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Company Analysis:

Dan no longer works for Alphabet, but he has a relatively large amount of his personal wealth tied up in both company stock and debt. Consequently, he would like an objective review of the company today and its future prospects. He would also like an opinion on the stocks equity and bond valuations. Dan has sufficient alternative assets and doesnt need to sell his ABCD stock or bonds, but he is becoming concerned about increasing inflation and is reviewing all of his holdings.

Economic Environment:

The risk-free rate is at 4.2%. The economy is just coming out of a recession, but Alphabet is in an early cycle industry and is already recovering (after a downturn in 2007). Alphabets earnings are expected to grow 12%. Inflation is running at 3%, but both Dan and economists are concerned that inflation could rise to 6% within five years.

Alphabet Corp - Income Statement

Period Ending 2010 2009 2008 Total Revenue 45,000,000 37,500,000 34,000,000 Cost of Revenue 22,000,000 18,750,000 18,700,000 Gross Profit 23,000,000 18,750,000 15,300,000 Operating Expenses Research Development 1,800,000 800,000 750,000 Selling General and Administrative 7,800,000 6,750,000 6,300,000 Total Operating Expenses 9,600,000 7,550,000 7,050,000 EBIT 13,400,000 11,200,000 8,250,000 Interest Expense 950,000 1,350,000 1,400,000 EBT 12,450,000 9,850,000 6,850,000 Income Tax Expense 3,975,000 2,950,000 2,050,000 Net Income Applicable To Common Shares (EAT) $8,475,000 $6,900,000 $4,800,000 Dividend per share $.385 $.31 $.20

Alphabet Corp Balance Sheet

Period Ending 2010 2009 2008 Assets Current Assets Cash And Cash Equivalents 2,500,000 3,200,000 2,200,000 Net Receivables 9,000,000 5,500,000 3,400,000 Inventory 5,500,000 5,000,000 4,000,000 Total Current Assets 17,000,000 13,700,000 9,600,000 Long Term Investments 3,000,000 4,000,000 4,000,000 Property Plant and Equipment 7,750,000 8,500,000 8,500,000 Goodwill 1,250,000 1,350,000 1,400,000 Total Assets 29,000,000 27,550,000 23,500,000 Current Liabilities Accounts Payable 4,500,000 3,800,000 3,500,000 Other Current Liabilities 900,000 750,000 800,000 LT Debt Due - 3,000,000 - Total Current Liabilities 5,400,000 7,550,000 4,300,000 Long Term Debt 8,000,000 8,000,000 11,000,000 Total Liabilities 13,400,000 15,550,000 15,300,000 Stockholders' Equity Preferred Stock - - - Common Stock (11 MM shares @ 1.00) 11,000,000 11,000,000 11,000,000 Retained Earnings 4,600,000 1,000,000 -2,800,000 Total Stockholder Equity 15,600,000 12,000,000 8,200,000

LT Debt 3 MM at 11% maturing 2015, 5 MM at 8% maturing 2020.

QUESTION 15

1. Alphabet is considering the purchase of a publicly-traded competitor. The purchase price for the business is $3,500,000.

   Year	After-tax Cashflows
   1	$150,000
   2	$340,000
   3	$420,000
   4	$500,000
   5	$600,000
   6-10	$640,000

   Does the purchase price make sense based on the 10-years of after-tax cashflows if Dan wants a return on investment of 8%?

   		No, the net present value of the acquisition is negative but the IRR% of the acquisition is positive
   		Yes, the net present value of the acquisition is positive and the IRR% is positive
   		Yes, the net present value of the acquisition is negative but the IRR% of the acquisition is positive
   		No, the net present value of the acquisition is negative and the IRR% is less than the required 8% return on investment

5 points

QUESTION 16

1. Year	After-tax Cashflows	Synergistic Savings
   1	$150,000	$40,000
   2	$340,000	$40,500
   3	$420,000	$50,000
   4	$500,000	$50,000
   5	$600,000	$50,000
   6-10	$640,000	$30,000

   Synergistic gains often occur when two companies are merged. The combination may result in net savings from duplication of staffing in accounting and administrative, legal, distribution, etc. Based on both the 10-years of after-tax cashflows and synergistic savings does this merger make sense based on an internal rate of return of 8% and a positive net present value?

   		Yes, the net present value of the acquisition is positive and the IRR% is greater than the required 8% return on investment rate.
   		Yes, the net present value of the acquisition is negative but the IRR% of the acquisition is positive
   		No, the net present value of the acquisition is negative and the IRR% is less than the required 8% return on investment
   		No, the net present value of the acquisition is negative but the IRR% of the acquisition is positive

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