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    This Study Resource Was: Group 9 - M&M Pizza Case Study

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    Asma Ayed
    The document discusses how a proposed repurchase plan by M&M Pizza would impact its risk, cost of equity, and financial statements. It finds that the repurchase plan would increase risk and cost of equity by leveraging the company through new debt. While the stock price would remain the same, financial metrics like net operating profit and dividends per share would change. The analysis also considers how a new tax law would further impact the cost of equity and financial ratios.

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    This Study Resource Was: Group 9 - M&M Pizza Case Study

    Uploaded by

    Asma Ayed
    371 views2 pages
    The document discusses how a proposed repurchase plan by M&M Pizza would impact its risk, cost of equity, and financial statements. It finds that the repurchase plan would increase risk and cost of equity by leveraging the company through new debt. While the stock price would remain the same, financial metrics like net operating profit and dividends per share would change. The analysis also considers how a new tax law would further impact the cost of equity and financial ratios.

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    Group_9___M_M_Pizza_Case_Study.docx

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    The document discusses how a proposed repurchase plan by M&M Pizza would impact its risk, cost of equity, and financial statements. It finds that the repurchase plan would increase risk and cost of equity by leveraging the company through new debt. While the stock price would remain the same, financial metrics like net operating profit and dividends per share would change. The analysis also considers how a new tax law would further impact the cost of equity and financial ratios.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    371 views2 pages

    This Study Resource Was: Group 9 - M&M Pizza Case Study

    Uploaded by

    Asma Ayed
    The document discusses how a proposed repurchase plan by M&M Pizza would impact its risk, cost of equity, and financial statements. It finds that the repurchase plan would increase risk and cost of equity by leveraging the company through new debt. While the stock price would remain the same, financial metrics like net operating profit and dividends per share would change. The analysis also considers how a new tax law would further impact the cost of equity and financial ratios.

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    Group 9 – M&M Pizza Case Study

    Q1. How would the proposed repurchase plan change the risk of M&M’s stock? Provide a numerical
    example to illustrate your point. For example, assume that there are three states of the world (low, normal
    and high) with corresponding operating profit. How will the cost of equity for M&M change following
    the repurchase plan?
    Ans. The risk of M&M stock will increase if the proposed repurchase plans is implemented as the
    investors are subjected to more risk due to the levered equity. The Beta which was 0.8 for when the
    company was unlevered will increase to 1.18 in a case where there is no corporate tax implemented.
    We can see the example of a case in three states of the world in the excel sheet.
    The Cost of Equity will also increase from 8% in an unlevered scenario to 9.88% without corporate tax
    when Debt is issued to repurchase equity.

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    Q2. How do the financial statements for M&M Pizza (Exhibit 1) change with the proposed repurchase

    o.
    plan?

    rs e
    Ans. The change in the Financial statements can be observed in the excel sheet working. We can see a
    ou urc
    change in the NOPAT due to the interest expense incurred which changes the dividends per share which
    are in-turn affected by the number of shares repurchased as well. As far as the Balance Sheet is
    concerned, the firm value is not affected by change in the capital structure in a perfect capital market.
    o

    Thus, the total value of the firm remains the same even if new debt is issued.
    aC s
    vi y re

    Q3. Will the repurchase plan affect M&M’s stock price in the market place?
    ed d

    Ans. No, there is no change in the stock price in the market place after the repurchase plan, with or
    ar stu

    without the corporate tax, because the increase in cost of equity is offset by the increase in risk to equity
    holders due to issue of debt.
    is
    Th

    Q4. How would the weighted average cost of capital change following the repurchase plan?
    Ans. The WACC would remain constant in a case when the shares are repurchased by issuing new debt
    sh

    and there is no corporate tax in the picture. However, the WACC decreases to 7.70% when taking the
    Corporate tax into the calculations after share repurchase and debt issuance.

    This study source was downloaded by 100000832890651 from CourseHero.com on 11-28-2021 08:44:12 GMT -06:00

    https://www.coursehero.com/file/73675987/Group-9-MM-Pizza-Case-Studydocx/
    Q5. How would your analysis in question 2-4 change if the new tax law gets implemented? Note that with
    the corporate taxes, the expected debt-to-equity ratio under the share repurchase plan is 0.588, and the
    number of remaining shares outstanding is 39.4 million.
    (Challenge: Can you figure out how these two numbers - 0.588 and 39.4 are computed?)
    Ans. The cost of Equity will further increase to 10.35% and the beta will be 1.27 in case the Corporate
    Tax comes into picture.
    There are changes in the financial statements as the amount of Current assets changes due to the tax
    shield and the NOPAT decreases further due to the Interest expense which lowers the amount dividend
    available for share holders but increases dividend per share due to share repurchases.
    Since the stock price remains same, the market cap when divided by the the share price gives 39.4 million
    as the number of shares outstanding.

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    This study source was downloaded by 100000832890651 from CourseHero.com on 11-28-2021 08:44:12 GMT -06:00

    https://www.coursehero.com/file/73675987/Group-9-MM-Pizza-Case-Studydocx/
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