solution of jc penny case(b)

1

Report on

Case analysis of J.C. PENNY (B)

Course (506): Cases in Financial Decision Making

Submitted To:Department of Finance

University of Dhaka

SUMITTED BY:MBA 14th Batch

Department of FinanceUniversity of Dhaka

Date of Submission

February 02, 2013

2

TABLE OF CONTENTS

Origin of the Report...............................................................................................................................................8

Objectives...............................................................................................................................................................8

Methodology..........................................................................................................................................................8

Limitations..............................................................................................................................................................8

Case Overview........................................................................................................................................................10

J.C. Penney Company, Inc....................................................................................................................................11

Economic Analysis..................................................................................................................................................11

PESTEl Analysis:................................................................................................................................................11

Snapshot of PESTEL Analysis (Implication, Market Driver, Key SuccessFactors, Strategy Response).12

Industry Analysis.....................................................................................................................................................13

Company Analysis:.................................................................................................................................................15

Strengths, Weaknesses, Opportunities and Threats (SWOT).......................................................................15

Risk Analysis:.......................................................................................................................................................17

Financial Risk.......................................................................................................................................................21

Business Risk on Subjective Judgment.......................................................................................................21

Predicting Bankruptcy Risk:...............................................................................................................................22

Ratio Analysis..........................................................................................................................................................23

Liquidity Ratio:.....................................................................................................................................................25

Profitability Ratio..................................................................................................................................................26

Asset Utilization Ratio.........................................................................................................................................27

Leverage Ratio....................................................................................................................................................28

DuPont Analysis..................................................................................................................................................29

Valuation of J.C Penny:..............................................................................................................................................32

Sources of Finance:............................................................................................................................................35

Option 01: Issuing medium or long term fixed rate dollar financing of $150 million at cost of 11.45%....36

3

Option 02: Issuing $200 million 7 year notes at par with a coupon of 11.75% and fees of 0.65%...........40

Option 03: Issuing zero coupon bonds with a face value of $200 million sold at 44.75% with a fess of .5%....................................................................................................................................................................45

Option 04_01:........................................................................................................................................................49

Option 04_02:........................................................................................................................................................53

Option 05_01:........................................................................................................................................................58

Option 05_02:........................................................................................................................................................62

Option 06_01:........................................................................................................................................................66

Option 06_02:........................................................................................................................................................70

Option 07:..............................................................................................................................................................74

Recommendation.......................................................................................................................................................78

Appendix:...................................................................................................................................................................79

4

Executive Summary

This case is on J.C. Penney Company, Inc. was a major retail operation providing merchandise and services to consumers through its stores and catalog operations across the U.S. and in Belgium. Penney marketed family apparel, home furnishings, leisure lines, drug merchandise, and insurance. In addition , JC Penny is the largest general merchandise catalog retailer in the US. The company primarily operates in the US and is head quartered in Plano, Texas and employs 147,000 people.

The company had a $2.5 billion capital expenditures program, primarily aimed at modernizing the over 1,900 retail stores across the United States. During 1983 and 1984, capital expenditures had totaled $948 million, and approximately 350 stores had been refurbished. Capital expenditures for 1985 were expected to exceed $500 million and the remainder of the $2.5 billion program would be spent through the end of the decade.

The company considering various proposals from its investment bankers ranging from common and preferred equity to short-, intermediate, and long-term debt financing. they were focusing on $100 million to $150 million of 7-year, fixed-rate dollar financing. In the domestic debt market, the company was considering straight and discount debt and, in the Eurodollar market, the possibilities of intermediate-term notes or notes with debt warrants. Also, several non-dollar issues had been proposed which could be hedged or swapped into fixed-rate dollar debt. As a totally different approach, the company noted that other major U.S. companies had obtained medium-term, fixed-rate financing by issuing additional commercial paper and executing interest-rate swaps to convert the floating rate liability to a fixed rate. Furthermore, with more financing planned within the next few months, the company was trying to find the right way how they could hedge against a significant rise in interest rates over that period.

5

CHAPTER 1: INTRODUCTION

Origin of the ReportObjectives of the ReportMethodologyof the ReportLimitation of the study

6

OBJECTIVES

The objectives of this report are:

To fulfill the partial requirement of MBA degree. To be able to use theoretical knowledge into practice to determine the optimum

corporate restructuring. To develop our skill in using analytical tools and techniques. To develop our interpersonal views and concept through sharing among every member

of the group that is reflected in this report.

METHODOLOGY

The information for the report was collected from secondary sources that are from the case and also from different published articles, books, prospectus and journals. The basic method that is used to analyze the data is quantitative analysis based on these data.

LIMITATIONS Although efforts made to make the report was as comprehensive as possible, nevertheless, the following limitations are identified at the time of preparing the report:

A lot of information regarding industry, economy, and company were required.We had put our optimum effort to formulize the available information.Inefficiency in some field of analysis.Non-availability of information for more relevant analysis.

Many analytical techniques and tools were needed to apply to get appropriate result but due to our lack of practical knowledge our analysis may not be a highly efficient one.

7

CHAPTER 2 : REPORT BODY Company overviewCase overviewEconomic AnalysisIndustry AnalysisCompany Analysis

8

CASE OVERVIEW

In 1983, J.C. PENNEY COMPANY, INC. had announced a $2.5 billion capital expenditures program, primarily aimed at modernizing the over 1,900 retail stores across the United States. During 1983 and 1984, capital expenditures had totaled $948 million, and approximately 350 stores had been refurbished. Capital expenditures for 1985 were expected to exceed $500 million and the remainder of the $2.5 billion program would be spent through the end of the decade.

The company considering various proposals from its investment bankers ranging from common and preferred equity to short-, intermediate, and long-term debt financing. they were focusing on $100 million to $150 million of 7-year, fixed-rate dollar financing. In the domestic debt market, the company was considering straight and discount debt and, in the Eurodollar market, the possibilities of intermediate-term notes or notes with debt warrants. Also, several non-dollar issues had been proposed which could be hedged or swapped into fixed-rate dollar debt. As a totally different approach, the company noted that other major U.S. companies had obtained medium-term, fixed-rate financing by issuing additional commercial paper and executing interest-rate swaps to convert the floating rate liability to a fixed rate. Furthermore, with more financing planned within the next few months, the company was trying to find the right way how they could hedge against a significant rise in interest rates over that period.

9

J.C. PENNEY COMPANY, INC.J.C. Penney Company, Inc. was a major retail operation providing merchandise and services to consumers through its stores and catalog operations across the U.S. and in Belgium. Penney marketed family apparel, home furnishings, leisure lines, drug merchandise, and insurance. In addition , JC Penny i s t h e largest general merchandise catalog retailer in the US. The company primarily operates in the US and is head quartered in Plano, Texas and employs 147,000 people.

ECONOMIC ANALYSIS

PESTEL ANALYSIS:

POLITICAL FACTORS

Parliamentary democratic practices /constitution-based federal strong democracy.

Political scenario of USA is much stable and it’s favorable for business proliferation and development.

Well established Legal framework

ECONOMIC FACTORS

One of the largest & influential economies in the world.

Low inflation rates and high real rate of returns.

Free market economy.

Increasing per capita GDP

Social factors

Slow population growth rate.

High standards of living.

High immigration rate in USA.

Diversified demographic factors

Technological Factors

High growth of Technological advancement & Innovation.

Efficient national infrastructure

10

Technology based communication, infrastructures developments

Environmental factors

Adverse effects from using forest products.

Environmental concerns.

Legal factors

Well established legal framework.

Good taxation Policy.

Efficient market and well recognized laws & orders

SNAPSHOT OF PESTEL ANALYSIS (IMPLICATION, MARKET DRIVER, KEY SUCCESSFACTORS, STRATEGY RESPONSE)

Assessment of the PESTEL Analysis and Finding out the possible Inclusion and Consideration on Valuation

Favorable economic conditions and rapid increase of GNP growth will ensure higher demand of products and service. This high demand should be considered in valuation assumption in the form of high initial growth rate.Stable political economy will provide us strength to assume growth of the firm.Rapid technological innovation will cause firm to concentrate on innovative and cost reducing process and this will cause more Research and Development cost in the future.The existence of the host of positive demand factors will be a supporting point for assuming high growth in the initial stage of the valuation process.

INDUSTRY ANALYSIS

11

In 1902, James Cash Penney opened the first J. C. Penney in the town of Kemmerer, Wyoming under the name the Golden Rule. It has become one of the largest department and discount retail chains in America. Its target market consists of middle-income families who want the convenience of shopping for a variety of goods at affordable prices without sacrificing quality.

Existing firms compete for market share based on economies of scale, tight cost controls, and investments in brand image. This competition nearly eliminates any possibility of new entrants entering into the industry. The majority of products found within this industry are similar; the threat of substitute products is moderate and the switching costs for buyers are moderate. Many of the companies within this industry compete on price while trying to maintain a certain level of quality in their products. Firms within this industry try to differentiate their product lines. J. C. Penney is a prime example of how this marketing strategy can help increase a company’s market share within the retail industry. However, differentiation does not come without a price. Because of the contracts and patents that come with this process, the bargaining power of a firm’s suppliers jumps from a low to a moderate level. The key success factors within this particular industry play an important role in gaining a competitive advantage. The key success factors within the department store retail industry are economies of scale, lower input costs, and investment in brand image. Staying on top of these key success factors allows a company to stay one step ahead of the competition, thus maintaining and even gaining more market share.

• Rivalry Among Existing Competitors ------------------Very high• Threats of New Entrants --------------------------------Low• Threats of Substitutes-------------------------------------Moderate• Bargaining Power of Buyers -----------------------------Moderate• Bargaining Power of Suppliers--------------------------Moderate

12

Snapshot and Action Assessment of the Porter Five Forces Model Analysis

Force Checked Threat Impact to Profitability

Action/ Response

Check

Threat of New Entrants Low High Profitability

Concentrate on reducing administrative costs

Bargaining Power of Suppliers

Moderate to low

Moderate Profitability

Increase Capital Expenditures.

Bargaining Power of Buyers

Moderate

Moderate

Profitability

Attractive Marketing & Promotional Strategy

Threat of Substitutes Moderate

Moderate

Profitability

Attractive Offering and High Advertising

Rivalry among Existing Competitors

Very High

Moderate

Profitability

Pursuing Mgt. Strategy

Assessment of the Porter Five Forces Model Analysis and Finding out the possible Inclusion and Consideration on Valuation

Low threat of new entry ensures the growth of the industry at moderate rates. That means the industry is not still in the matured stage. Moderate bargaining power of the supplier ensures an average profitability to the existing players. So the existing players may concentrate on the more Research and Development expenditure. High rivalry among the competitors in a concentrated industry.

13

COMPANY ANALYSIS:

STRENGTHS, WEAKNESSES, OPPORTUNITIES AND THREATS (SWOT)

SWOT analysis is helpful to evaluate firm’s current and potential position by examining internally and externally.

Internal: to find out the firm’s strength & weakness within the organization.

External: opportunities and threats outside the firm and within the economy & industry.

In here we’ve executed the SWOT analysis to find out J.C.Penney Co’s major strengths, weakness, opportunities and threats.

Strenghts

Wide product and service offerings through multiple retail channelCustomer FIRST initiativeBalanced brand portfolio

14

Weaknesses

Strong decline in comparable store salesContinuous product recallsIncrease in Operating expense

Opportunities

Focus on expansion of stores.Launching new exclusive and private label brands.Investment in online format.

Threats

Huge Competition.

Moderate new store opening

15

RISK ANALYSIS:

We’ve considered three risk factors here.

Business RiskFinancial RiskCredit Risk or Bankruptcy possibility.

Business Risk: uncertainty of operating income caused by the firm’s industry.

Sales Variability:

Volatility of Sales = f (Coefficient of Variation of Sales)

The coefficient of variation (CV) is defined as the ratio of the standard deviation to the mean :

It shows the extent of variability in relation to mean of the population.

Sales variability of the J.C.Penney Company of last 2 years is calculated as follows:

1984 198511000

11500

12000

12500

13000

13500

14000

Revenue

Revenue

16

Since the coefficient of variation of Sales (0.076) is lower than 0.50, the volatility of Sales is low. That’s why business risk is low.

Costs of Sales Variability:

Volatility of Costs = f (Coefficient of Variation of Costs)

The coefficient of variation (CV) is defined as the ratio of the standard deviation to the mean:


Earnings variability is calculated as follows.

1984 19857400760078008000820084008600880090009200

Cost of sales

Cost of sales

1. Sales Volatility

1984 1985

Revenue 12078 13451

Changes 0.113677761

Mean 12764.5

STD 970.8576106

CV 0.076059196

17

3.cost of sales Volatility

1984 1985

Cost of sales 8053 9030

Changes 10.82%

Mean 8541.5

STD 690.8433

CV 0.080881

Since the coefficient of variation of .0808 is lower than 0.50, the volatility of costs is high.

Earnings Variability:

Volatility of Earnings = f (Coefficient of Variation of earnings)

The coefficient of variation (CV) is defined as the ratio of the standard deviation to the mean:


Earnings variability of is calculated as follows:

18

1984 19851073.5

10741074.5

10751075.5

10761076.5

10771077.5

10781078.5

EBIT

EBIT

2. EBIT Volatility1984 1985

EBIT 1078 1075Changes 0.002790698Mean 1076.5STD 2.121320344CV 0.001970572

Since the coefficient of variation of Earnings .00197 is lower than 0.50, the volatility of Earnings is low.

Degree of Operating Leverage:

Operating Leverage

YEAR 1984 1985

% change in EBIT -0.28%

% change in Sales 11.37%

Operating leverage -0.02448088

The average DOL of the J.C.penney Company is referring very low business risk.

19

FINANCIAL RISK

Degree of Financial Leverage

DFL indicates low financial risk.

Financial leverage

YEAR 1984 1985

EBIT 1,078 1,075

Interest 266 350

Financial leverage 1.33 1.48

12

1.20 1.25 1.30 1.35 1.40 1.45 1.50

Financial leverage

Financial leverage

BUSINESS RISK ON SUBJECTIVE JUDGMENT

Significances of political Risk: stable and democratic practice reduce the possibility of adverse political impacts and indicates low business risk.

Sensitivity of Economic Change: no major downturns or bad economic consequences have been observed. So it is low.

Technological Obsolesce: This business activity is not too much technology based. So it is low.

Regulatory Risk: Well-functioning markets, flexible taxation policy and good legal framework keep regulatory risk at low level.

20

Overall risk analysis we’ve concluded that it holds the low business risk.

PREDICTING BANKRUPTCY RISK:

Altman Z-score

Original z-score component definitions variable definition weighting factor

X1 = Working Capital / Total Assets

X2 = Retained Earnings / Total Assets

X3 = Earnings before Interest and Taxes / Total Assets

X4 = Market Value of Equity / Total Liabilities

X5 = Sales/ Total Assets

Z score bankruptcy model:

Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + .999X5

Zones of Discrimination:

Z > 2.99 -“Safe” Zones

1.81 < Z < 2.99 -“Grey” Zones

Z < 1.81 -“Distress” Zones

1984 1985

Altman Z score 4.300 4.083

We’ve calculated Altman Z score for last two years due to the lack required information. Last two year z core indicates that’s J.C.Penney holds safe position. That means it has low probability to become bankrupted because it scored 4.3 & 4.083 that are higher than 2.99 score.

21

RATIO ANALYSIS

Ratio analysis is the starting point in developing the information desired by the analyst. It provides only a single snapshot, the analysis being for one given point or period in time. In the ratio analysis it is possible to define the company ratio with a standard one. Ratios are more informative than raw numbers. Through the ratio analysis one can easily understand that whether the company is progressing or declining. It also helps to estimate future performance. To show the overall financial position of J.C.Penny Company we have done four types of ratio analysis for the year 1984& 1985. These are shown in the bellow:

We have conducted the following four types of ratio analysis:

A) Liquidity ratio

B) Profitability ratio

C) Asset Utilization ratio

D) Leverage ratio

Ratios 1985 1984

Liquidity Ratio Current Ratio 2.40566 2.19989

Cash ratio 0.02338 0.03387

Profitability Ratio

Gross profit margin

7.78381 8.71005

Net profit margin 3.0258 3.65127

ROA 5.32% 6.28%

22

ROE 11.41% 13.12%

Asset Utilization Ratio

Total asset turnover

1.64639 1.62382

Fixed Asset turnover

3.59076 3.47468

Leverage Ratio Debt to equity Ratio

0.54696 0.48019

Debt to asset ratio

0.2552 0.22977

23

LIQUIDITY RATIO:

Liquidity ratio measures the ability of the firm to meet its obligations. These ratios establish relation between cash and other current assets and current liabilities. Creditors to evaluate the creditworthiness of the firm use these ratios. These ratios also provide revels management’s policy in managing liquidity position of the firm. Internal liquidity ratios indicate the firm’s ability to quickly generate cash versus the firm’s need for cash on short notice.. The higher the ratio, the more liquid the firm is said to be.

In order to assess the liquidity position,. we have determined the following two liquidity ratios:

1. Current ratio

2. Cash ratio

1985 1984

Cureent Ratio 2.40565524741708 2.19988895058301

Cash Ratio 0.0233822729744426 0.0338700721821211

0.25

0.75

1.25

1.75

2.25

Cureent Ratio

Cash Ratio

Liquidity Ratio

Current ratio is the ratio of current assets to current liabilities. Current ratio increased slightly in the year 1985 compared to the yea 1984. Cash ratio is the most conservative liquidity ratio. This is the ratio of cash to current liabilities. Cash ratio decreased in the year 1985 compared to the year 1984. So we can say that overall liquidity position of the company is not so much outperforming.

24

PROFITABILITY RATIO

Profitability ratios focus on the firm’s earnings. It measures how well management is operating a business in terms of rate of profit on revenue and percentage return on capital. The higher the ratio, the more profitable the firm is said to be.

1985 1984

Gross Profity Margin

7.7838078953

2377

8.7100513330

0215

Net Profit Margin

3.0257973384

8785

3.6512667660

2086

ROA

0.0532435740514076

0.0627856950793224

ROE

0.1141 0.13122

0.54.58.5

Gross Profity Margin

ROA

Profitability Ratio

Net profit margin is the ratio of EBIT to net sales. ROA ROE measures how much profit is generated for each dollar of assets and capital respectively. Here the profitability ratio shows a downward trend for the company and the ROA and ROE is also decreasing throughout the years.

25

ASSET UTILIZATION RATIO

It shows how efficiently the management is utilizing its assets to generate revenue. The higher the ratio, the more efficient the firm is said to be.

1985 1984

Total Asset Turnover

1.64638922888617 1.62382360849691


3.59076348104645 3.4746835443038

0.250.751.251.752.252.753.253.75

Total Asset Turnover


Asset Utilization Ratio

Total Asset Turnover and Fixed Asset Turnover is the ratio of revenue to average total asset and average fixed asset respectively. The upward trend is shown in the case of Total Asset Turnover and Fixed Asset Turnover in two years. Overall we can say that the company is efficiently utilizing its assets.

26

LEVERAGE RATIO

Leverage ratio provides the insights of the firm’s credit profile. The higher leverage ratio means that Total Asset Turnover and Fixed Asset Turnover is the ratio of revenue to average total asset and average fixed asset respectively. The upward trend is shown in the case of Total Asset Turnover whereas Fixed Asset Turnover is decreased in the last year. Overall we can say that the company is efficiently utilizing its assets. The company is bearing higher amount of debt.

1985 1984

Debt Eqity ra-tio

0.546956977964323

0.480191064905873

Debt As-set ra-tio

0.255201958384333

0.229766066146814

0.10.5

Debt Eqity ratioDebt Asset ratio

Leverage Ratio

Both of the Debt to Equity and Debt to Total Assets shows that the company is not improving its credit condition day by day. Because both Debt to Total Assets and Debt to equity ratio has an upward slope.

27

DUPONT ANALYSIS

To understand the factors affecting a firm’s ROE, particularly its trend over the time and its performance relative to competitors, analysts often decompose ROE into the product of a series of ratios. Each component ratio is in itself meaningful, and the process serves to focus the analyst’s attention on the separate factors influencing performance. This kind of decomposition of ROE is often called the DuPont analysis.

Decomposition of ROE is;

ROE=

EBITRevenue

∗Revenue

Total Asset∗EBT

EBIT∗Net Income

EBT∗Total Asset

Stockholders equity

We can summarize all of these relationships as follows;

ROE=Profit Margin∗Asset Turnover∗Interest Burden∗Tax Burden∗Financial Leverage

From the analysis we found that;

Year 1985 1984

Du Pont 0.114 0.131

1985 1984

Net Profit AT/Sales 0.03234 0.038665

Sales/Total Assets 1.646389 1.623824

ROA 0.053244 0.062786

Total Assets/Stockhldrs. Equity 2.143232 2.089913

ROE 0.114113 0.131217

28

1985 19840.1050.1100.1150.1200.1250.1300.135

Du Pont

Du Pont

ROE has decreased that means the company is not effectively employing the funds invested by the firm’s shareholders to generate return.

From the DuPont analysis we can say that financial leverage is highly influencing the ROE. On the other hand profit margin has the least contribution on ROE.

29

CHAPTER 3:

VALUATION OF THE J.C PENNY

30

VALUATION OF J.C PENNY:

J.C Penny has good amount of equity and cash flow with some subsidiaries. Now valuation needs to be done for determining the original value of the J. C. Penny.

Assumptions:

Terminal Growth Rate 2.00%

Cost of Equity 18.82%

Cost of Debt 11.32%

Premium 7.50%


The cost of equity is calculated using the Bond Yield plus premium method. In this

method the cost of bond is determined by the previous bond issue and their maturity

period. Using the IRR method the cost of bond is determined. After determining the cost

of debt a premium which is determined based on the judgment is added to find the cost

of equity.

66.90%Average Growth Rate



42.75% Average Tax rate

31

The growth rates are found using the average growth rate of two years. And for

projections sales driven strategy are used.

Calculation of Free Cash Flow to Equity

Projections

Particulars Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89Jan-

90

Sales 12078 1345114980.

0816682.

98118476.

40220342.51

85822275.

06

Sales Growth 11.37% 11.37% 10.75% 10.10% 9.50%

Costs and Expenses

COGS 8053 903010022.

23511161.

5412361.

40613609.90

79214902.

85

COGS % of Sales66.67

% 67.13%

Selling, General, Administrative expense 2973 3374

3722.45

4145.61

4591.26 5054.98

5535.20

% of Sales24.62

% 25.08%

Interest Expense Net 266.00

350.00

359.85

400.76

443.84

488.67

535.09

% Growth 2.20% 2.60%

Total Cost and Expense11292.

00 12754.0014104.

5315707.

9117396.

51 19153.5520973.

14

EBIT 786 697 875.55 975.081079.9

0 1188.971301.9

2

Income Taxes 345 290 374.30 416.85 461.66 508.28 556.57

% of EBIT43.89

% 41.61%

Income Before un consolidated Subsidiaries 441 407 501.25 558.23 618.24 680.68 745.35

Income of unconsolidated subsidiaries 26 28 30.15 32.47 34.97 37.66 40.56

Growth Rate 7.69% 7.69% 7.69% 7.69% 7.69%

Income from continuing operations 467 435 531.40 590.70 653.21 718.34 785.91

32

Net Income 467 435 531.40 590.70 653.21 718.34 785.91

Number of Shares 74.7 74.7

Per Share 6.25 5.82

Cash Flows 467 435 531.40 590.70 653.21 718.34 785.91

Depreciation 897 1015 1112.4 1219.2 1336.3 1464.6 1605.2

CWNC -123 387.75 445.91 512.80 589.72 678.18

Capital Expenditure 250 276.51 305.82 338.24 374.11 413.77

Cash Flow 1364 1323 979.591058.2

01138.4

5 1219.081299.1

2

Terminal Value7723.6

69

Total Cash Flow 979.591058.2

01138.4

5 1219.089022.7

9

Present Value 824.43 749.53 678.65 6123809.7

2

Firm Value 6673.94

Add: Cash 43.00

FCFE 6716.94

Number of Shares 74.7

Per Share Value 89.92

Here the value per share is $89.92 which is quite good. Now J. C. Penny needs to have

some finance to improve their value.

33

SOURCES OF FINANCE:

There are some sources of finance which is available to J. C Penny. These are

Issuing medium or long term fixed rate dollar financing of $150 million at cost of

11.45%.

Issuing $200 million 7 year notes at par with a coupon of 11.75% and fees

of .65%

Issuing zero coupon bonds with a face value of $200 million sold at 44.75% with

a fess of .5%

Issuing Eurodollar bond of $100 million 7 year bond at 99.875% with a coupon

of 11.375% and fees of 1.875% with a call option at 101% of par at the

beginning of the fifth year.

Issuing Eurodollar bond of $100 million 7 year bond at 99.875% with a coupon

of 11.375% and fees of 1.875% with a option to issue bond warrant.

Raising Swiss Franc 200 million with a coupon of 5.375% and fees of 2.065%.

Using the SWAP contract with a major US bank paying US dollars 11.95% and

receiving Swiss Franc at 6.00%

Raising Yen 25 billion with a coupon of 6.75% and fees of 1.875%. Using the

SWAP contract with a major US bank paying US dollars 11.95% and receiving

Yen at 7.10%

Issuing Commercial paper total about $800 million which will be redeemed after

every 6 months and can be swapped with a fixed exchange rate of 11.95%.

(yearly)

Issuing Commercial paper total about $800 million which will be redeemed after

every month and can be swapped with a fixed exchange rate of 11.95% (yearly).

Intermediate term debt financing of $100 million with a 10 year issue in march using the options to hedge against the interest rate risk.

We have valued each options to determine the best option.

34

OPTION 01: ISSUING MEDIUM OR LONG TERM FIXED RATE DOLLAR FINANCING OF $150 MILLION AT COST OF 11.45%.

The assumptions are as follows:

Assumptions:



Cost of Debt11.33%

Premium8.00

%

Cost of Equity19.33%

66.90% Average Growth Rate




The cost of equity is found through the method described previously. Here the terminal

growth rate is assumed to be 2.50% and cost of equity is 19.33% which is found by

using the Bond yield plus risk premium method.

35

Sensitivity Analysis:

The bond is valued using the Yield and sensitivity analyses are made.

Base Case 1% Decrease 1% Increase

Face Value 150 Face Value 150 Face Value 150

Yield 11.45% Yield 10.45% Yield 12.45%

Coupon Rate 11.45% Coupon rate 11.45% Coupon Rate 11.45%

Coupon 17.175 Coupon 17.175 Coupon 17.175

Period 7 Period 7 Period 7

Market Price $150.00 Market Price$157.2

0 Market Price$143.2

5

Option 01:Raising $150 Million

Projections

Particulars Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90

Sales 12078 1345115047.

33516833.

11918830.

83521065.

6423565.

66

Sales Growth11.87

% 11.87% 11.87% 11.87%11.87

%

Costs and Expenses

COGS 8053 903010067.

23111261.

98812598.

53514093.

715766.

31


%67.13

%

36


3739.16

4182.92

4679.33

5234.67

5855.91

% of Sales24.62

%25.08

%


350.00

361.47

404.36

452.35

506.04

566.09

% Growth 2.20% 2.60%


0012754.

0014167.

8615849.

2717730.

2219834.

4122188.

31

EBIT 786 697 879.48 983.851100.6

11231.2

31377.3

5

Income Taxes 345 290 375.98 420.60 470.51 526.35 588.82

% of EBIT43.89

%41.61

%

Income Before unconsolidated Subsidiaries 441 407 503.50 563.25 630.10 704.88 788.53


Growth Rate 7.69%


Net Income 467 435 533.65 593.41 660.25 735.03 818.69


Per Share 6.25 5.82

Cash Flows 467 435 533.65 593.41 660.25 735.03 818.69

Depreciation 897 10151163.2

11333.0

71527.7

21750.8

12006.4

6

CWNC -123 452.38 531.54 624.56 733.86 862.28

37


Total Cash Flow 1364 1323 957.991066.5

91187.1

31320.7

51468.6

6


58


91187.1

31320.7

510195.

12

Present Value 802.80 749.03 698.63 651.364213.5

1

Firm Value7115.3

4

Add: Cash 43.00

FCFE7158.3

4



Solvency Ratios:

Amount New Debt Total

Total Debt 4358 150 4508

Equity 3812 3812

Total Assets 8170 8170

Long Term Debt 2085 150 2235

Debt to Equity Ratio 1.14 1.18

Long Term Debt to Equity Ratio 54.70% 58.63%

Debt to Asset Ratio 53.34% 55.18%

38

Simulation Analysis:

In this simulation we can see that the mean is 7164.89 million and with a standard

deviation of 4438.24 million. The distribution follows a normal distribution.

39

OPTION 02: ISSUING $200 MILLION 7 YEAR NOTES AT PAR WITH A COUPON OF 11.75% AND FEES OF 0.65%

Here we can see that using the debt of $150 million the value per share can increase to

$95.83 this is all because of the leverage effect. The debt-equity ratio is quite good and

stable.


Assumptions:



Cost of Debt11.37%

Premium8.25

%

Cost of Equity19.62%





Here the terminal growth rate is assumed to be 2.50% and cost of equity is 19.62%

which is found by using the Bond yield plus risk premium method.


40




Coupon Rate 11.75% Coupon Rate 11.75% Coupon Rate 11.75%



Market Price $199.27 Market Price $208.72 Market Price $190.40

Option 02:Raising $200 Million

Projections


Sales 12078 1345115988.

90519005.

65522591.

626854.

1331920.

91

Sales Growth18.87

% 18.87% 18.87% 18.87%18.87

%

Costs and Expenses

COGS 8053 903010697.

17712715.

49615114.

62817966.

4221356.

29


%67.13

%


3973.13

4722.78

5613.86

6673.07

7932.13

% of Sales24.62

%25.08

%

41


350.00

384.08

456.55

542.69

645.09

766.80

% Growth 2.20% 2.60%


0012754.

0015054.

4017894.

8321271.

1825284.

5830055.

22

EBIT 786 697 934.511110.8

31320.4

21569.5

51865.6

9

Income Taxes 345 290 399.50 474.88 564.48 670.98 797.58

% of EBIT43.89

%41.61

%

Income Before unconsolidated Subsidiaries 441 407 535.01 635.95 755.94 898.57

1068.11


Growth Rate 7.69%

Income from continuing operations 467 435 565.16 666.10 786.09 928.72

1098.26

Net Income 467 435 565.16 666.10 786.09 928.721098.2

6


Per Share 6.25 5.82

Cash Flows 467 435 565.16 666.10 786.09 928.721098.2

6


91333.0

21527.6

41750.6

72006.2

7

CWNC -123 478.23 566.70 671.54 795.77 942.99


Total Cash Flow 1364 1323 958.621092.5

21245.8

61421.4

91622.6

9

42


14


21245.8

61421.4

911101.

00

Present Value 801.39 763.52 727.88 694.274532.5

6

Firm Value7519.6

1

Add: Cash 43.00

FCFE7562.6

1



The value per share is $101.24. The price increased because of using debt of $200 which magnifies the income and value.

Solvency Ratios:


Total Debt 4358 199.27 4557.27

Equity 3812 3812


Long Term Debt 2085 199.27 2284.27

43







OPTION 03: ISSUING ZERO COUPON BONDS WITH A FACE VALUE OF $200 MILLION SOLD AT 44.75% WITH A FESS OF .5%


Assumptions:



44

Cost of Debt11.41

%

Premium7.75

%

Cost of Equity19.16

%







Option 03:Raising $89.053 Million by issuing $200 million zero coupon bonds

Projections


45

Sales 12078 1345115006.9

8216742.9

5618679.7

4320840.

5723251.

37

Sales Growth11.57

% 11.57% 11.57% 11.57%11.57

%

Costs and Expenses

COGS 8053 903010040.2

3411201.6

6512497.4

4913943.

1315556.

04


%67.13

%

Selling, General, Administrative expense 2973 3374 3729.13 4160.51 4641.79

5178.74

5777.81

% of Sales24.62

%25.08

%


350.00

360.50

402.20

448.72

500.63

558.54

% Growth 2.20% 2.60%


0012754.

0014129.8

615764.3

717587.9

619622.

5021892.

38

EBIT 786 697 877.12 978.58 1091.781218.0

81358.9

8

Income Taxes 345 290 374.97 418.34 466.74 520.73 580.96

% of EBIT43.89

%41.61

%



Growth Rate 7.69%


Net Income 467 435 532.30 590.39 655.20 727.50 808.17


46

Per Share 6.25 5.82

Cash Flows 467 435 532.30 590.39 655.20 727.50 808.17

Depreciation 897 1015 1132.74 1264.14 1410.781574.4

31757.0

6

CWNC -123 413.60 479.78 556.54 645.59 748.88


Total Cash Flow 1364 1323 969.94 1057.77 1152.511254.4

41363.7

9


34

Total Cash Flow 969.94 1057.77 1152.511254.4

49549.8

3

Present Value 813.98 744.96 681.17 622.193975.0

5

Firm Value6837.3

5

Add: Cash 43.00

FCFE6880.3

5



The value per share is quite less than the previous one. This is because using the zero

coupon bonds to raise fund generates fewer cash flows than issuing bonds.

Solvency Ratios:


Total Debt 4358 200 4558

47

Equity 3812 3812









OPTION 04_01:

Issuing Eurodollar bond of $100 million 7 year bond at 99.875%

with a coupon of 11.375% and fees of 1.875% with a call option at

101% of par at the beginning of the fifth year.

48

Assumptions:


Cost of Equity First 4 Years 19.08%

Cost of Equity Fifth Year 19.04%

Redemption of the Bonds 30%

For the First 4 Years

Cost of Debt 11.33%

Premium 7.75%


From the 5th Year

Cost of Debt 11.29%

Premium 7.75%






49

Here the terminal growth rate is assumed to be 2.50% and cost of equity is 19.08% for

1st 4 years & 19.04 for 5th year which is found by using the Bond yield plus risk premium

method.

Option 04:Raising $100 form Euro Dollar Bonds

Projections


Sales 12078 1345115006.98

15716742.

95618679.

74320840.

5723251.

37

Sales Growth11.57

% 11.57% 11.57% 11.57%11.57

%

Costs and Expenses

COGS 8053 903010040.23

35311201.

66512497.

44913943.

1315556.

04

COGS % of Sales 66.67%67.13

%

Selling, General, Administrative expense 2973 3374 3729.13

4160.51

4641.79

5178.74

5777.81

% of Sales 24.62%25.08

%


350.00

360.50

402.20

448.72

500.63

558.54

% Growth 2.20% 2.60%

Total Cost and Expense11292.0

012754.

00 14129.8615764.

3717587.

9619622.

5021892.

38

EBIT 786 697 877.12 978.581091.7

81218.0

81358.9

8

Income Taxes 345 290 374.97 418.34 466.74 520.73 580.96

% of EBIT 43.89%41.61

%



50

Growth Rate 7.69%


Net Income 467 435 532.30 590.39 655.20 727.50 808.17


Per Share 6.25 5.82

Cash Flows 467 435 532.30 590.39 655.20 727.50 808.17

Depreciation 897 1015 1,139.34

1,278.91

1,435.57

1,611.43

1,808.83

CWNC -123 420.06 488.32 567.68 659.92 767.16


Total Cash Flow 1364 1323 968.821061.1

71161.3

91269.9

21387.1

5


09

Redemption Of Bonds 30.3


71161.3

91239.6

29773.7

5

Present Value 813.59 748.36 687.80 616.504088.8

1

Firm Value6955.0

5

Add: Cash 43.00

FCFE6998.0

5







51

Coupon Rate 11.375% Coupon Rate 11.375% Coupon Rate 11.375%



Market Price $98.91 Market Price $103.65 Market Price $94.47

Option Value 0.0022203 Option Value0.033527

8 Option Value-

0.000688

Bond Value $98.91 Bond Value $103.62 Bond Value $94.47

Solvency Ratios:


Total Debt 4358 98.92 4456.92

Equity 3812 3812


Long Term Debt 2085 98.92 2183.92





52


deviation of 4485.49 million. The distribution is close to normal distribution.

OPTION 04_02:

Issuing Eurodollar bond of $100 million 7 year bond at 99.875%

with a coupon of 11.375% and fees of 1.875% with a option to

issue bond warrant.



Cost of Equity First 4 Years 19.08%

Cost of Equity Fifth Year 19.07%

Redemption of the Bonds 30%

Issuance of New bonds with warrant

100%, with a fees of 1%,

53

First 4 Years

Cost of Debt 11.33%

Premium 7.75%


From Fifth Year

Cost of Debt 11.32%

Premium 7.75%


Option 04:Raising $100 form Euro Dollar Bonds

Projections

ParticularsJan-

84Jan-

85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90

Sales 12078 1345115006.9

8216742.9

5618679.7

4320840.

5723251.

37

Sales Growth11.57

% 11.57% 11.57% 11.57% 11.57%

Costs and Expenses

COGS 8053 903010040.2

3411201.6

6512497.4

4913943.

1315556.

04


%67.13

%


5178.74

5777.81

% of Sales24.62

%25.08

%

Interest Expense Net266.00

350.00

360.50

402.20 448.72

500.63 558.54

% Growth 2.20% 2.60%

Total Cost and Expense11292

.0012754

.0014129.8

615764.3

717587.9

619622.

5021892.

38

54

EBIT 786 697 877.12 978.58 1091.781218.0

81358.9

8

Income Taxes 345 290 374.97 418.34 466.74 520.73 580.96

% of EBIT 43.89%

41.61%

Income Before unconsolidated Subsidiaries

441 407 502.15 560.24 625.04 697.35 778.02

Income of unconsolidated subsidiaries

26 28 30.15 30.15 30.15 30.15 30.15

Growth Rate 7.69%

Income from continuing operations

467 435 532.30 590.39 655.20 727.50 808.17

Net Income 467 435 532.30 590.39 655.20 727.50 808.17


Per Share 6.25 5.82

Cash Flows 467 435 532.30 590.39 655.20 727.50 808.17

Depreciation 897 1015

1,139.34

1,278.91

1,435.57

1,611.43

1,808.83

CWNC -123 420.06 488.32 567.68 659.92 767.16


Total Cash Flow 1364 1323 968.82 1061.17 1161.39 1269.92

1387.15

Terminal Value 8371.42

Redemption Of Bonds 30.3

Issuance of New bonds with warrant

29.7

Total Cash Flow 968.82 1061.17 1161.39 1269.32

9758.57

Present Value 813.59 748.36 687.80 631.27 4077.32

Firm Value 6958.33

Add: Cash 43.00

55

FCFE7001.

33



Solvency Ratios:


Total Debt 4358 99.4 4457.4

Equity 3812 3812


Long Term Debt 2085 99.4 2184.4





56


deviation of 4468.34 million. The distribution is close to normal distribution.

OPTION 05_01:

57

Raising Swiss Franc 200 million with a coupon of 5.375% and

fees of 2.065%. Using the SWAP contract with a major US bank

paying US dollars 11.95% and receiving Swiss Franc at 6.00%

The assumptions are:

Assumptions:



Cost of Debt 11.18%

Premium 8.25%


66.90% Average Growth Rate COGS

24.85% Average Growth Rate S & A expenses

2.40% Average Growth Rate Interest rate




Option 05: Raising $75.12 Million from Swiss Market issuing Sfr 200 million

Projections

58


Sales 12078 1345115006.9

8216742.9

5618679.7

4320840.

5723251.

37

Sales Growth11.57

% 11.57% 11.57% 11.57%11.57

%

Costs and Expenses

COGS 8053 903010040.2

3411201.6

6512497.4

4913943.

1315556.

04


%67.13

%


5178.74

5777.81

% of Sales24.62

%25.08

%


350.00

360.50

402.20

448.72

500.63

558.54

% Growth 2.20% 2.60%


0012754.

0014129.8

615764.3

717587.9

619622.

5021892.

38

EBIT 786 697 877.12 978.58 1091.781218.0

81358.9

8

Income Taxes 345 290 374.97 418.34 466.74 520.73 580.96

% of EBIT43.89

%41.61

%



Growth Rate 7.69%


Net Income 467 435 532.30 590.39 655.20 727.50 808.17


Per Share 6.25 5.82

Cash Flows 467 435 532.30 590.39 655.20 727.50 808.17

59

Depreciation 897 1015 1132.74 1264.14 1410.781574.4

31757.0

6

CWNC -123 413.60 479.78 556.54 645.59 748.88


Total Cash Flow 1364 1323 969.94 1057.77 1152.511254.4

41363.7

9


83

Total Cash Flow 969.94 1057.77 1152.511254.4

49419.2

8

Present Value 812.14 741.59 676.56 616.593876.5

9

Firm Value6723.4

7

Add: Cash 43.00

FCFE6766.4

7



Solvency Ratios:


Total Debt 4358 58.1 4416.1

Equity 3812 3812


Long Term Debt 2085 58.1 2143.1




60




61

OPTION 05_02:

Raising Yen 25 billion with a coupon of 6.75% and fees of 1.875%.

Using the SWAP contract with a major US bank paying US dollars

11.95% and receiving Yen at 7.10%

The Assumptions are:

Assumptions:



Cost of Debt 11.34%

Premium 8.25%








62

Option 05: Raising $96.99 Million from Euro Yen Market issuing Yen 25 Billion

Projections


Sales 12078 1345115006.9

8216742.9

5618679.7

4320840.

5723251.

37

Sales Growth11.57

% 11.57% 11.57% 11.57%11.57

%

Costs and Expenses

COGS 8053 903010040.2

3411201.6

6512497.4

4913943.

1315556.

04


%67.13

%


5178.74

5777.81

% of Sales24.62

%25.08

%


350.00

360.50

402.20

448.72

500.63

558.54

% Growth 2.20% 2.60%


0012754.

0014129.8

615764.3

717587.9

619622.

5021892.

38

EBIT 786 697 877.12 978.58 1091.781218.0

81358.9

8

Income Taxes 345 290 374.97 418.34 466.74 520.73 580.96

% of EBIT43.89

%41.61

%



Growth Rate 7.69%


Net Income 467 435 532.30 590.39 655.20 727.50 808.17


63

Per Share 6.25 5.82

Cash Flows 467 435 532.30 590.39 655.20 727.50 808.17

Depreciation 897 1015 1132.74 1264.14 1410.781574.4

31757.0

6

CWNC -123 413.60 479.78 556.54 645.59 748.88


Total Cash Flow 1364 1323 969.94 1057.77 1152.511254.4

41363.7

9


66

Total Cash Flow 969.94 1057.77 1152.511254.4

49343.8

6

Present Value 811.05 739.61 673.84 613.293819.9

0

Firm Value6657.7

0

Add: Cash 43.00

FCFE6700.7

0



Solvency Ratio:

Amoun

t New Debt Total

Total Debt 4358 79.82 4437.82

Equity 3812 3812


Long Term Debt 2085 79.82 2164.82


64



The long term debt to equity ratio just increased by 2% after taking the Japanese yen Loan. This loan also gives a gain in exchange term basis.




65

OPTION 06_01:

Issuing Commercial paper total about $800 million which will be

redeemed after every 6 months and can be swapped with a fixed

exchange rate of 11.95%. (Yearly)

Assumptions:



Cost of Debt 11.35%

Premium 8.25%








66

Option 06: Commercial Paper Swap of $800 Million

Projections

ParticularsJan-

84Jan-

85 Jan-86 Jan-87 Jan-88Jan-

89Jan-

90

Sales 12078 1345115006.

98216742.9

5618679.

74320840.

5723251.

37

Sales Growth11.57

% 11.57% 11.57% 11.57%11.57

%

Costs and Expenses

COGS 8053 903010040.

23411201.6

6512497.

44913943.

1315556.

04


%67.13

%


3729.13 4160.51

4641.79

5178.74

5777.81

% of Sales24.62

%25.08

%


350.00 360.50

402.20

448.72

500.63 558.54

% Growth 2.20% 2.60%


0012754.

0014129.

8615764.3

717587.

9619622.

5021892.

38

EBIT 786 697 877.12 978.581091.7

81218.0

81358.9

8

Income Taxes 345 290 374.97 418.34 466.74 520.73 580.96

% of EBIT43.89

%41.61

%



Growth Rate 7.69%

Income from continuing 467 435 532.30 590.39 655.20 727.50 808.17

67

operations

Net Income 467 435 532.30 590.39 655.20 727.50 808.17


Per Share 6.25 5.82

Cash Flows 467 435 532.30 590.39 655.20 727.50 808.17


4 1264.141410.7

81574.4

31757.0

6

CWNC -123 413.60 479.78 556.54 645.59 748.88


Total Cash Flow 1364 1323 969.94 1057.771152.5

11254.4

41363.7

9


73

Commercial Paper Repayment $89.26 $88.02 $86.68 $88.44 $90.86

Total Cash Flow 880.68 969.761065.8

31166.0

09248.0

1

Present Value 736.35 677.95 623.00 569.853779.0

2

Firm Value6386.1

7

Add: Cash 43.00

FCFE6429.1

7



Solvency Ratios:


Total Debt 4358 88.65 4446.65

Equity 3812 3812


Long Term Debt 2085 88.65 2173.65


68



Debt to equity ratio is 1.166 after taking the new debt. It shows that the debt is higher than the equity.




69

OPTION 06_02:

Issuing Commercial paper total about $800 million which will be

redeemed after every month and can be swapped with a fixed

exchange rate of 11.95%. (Yearly)

Assumptions:



Cost of Debt 11.39%

Premium 8.25%




70

Option 06: Commercial Paper Swap of $800 Million

Projections


Sales 12078 1345115006.9

8216742.9

5618679.7

4320840.

5723251.

37

Sales Growth11.57

% 11.57% 11.57% 11.57%11.57

%

Costs and Expenses

COGS 8053 903010040.2

3411201.6

6512497.4

4913943.

1315556.

04


%67.13

%


5178.74

5777.81

% of Sales24.62

%25.08

%


350.00

360.50

402.20

448.72

500.63

558.54

% Growth 2.20% 2.60%


0012754.

0014129.8

615764.3

717587.9

619622.

5021892.

38

EBIT 786 697 877.12 978.58 1091.781218.0

81358.9

8

Income Taxes 345 290 374.97 418.34 466.74 520.73 580.96

% of EBIT43.89

%41.61

%



Growth Rate 7.69%


Net Income 467 435 532.30 590.39 655.20 727.50 808.17

71


Per Share 6.25 5.82

Cash Flows 467 435 532.30 590.39 655.20 727.50 808.17

Depreciation 897 1015 1132.74 1264.14 1410.781574.4

31757.0

6

CWNC -123 413.60 479.78 556.54 645.59 748.88


Total Cash Flow 1364 1323 969.94 1057.77 1152.511254.4

41363.7

9


23

Commercial Paper Repayment $100.02 $98.14 $100.90 $95.56 $97.32

Total Cash Flow 869.92 959.64 1051.611158.8

89225.4

0

Present Value 727.14 670.48 614.15 565.723764.3

2

Firm Value6341.8

1

Add: Cash 43.00

FCFE6384.8

1



Solvency Ratios:


Total Debt 4358 98.39 4456.39

Equity 3812 3812


Long Term Debt 2085 98.39 2183.39

72




Here the solvency ratio is quite good and although it has good amount of debt but it

does not reach to high level of debt. This is a very good sign for the company.




73

OPTION 07:

Intermediate term debt financing of $100 million with a 10-year issue in March using the options to hedge against the interest rate risk.

Assumptions:



Cost of Debt 11.36%

Premium 8.25%


66.90% Average Growth Rate COGS

24.85% Average Growth Rate S& A expenses

2.40% Average Growth Rate Interest rate




74

Option 07: Intermediate Bond issue of $100 Million

Projections


Sales 12078 1345115006.9

8216742.9

5618679.7

4320840.

5723251.

37

Sales Growth11.57

% 11.57% 11.57% 11.57%11.57

%

Costs and Expenses

COGS 8053 903010040.2

3411201.6

6512497.4

4913943.

1315556.

04


%67.13

%


5178.74

5777.81

% of Sales24.62

%25.08

%


350.00

360.50

402.20

448.72

500.63

558.54

% Growth 2.20% 2.60%


0012754.

0014129.8

615764.3

717587.9

619622.

5021892.

38

EBIT 786 697 877.12 978.58 1091.781218.0

81358.9

8

Income Taxes 345 290 374.97 418.34 466.74 520.73 580.96

% of EBIT43.89

%41.61

%



Growth Rate 7.69%

75


Net Income 467 435 532.30 590.39 655.20 727.50 808.17


Per Share 6.25 5.82

Cash Flows 467 435 532.30 590.39 655.20 727.50 808.17


751278.90

631435.57

241611.4

31808.8

3

CWNC -123 413.60 479.78 556.54 645.59 748.88


Total Cash Flow 1364 1323 975.29 1069.72 1172.531284.2

51405.4

2


52

Cash flow for Option payment 0.12 0.17 0.22 0.32 0.42

Total Cash Flow 975.17 1069.55 1172.311283.9

39619.0

6

Present Value 815.29 747.59 685.08 627.293929.1

2

Firm Value6804.3

7

Add: Cash 43.00

FCFE6847.3

7



76

Solvency Ratios:


Total Debt 4358 100 4458

Equity 3812 3812






The solvency ratio so J C Penny is quite good and moderate. Although JC Penny has

good amount of debt but it has good risk capacity level to control over the debt.


77



RECOMMENDATION

We, the finance team of the J. C. Penny will recommend the way of raising the $200

million from the US domestic debt market which is 7 year notes at par with a coupon of

11.75% and fees of .65%. Issuing debt will increase the cost of the J.C Penny and also

increase the debt to equity ratio, debt to asset ratio, long term debt to asset ratio etc.

We believe that as the business is facing moderate business risk through low sales risk,

high cost risk etc J. C Penny can take Moderate or Higher Moderate risk and take debt

amount of $200. The solvency ratios are as follows:


Total Debt 4358 199.27 4557.27

Equity 3812 3812


Long Term Debt 2085 199.27 2284.27




78

The firm value will also improve and it will rise to

Firm Value 7519.61

Add: Cash 43.00

FCFE 7562.61



APPENDIX:

:

Base Case

Assumption:

Working Capital Growth15.00

%

Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90

Current Assets 3962 4424

Current Liabilities 1254 1839

Working Capital 2708 2585 2972.753418.6

63931.4

64521.1

85199.3

6

CNWC -123 387.75 445.91 512.80 589.72 678.18

Properties 2358 2608

Growth10.60

%

CAPEX 250 276.51 305.82 338.24 374.11 413.77

Depreciation 897 1015 1112.441219.2

31336.2

81464.5

61605.1

6

79

Growth CAPEX 9.60%

Option 01 Working Capital Growth 17.50%

Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89



Working Capital 2708 2585 3037.38 3568.92 4193.48 4927.33

CNWC -123 452.38 531.54 624.56 733.86


Growth14.60

%

CAPEX 250 286.51 328.34 376.29 431.23

Depreciation 897 1015 1163.21 1333.07 1527.72 1750.81

Growth CAPEX14.60

%

Option 02 Working Capital Growth

18.50%

Jan-84




Working Capital 2708 2585 3063.23 3629.92

4301.46

5097.23

6040.21

CNWC -123 478.23 566.70 671.54 795.77 942.99


Growth 16.60

80

%

CAPEX 250 291.51 339.90 396.33 462.13 538.86

Depreciation 897 1015 1163.19 1333.02

1527.64

1750.67

2006.27

Growth CAPEX 14.60%


16.00%

Jan-84




Working Capital 2708 2585 2998.60 3478.38

4034.92

4680.50

5429.38

CNWC -123 413.60 479.78 556.54 645.59 748.88


Growth 12.60%

CAPEX 250 281.51 316.98 356.93 401.91 452.56

Depreciation 897 1015 1132.74 1264.14

1410.78

1574.43

1757.06

Growth CAPEX 11.60%

Option 04 Working Capital 16.25%

81

Growth

Jan-84




Working Capital 2708 2585 3005.06 3493.39

4061.06

4720.98

5488.14

CNWC -123 420.06 488.32 567.68 659.92 767.16


Growth 13.10%

CAPEX 250 282.76 319.80 361.70 409.10 462.70

Depreciation 897 1015 1139.34 1278.91

1435.57

1611.43

1808.83

Growth CAPEX 12.25%


16.00%

Jan-84




Working Capital 2708 2585 2998.60 3478.38

4034.92

4680.50

5429.38

CNWC -123 413.60 479.78 556.54 645.59 748.88


Growth 13.10%

CAPEX 250 282.76 319.80 361.70 409.10 462.70

Depreciation 897 1015 1139.34 1278.91

1435.57

1611.43

1808.83

82

Growth CAPEX 12.25%

solution of jc penny case(b)

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