With early results of the recent acquisitions flashing positive growth we can

With early results of the recent acquisitions

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scale compared to even the closest competing company. With early results of the recent acquisitions flashing positive growth, we can assume that SCI can successfully manage a capital structure of 65-70% given that they can maintain a debt rating of BBB. If SCI’s debt rating is downgraded, the resulting cost of debt may be too high and SCI would stand to face significant financial distress risk. This would suggest that SCI should begin to pick and choose acquisition targets with extreme caution and not just acquire additional companies for the sake of acquisition. While the risks of financial distress increases as SCI continues to add additional debt, if they continue to utilize acquisitions as their method of growth, issuance of debt would be the best way to fund the future investments. With the death rate growing at less than 1% per year, issuing equity to fund acquisitions may cause the market to respond adversely as they become skeptical about the potential returns that SCI can realistically obtain. With stable and sizable earnings, SCI should be able to service any additional debt they decide to issue while maintaining their ability to growth given that they choose future acquisitions carefully. As the corporate manager of SCI, I would look at profitability as a way to measure the value driven from this growth strategy. Profitable firms should maintain a higher Market/Book ratio and, as a corporate manager, I can convince investors that this strategy is driving profitability by selling the high returns given the current amount of equity. To find the Market/Book ratio, I compare the Return-on-Equity (ROE) and the Cost of Equity (Ke) to find the growth ratio. I find
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ROE by taking the current Net Income ($131,045) over Total Equity ($1,196,622) which can be found on Exhibits 8 and 7. The ROE is 19.18%. I find Ke by first finding the Equity Beta for SCI (see Exhibit A). I then use CAPM to find Ke at 16.09%. The ROE/Ke ratio is 1.19. Since the Market/Book ratio is greater than 1, I would convince investors that the firm is currently generating higher returns per dollar of equity which shows that the current growth strategy is working. As an investor, I would acknowledge the assumption that this growth strategy carries an impending expiration that the company cannot sustain this strategy because other firms will see the success and begin to mimic the same strategy. I would use the assumption that there exists an advantage horizon for this firm and the cash flows should be looked at as an annuity rather than a perpetuity. To do this, I take the Market/Book ratio with an advantage horizon of “n” years. According to Fruhan’s research found from the “Note on Value Drivers” article, firms typically enjoyed the highest ROE in 5-10 years so we’ll use 5 years as our most conservative estimate (Etsy p.4). Using the same ROE and Ke as in the current assessment of the Market/Book ratio, we plug those numbers into the following equation:
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