| 50%| 100. 00| 1. 626386| 8. 74%| 60%| 150. 00| 1. 704304| 8. 92%| 70%| 233. 33| 1. 782222| 9. 10%| 80%| 400. 00| 1. 86014| 9. 28%| 90%| 900. 00| 1. 938058| 9. 46%| Effect of Moving to Other Debt Ratios (ALL Figures in Thousands)| Debt Ratio| 0%| 10%| 20%| 30%| 40%| 50%| 60%| 70%| 80%| 90%| EBIT| 48,975| 48,975| 48,975| 48,975| 48,975| 48,975| 48,975| 48,975| 48,975| 48,975| Debt| 0| 81510| 163020| 244530| 326040| 407550| 489060| 570570| 652080| 733590| interest| 0| 5950. 23| 11900. 6| 17850. 69| 23800. 92| 29751. 15| 35701. 38| 41651. 61| 47601. 84| 53552. 07| CR| *| 8. 230774| 4. 115387| 2. 743591| 2. 057694| 1. 646155| 1. 371796| 1. 175825| 1. 028847| 0. 91453| IR| aaa| AA| A-| BBB| BB| B| B-| CCC| CCC| CCC| Pretax| 5. 20%| 5. 500%| 6. 2500%| 6. 500%| 7. 00%| 8. 2500%| 9. 2500%| 10. 0%| 10. 0%| 10%| Tax Rate| 37%| 37%| 37%| 37%| 37%| 37%| 37%| 37%| 37%| 33. 84%| AfterTax| 1. 92%| 2. 04%| 2. 31%| 2. 41%| 2. 59%| 3. 05%| 3. 42%| 3. 70%| 3. 70%| 3. 38%| Cost of Equity, Debt and Capital| Debt Ratio| Cost of Equity | After tAx| Cost of Capital| 0%| 7. 84| 3. 8| 7. 84| 10%| 8. 02| 3. 47| 7. 565| 20%| 8. 20| 3. 94| 7. 348| 30%| 8. 38| 4. 10| 7. 096| 40%| 8. 56| 4. 41| 6. 9| 50%| 8. 74| 5. 20| 6. 97| 60%| 8. 92| 5. 83| 7. 066| 70%| 9. 10| 6. 30| 7. 14| 80%| 9. 28| 6. 30| 6. 896| 90%| 9. 46| 6. 62| 6. 904| The optimal debt ratio for Winn Dixie would be 40%. 4. What will happen to the firm value and to the stock price of the firm if the firm moves to its optimal? Task #2: Building Constraints into the Process 1. What rating does the company have at the optimal debt ratio? 2. If you were to impose a rating constraint, what would it be, and why?

What is the optimal debt ratio with this rating constraint? Task #3: Relative Analysis 1. Relative to the sector to which this firm belongs, does it have too much or too little in debt? Task #4: Mechanics of Moving to the Optimal 1. If the firm is underlevered, does it have the characteristics of a firm that is a likely takeover target (e. g. , smaller, poorer project and stock price performance than their peer groups, and lower insider holdings)? If the firm is overlevered, is it in danger of bankruptcy (look at the bond rating)? 2.

What kind of projects does this firm expect to have? Can it expect to make excess returns on these projects? (Past project returns is a reasonable place to look – see Section IV. ) 3. What type of stockholders does this firm have (see Section I)? If cash had to be returned to them, would they prefer dividends or stock buybacks? (Again, look at the past. If the company has paid high dividends historically, it will end up with investors who like dividends. ) 1. Use your answers to Questions 1-3 to suggest an approach to moving to the optimal debt ratio.

Section VII: Dividend Policy Objective To analyze how much the firm has returned to stockholders in the past, and to assess, from a qualitative trade off, whether it should return more or less. Key Questions 1. How has the company returned cash to its owners (dividends, stock repurchases)? 2. Given your firm’s characteristics today, how would you recommend that it return cash to stockholders (assuming that it has excess cash)? 3. How much could the firm have returned to its stockholders over the last few years? How much did it actually return? 4.

Given the dividend policy and the current cash balance of the firm, should the firm change its dividend policy (return more or less cash to its owners)? 5. How does your firm’s dividend policy compare to those of its peer group? Task List Task #1: Historical Dividend Policy 1. How much has this company paid out in dividends each year over the last few years? 2. How much stock has this company bought back each year over the last few years? 3. What is the total amount of cash returned to stockholders each year for the past few years? Task #2: Firm Characteristics 1. Who are the marginal stockholders in this firm?

Do they like dividends or would they prefer stock buybacks? 2. Are there any significant bond covenants that restrict the firm’s dividend policy? 3. How does this firm compare with other firms in the sector in terms of dividend policy? Task #3: Affordable Dividends ; Management Trust 1. What were the free cash flows to equity (FCFE) that this firm had over the last few years? 2. What is the current cash balance for this firm? 3. How well have the managers of the firm picked investments, historically (see Section IV)? Is there any reason to believe that future investments of this firm will be different from the historical record?

Task #4: Changing Dividend Policy 1. Given the relationship between dividends and free cash flows to equity, and the trust you have in the management of this firm, would you change this firm’s dividend policy? 2. Relative to the sector to which this firm belongs, does it pay too much or too little in dividends? Section VIII: Valuation Objective To determine the value of the firm, based on your expectations for the future. Key Questions 1. What is the value of the firm’s equity, based on the dividend valuation model & the free cash flow to equity (FCFE) model? 2.

What is the value of the firm, based on the free cash flow to the firm (FCFF) model? Task List Task #1: Estimating Current Dividends and Cash Flows 1. What is the most recent dividend paid by the firm? 2. Estimate free cash flow to equity (FCFE) and free cash flow to the firm (FCFF) for the most recent year. Task #2: Choosing a Growth Pattern 1. How fast have this company’s earnings grown historically? 2. How fast do analysts expect this company’s earnings to grow in the future? 3. What do the fundamentals suggest about earnings growth at this company? How much is being reinvested and at what rate of return? 4.

If there is anticipated high growth, what are the barriers to entry that will allow this high growth to continue? For how long do you expect the high growth to continue? Task #3: Valuation 1. Determine the value of the firm’s stock, based upon your selected growth pattern, an appropriate cost of equity (see Section III) and both the dividend discount model and FCFE model. Which model do you believe provides a more accurate assessment of the stock price? 2. What is the value of the firm, based upon your selected growth pattern, the firm’s weighted average cost of capital (WACC from Section III), and the free cash flow to the firm (FCFF)?

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