How many gallons of gasoline would it take to charge an iPhone?

How many gallons of gasoline would it take to charge an iPhone?

Pressure drop field

You can review below link which is about System Advisor Model (SAM):

https://sam.nrel.gov/content/pressure-drop-field

Here is also very fascinating report for who are interested in working on Energy Saving field:

http://www.unene.ca/un803-pwp/UN0803_System_Thermal_Hydraulics_Written_Report.pdf

A New Financial Simulation Model for Case Analysis of GAINESBORO MACHINE TOOLS CORPORATION

Introduction

Following to the article of “Application of Pascal’s Triangular in Corporate Financial Strategy” on link: http://emfps.blogspot.com/2012/04/application-of-pascals-triangular-in.html and the article of “Case Analysis of GAINESBORO MACHINE TOOLS CORPORATION: The Dividend Policy” on link: http://emfps.blogspot.com/2012/03/case-analysis-of-gainesboro-machine.html

In this article, I am willing to introduce you a new financial simulation model which is based on EXHIBIT 8 (Projected Sources – and Uses Statement Assuming a 40% Payout Ratio) of the case: GAINESBORO MACHINE TOOLS CORPORATION. In fact, the template of this new simulation model is EXHIBIT 8 whereas I have developed this template by adding new assumptions and new components. I can say that this simulation model is the combination of Exhibit 8 and Discounted Cash Flow Analysis plus some new components. The purpose of this simulation model is to analyze simultaneous impact two independent variables which are the Cost of Capital (WACC) and Dividend payout ratio on one dependent variable which is the Stock Price. My final result will be to find the appropriate the Cost of Capital (WACC) and Terminal Value Growth Rate for two given data in this case which are dividend payout ratio and the Stock Price. Of course, maybe you think that I should depict dividend policy which is the issue of the case. Yes, but I will analyze it in my next article. Here, I will show you that I have still the problem with the calculation WACC of Gainesboro Machine Tools Corporation. Anyway, I think that I have obtained the best estimation for WACC.

Methodology

As I told you, I used from EXHIBIT 8 as my template and I entered all data on my spreadsheet then I did following actions step by step:

Step1: I added below assumptions to Exhibit 8:

Ø  Depreciation growth rate

Ø  CAPEX growth rate

Ø  Change in NWC growth rate

Ø  Cost of Capital

Ø  Terminal value growth rate

In the result, we will have 8 independent variables.

Step 2: To complete my spreadsheet (template), I should get the growth rate of CAPEX and Change in NWC and Depreciation growth rate.

Firstly, I checked the amounts obtained from Exhibit 2 (Balance sheet) for CAPEX and Change in NWC replaced on Exhibit 8 for 2005 year.

Note (1): I can tell you that Change in NWC (19.5) on Exhibit 8 is not true because we cannot consider Bank loan as current liability. In the meanwhile, the growth rate of CAPEX for 2009 year had been considered 3.5%!!!!

 Please see my true and false calculation as follows:

On the other hand, I calculated CAPEX as follows:

You can see on Exhibit 8 the amount of CAPEX is equal to 43.8 (2005 year) while the true CAPEX is equal 39.63

I could not find any rational reason behind a 10.5 % increase on CAPEX.

Anyway, if you have any time, you can contact to writers (Robert F. Bruner and Sean Carr) or publisher (University of Virginia Darden School Foundation, Charlottesville, VA) about these problems.

Step 3: Following to step 2, I worked on the calculation of the cost of capital and terminal value growth rate as follows:

Ø  Cost of Debt

I considered the cost of debt equal to 4.3% in the reference with Exhibit 3 and Ten – year Treasury note yield of 2004 year.

Ø  Cost of Equity

The analysis of the cost of equity in this case is very hard. I use from three methods as follows:

1) Cost of Equity by using the Constant - Growth Valuation (Gordon) Model. Since the cost of equity by using of this method is calculated approximately equal to 1.34% which is less than the cost of debt, I assumed the cost of equity more than 4.3%.

            2) Using of Stock valuation formula. This method is wrong way

            3) The compare shareholders' expected return and cost of debt. In this method,

            I assumed that the cost of equity is always less than the shareholders' expected return

            and more than the cost of debt consequently we have 23% < Ke < 4.3%. I considered

            the average of it as the cost of equity equal to 13%.

Here is my details calculation:

As you can see, finally I considered a range between 4% and 11% for WACC.

One of the most crucial problems to use the discounted cash flow analysis is to find the appropriate the Terminal Value Growth Rate because this methodology is very sensitive to TVGR. There are many ways to estimate TVGR as follows:

-Historic growth rates

-Forecast 3- year growth rates

-Terminal capital expenditure

-Competitive advantages among the firms

-Current and future market cap (refer to BGC matrix in Strategic Management)

-Porter’s five forces such as competitions on barriers to entry

-Macroeconomic indicators such as inflation, interest rate, GDP and so on

The based on Exhibit 3 and the growth rate of CAPEX for final cash flow, I assumed the range between 0 and 3 for Terminal Value Growth Rate.

Step 4: I have added some components to my simulation model as follows:

-After dividend Excess cash
-Terminal value
-Total excess cash(borrowing )
-Plug: excess cash(borrowing)
-Present value of flows
-Enterprise value
-Borrowing needs
-FV of borrowing needs
-Plug: FV of borrowing needs
-New borrowing needs
- Current outstanding debt
-Total outstanding debt
-Equity value
-Current shares outstanding
-Equity value per share
-Current share price

I used from formula = IF (PLUG < 0, - PLUG, 0) and =IF (PLUG > 0, +PLUG, 0) for below parameters:

-Plug: excess cash (borrowing)

-Borrowing needs

-Plug: FV of borrowing needs

Here is this part of my simulation model:

Note (2): I think this part of my simulation model is very important for Macroeconomic analysis because we can examine the risk of deficit financing where the final cash flow will lead us to a NPV > 0 or a huge economic collapse throughout the world. 

Step 5: In this step, I used two ways table of sensitivity analysis in which I analyzed the impact of the cost of capital and dividend payout ratio as independent variables on the stock price as dependent variable. The findings are below cited.

Finding and Discussion

The final result of my sensitivity analysis is as follows:

In the reference with Exhibit 5, the average current stock price of Gainesboro Machine Tools Corporation is equal $29.15

As you can see on above sensitivity analysis, there are four points which show us the current situation of Gainesboro as follows:

-WACC = 5% and Dividend payout ratio = 35%

-WACC = 7% and Dividend payout ratio = 20%

- WACC = 9% and Dividend payout ratio = 5%

- WACC = 9% and Dividend payout ratio = 3%

In this analysis, I chose Terminal Value Growth rate equal to 3%.

Now, please look at Exhibit 1 (Income statement). You can see the dividend payout ratio for 2003 year is equal 35.7%

Dividend payout ratio = Total dividend payout / Net income

Total dividend payout = 0.25 * 18,600,000 = $4,650,000

Net income = 12,993 * 1000 = $12,993,000

Dividend payout ratio = (4,650,000 / 12,993,000) *100 = 35.7%

In the result, I can reserve my assumptions for Terminal Value Growth Rate = 3% and Cost of Capital = 5 % as my primary data because of current situation of Gainesboro. As the matter of fact, in my next article, I will explain you how we can make decision for dividend payout ratio (Dividend Policy) where the basic of our assumptions for WACC will be equal 5 % and Terminal value growth rate will be equal 3%.

To be continued……

Note:  “All spreadsheets and calculation notes are available. The people, who are interested in having my spreadsheets of this simulation model as a template for further practice, do not hesitate to ask me by sending an email to: soleimani_gh@hotmail.com or call me on my cellphone: +989109250225. Please be informed these spreadsheets are not free of charge.”

1. 
   

Quotation of Mahatma Gandhi

Here is the quotation of Mahatma Gandhi, Indian philosopher, who was internationally esteemed for his doctrine of nonviolent protest, (1869 – 1948):

FIRST THEY IGNORE YOU,

THEN THEY LAUGH AT YOU,

THEN THEY FIGHT YOU,

THEN YOU WIN.

Application of Pascal’s Triangular in Corporate Financial Strategy

As we know, the finance could be divided into two fields: 1) Asset Pricing 2) Corporate finance

1) Asset Pricing: In this case, the investors are willing to know how they should cope with their assets. What is the price of the assets? Should they sell their assets or purchase new ones? Is there any business model to liquidate the assets immediately?

In this article, I will not have any debate on asset pricing models but I can refer you to my research proposal of “Application of Game Theory as a New Strategy Implementation in the Residential Real Estate Market” where the combination of  Markov Chain and Monte Carlo Simulation Model plus the Constant Eigenvector approach  (mentioned on link: http://emfps.blogspot.com/2011/11/efficient-portfolio-of-assets-markov.html)  have been applied as research methodology. The final result will be about how the investors can liquidate their residential properties in the stagnated market.

 2) Corporate finance: It is about the firm’s concern and finally decision making in finance such as capital structure and leverage, dividend policy and so on. There are many applications of the Game theory in corporate finance. In this article, I am willing to discuss about Dividend Signalling theory which is a type of Dividend Relevance Theory. My example will be the case of Gainesboro Machine Tools Corporation on below link: http://emfps.blogspot.com/2012/03/case-analysis-of-gainesboro-machine.html

By the constant or increasing dividends, the firm can show the positive signals about the future prospects of the company consequently an increase in share price and vice versa, absence of dividends or decreasing dividends presents negative signal resulting in decline in share price. Of course, this is still a traditional theory. In the real world, due to the uncertainty in business and financial risks, nowadays the firms are following the Game theory in which the repurchasing (buy back) of stocks by the company could also be a positive signal to increase of the share prices.

Before going to the application of the game theory on this type of dividend policy, let me have an overview on the statistics as follows:

 Permutations & Combinations

What is the total number of outcomes when you have “n” possibilities and you choose “r’ of these possibilities? Definitely it depends on the type of combination:

-If the replacement does not matter, it is a combination. For instance, 1234 = 4312

-If the replacement does matter, it is a permutation where 1234 is different with 4312

On the other hand, we have permutations & combinations with and without repetition.

Example (1): In Backgammon game, we have two dices. What is the probability of each status after throwing dices?

Firstly, we should find the number of total combinations. Which one of above mentioned should we use?

-Permutation with repetition

-Permutation without repetition

-Combination with repetition

-Combination without repetition

Since the replacement does not matter (because 3 &4 is equal 4&3) and also we can have repetition status such 6 & 6, we should apply the formula for the Combination with repetition as follows:

C (n + r -1, r) = [(n + r – 1)!] / [r! (n – 1)!]

Where we have:

 n = 6 total possibilities

 r = 2 our choice

C (n + r -1, r) = 7! / 2!(6-1)! = 21 number of outcomes

X = each outcome

P (X) = probability of each outcome

P (X) = 1 / 21 = 4.8%

Example (2): In the case of Combination without repetition, I assume we have the set of possibilities A = [1, 2, 3, 4, 5, 6, 7, 8] and we have 3 choice. What is the total number of combinations without repetition?

We can use from Binomial formula as follows:

C (n, r) = n! / [r!(n – r)!]

Where:

n = 8

r = 3

C (n, r) = 8! / [3!(8 -3)!] = 56

We can also use from Pascal’s Triangular to get all outcomes:

0	1
1	1	1
2	1	2	1
3	1	3	3	1
4	1	4	6	4	1
5	1	5	10	10	5	1
6	1	6	15	20	15	6	1
7	1	7	21	35	35	21	7	1
8	1	8	28	56	70	56	28	8	1

As you can see, the number of rows is 9 but n = 8.

The best way to find all combinations and permutations is to utilize sensitivity analysis by using of one way - data table on excel spreadsheet just like below sheet:

 

In the case of corporate financial strategy (in this article), I assume that there is a normal probability distribution then I utilize from Combination without repetition (using of Pascal’s Triangular) to obtain all outcomes in which I use Binomial formula. Before that, please review examples (3) and (4).

Example (3): Now, let me bring an example in the field of Strategic Management. I consider two competitors “A” and “B” and I also assume that there are 9 driving forces (please see link: http://emfps.blogspot.com/2012/02/fuzzy-delphi-method-to-design-strategic.html) which are affecting on new SWOT matrix of “A” or “B” as follows:

DF1, DF2, DF3 …DF10

How can we calculate the total number of outcomes made by the combination of driving forces?

We can use from below formula:

X = the number of driving forces

n = X -1, n = 8

Total number of outcomes = SUM C (8, r)

Where:             r = 0, 1, 2, 3…8

Total number of outcomes = C (8, 0) + C (8, 1) + C (8, 2) + C (8, 3) + C (8, 4) + C (8, 5) + C (8, 6) + C (8, 7) + C (8, 8) = 256

You can also use from Pascal’s Triangular as follows:

n = 8, Total number of outcomes = 1 + 8 + 28 + 56 + 70 + 56 + 28 + 8 +1 = 256

Another formula can be below cited:

Total number of outcomes = 2 ^ (X – 1) = 2 ^ 8 = 256

Example (4): If we assume that firm “A” gains 4 key success factors form all driving forces and the firm “B” gains 5 key success factors from all driving forces, how can we calculate the probability of competitive advantage for the firm “A”?

Total number of outcomes for fourth key success factors = C (8, 0) + C (8, 1) + C (8, 2) + C (8, 3) + C (8, 4) = 163

But the best solution is to use from Pascal’s Triangular as follows:

Total number of outcomes for 4 key success factors = 1 + 8 + 28 + 56 + 70 = 163

Total number of outcomes = 256

Probability of competitive advantage for the firm “A” = 163 / 256 = 64%

The Case of Gainesboro Machine Tools Corporation: Dividend Policy

We assume that Gainesboro will apply dividend signalling theory as follows:

According to Exhibit 8, the assumption of dividend-payout ratio is 40% of net income. If the company consider 20% (for instance) of net income as dividend-payout ratio and simultaneously repurchase its stocks, the number of the shareholders will be very important to obtain positive signalling. Why?

Here, I am willing to use again from example (4) where I have already make 1000 trials (rows) of Pascal’s Triangular by excel spreadsheet.

The approach of the shareholders is two different choices:

A = Buyers of the stocks (number)

B = Sellers of the stocks (number)

An increase on the number of buyers accompanied by dividend payout will have the positive signalling on demand and consequently an increase on stock prices. But repurchasing of the shares by the company is limited to source of net income because we have:

Total amount of money to repurchase the stocks = total number of the buyers * the number of shares purchased by each buyer

Therefore, an increase on total number of the buyers will decrease the number of stocks purchased by each buyer

Now, I assume below conditions:

-A = 51% of total number of the shareholders

-B = 49% of total number of the shareholders

If total number of the shareholders is variable as follows, by using of Pascal’s Triangular, we are able to calculate all outcomes:

Total Number of Shareholders                       Total Outcomes

100				6.34E+29
300				1.02E+90
500				1.6E+150
750				3E+225
1000				5.4E+300

Total number of Shareholders		Total outcomes of sellers		Total outcomes of buyers
100		3.16913E+29		4.15826E+29
300		4.1612E+89		6.90715E+89
500		5.8944E+149		1.1529E+150
750		9.7878E+224		2.205E+225
1000		1.5243E+300		4.0545E+300

In the result, we will have a diagram for the probability of outcomes as follows (I have also included 50% buyer and seller):

As you can see, by increasing of total number of shareholders, if the percentage of buyers goes down to 49% of total number of shareholders, the probability of stocks’ demand will decrease and vice verse.

This is a general diagram in which we can utilize it even for the people's voting.

Note:  “All spreadsheets and calculation notes are available. The people, who are interested in having my spreadsheets of this method as a template for further practice, do not hesitate to ask me by sending an email to: soleimani_gh@hotmail.com or call me on my cellphone: +989109250225. Please be informed these spreadsheets are not free of charge.”

Case Analysis of GAINESBORO MACHINE TOOLS CORPORATION: The Dividend Policy

This case is about the impact of an environmental factor (External issue) on dividend policy of the firm (Internal issue). The environmental disaster was Hurricane Katrina which was caused the huge destruction across the south-eastern United States. Because of the storm, the stock market notably fell down. Since it is possible that the price of the shares once more increase even more than before in the near future, Ashley Swenson, chief financial officer (CFO) of Gainesboro Machine Tools Corporation has the dilemma to buy back stock or to spend the money as dividend the shareholders. In fact, the question is: How can she forecast the fortune of the stock market? In the other word, what are the driving forces (as the external factors) which are affecting on internal factors such as dividend policy? Definitely, the best way is to use from Fuzzy Delphi Method (FDM). To perceive FDM, please review my article of “Fuzzy Delphi Method to Design a Strategic Plan” on link” http://emfps.blogspot.com/2012/02/fuzzy-delphi-method-to-design-strategic.html”.

At the first, she can design a strategic plan including current and future BCG matrix. I think that one of the best reference books which has established a logical relationship between BCG matrix and Dividend policy is: “Corporate Financial Strategy” by Ruth Bender and Keith Ward (Elsevier Butterworth-Heinemann)”. I would like to refer you page 34 (please review STEADY STATE), page 59 (Balancing business and financial risk), page 75 (Figure 4.14), page 226 (Dividends and buybacks) on 3^rd edition (2009). Where is the location of the firm in BCG matrix? Stars (Growth), Question marks (Launch), Cash cows (Maturity) or Dogs (Decline).

Accordingto this reference book, we have below conditions for each area of BCG matrix:

Stars (Growth)                                                              Question marks (Launch)

Business risk high                                                                 Business risk very high 

Financial risk low                                                                Financial risk very low

Funding equity                                                                     Funding equity

Nominal dividend payout ratio                                   Nil dividend payout ratio

Cash cows (Maturity)                                                       Dogs (Decline)       

 Business risk medium                                                         Business risk low

Financial risk medium                                                        Financial risk high

Funding debt                                                                      Funding debt

High dividend payout ratio                                             Total dividend payout ratio  

Let me specify the situation of this company on BCG matrix by using of its market share in industry and industry revenue growth rate as follows:

-Referring to Exhibit 6, Gainesboro’s market cap is $ 504,000,000 in 2005 in which we can calculate its share market approximately 1.43% (Please see my spreadsheet).

-Referring to Exhibit 2, the economic indicators show us the high growth rate of macroeconomic environment in USA from 2001 to 2004 while the projected data present us a steady and slow economic growth rate. On the other hand, if we see Exhibit 7, we will find that the expected growth rate of sales (next 3-5 years) for high dividend payout companies is going down whereas the zero-payout companies will have the high growth rate of sales.

We can observe this fact on consolidated Income Statement of Gainesboro (Exhibit 1) where the negative growth rate from 2002 to 2004 accompanied by dividend payout has pushed the current situation of this company on Quadrant IV of BCG matrix which is named Dogs. It means that the current strategies of Gainesboro could be Retrenchment, Divestiture, and Liquidation.

Referring to the case, if Gainesboro diversifies its business units and products such as the Artificial Workforce products, the expected growth rate of sales will go up 15% annually.

In this case, the new situation of company will be on Quadrant I of the BCG matrix (Question Marks) where the dividend policy of this company should be Zero – dividend payout.

Here, I would like to bring you so many logical reasons which approve the Zero – dividend payout as the best option for dividend policy of Gainesboro as follows:

1) Gainesboro has Negative Net Cash Flow. I calculated them in accordance with Exhibit 2 (please see my spreadsheet) below cited:

-Net Cash Flow in 2004 = -78376 (dollars in thousands)

-Net Cash Flow in 2005 (projected) = -36438 (dollars in thousands)

If you see Figure (4.10) on above reference book, you will find that the best dividend policy for Gainesboro is nil dividend payout ratios.

2) Please compare Exhibit 1 with Exhibit 5 just like below table:

Year                                Net income ($000)            Ave. Stock Price     

 2002                                    -$61,322                          $26.45

2003                                      $12,993                          $61.33 

2004                                     -$140,784                        $29.15

2005 (Projected)                   $18,018                              ?

 What can you consider instead of question mark? Definitely Gainesboro’s stock price will significantly increase if the management prediction about the revenue growth rate is true. Therefore, the best strategy is to repurchase Gainesboro’s shares.

3) Firstly, let me have an overview on all theories of dividend policy as follows:

-Dividend Relevance Theories

-Dividend Irrelevance Theories

Dividend Relevance Theory

  A) Traditional Model

B) Walter’s Model

C) Gordon’s Dividend Capitalization Model

D) Bird-in-hand Theory

E) Dividend Signaling Theory

F) Agency Cost Theory

 Dividend Irrelevance Theories

G) Residual Theory

H) Modigliani and Miller (M&M) Model

 I) Dividend Clientele Effect

 J) Rational Expectations Model

In the next article, I will examine each one of above models to find out the best dividend policy for Gainesboro. 


 

Note:  “All spreadsheets and calculation notes are available. The people, who are interested in having my spreadsheets of this case analysis as a template for further practice, do not hesitate to ask me by sending an email to: soleimani_gh@hotmail.com or call me on my cellphone: +989109250225.   Please be informed these spreadsheets are not free of charge.”

 

To be continued …….