ITS Case Study Analysis Help with Solutions

CASE INFORMATION

International Technology Systems (ITS) is an IT company that develops and manufactures IT products and services worldwide. Its major operating segments include Global Technology Services, Global Business Services, Software, Systems and Technology, and Global Financing. The majority of the company’s enterprise business, which excludes the company’s original equipment manufacturer (OEM) technology business, occurs in industries that are broadly grouped into six sectors – financial services, public, industrial, distribution and communications as well as small and medium sized businesses. In spite of the current global financial crisis, ITS appears to be doing very well. In January of 2009, it announced better than expected fourth quarter earnings with net income of US$4.4 billion, up from US$4 billion the previous year. According to its CEO, ITS “performed well in an extremely difficult economic environment” in year N+4 and that the company will “enter the year in a very strong position”.

QUESTIONS

After a quick glance at the available information and the decision making requirements of the Gordon Crown, you have decided that at the minimum you have to do the following:

Question 1: For component costs:
A. Compute the before- and after-tax costs of ITS debt.
B. Compute the cost of equity (assuming all funds come from internal sources):
i. Using the constant growth Gordon Dividend Valuation Model
ii. Using the Security Market Line Equation (SML) from the CAPM

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Question 2: Compute the Weighted Average Cost of Capital (WACC) based on cost of equity estimated under the Gordon’s Constant Growth Dividend Valuation Model:
A. Using book value weights for debt and equity
B. Using market value weights for debt and equity

Question 3: Compute the WACC based on cost of equity estimated under the CAPM:
A. Using book value weights for debt and equity
B. Using market value weights for debt and equity

Question 4: Address the pros and cons of using market value weights versus book value weights and reconcile the divergent views of Crown and Chang.

Question 5: Compute the Required Rate of Return for the project(s), adding appropriate risk premiums subjectively to the WACC’s in questions 2 and 3. These risk premiums can differ depending on the nature and continental location of the projects.

Question 6: Make a recommendation as to which, if any, of the investments identified in Table 6 should be accepted taking into account the capital constraint.

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