Taylor Brands

Jermaine D. Huell

MGT 5090 Financial Management

Professor- David Weyant

Case study # 30 Taylor Brands

Introduction:

Taylor Brands’ (Taylor) case study is about cost of capital, from the firm’s viewpoint, or about the required rate of return, from the investor’s perspective. Allegedly, Taylor Brands’ management is employing an overzealous approach in selecting discounts rates and some of the company’s executives believe that a 30 percent rate is too high and that it creates problems. Robert West is one of Taylor’s most innovative and respected executives. Willing to apply his knowledge on cost of capital, he asks the general manager, Trevor Unruh, for the opportunity to conduct a cost-of-capital analysis in an attempt to resolve some of the existing issues. Although apparently uninterested, Unruh asks West to examine the firm’s cost of capital procedures and to prepare a formal report.

Body:

2. (a) Capital Asset Pricing Model: Ke = Rf + B (Rm - Rf)

= .07 + .8 (.121 - .049)

= .07 + 0.0576

= 0.1276

(b) Dividend Discount Model: Ke = D1 / Po + g

EPSf = EPS (1+g)

= 2.83 (1 + .036)

DPS = 2.95 x .7 (payout ratio)

=2.05

Ke = D1 / P0 + g

= 2.05 / 32 + .036

= 0.1

(c) The cost of equity or required rate of return is the combination of assets appreciation and dividends payment required to make an investment worthwhile and attractive to investors. Investors want to know with a substantial degree of probability how much profit their investment will yield and how long it will take their investment to grow to their expectations. The cost of equity or required rate of return provides investors and firms with this critical information to assist in making a financially sound decision.

3.

Dividend Discount Model

| Book Value($000s) | Cost | Optimal capital structure | WACC |

Notes | $16,000 | .042 | .07 | .0029 |

Bonds | 89,000 | .048 | .38 | .0182 |

Equity | 130,000 | .1281 |...