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Finance Project

Corporate Finance Project
Research on Computer Industry

Corporate Finance

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Corporate Finance Project – Computer Industry

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Executive summary

We chose the computer industry for our project. We picked five hardware companies-
Compaq, Hewlett Packard, Hitachi, IBM, and Unisys – and one software company- Oracle-
for our analysis.

Risk and Return

In the risk analysis section, we observed that high-risk companies, such as Unisys, have larger
betas and higher costs of equity. As a result of our calculations, we estimated each company’s
hurdle rate as follows:

Compaq HP Hitachi IBM Oracle Unisys
Cost of Equity 15.55% 15.79% 8.04% 13.88% 12.22% 17.58%
Cost of Capital 15.55% 15.16% 5.14% 12.37% 11.94% *12.41%

* Unisys’s cost of capital includes preferred stock.

We then compared each company’s ROE with Cost of Equity and ROC with Cost of Capital.
Compaq, HP, IBM and Oracle have all achieved excess returns in ROE, but only Compaq and
Oracle have excess returns in ROC. This phenomenon led us to the conclusion that Compaq
and Oracle generally chose good projects, while HP and IBM are not always as successful.
However, HP and IBM return their excess cash the stockholders by paying stable dividends
and stock buybacks.

Optimal Capital Structure

Generally speaking, the debt ratio in the computer industry (12%) is relatively lower than that
in other industries. Considering our chosen companies, mature ones such as IBM and Unisys
have higher debt ratios, while fast-growing companies, such as Oracle and Compaq, have
lower ones. After our analysis, we reached the following optimal debt ratios and paths to the
optimal.

Compaq HP Hitachi IBM Oracle Unisys
Current 0.00% 5.68% 42.99% 15.91% 3.99% 37.49%
Optimal 20.00% 20.00% 40.00% 30.00% 5.00% 20.00%

Hitachi and Oracle have already realized their optimal financing mix. As for HP and IBM,
their debt ratios are lower than the optimal, so they need to increase debt ratios by buying
back their stock, which they did recently. Compaq’s debt ratio is lower than the optimal, so
Compaq needs to issue short-term debt (based on the duration coming from the regression
analysis) in a mix of currencies, because the structure of debt should reflect the mix of the
revenues from each country. Compaq’s acquisition of DEC will lead Compaq’s debt ratio to
increase, but we believe the company still has some excess debt capacity. Unisys has to
decrease its debt ratio immediately by selling assets and renegotiating with lenders. The
company is in the process of restructuring its businesses and its finances in an effort to come
to terms with this situation.

Dividend Policy

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In summary, the dividend policies of companies in the computer industry are such that they do
not generally pay many dividends. In the companies we analyzed, the rule of thumb is that for
growth companies, the policy is to not pay dividends. For more mature companies, dividends
are one of the ways for returning cash to investors.

We found that growing companies such as Compaq and Oracle do not pay dividends at all
because of the need of the financing flexibility they require to take advantage good investment
opportunities. It is also the case that stockholders in growing companies do not expect
dividends and would prefer cash returned to them in the form of buybacks. More mature
companies, such as HP, Hitachi and IBM, do pay dividends.

I. Risk Profile

For all other companies, we used what we believe are the more reliable regression beta estimates. In
the case of Hitachi, both its regression beta and its bottom up beta were 1. For HP, it has a high R-
squared, its standard error of the beta estimate is reasonably low, and its regression beta is higher
than the industry average. In the case of Compaq, we used the regression beta for our analysis
forward because there has been no substantial change in the business mix or financial leverage of the
company. Lastly, for Unisys, it has been in a rather extraordinary position because it has operated at
a loss over the last several years. This runs counter to how the industry has performed, so we believe
the regression beta is a more appropriate measure of risk for the company.

Estimating Costs of Equity

To arrive at a cost of equity from the appropriate beta for each company, we assumed a
risk-free rate of 6%, the long-term treasury bond rate for the period of our analysis. For the risk
premium, we used a geometric historical risk premium for stocks over the long-term treasury bond
of 6.16%. For our foreign company, Hitachi, we used the Japanese risk free rate of 1.88% and the
same risk premium.

Using the CAPM formula, below we present the costs of equity (expected returns) for each
company:

Compaq HP Hitachi IBM Oracle Unisys

Cost
of
Equit
y

15.55% 15.79
%

8.04% 13.88% 12.22% 17.58%

As we can see, the return that investors expect to make on an investment in Unisys, given

its comparatively high risk, is the largest among all companies at 17.58%. By comparison,
Hitachi’s expected return is the lowest at 8.04%. Its risk is the market risk and is based upon the
lower Japanese risk-free rate. The return that investors expect to make by investing into any
company becomes the cost of equity for managers running that company.

Estimating Costs of Debt

The current bond ratings for all our companies are presented below, which are factored

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into obtaining a current cost of debt for all companies:

Compaq HP Hitachi IBM Oracle Unisys
Bond
Rating

BBB AA Aa2 A+ BBB

Pre-
tax
Cost
of
Debt1

8% 6.7% 2.58% 6.8% 8% 10%

After-
tax
Cost of
Debt

5.12% 4.69% 1.31% 4.35% 5.12% 6.4%

Estimating Costs of Capital

For each company, we computed a cost of capital by taking the cost of equity,

estimated from the beta, along with the after-tax cost of debt. The costs of capital for each
company are presented below:

Compaq HP Hitachi IBM Oracle Unisys
Cost of
Equity

15.55% 15.79
%

8.04% 13.88% 12.22% 17.58%

E/(D+E) 100% 94.32
%

57% 84.09% 96% 49.8%

Cost of Debt 5.12% 4.69% 1.31% 4.35% 5.12% 6.4%

D/(D+E) 0% 5.68% 43% 15.91% 4% 29.86%
Cost of
Capital

15.55% 15.16
%

5.14% 12.37% 11.94% 12.41%

Note that, in addition, Unisys has preferred stock outstanding. We calculated the cost of preferred
stock as: Cost of Pref. Stock = Pref. Div./MV Pref. Equity = 120.4/1420.2 = 8.5%
The cost of capital as calculated above for Unisys includes the weighted average cost of preferred
stock of 8.5% multiplied by the preferred stock ratio of 20.34%, yielding a total weighted average
cost of capital of 12.41%.

The cost of capital for each company is the benchmark each company uses to analyze projects on a
predebt basis. In the next section, we will determine how each company has performed based on their
respective costs of equity and costs of capital.

1 We used the long-term treasury bond rate of 6% for all companies (except Hitachi, where we used the long-term treasury bond
rate of 1.88%), adding on the appropriate default spread based upon each company’s bond rating.

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II. Investment Return Analysis

Business Project Flow Characteristics Type of Financing/Appropriate

Debt

Computer
Hardware
Business

• Be short term for personal
computers,
medium term for mainframe
computers

• Have cash outflows that are
primarily in dollars, but with
inflows that are frequently in
foreign currencies due to large
overseas sales

• Be very competitive and volatile

• Short term
• Both in US $ and foreign

currency
• Linked to a high-technology

index fund, if possible

Computer
Software
Business

• Be short term
• Have cash outflows that are

primarily in dollars, but with
inflows that are frequently in
foreign currencies due to large
overseas sales

• Can be considerably profitable
due to
low fixed costs

• Short term
• Both in US $ and foreign

currency
• Linked to a high-technology

index fund, if possible

Electrical
Equipment

• Be medium to long term
• Have cash outflows that are

primarily in dollars, but with
inflows that are frequently in
foreign currencies due to large
overseas sales

• Stable, but can be cyclical

• Mixture of medium and long
term

• Both in US$ and foreign
currency

Electrical
Machinery

• Be long term
• Have cash outflows that are

primarily in dollars, but with
inflows that are frequently in
foreign currencies due to large
overseas sales

• Stable
• Sensitive to exogenous factors,

such as politics and macro-
economic factors

• Mixture of medium and long
term

• Both in US$ and foreign
currency

• Linked to the specific country
ratings, if possible

Test &
Measurement
Medial Electronic
Equipment,
Chemical
Analysis &
Service

• Long term
• Have cash outflows that are

primarily in dollars
• Stable
• High fixed costs

• Mixture of medium and long
term

• Mainly in US$

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Measuring Past Returns

We assumed that the current book value of assets and equity of our companies reflected the current
capital and equity invested in existing projects. Using the net income and book value of equity, we
computed the return of equity of each firm as follows:

Compa
q

HP Hitachi IBM Oracl
e

Unisys

ROE 22.19% 21.08
%

2.72% 29.4% 38.75
%


176.29

%
ROC 22.87% 16.13

%
2.4% 12.77

%
36.56

%
9.29%

Hitachi’s ROE and ROC are extremely low compared with the US companies. Unisys operates
at a loss and thus, its ROE is negative. Since Compaq and Oracle have little to no debt, their
ROCs are not much different from their ROEs. IBM’s ROE is significantly higher, reflecting its
relatively high debt ratio and its active stock buybacks.

Graphically, these returns appear as follows:

ROE&ROC

0%

-50%

-100%

-150%

Return on
Equity
Return on
Capital

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Evaluation of Past Returns

Calculation of Equity Return Spread

Compa
q

HP Hitachi IBM Oracl
e

Unisys Industry
Average

ROE 22.19% 21.08
%

2.72% 29.4% 38.75
%


176.29

%

22.4%

Cost of Equity 15.55% 15.79
%

8.04% 13.88
%

12.22
%

17.58% 12.8%

Equity Return
Spread

6.64% 5.29% -5.32% 15.52
%

26.53
%


193.87

%

9.6%

Calculation of Capital Return Spread

Compa

q
HP Hitachi IBM Oracl

e
Unisy

s
Industry
Average

ROC 22.87% 16.1% 2.4% 12.77
%

36.56
%

9.29% 25.24
%

Cost of Capital 15.55% 15.16% 5.14% 12.37
%

11.94
%

12.41
%

12.31
%

Capital Return
Spread

7.32% 0.94% -2.74% 0.4% 24.62
%


3.12%

12.93
%

Compaq and Oracle are well outperforming their respective cost of equity and cost of capital,
meaning both companies are picking up good projects. On the other hand, return spreads of cost of
capital for HP and IBM are close to zero, as compared to their equity return spread of 5.29% (HP)
and 15.52% (IBM). This suggests that since HP and IBM do not have many good projects, they just
buy back stocks alternatively. Reflecting its low ROE & ROC, Hitachi’s return spread is negative,
as is its EVA. Hitachi’s ROE and ROC do not match the hurdle rates, thus its EVAs are negative.
Unisys’ projects did not generate necessary return to the company.

The accounting returns certainly give us general information on each company’s performance. However,
accounting returns do not necessarily reflect the company’s real picture, because they are influenced by
certain accounting standards, and do not reflect market value. Since, it is meaningful to use both book value
basis returns and market value returns to get more precise and comprehensive information of the companies
in our analysis, we compared market value based excess return (return on stock – required return) in the
following dividend chapter.

Assessments for the Future

We believe that the computer hardware and software industries have huge opportunities for further growth
in the future based on the following reasons: 1) we expect that the customer base will continue to expand,

Corporate Finance Project – Computer Industry

8

both domestically and internationally; and 2) new related businesses, such as network computer and IT
solution consulting business, were created and grew at a rapid pace.

Compaq has been growing rapidly and is likely to continue to do so in the future, given its relatively small
company size. Through acquiring DEC, Compaq is entering into the network business, which is a business of
both high profitability and risk. However, we believe Compaq’s good brand image will make it possible to
earn higher operating margins.

HP’s diversification into relatively low risk businesses, such as electrical manufacturing, medical electronics
and chemical analysis, provides the company with buffers to exposure in its highly risky computer hardware
business. On the other hand, its diversification may limit its opportunities to capture any high growth
opportunities in the computer hardware business. So, together with its big size, we anticipate that HP’s
growth will be stable in the future.

Hitachi should increase its ROE and ROC in order to match the required hurdle rates. Its low ROE and ROC
are a reflection of Hitachi’s power structure between strong incumbent managers and weak stockholders. If
stockholders acted to check the managers, it would be harder for the firm to generate a negative EVA. Thus,
we do not foresee high growth for Hitachi. Given the current bad fundamentals for the Japanese economy, it
may grow only modestly.

While focusing on the computer hardware business, IBM transitioned into other areas, such as software
services and consulting, which are relatively less risky than its current stronghold. IBM’s policy to buy back
stocks suggests that the company does not have many good projects to invest. So, we anticipate that IBM
will grow at a moderate rate.

Oracle, on the other hand, is concentrating on the fast-growing software service business. Given that the
company is still relatively small, there is room to grow for the company, although its growth may be volatile.

Unisys is in the process of turning itself around. Since new CEO Larry Weinbach came on board in
September of 1997, Unisys is focussing on the future. Unisys has since contracted out to manufacture
desktop computers and low-end servers, and is now concentrating on its mainframes and high-end servers.

More importantly, Unisys is over 80% of the way towards achieving Weinbach’s goal of reducing debt
by $1 billion dollars by the year 2000. This success resulted from the conversion of $616 million in bonds
and the retirement of $198 million in additional debt. With this financial restructuring and the streamlining
of its manufacturing operations, we believe that Unisys is poised to make a comeback.

III. Dividend Policy: The Tradeoff

The way the six companies return cash to stockholders is different and the reasons they return the
cash also vary.

The following tables sum up the dividend and stock buyback of the last 5 years.

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Hewlett
Packard

Hitachi

Unisys Oracle

IBM Compaq

In the following table we compare the 3 companies of ours that pay dividends to industry
averages:

Dividend

Payout
Dividend

Yield
IBM 12.85 0.77
HP 17.06 0.83
Hitachi 41.46 0.01
Hardware Ind.
Avg.

7.67 0.42

Soft.&Serv Ind. Avg. 7.25 0.19

Ind. Wt. Avg. 7.45 0.30

Year 1993 1994 1995 1996 1997
Dividends $228 $280 $358 $450 $532
+ Equity

Repurchases
$6 $25 $325 $726 $305

= Cash to
Stockholders

$234 $305 $683 $1,176 $837

Year 1993 1994 1995 1996 1997
Dividends 37.35 37.10 37.98 36.39 36.63
+ Equity

Repurchases

= Cash to
Stockholders

Y37.35 Y37.1 Y37.98 Y36.39 Y36.63

Year 1993 1994 1995 1996 1997
Dividends
+ Equity

Repurchases

= Cash to
Stockholders

$0.00 $0.00 $0.00 $0.00 $0.00

Year 1993 1994 1995 1996 1997
Dividends
+ Equity

Repurchases
$43.63 $81.16 $75.86 $113.09 $528.21

= Cash to
Stockholders

$43.63 $81.16 $75.86 $113.09 $528.21

Year 1993 1994 1995 1996 1997
Dividends $933 $662 $591 $706 $783
+ Equity

Repurchases
$10 $5,526 $5,005 $6,251

= Cash to
Stockholders

$933 $672 $6,117 $5,711 $7,034

Year 1993 1994 1995 1996 1997
Dividends
+ Equity

Repurchases

= Cash to
Stockholders

$0.00 $0.00 $0.00 $0.00 $0.00

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As shown above, our 3 companies have higher payout ratios and yields than the industry averages.
However, we must view Hitachi as an exception because it is a Japanese company and operates
under different constraints.

To better understand some of the tradeoffs of different dividend policies, we will compare the policies of
Compaq and IBM, which exemplify two common dividend policies, namely the policy of paying
dividends and the policy of not paying dividends.

Factor Implication for Compaq Implication for IBM
Stockholder Tax Preference Considering its history of

no dividends, stockholders
choose it for its capital
gains potential. In the
future, stockholders would
prefer buybacks over
dividends.

IBM was a typical dividend
paying company before the
recession, but 5 years of
low dividends have changed
stockholders attitudes so
now they do not expect high
dividends

Information Effects and
Signaling Incentives

Considering its no-dividend
policy, it is unlikely that
Compaq would use
dividends to signal
information about future
cash flows.

Its announcement that it
would reduce dividends
sent its stock plummeting.

Effect on Flexibility Not paying dividends gives
Compaq more flexibility in
accepting projects

Since IBM does not have
many good projects, they
tend to return money to
stockholders. Therefore,
they do not require much
flexibility.

Bond Covenants and
Ratings Agency Concern

Considering that it has no
debt, this is not a concern

They have many bond
holders, so ratings are a
concern and effects their
dividend policy.

As suggested above, when Compaq decides to return money to stockholders it should do so in the form of
buybacks. IBM should continue its current dividend policy.

IV. Dividend Policy: A Framework

The following tables sum up our results of what the companies should have returned and what
they did. It also shows where the companies paid out too much.

Hewlett Packard

Year 1993 1994 1995 1996 1997 Averag

e
Net Income $1,177.00 $1,599.00 $2,433.00 $2,586.00 $3,119.00 $2,182.80
(Cap Ex – Depr) (1-
DR)

$397.00 $168.00 $318.00 $642.00 $557.00 $416.40

Corporate Finance Project – Computer Industry

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Change in WC * (1-
DR)

$556.00 $647.00 $721.00 $1,472.00 $1,676.00 $1,014.40

FCFE $224.00 $784.00 $1,394.00 $472.00 $887.00 $752.20
Cash to Shareholders $234.00 $305.00 $683.00 $1,176.00 $837.00 $647.00
Payout Ratio 19.4% 17.5% 14.7% 17.4% 17.1% 17.2%
Cash Paid as % of
FCFE

104.5% 38.9% 49.0% 249.2% 94.4% 107.2%

Hitachi

Year 1993 1994 1995 1996 1997 Averag

e
Net Income $77.29 $65.28 $113.91 $141.77 $88.33 $97.32
(Cap Ex – Depr) (1-
DR)

$91.50 $112.39 $90.87 $112.55 $132.60 $107.98

Change in WC * (1-
DR)

($88.96) ($31.75) $37.16 $205.87 ($11.52) $22.16

FCFE $74.75 ($15.36) ($14.12) ($176.64) ($32.75) ($32.82)
Cash to Shareholders $37.35 $37.10 $37.98 $36.39 $36.63 $37.09
Payout Ratio 48.3% 56.8% 33.3% 25.7% 41.5% 41%
Cash Paid as % of
FCFE

50.0% -241.5% -269.0% -20.6% -111.8% -119%

Compaq

Year 1993 1994 1995 1996 1997 Averag

e
Net Income $462.00 $867.00 $789.00 $1,318.00 $1,855.00 $1,058.20
(Cap Ex – Depr) (1-
DR)

($11.00) $188.00 $177.00 $1.00 $184.00 $107.80

Change in WC * (1-
DR)

$390.00 $1,090.00 $422.00 $1,958.00 $859.00 $943.80

FCFE $83.00 ($411.00) $190.00 ($641.00) $812.00 $6.60
Cash to Shareholders
Payout Ratio
Cash Paid as % of
FCFE

Oracle

Year 1993 1994 1995 1996 1997 Averag

e
Net Income $98.26 $283.72 $441.52 $603.28 $821.46 $449.65
(Cap Ex – Depr) (1-
DR)

($36.37) $140.25 $109.71 $85.34 $120.93 $83.97

Change in WC * (1-
DR)

($11.14) $70.64 $268.68 $264.00 $422.47 $202.93

Corporate Finance Project – Computer Industry

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FCFE $145.77 $72.84 $63.13 $253.94 $278.06 $162.75
Cash to Shareholders $43.63 $81.16 $75.86 $113.09 $528.21 $168.39
Payout Ratio
Cash Paid as % of
FCFE

29.9% 111.4% 120.2% 44.5% 190.0% 99%

Unisys

Year 1993 1994 1995 1996 1997 Averag

e
Net Income $565.40 $100.50 ($624.

60)
$49.70 ($853.60) ($152.52)

(Cap Ex – Depr) (1-
DR)

($167.02) ($122.56) ($119.
70)

($99.89) ($618.78) ($225.59)

Change in WC * (1-
DR)

$6.15 ($120.59) ($334.
63)

$356.05 ($204.67) ($59.54)

FCFE $726.27 $343.66 ($170.
27)

($206.46) ($30.15) $132.61

Cash to Shareholders
Payout Ratio
Cash Paid as % of
FCFE

IBM

Year 1993 1994 1995 1996 1997 Averag

e
Net Income ($8,101.00) $3,021.00 $4,178.00 $5,429.00 $6,093.00 $2,124.00
(Cap Ex – Depr) (1-
DR)

($2,469.29) ($2,265.10) ($604.12) $613.27 $1,261.75 ($692.70)

Change in WC * (1-
DR)

$2,180.61 $4,266.86 ($2,160.89) ($1,653.23) ($841.40) $358.39

FCFE ($7,812.32) $1,019.24 $6,943.01 $6,468.96 $5,672.65 $2,458.31
Cash to Shareholders $933.00 $672.00 $6,117.00 $5,711.00 $7,034.00 $4,093.40
Payout Ratio -11.5% 21.9% 14.1% 13.0% 12.9% 10%
Cash Paid as % of
FCFE

-11.9% 65.9% 88.1% 88.3% 124.0% 71%

By looking at the shaded areas in the above tables, we can get an idea of how much the
companies could have returned to stockholders and how much they actually did.

The companies can be categorized in 4 ways by looking at how they return cash to stockholders.

1) Those that pay dividends: Hitachi
2) Those that buyback stocks: Oracle
3) Those that pay dividends and buyback stocks: Hewlett Packard and IBM
4) Those that that do neither: Compaq and Unisys

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1) Hitachi has been paying the same 11 yen per share dividend since 1990, even though its
profits have been declining due to the Japanese recession. This is common in large mature
Japanese companies. Even though this dividend is regular, its yield is just 1.15%. However,
since its net income per share was just 25.55 yen in 1997, 11 yen per share means its payout ratio
is 43%, which is not very low. Their 10-year historical dividend payout ratio is 26.31%.

As this is the only Japanese company in the group, the following information is included for
comparison.

Toshiba: Dividend pay out =Y10/Y18.7=53.5% Yield: Y10/Y547=1.82%
Matsushita: Dividend pay out = Y13/Y39.4=33.0% Yield: Y13/Y1,985=0.65%

Compared with other Japanese computer and electronics companies, Hitachi’s dividend ratios are
between Toshiba and Matsushita: not so high but not so low.

Since most of Hitachi’s shareholders are institutional investors, they prefer capital gains and
stable growth, rather than obtaining large dividends. This is due to the difference in tax
treatment.

2) Oracle is unique in our survey because it has been returning cash in the form of stock
buybacks. From the data, it seems that Oracle is transforming itself from a growth company to a
more mature company. Since Oracle has never paid dividends, its investors are not expecting
any in the future. As Oracle does not have as many good projects as in the past it is returning
cash in the form of stock buybacks.

3) Hewlett Packard and IBM seem very similar on the surface in terms of their cash returning
policies. Both companies have a low positive EVA, which is consistent with large mature
companies which do not have attractive projects. However, with a little analysis we can see
some differences. HP is a typical large mature company with a relatively stable dividend payout
ratio. It is also buying back stock.

IBM, on the other hand, appears to be behaving in the same manner. But by looking back a few
years, we can discover a different reason for IBM’s actions. From 1991-1992 IBM’s stock price
fell 43%. This came on the heels of mounting loses as a result of mismanagement. In 1993,
IBM’s new management, lead by Louis Gerstner, Jr., announced a decrease in dividends which
was greeted with further downward pressure on their stock price. To counter this effect IBM
started to repurchase its stock. In this way it returned cash to shareholders and helped bring the
price back up.

4) The last two companies also appear similar if looking at their dividends and buyback policies,
but other than that, they are widely different. Compaq is a typical growth company. It has an
EVA of 7.32%, which signifies that it is investing in good projects. Its policy of not returning
money to shareholders and reinvesting it in projects is the definition of a growth company.

Unisys, on the other hand, is a company that has been loosing money for several years and has
posted negative FCFE for 6 of the last 10 years. It is not surprising that the firm does not pay
any dividends.

Corporate Finance Project – Computer Industry

14

How much do we trust management at these computer companies?

Comparison to Peer Group

In comparing our companies to each other, as well as to a representative cross section of its peer
group, we have examined dividend yields and payouts.

Expecte
d
Growth

Dividen
d
Payout

Dividen
d
Yield

Price

Microsoft 23.81 0 0 64.63
Intel 19.64 2.7 0.16 70.25
Dell 29.58 0 0 42
Micron 16.58 0 0 9.13
DEC 12 0 0 37.13
Cisco 29.85 0 0 55.75
3Com 24.15 0 0 34.94
Compaq 20.38 0 0 28.25
IBM 10 12.85 0.77 104.63
Oracle 24.48 0 0 31.08
HP 15.47 17.06 0.83 61.63
Unisys 10.6 0 0 13.88
Hitachi 2.07 41.46 0.01

The forecasted growth rates were taken from the Zacks service by way of Bloomberg.

Conclusions on Dividend Policy

In summary, it seems that investors in our six companies know what type of dividend
policy to expect. Except for Unisys, management has earned a certain measure of trust
based on excess returns for their investors. This gives the companies greater flexibility for
investing and paying out dividends. It is also true that these companies generally stick to a
given policy and their stockholders have chosen to invest accordingly.

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15

Reference

Miller, M.H. and Modigliani, F., 1961. Dividend policy, growth, and the valuation of
shares. the Journal of Business, 34(4), pp.411-433.

Lettau, M. and Ludvigson, S.C., 2005. Expected returns and expected dividend
growth. Journal of Financial Economics, 76(3), pp.583-626.

  • Risk and Return
  • Optimal Capital Structure
  • Dividend Policy
  • I. Risk Profile
  • II. Investment Return Analysis
  • III. Dividend Policy: The Tradeoff
  • IV. Dividend Policy: A Framework
    • How much do we trust management at these computer companies?

Finance Project

Rubrics

Assessment of Corporate Finance Term project
Criteria Does not meet expectations (1) Meets expectations (2) Exceeds Expectations (3) Evaluation
Awareness of interdisciplinary relationships Demonstrates little or no awareness of inter-relationships among business disciplines or the relationship of a business to its environment. Demonstrates some awareness of inter-relationships among the disciplines and the relationship of the business to its environment. Clearly demonstrates an awareness of inter-relationships among the disciplines, and the relation of the business to its environment.
Attempts to Integrate across disciplines Does not successfully integrate interdisciplinary skills and knowledge. Partially integrates interdisciplinary skills and knowledge. Successfully integrates interdisciplinary skills and knowledge.
Analyze the risk and return Does not explain why this cconclusion is drawn, not document sources or explains assumptions, not complete the analysis in a clear way. Applies appropriate argumentation and methodology for the rationale for the conclusion. Partially documents sources or explains assumptions. Partially complete the analysis in a clear way. Clearly and reflectively applies appropriate argumentation and methodology for the rationale for the conclusion. Fully documents sources or explains assumptions. Fully complete the analysis in a clear way.
Analyze the capirtal structure Does not explain why this cconclusion is drawn, not document sources or explains assumptions, not complete the analysis in a clear way. Applies appropriate argumentation and methodology for the rationale for the conclusion. Partially documents sources or explains assumptions. Partially complete the analysis in a clear way. Clearly and reflectively applies appropriate argumentation and methodology for the rationale for the conclusion. Fully documents sources or explains assumptions. Fully complete the analysis in a clear way.
Analyze the didvdend policy Does not explain why this cconclusion is drawn, not document sources or explains assumptions, not complete the analysis in a clear way. Applies appropriate argumentation and methodology for the rationale for the conclusion. Partially documents sources or explains assumptions. Partially complete the analysis in a clear way. Clearly and reflectively applies appropriate argumentation and methodology for the rationale for the conclusion. Fully documents sources or explains assumptions. Fully complete the analysis in a clear way.
Discussion of results and implications. Does not discuss results and implications. Partially discusses results. Full discussion of results.
Total

Finance Project

1

Corporate Finance Term Project Specifications

1. For this project, you will play the role of a financial analyst. You have been assigned to
do an in-depth analysis of the business and its industry from the perspective of an
independent research analyst.

2. The written research report on the subject companies must:
1. include a cover page with the course title, team members name, date, and title of the

report a minimum;
2. follow by the report content with no longer than 15 pages, although you may

include an appendix no longer than 20 pages;
3. contain only publicly available information;
4. be the original work of the team members;
5. contain (but not limited to) the following sections:

a. Analyze and compare a group of companies in the same industry
b. Executive summary
c. Risk and return analysis
d. Capital structure analysis
e. Dividend policy analysis
f. Reference list

3. The valuation report will address the following issues:

1. The industry and company information can be found in many public resources, like
Value line, Hoover’s, Yahoo Finance, Morningstar, Wall Street Journal, etc. The 10-
k of the firm normally has lots of the information too. 10-k is available on the
website of SEC (http://www.sec.gov/edgar/searchedgar/companysearch.html). Also,
don’t forget the librarian Diane. It is time to ask her something.

2. Need to explain the reason for conclusion.

4. Your report must be written using Microsoft Word and submitted as a single
document, that is, one file only. The report needs to be submitted electronically only.
The paper should be presented in a way that makes it visually attractive and appealing.
Remember, you are trying to convey some important conclusions from your analysis of
your company and trying to sell your ideas. The use of color, some relevant images or
pictures, different font sizes for headers, the use of sub-sections, bullets where
appropriate, tables, graphs etc. will make your paper stand out from the crowd, but the
analysis needs to be strong and convincing based on the evidence you present.

Please note any images or pictures that you use also have to be properly referenced.

5. Plagiarism will get into serious trouble. This is the use of the material in books,
magazines, the internet etc., that you try to pass off as your own without proper
attribution. The proper way to use the material of others is to put quotes (“ ” ) around it
and mark it with a reference. There are several different styles of referencing which are
acceptable. Check these out on your own. Place your references together at the end of the
paper.

• Cut and paste from other sources is unacceptable.

2

To get an A, it needs a good analysis and presentation plus something unique that sets your paper
apart in some way. Creativity and innovation on top of a solid paper will get you an A. Also,
working above and beyond the minimum requirements can get you an A as well.

If the analysis is good and the presentation is good, you will get a B.

If the analysis is weak and the presentation is not very strong in the use of the Word components
suggested above, you will get a C.

If something is turned in, but directions are significantly ignored, and the analysis is very weak,
you will get a D.

If nothing is turned in, the grade for the project is an F. Plagiarism will also earn an F for the
project so be very careful how you use the work of others. Cutting and pasting material from the
internet without rigorous referencing and quotes showing it is from another source and not your
words will get you into trouble.

Finance Project

1

Corporate Finance Term Project Specifications

1. For this project, you will play the role of a financial analyst. You have been assigned to
do an in-depth analysis of the business and its industry from the perspective of an
independent research analyst.

2. The written research report on the subject companies must:
1. include a cover page with the course title, team members name, date, and title of the

report a minimum;
2. follow by the report content with no longer than 15 pages, although you may

include an appendix no longer than 20 pages;
3. contain only publicly available information;
4. be the original work of the team members;
5. contain (but not limited to) the following sections:

a. Analyze and compare a group of companies in the same industry
b. Executive summary
c. Risk and return analysis
d. Capital structure analysis
e. Dividend policy analysis
f. Reference list

3. The valuation report will address the following issues:

1. The industry and company information can be found in many public resources, like
Value line, Hoover’s, Yahoo Finance, Morningstar, Wall Street Journal, etc. The 10-
k of the firm normally has lots of the information too. 10-k is available on the
website of SEC (http://www.sec.gov/edgar/searchedgar/companysearch.html). Also,
don’t forget the librarian Diane. It is time to ask her something.

2. Need to explain the reason for conclusion.

4. Your report must be written using Microsoft Word and submitted as a single
document, that is, one file only. The report needs to be submitted electronically only.
The paper should be presented in a way that makes it visually attractive and appealing.
Remember, you are trying to convey some important conclusions from your analysis of
your company and trying to sell your ideas. The use of color, some relevant images or
pictures, different font sizes for headers, the use of sub-sections, bullets where
appropriate, tables, graphs etc. will make your paper stand out from the crowd, but the
analysis needs to be strong and convincing based on the evidence you present.

Please note any images or pictures that you use also have to be properly referenced.

5. Plagiarism will get into serious trouble. This is the use of the material in books,
magazines, the internet etc., that you try to pass off as your own without proper
attribution. The proper way to use the material of others is to put quotes (“ ” ) around it
and mark it with a reference. There are several different styles of referencing which are
acceptable. Check these out on your own. Place your references together at the end of the
paper.

• Cut and paste from other sources is unacceptable.

2

To get an A, it needs a good analysis and presentation plus something unique that sets your paper
apart in some way. Creativity and innovation on top of a solid paper will get you an A. Also,
working above and beyond the minimum requirements can get you an A as well.

If the analysis is good and the presentation is good, you will get a B.

If the analysis is weak and the presentation is not very strong in the use of the Word components
suggested above, you will get a C.

If something is turned in, but directions are significantly ignored, and the analysis is very weak,
you will get a D.

If nothing is turned in, the grade for the project is an F. Plagiarism will also earn an F for the
project so be very careful how you use the work of others. Cutting and pasting material from the
internet without rigorous referencing and quotes showing it is from another source and not your
words will get you into trouble.