• Mission

 The basic purpose of the organization as well as its scope of operations

• Strategic Vision

 A statement about where the company is going and what it can become in the future; clarifies the long-
term direction of the company and its strategic intent

• Core Values

 The strong and enduring beliefs and principles that the company uses as a foundation for its decisions
 Forecasting the Supply of Employees:
Internal Labor Supply
• Staffing Tables
• Markov
Analysis
• Skill
Inventories
•
•

Internal Demand Forecasting Tools

• Skill Inventories

 Files of personnel education, experience, interests, skills, etc., that allow managers to quickly match job
openings with employee backgrounds.

• Replacement Charts

 Listings of current jobholders and persons who are potential replacements if an opening occurs.

• Succession Planning

 The process of identifying, developing, and tracking key individuals for executive positions.
7.4 Preferred Stock Valuation

Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year. The
preferred sells for $50 a share. What is the stock’s required rate of return?

Vps = Dividend per year / ROR $50 = $5 / ROR $50 (ROR) = $5 ROR = 10%

7.5 Nonconstant Growth Valuation

A company currently pays a dividend of $2 per share (D0 = $2). It is estimated that the company’s dividend will grow at a rate of
20% per year for the next 2 years, then at a constant rate of 7% thereafter. The company’s stock has a beta of 1.2, the risk-free
rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock’s current price?

RP of stock = RP = (RP)b RP of stock = 4% * 1.2 RP of stock = 4.8%

ROR = risk-free rate + RP ROR = 7.5% + 4.8% ROR = 12.3%

P0 = [ D1 / (1 + rs)1 + D2 / (1 + rs)2 ] + PN / (1 + rs)N P0 = PV (D1) + PV (D2) + PV (D3) / (ROR – CR) P0 = ($2 * 1.20) / 1.123^1 +
($2.40 * 1.20) / 1.123^2 + ($2.88 * 1.07) / (12.3% - 7%) / 1.123^2 P0 = $2.14 + $2.28 + ($3.08) / 5.3%) / 1.123^2 P0 = $2.14 +
$2.28 + ($58.11 / 1.261129) P0 = $2.14 + $2.28 + $46.08 P0 = $50.50

Problems (p. 371)

9.2 After-tax Cost of Debt

LL Incorporated’s currently outstanding 11% coupon bonds have a yield to maturity of 8%. LL believes it could issue new bonds
at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is LL’s after-tax cost of debt?

Rd(1-T) = 8%(1.0-.35) Rd(1-T) = 8%(.65) After-tax cost of debt = 5.2%

9.4 Cost of Preferred Stock with Flotation Costs

Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend. A similar stock is selling on the market for $70.
Burnwood must pay flotation costs of 5% of the issue price. What is the cost of the preferred stock?

Rps = Dps / Pps (1-F) Rps = $60 * 6% / $70(1-5%) Rps = $3.60 / $70(.95) Rps = $3.60 / $66.50 Rps = 5.41%

9.5 Cost of Equity: DCF

Summerdahl Resort’s common stock is currently trading at $36 a share. The stock is expected to pay a dividend of $3.00 a share
at the end of the year (D1 = $3.00), and the dividend is expected to grow at a constant rate of 5% a year. What is its cost of
common equity.

rs = rs = D1 / P0 + Expected g rs = $3 / $36 + 5% rs = .0833 + .05 rs = 13.33%

9.6 Cost of Equity: CAPM

Booher Book Stores has a beta of 0.8. The yield on a 3-month T-bill is 4% and the yield on a 10-year Tbond is 6%. The market
risk premium is 5.5%, and the return on an average stock in the market last year was 15%. What is the estimated cost of
common equity using the CAPM?

rs = rRF + RPM (b1) rs = 6% + 5.5%(0.8) rs = .06 + .044 rs = 10.4%

9.7 WACC
Shi Importer’s balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common
equity. Shi’s tax rate is 40%, rd = 6%, rps = 5.8%, and rs = 12%. If Shi has a target capital structure of 30% debt, 5% preferred
stock, and 65% common stock, what is its WACC?

WACC = wdrd(1 – T) + wpsrps + wsrs WACC = .30*.06(1-.40) + .05*.058 + .65*.12