Jessica Nguyen

MGMT E2020: Managerial Finance

Dr. C. Bulent Aybar
January 21, 2017
Ocean Carriers, Blaine Kitchenware, Midland Energy and Wal-Mart Reflection Essay
Ocean Carriers Case
Ocean Carriers, a shipping company with two offices in US and Hong Kong is proposed
a lease of a ship for 3 years beginning in 2003, making the effective duration of the operation of
the carrier between 2003-2005. This project would require that a new carrier priced at $39
million, be paid at 3 increments, 10% for each of the first two years before the boat is built and
the rest of the cost upon delivery of the boat, which would be $31.5 million. Other details of the
case that were important in the calculations for the decisions included the fact that an initial net
working capital investment of $500,000 was required, operating costs starting at $4,000 and
would increase as well as operating, survey and maintenance costs.
This case revolves around the understanding of net present value and determining
whether the specific project should be undertaken. In this case, Ms Linn, responsible for the
project decision is battling two decisions, whether she should take a project that requires a
complete building of a new ship for operations in the US as well as Hong Kong. She is proposed
a potential lease to where she must make NPV and IRR projections to determine whether Ocean
Carriers should continue the project. What makes this project interesting is that the project
manager needs to evaluate the worth of the project as well as the potential of the carrier to make
money. Because the lifetime of these ships were usually 25 years, with a peak of just 15 years
due to the extremely expensive maintenance costs after the prime period, ships tend to be
scrapped or be sold. This means that the project manager has to also anticipate market values and
depreciation.
From the calculations in the class, there was two scenarios where the case was being
presented. In the United States the tax rate is 35%. This meant that whatever amount that was too
be made from the carriers deduced from the hire rates of the market, would be subjected to this
deduction, making the profitability of this project low and was proved to be a negative project
after the calculation of NPV and IRR values. The IRR value was lower than the cost of capital at
9%. The NPV value, which is used by all practitioners as indicators to see whether the project is
good or not, resulted in a negative number meaning that this project was not profitable.
Although, this project was seen as not viable in the United States, we looked at another more
potential situation abroad which would be a good venture for Ocean Carriers as well: Hong
Kong.
In Hong Kong, the tax rate is 0% on shipping carriers which meant that a large amount of
the income deducts from the 35% tax rate in the US would be added back to the calculations.
This results in a large result and one would think that the large difference between a 0% and 35%
tax rate, would result in a positive NPV and IRR value, making the project profitable. However,
although the income increased and there were more capital gains in the Hong Kong scenario, the
NPV and IRR values were still too low. This is due to other external factors that included the
survey, maintenance and depreciation costs still being too large overshadowing the potential for
the project. When looking at the results of this case, the NPV values are the major numbers that
are indicating whether the project should happen or not. When we compared that, it could be

seen that the project in both the US and Hong Kong were not profitable at all. The only
suggestions that can be made is if there was a way to drop expenses and improve the revenues
that we are projecting. This would increase NPV exponentially, making this project extremely
profitable in Hong Kong.
To look at this case, it would be a good idea to draw attention to the usefulness of NPV as
a value indicator for project projections that managers use to see whether expansion and
replacement projects are worth it, which for Ocean Carriers, results in Ms. Linn, not undertaking
the project due to low profits and the post lease terms not outweighing the profits that would be
made during the leasing period of 2003-2005.
Wal-Mart Valuation
Sabrina Gupta is an investment advisor that is examining Wal-mart's stocks and its
valuation to see whether she would recommend its stocks to other clients as well as clients that
have already purchased the company's stocks. Some of the major competitors in the industry
include, Costco Wholesale Corporation, Family Dollar stores, Big Lots, Target, BJ's and other
foreign competitors because of Wal-marts ventures into other markets as well. Walmart is a
successful retail company that does well by selling to consumers at lower prices. What enables
Wal-mart to offer consumers lower prices is the fact that they purchase in larger quantities and
cater to a larger demographic. This case involves the valuation of Wal-mart and determining if
the investment in Wal-mart is due to the notion that Wal-mart's assets could be worth more than
they are, which is what valuation is. It is the process of estimating how much an asset it worth
and it actually takes several things into consideration such as the comparison of asset values for
investment decision and determination of those assets to see whether it has a certain value.
"To determine an appropriate equity discount rate for Wal-mart, Gupta considered using
the capital asset pricing model (CAPM), one of the more popular methods for estimating and
equity investor's required (or expected) return" (Zehedi 4). Gupta is looking into several aspects
of Wal-mart that include profitability, rate of return, leverage and growth. Wal-mart's profitability
and rate of return would indicate that the company has both the potential to grow with the help of
investors and strategic business units. If a positive profitability margin is evident it could lead to
Wal-mart looking to invest and expand into even more markets and opening more chain stores,
even possibly competing with international brands and making more capital gains abroad
comparable to that in the US.
To being the valuation of Wal-mart we need to look in to dividend discount model
(DDM) to value the predicted Dividents) Using the DDM formula (Value of Stock = Divident
per share / (Discount Rate - Dividend growth rate [P=D/(Ke-g)]), we can determine the dividend
to see the reflection of the current divident value and the intrinsic stock value of what Wal-mart's
dividends are actually worth. In this case we use a risk free rate of 3.678%, the beta of Wal-mart
being 0.66 and the market risk premium rate of 5.05%. Using these knowns from the case it is
calculated that the required rate of return would be 7.01%. Further applying the required rate of
return and rearranging the calculations we get the value of the stock being worth around $53.48.
Wal-mart has a stable financial structure and it can prove so with two strong indicators:
the cost of debt and the cost of equity. With the cost of debt being 7.27% and the cost of equity
being 9.07% and stocks being on the market for $73.51 (stocks intrinsic value of $95.56) Gupta,
can use these numbers to inform her clients that Wal-mart is a profitable investment, with stocks
being worth the purchase.

Blaine Kitchenware
Blaine Kitchenware is a company that has been in operation for over 80 years and has a
record of using debt in just two times over the course of being one of the top competitors in the
industry. Having just under 10% of the US market for small kitchen appliances during 20032006, estimated around $2.3 billion, it showed potential annual sales growth with a projected
increase of 2% against positive market competitors that were ranged from inexpensive and
cheaper imports purchased from merchandisers in the industry. As Blaine stood out in the US, it
had projected efforts to expand into foreign markets which included business in Canada, Europe,
Central America and South America (Luerhman 1).
The main issue in this case is whether Blaine Kitchenware should be using its debt and
decide if the current financial policies of the organization are sufficient enough to fund potential
growth. The reason Blaine is looking into the use of its debt is because the organization should
be funded in general from its retained earnings of the prior years, the use of debt, private equity
tax relief services and lastly using the equity from the current shareholders. A side concern was
whether Blaine should buy back all the stocks and shares because it could lead to both a business
and financial risk. "Using cash on Blaine's balance sheet and new borrowings, a private equity
firm could purchase all of Blaine's outstanding shares at a price higher than $16.25 per share, its
current stock price. It would then repay the debt over time using the company's future earnings"
(Luehrman 1).
One of the main reasons that debt should be fully utilized is because it will lower the cost
of capital and could lead to many benefits that would help to alleviate certain business stress that
is currently burdening the company. Although the cost of capital would be lowered and there
would be more access to capital funding, there are several issues that would be encountered such
as liquidation of the company, foreclosures of organizational assets by the lender as well as strict
financial restrictions from the company.
What Blaine Kitchenware needs to question is whether is should repurchase large shares
from the board. Because stock handouts were one of the major issues that Blaine Kitchenware
was concerned with, utilizing debt would increase the shares of the company because the
demand would increase as shareholders would be more likely interested in a company that used
long term debt to fund business activities. "Dubinski had begun to suspect that family members
on the board would welcome some of the possible effects of large share repurchase. Assuming
that family members held on to their shares, their percentage ownership of Blaine would rise,
reversing a downward trend dating from BKI's IPO" (Luerhman 4). This not only add values to
the company but the earnings per share would mean that there would be a large boost in the
valuation. Even though there is a boost, the potential decrease in available cash flow that is ready
for the company to use would lead to a potential liquidation of the company by the lenders,
meaning that the company would have less capital to make capital investments as the decrease of
the amount of dividend payments would most likely create problems for shareholders will less
shares.
Several important notes to take is when looking at the balance sheet, because it is clear
that Blaine Kitchen ware is debt free and is sitting on a pile of cash and securities worth almost
$231 million. The suggested solution is that Blaine repurchase the stocks.
Midland Energy Resource, Inc
Midland is a global energy company that specializes in oil and gas operations including
exploration, refining and marketing or petrochemicals. The time period that we are interested in

the case is for 2006 where the operating revenue and operating income of $248.5 billion and
$42.4 billion, respectively. These two numbers are the what the case focuses one when we are
looking into the cost of capital for running a business, especially one on a larger scale. In this
case Mortensen, Midland Energy's financial analyst determine whether the company would be
able to grow at a rate that would be sustainable for the long term, if not, the financial structure
that upheld the four pillars of Midland as a company which include 1) to fund significant
overseas growth; 2) to invest in value-creating projects across all divisions; 3) to optimize its
capital structure; and 4) to opportunistically repurchase undervalued shares.
One of the most important tasks that required Mortensen to make calculations on was the
determination of WACC, which would revolve around Midland's current standing in the market
with regards to the cost of debt, equity and the translational tax rate of the industry that it is in.
Through these calculations, Mortensen has made estimates that are going to be used for
performance assessments, stock repurchasing and even asset appraisals for capital budgeting and
financial accounting. Her calculations for the cost of capital has a deep relation to WACC. When
using the WACC= rE (E/V) + rD(D/V)(1-t) formula it was calculation that the corporate WACC is
8.548%
According to Mortensen, Midland's findings after the calculation of WACC she found
that rD (without using CAPM because of the interest rates paid on new loans), is equal to around
6.6% as well as the tax rate average over the course of the three years that we were looking into
was around 39%. When comparing these numbers to the other companies that are also
competitors in the industry, Midland's numbers are higher because the surveys showed lower
EMRP rates around 2.5%-4.7%. When calculating RE, we look into Midland's corporate which
is available to the public and because it is reported on a corporate level, 1.25 is used as a for
the WACC calculations as well, resulting in RE=11.23%
The main question of the case was whether Midland Energy Resources should use a
single corporate rate for the evaluation of investment for all of the divisions that it is responsible.
Through the calculations of WACC and the usage of the corporate , available to the public it
was concluded that first off, because Midland had different business divisions, we should assess
the risk factor for each of those divisions separately and not just one rate. Also, since the risk
profiles are different if Midland wishes to invest on a corporate level, the WACC percentage
indicates that corporate investments would be profitable, as long as Midland's investment team
takes into consideration that different company divisions have different risk profiles, credit
ratings and s as well.
References
Luehrman, Timothy A., and Joel L. Heilprin. "Blaine Kitchenware, Inc.: Capital Structure (Brief
Case)." Harvard Business School Teaching Note 094-041, October 2009.
Zahedi, C. (2011). Valuing Wal-Mart - 2010. Ontario: Richard Ivey School of Business.