1) Chevron executives acknowledged that the days of easy oil are over due to increasing costs, flattening demand, and carbon regulations. While oil prices remain low, Chevron is committed to supporting its dividend by increasing debt levels, though its balance sheet remains healthy overall.
2) Upstream earnings significantly declined due to lower oil prices, but refining earnings improved due to efficiencies. Chevron increased its debt by $6.2 billion to entirely cover its dividend as cash flow declined.
3) While dividend growth has slowed, management intends to cover future dividends and capital expenditures entirely with cash flow by 2017. Chevron's dividend remains safe given its balance sheet strength and management's focus on efficiency, even
The addresses of the Chairman, the Managing Director and CEO, and Chairman Elect are available on the Santos website. Click here to download their addresses.
The addresses of the Chairman, the Managing Director and CEO, and Chairman Elect are available on the Santos website. Click here to download their addresses.
Lesson 1 of 4: The Rise of Hitler - Circumstances in Germany
In this lesson, we studied how the circumstances in Germany contributed to Hitler's rise to power. First, we made connections between what we studied in Chapter 1 (Treaty of Versailles and the League of Nations) and the start of Chapter 3. Then, we looked at the three major issues in Germany: the weakness of the Weimar Government, the problem of hyperinflation, and the severe impact of the Great Depression.
This game will help you to understand the challenges that governments face when dealing with trade-offs. Governments need to deal with the differing demands of society as well as prepare themselves for unforeseen events, whilst maintaining the economic and social well-being of the nation.
UNIVERSITY OF LA VERNEECBU 500D – BUSINESS FINANCEFINAL EXAM.docxouldparis
UNIVERSITY OF LA VERNE
ECBU 500D – BUSINESS FINANCE
FINAL EXAM
DECEMBER 3, 2019
“STUDENT NAME”
A key difference between replacement and expansion project analyses is that with replacement, the incremental cash flows are measured as the net difference between projected cash flows from the current productive assets and cash flows of the proposed new productive assets.
True / False
The weighted average cost of capital increases if the total funds required call for an amount of equity in excess of what can be obtained as retained earnings.
True / False
Market risk refers to the tendency of a stock to move with the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and it will have a beta which is greater than 1.0.
True / False
Other things held constant, an increase in financial leverage will increase a firm's market risk as measured by its beta coefficient.
True / False
The post-audit is a simple process in which actual results are compared to forecasted results and any discrepancy indicates a change in factors that are completely under management's control.
True / False
Short-term financing might be riskier than long-term financing because, during periods of tight credit, the firm might not be able to rollover (renew) its debt.
True / False
Effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased, thereby providing an opportunity to purchase and install assets before they are needed.
True / False
Since the degree of total leverage is equal to the degree of operating leverage times the degree of financial leverage, the degree of total leverage must always be greater than or equal to positive 1.0.
True / False
If the information content, or signaling, hypothesis is correct, then changes in dividend policy can be important with respect to firm value and capital costs.
True / False
A just-in-time system of inventory control requires that manufacturers coordinate production with suppliers so that raw materials or components arrive just as they are needed in the production process. The main objective of such a system is to reduce carrying costs.
True / False
The best and most comprehensive picture of a firm's liquidity position is obtained by examining its cash budget.
True / False
A firm’s goal should be to lengthen the cash conversion cycle since shorter cash conversion cycles leads firms to increase their dependence on costly external financing.
True / False
Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV.
True / False
The primary goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a stock-out (i.e., runs out of an inventory item).
True / False
The ex-dividend date is the date on which a firm actually mails (funds) divid ...
BNFN 4304 – Financial Policy
Mr. Masood Aijazi
Case 33: California Pizza Kitchen
Spring Semester 2017 – 2018
WrittenBy
Maryam Barifah 1420023
Nour Abdulaziz 1420149
Shrouq Al-Jaaidi 1420072
Balqees Mekhlafi 1420231
Submission Date
22/03/2018
CASE 33
CALIFORNIA PIZZA KITCHEN
Guidance Sheet
Synopsis and Objectives
This case examines the question of financial leverage at California Pizza Kitchen (CPK) in July 2007. With a highly profitable business and an aversion to debt, CPK management is considering a debt-financed stock buyback program. The case is intended to provide an introduction to the Modigliani-Miller capital structure irrelevance propositions and the concept of debt tax shields. With the background of a pizza company, the case provides an engaging context to discuss the “pizza graphs” that are commonly used in corporate finance curriculum to illustrate the wealth effects of capital structure decisions.
The case serves to motivate the following learning objectives:
1. Introduce the Modigliani-Miller intuition of capital structure irrelevance;
1. Establish how the cost of equity is affected by capital structure decisions by defining financial risk and introducing the levered-beta capital asset pricing model (CAPM) equation;
1. Discuss interest tax deductibility and the valuation tax shields;
1. Explore the importance of debt capacity in a growing business.
Questions
1. What is going on at CPK? What decisions does Susan Collyns face? In what ways can she facilitate the success of CPK? What do you recommend?
1. Using the scenarios in case Exhibit 9, what role does leverage play in affecting the return on equity (ROE) for CPK?
1. Is the capital structure decisions relevant for maximizing the shareholders’ value? What is the ratio of debt-to-equity that maximizes the shareholder’s value? Why should the stockholders care about maximizing firm value? Shouldn’t they be interested in strategies that maximize shareholdervalue only?
What are the key drivers for increasing value of CPK how it affects its capital providers i.e. shareholders and creditors.
1. How does debt add value to CPK?
1. What is the case for not doing the recapitalization?
1. What should Collyns recommend?
Note: A spreadsheet is provided to assist students. Students however can create their own analysis, financial model, spreadsheet, schedule or tables.
Please submit your case write up, presentation and spreadsheet. Please put you names on the spreadsheets as well,
Table of Contents
1. What is going on at CPK? What decisions does Susan Collyns face? In what ways can she facilitate the success of CPK? What do you recommend? 3
2. Using the scenarios in case Exhibit 9, what role does leverage play in affecting the return on equity (ROE) for CPK? 5
3. Is the capital structure decisions relevant for maximizing the shareholders’ value? What is the ratio of debt-to-equity that maximizes the shareholder’s value? Why should th.
1. 1
Chevron’s Debt Increase A Crude Way To
Support Dividend
Ben Black
5/5/2015
Management Speaks Out
In its most recent proxy statement, Chevron (CVX) executives urged caution about lower oil and
gas prices, pleading with investors to be patient as it transitions into a “new normal” of rock-
bottom energy pricing. The company was surprisingly forthcoming in its assessment of the
changing marketplace and the limitations it expects going forward:
“The days of easy oil are over. Costs to find, develop, and produce oil are increasing. At the same time,
demand for oil is flattening and is projected by many to decrease due to a host of carbon-related factors
including regulations to stave off global temperature rise, increasing fuel economy requirements,
decreasing costs of renewables, and fuel substitution. A 21st century business strategy should reflect and
incorporate these factors, emphasizing shareholder value over irrational growth of reserves.”1
In response to requests for a more robust capital return program to augment shareholder
returns when returns on investment from cap ex are muted at best and destructive to
shareholder equity at worst, Chevron reaffirmed its commitment to a growing dividend,
although ironically, it actually kept it unchanged for the 2nd quarter, the first such time that has
happened in several years. Still, it appears that executives know the score and are going to be
focused on supporting the payout, as truly viable opportunities for organic growth and
development of proven reserves dry up, so to speak, as the below quote reflects:
“This changing energy market creates deep investor concern over Chevron’s capital investments in high
cost, high carbon fossil fuel projects. Increased capital distribution serves to maximize and protect
shareholder value; represents a more prudent use of investor capital in the face of growing risks; and
allows shareholders to re-allocate their investments in alignment with a carbon-constrained world.”2
Going over the latest 10Q (quarterly report), it’s easy to understand shareholder concern over
how to best support the stock price. Upstream earnings, a key driver of profitability for most
consolidated oil majors, took a major hit, dropping from about $4.3 to $1.5 billion year over
year, due to rising costs and much lower commodity prices (average crude and natural gas
prices were roughly half of their previous levels in the prior comparable period). On the flipside,
1 Chevron Corporation 2015 Proxy statement, page 1.
2 Ibid.
2. 2
upstream earnings were much improved, increasing from about $700 million to $1.4 billion due
to more efficient refining operating activity.
Unfortunately, Chevron’s capital structure and liquidity deteriorated somewhat, as net debt
levels increased by about $6.2 billion. Operating cash flow declined significantly as a result,
going from $8.4 billion to $2.3 billion. That aforementioned leverage, by the way, was used to
cover the dividend entirely, as cash flow from operations was actually used for other purposes.
While that is an unsustainable strategy for the long-term, Chevron’s overall debt-to-equity ratio
remains at relatively healthy 0.217 while its ratio of earnings to fixed charges, a measure which
is very similar to the interest coverage ratio, stands at 9.54. While this is significantly weaker
than what Chevron’s provided in the past, it has more to do with a major hit to earnings than it
does a truly significant increase in debt levels.3
Trying To Find Balance in the Balance Sheet
Net of cash, overall debt remained around $14.5 billion at the end of 2014, which is less than
10% of its total capital. The balance sheet is still in solid shape, and the company’s borrowing
capacity and its ability to service such debt remains strong. Chevron’s costs are slowly coming
back within a reasonably sustainable range, with numerous projects winding down over the
next couple of years. In the latest quarterly report, the company stated a clear goal of covering
both cap ex and dividends entirely out of operating cash flow by 2017.4
Dividend growth has certainly slowed recently, as management maintained the 2nd quarter
dividend at its current level of $1.07 per share. Over the last four quarters, dividends have
totaled $4.28, compared to $4.00 in the prior four quarters, an increase of only 7%, which is a
step back from its 5-year annual dividend growth rate of 9.62%. This makes sense financially
speaking, however, as trailing 5-year revenue growth remains a tepid 3.62%, and unlikely to
materially improve in the next couple of years. With a current dividend yield of 3.98% as of this
writing, and a still healthy balance sheet, Chevron appears to be a safe income stock to own,
particularly given the fact that oil is unlikely to remain artificially cheap forever (depending on
OPEC’s obstinance).5
Foolish Conclusion
Overall, my Foolish take is that despite some disturbing secular trends in the oil and gas
industry over the last 12-18 months and Chevron’s own earnings slump, cost reduction and a
focus on operating efficiency along with prudent cash management will be management’s main
focus to keep the dividend payout ratio in line, ensuring the viability of future dividend hikes. It
is important to note that management fully intends to cover future dividend growth by
operating cash flow in the future, but their delivery on that goal is well worth monitoring. While
3 Chevron 10Q,page 40.
4 Morningstar.combalancesheet section under “financialstab”for Chevron.
5 Fool.com earnings/growth rates tab on Chevron profile.
3. 3
the latest quarterly payout ratio of .78 is surprisingly high by Chevron’s own lofty standards, it
was not entirely unexpected given the particularly unfavorable mix of higher costs and lower
revenues over the last quarter.