LDR640 Week 7 Discussion Questions and Replies
Week 7 Forum 1 (DQ 1): Chapters 10-11
1. Which three areas discussed in Chapter 10 are most difficult for you to understand? What
questions do you have?
Alternate Q1: Which three key learning points from Chapter 10 can you apply to your daily
professional and/or personal lives? Please explain.
2. Which three areas discussed in Chapter 11 are most difficult for you to understand? What
questions do you have?
Alternate Q2: Which three key learning points from Chapter 11 can you apply to your daily
professional and/or personal lives? Please explain.
Week 7,
Forum 1,
Chapters 10 Mary Stephens
& 11
5/8/2013 10:32:03 PM
1. There were actually just two areas discussed in Chapter 10 in which my understanding
is still a bit fuzzy: Estimating a Firm’s Weighted Average Cost of Capital (WACC)
(Exhibit 10.7, p. 342) and Estimating a Firm’s Weighted Average Cost of Capital, When
Risk is Different from the Risk of the Firm (Exhibit 10.9, p. 347). While I am able to
follow the steps laid out in each exhibit and understand the concepts and formulas, I
perceive that calculating these values would be challenging. My question regarding these
two processes would be directed to Professor Dishman: Professor, in VC4 could you
please review estimating WACC and demonstrate how to calculate it using the Excel
template that you sent on May 7? I believe Professor Dishman’s demonstration and oral
explanation will clear up my questions. Thank you.
2. Chapter 11 was quite an interesting chapter. I am intrigued by Modigliani and Miller’s
theory which states “the value of a firm’s assets is determined only by the ability of its
managers to generate as much cash flow as possible from these assets” (p. 363). Perhaps
this explains why firms are willing to compensate their managers with such lucrative
salaries! My questions from chapter 11 revolve around the summary of their Valuation
Formulas presented in Exhibit 11.13 (p. 377) which lists equations 11.4-11.8. I am
interested to know how are these six formulas would be calculated in Excel.
Hawawini, G., & Viallet, C. (2011). Finance for executives: Managing for value
creation. Mason, OH: South-Western Cengage Learning.
RE:
Chapter 10 Mary Stephens
and 11 KN
5/11/2013 4:39:43 PM
Karen:
Pages 310-311 of chapter nine, give a definition and example of how to calculate the
value of common stocks. It explains in detail what each of the parts of the equation
represent and where to place which value into the formula.
By adding subsequent years expected dividends into an “infinitely large number of
periods,” (p.311) we have the DDM (dividend discount model) as shown on page
325.
Ben McClure of Investopedia describes the DDM this way: “Here is the basic idea:
any stock is ultimately worth no more than what it will provide investors in current
and future dividends. Financial theory says that the value of a stock is worth all of the
future cash flows expected to be generated by the firm, discounted by an appropriate
risk-adjusted rate. According to the DDM, dividends are the cash flows that are
returned to the shareholder.”
McClure, B. (2011, March 13). Digging into the dividend discount model.
Investopedia. Retrieved from
http://www.investopedia.com/articles/fundamental/04/041404.asp
Hawawini, G., & Viallet, C. (2011). Finance for executives: Managing for value
creation. Mason, OH: South-Western Cengage Learning.
Week 7 Forum 2 (DQ 2): Chapter 9 (pp. 294-314)
Which three calculations discussed in Chapter 9, Sections 4 and 5 (pages 294 - 314) can be
linked to your learning in preceding chapters? How has your prior learning in this course and
elsewhere prepared you to learn the materials in these sections?
Week 7
Forum 2,
Chapter 9
Mary Stephens
5/8/2013 9:38:11 PM
The three calculations discussed in Chapter 9 of the Hawawini and Viallet (2011)
textbook that are linked to information presented in previous chapters include the
following: Net Advantage to Leasing (NAL) (p. 296), Market Yield of a bond (p. 300),
and Valuation of Preferred Stock (p. 310).
Net Advantage to Leasing (NAL)—“The net present value of the difference in cash
flows between leasing and buying an asset. If NAL is positive, the asset should be
leased” (p. 625).
Market Yield (of a bond)—“The rate that makes the bond price equal to the present
value of the bond’s future cash-flow stream” (p. 625).
Valuation of Preferred Stock—“The present value of an infinite annuity” (p. 310).
Experience from taking two accounting classes and two finance classes in my
undergraduate Business Administration program helped prepare me for information in
this section by introducing me to these complex financial concepts. While it has been a
few years since I have studied the theories of valuation of rates of return, capital markets,
dividend policy and retained earnings, I feel that prior learning in these areas has helped
me gain a better understanding and comprehension of the real-world applications of these
finance principles.
Hawawini, G., & Viallet, C. (2011). Finance for executives: Managing for value
creation. Mason, OH: South-Western Cengage Learning.
RE:
Melania_Week
7_DQ2
Mary Stephens
5/11/2013 5:15:16 PM
Mel,
If you don’t mind my asking, I am interested to know your opinion on financial
leases. I understand from the Hawawini and Viallet (2011) text that leasing is often
valuable for businesses; however, it doesn't seem appealing from an individual
perspective. Have you ever found that leasing was a beneficial financial decision
from your personal experience?
According to Dave Ramsey, “People get sold automobile leases because they are
told that it’s what sophisticated people do. But as it turns out, the car companies
make more money on leasing you the car than if you bought the car with cash,
according to the National Auto Dealers Association. Broke people think ‘how much
down and how much a month’. Rich people think ‘how much’. If you can’t pay cash
for a car, then ride a bicycle. But don’t lease a car” (para. 3).
Hawawini, G., & Viallet, C. (2011). Finance for executives: Managing for value
creation. Mason, OH: South-Western Cengage Learning.
Ramsey, D. (2013) Ask Dave: Explain how a car lease works. daveramsey.com.
Retrieved from
http://www.daveramsey.com/index.cfm?event=askdave/&intContentItemId=
124195