# M & M Pizza Solved Financial Case Solution Sample

QUESTION

1. What is going on at M&M Pizza? How do the financial statements for M&M Pizza vary with the proposed repurchase plan? Do the alternative policies improve the expected dividends per share?
2. What impact does the repurchase plan have on M&M’s weighted-average cost of capital? Complete the table below (No Corporate Taxes)

 Income Statement Debt = 0 Debt = 500 Revenue 1500 1500 Operating expenses 1375 1375 Operating profit 125 125 Interest payments 0 Taxes 0 0 Net profit 125 Dividends 125 Shares outstanding 62.5 Dividends per share 2.00 Cost of Capital Cost of debt 4.00% 4.00% Beta 0.800 Levered Beta Cost of equity CAPM WACC = D / V * Kd (1 – t) + (1 – D/V) * Ke Cash flows Debt holders = Interest payments Equity holders = Dividend payments Free cash flow = Op profit Value Debt = Int payments / Kd Equity = Div payments / Ke Total = Sum or FCF / WACC Share price 1 = Equity / Shares outstanding Share price 2 = DPS / Ke Value of Firm = Value of unlevered + Tax shield D/E = D / (V – D) D/V = D / V

1. What are the debt and equity claims worth under the alternative scenarios? You may note that the present value of a perpetual cash flow stream is equal to the expected payment divided by the associated required return. Which proposal is best for investors? What do you recommend that Miller do?
2. How would your analysis in questions 2 and 3 and recommendation in question 4 change if the new tax law is implemented? Please note that, with 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. Complete the same table as in question 2 with a tax rate of 20%.

1. What is going on at M&M Pizza? How do the financial statements for M&M Pizza vary with the proposed repurchase plan? Do the alternative policies improve the expected dividends per share?

M&M Pizza, even though is in a sound financial condition, has not been able to raise its share price. It gives out consistent dividend and makes good profit every year, and the new MD of the firm wants to rectify it. He wants to take a loan of F\$ 500 million to arrange a share buyback which he hopes will increase the share price.

Currently there is 0 debt on the books of M&M but after the repurchase that debt would increase to F\$500 million, and equity would reduce by the same amount. Also, as there is no debt, the interest payment is zero, and all the profit is divided amongst the shareholders.

Current DPS: F\$2

Current Share Price: F\$25

Number of shares bought back: 20 million

Number of remaining shares: 42.5 Million

Interest payments: F\$ 20 Million

Profit to shared amongst the shareholders: F\$ 105 Million

New DPS: F\$2.47

The alternate policy improves the dividend by 23.5%.

1. What impact does the repurchase plan have on M&M’s weighted-average cost of capital? Complete the table below (No Corporate Taxes)

 Income Statement Debt = 0 Debt = 500 Revenue 1500 1500 Operating expenses 1375 1375 Operating profit 125 125 Interest payments 0 20 Taxes 0 0 Net profit 125 105 Dividends 125 105 Shares outstanding 62.5 42.5 Dividends per share 2.00 2.47 Cost of Capital Cost of debt 4.00% 4.00% Beta 0.800 1.2 Cost of equity CAPM 0.1 WACC = D / V * Kd (1 – t) + (1 – D/V) * Ke .07 Cash flows Debt holders = Interest payments 20 Million Equity holders = Dividend payments 105 Million Free cash flow = Op profit 105 Million Value Debt = Int payments / Kd 500 Million Equity = Div payments / Ke 1050 Million Total = Sum or FCF / WACC 1550 Million Share price 1 = Equity / Shares outstanding 24.70 Share price 2 = DPS / Ke 24.7 Value of Firm = Value of unlevered + Tax shield 1805.71 Million D/E = D / (V – D) .383 D/V = D / V .277

1. What are the debt and equity claims worth under the alternative scenarios? You may note that the present value of a perpetual cash flow stream is equal to the expected payment divided by the associated required return. Which proposal is best for investors? What do you recommend that Miller do?

Even though the dividend paid by the firm increases, the value of the share price goes down as the debt holders also have a claim to the share of the company. IAs the primary motive was to increase the share price; I think Miller should stick with the current capital structure.

1. How would your analysis in questions 2 and 3 and recommendation in question 4 change if the new tax law is implemented? Please note that, with 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. Complete the same table as in question 2 with a tax rate of 20%.
 Income Statement Debt = 0 Debt = 500 Revenue 1500 1500 Operating expenses 1375 1375 Operating profit 125 125 Interest payments 0 20 Taxes 0 21 Net profit 125 84 Dividends 125 84 Shares outstanding 62.5 39.4 Million Dividends per share 2.00 2.13 Cost of Capital Cost of debt 4.00% 4.00% Beta 0.800 1.2 Cost of equity CAPM 0.1 WACC = D / V * Kd (1 – t) + (1 – D/V) * Ke .37*.04*(.8)+(.63*.1)=7.4% Cash flows Debt holders = Interest payments 20 Million Equity holders = Dividend payments 84 Million Free cash flow = Op profit 125 Million Value Debt = Int payments / Kd 500 Million Equity = Div payments / Ke 840 Million Total = Sum or FCF / WACC 1340 Million Share price 1 = Equity / Shares outstanding 21.3 Share price 2 = DPS / Ke 21.3 Value of Firm = Value of unlevered + Tax shield 1371.35 D/E = D / (V – D) .574 D/V = D / V .364

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