Group Members:

Hieu Duong Wesley Brown

Interviewee:
Douglas J. Stussi Executive Vice-President CFO Phone: (405) 302-6695 Email: doug.stussi@loves.com

1.

Who is able to identify investment opportunities facing the firm?

Love do two business. The first one is retail business, travel stops and convenient stores throughout United State and another one is musket corporation that is whole sale fuel business. Furthermore, both those businesses have they own business development groups and each group usually contains three people; two of them are fulltime employees. Those people will help senior executives who really own the business to look at investment opportunities. 2. Who are decision makers in the firm?

Loves corporation is owned by a family; three of four children of the family do business in Loves and another one just has shares in corporation, not really working in corporation. Therefore, those three men are main decision makers of the firm. However, the corporation has board of senior managers who give those three owners recommendation in making decision. 3. What performance measures are used by these decision makers?

NPV and IRR are two measures the company uses most frequently when they do capital budgeting. However it more often uses NPV than IRR because NPV assumes that the project's cash inflows are reinvested to earn the hurdle rate; IRR assumes that the cash inflows are reinvested to earn the IRR. Therefore, it is more realistic to use NPV. 4. What is the cutoff rate (required return, hurdle rate) used and how is it

determined? Because the company uses both NPV and IRR, it also uses both hurdle rate and required rate of return based on their capital structure. However, the minimum required rate of return of the company is 16 percent that is applied in almost the companys projects and that amount of percent is calculated based on annually gallons of gas, amount retail stores they own, sale revenue and other factors. Furthermore, the company wants to have 25 percent return on investment when they do more risky projects that normal ones and higher 25 percent on some projects if the company have to pay all amounts within one installment and the projects are longer than 3 years. 5. Is the firm using risk-adjusted discount rates or not and, if so, how are they

estimated? Yes, the company is using risk-adjusted discount rate. The discount rate is usually affected by cost of capital factors. Moreover, the company prevents double debt by not discounting its cash inflow by require rate of return. 6. Why? Is the firm using a singular cut-off rate or multi-divisional cut-off rates?

Yes, the firm is using different cut-off rate based on different opportunities. Because if the company uses a firm wide cutoff rate, this rate will be too high for low-risk divisions and too low for high-risk divisions. Then the company will accept bad high-risk projects and reject good low-risk projects. Therefore, it is important to estimate divisional cutoff rates that will reflect the risk of each division. 7. Are there capital constrains applied, if so, how is the level determined? 13:

Yes, there are few capital constrains applied and its basically difference between cash flow and contingency 8. Does the firm lease assets, if so, how do they decide which assets to lease

vs. buy? Yes, the firm leases assets. The company decides which assets to lease based on following criteria: What term (long term vs. short term) does the company plan to keep the assets? It is really clear that if the company just needs to use the assets in short term then the best choice for it to lease the assets. How difficult do the company raise fund? The company raises money at pretty low rate and it has enough cash reserve so it prefers to buy the assets in the situation that it needs those assets for long term. What are the tax benefits of buying vs. leasing? The company considers all related tax benefits for buying and leasing options as they relate to specific business situation. There is usually a tax benefit associated with leasing where the company can get to deduct the full lease payment immediately.

9.

Does the firm do its acquisition analysis internally and, if so, what models

are used? The firm does acquisition but it rents experts to help it. 10. Does the firm invest internationally and, if so, how do they adjust for risk?

No, it does not do business internationally. 11. 20:00 This is private company so the post-audit processes are not important to it. The company has own its accountants who are responsible for the accuracy of reports to the family owner. 12. Does the firm apply real option analysis, if not, why not? Does the firm have any post-audit processes in place and, if not, why not?

Yes, the company applies real option analysis. By providing managers discretion - rights but not obligations, real options can help the company limit its downside risk while also gaining access to upside opportunities in the future.

Discusses all relevant aspects of the process that are inconsistent with course material and provides and comments on the firms explanation for this inconsistency. According to the textbook, the board of directors and managers in the corporation will define the investment opportunities, set policy for the corporation and makes major financial decisions. In addition, they have a right in authorizing the issuance of stock, electing the corporate officers, setting officer and key employee salary amounts, deciding whether to mortgage, sell, or lease real estate, and approving loans to or from

the corporation. All what board of directors does is to maximize the shareholders wealth so the shareholders are actual owners and final decision makers of a corporation. In Loves Corporation, however, almost authorities are held by family owners and the business decisions are undertaken by business owners. Moreover, the senior management, key employees, and other individuals closely associated with the business are typically the stockholders. This corporation can have increased flexibility in short- and long-term business decisions because its managers are less focused on increasing the value of the company in the short term. In short, the initial reason for above inconsistencies with the course material is that the textbook talks about the structure, the operation of public corporation while Loves Corporation is the private entity. Comments: In public value of a corporation replies on the numbers of shares outstanding, its shares are listed and traded on stock market. In contrast, it will be difficult to sell share of private corporation because investors do not have enough information about the corporation as they want and need. Hence, the values of private corporation like Loves fluctuate more than public companies. Recommendations to improve on the firms capital budgeting process: To improve the corporations capital budgeting process, the first thing the corporation should do is to have informed Capital Budgeting. It is extremely important for Loves corporation to have the right data to support its capital budgeting process. The right data about projects will help the company improve the timeliness and effectiveness of the capital planning and budgeting.

The second thing the company should do to improve its capital budgeting process is timing for the greatest value. Because that process is multiple periods, the company should develop a multi-year horizon for capital. Some projects are carried out more than one year to complete and realize the intended benefits. Furthermore, the company should be able to define which projects to be better for deferral than others, and then the company will have more money to focus on projects that need more money currently. In addition, Loves corporation should evaluate its capital and find projects that are adequate to its capital capacity. This action can help the company prevent cost overruns, execution delays or expected benefits not being realized.