Well, this is the solution to assignment one, starting with question one where the question was for you to discuss why maximizing current shareholder wealth is a reasonable objective for the company. The important idea that we discussed in the lecture is that the stock price should reflect all future consequences of current corporate decisions. Stock price should reflect all future cash flows, and therefore, it's likely to be a much better objective than alternatives such as earnings-per-share, and book value per share which only measure current profits, disregard the future, and therefore can definitely lead the company to become short-termism. Remember though as we discussed in the lectures that reasonable doesn't mean perfect. Maximizing stock prices relies on the assumption of market efficiency. It can lead to conflicts between shareholder value in society. Question two, it really is an application of this idea of shareholder value. So if you think about the differences between bonus-based compensation and stock-based compensation, the key difference is that a bonus-based compensation is going to be a function, is going to be based on current profits. So executives will be paid more if they increase current profits. Guess what, what will tend to happen is that this will lead to short-termism. If you tell executives that they're going to be paid more if current profits are higher, guess what, what they're going to do is try to maximize current profits, and might take actions that are bad for shareholders in the long term. Stock-based compensation is not a perfect solution but it may help alleviate this problem. As we discussed in the lecture there are some issues, for example, many academics and practitioners are concerned that stock-based compensation has gone too far and executives are paid too much. Definitely, if I had to choose between stock versus bonus, I believe that stock is definitely a more reasonable way to set compensation for real-world companies. Question three asks you to compute liquidity ratios, and the example here is a Nike and VF Corporation, which are two competitors. The solution is here, all the numbers, you can check your calculations to make sure you've done it right. In terms of the analysis, the two points to note are that first of all, both companies seem to have appropriate liquidity. The ratios are high enough. Second, Nike appears to have higher liquidity than VF Corporation. So those are the two points you should have noted in your analysis. Question four, asks you to compute leverage or solvency ratios. Remember, the key idea here is to use market values. We do not use book value of assets, book value of equity. We use the market value. The market value of equity is the market capitalization which is just the stock price times the number of shares outstanding that was directly in the data both for VF and Nike. To compute the market value of assets, all you need to do is to add liabilities to the market value of equity as we learned in the lecture notes. So these are the values that you should have using the latest data. As we discussed in the assignment, for this question, you only need to do it using the latest data. Given this, the leverage ratios should be easy to compute. Debt divided by debt plus equity and liabilities over assets. These are the numbers you should have found. If you look at these numbers, you see that both companies have relatively low leverage ratios. Nike has lower leverage ratios than VF Corporation. Then we move on to profitability as we discussed in the lecture notes, the key starting point here is to compute OPAT. We want to compute profitability for the business, profitability for the company as a whole. So the best measure is a measure that considers sales and costs and takes taxes out, rather than looking at net income which is affected by interest payments, is affected by one time items and a bunch of other things that may not be relevant if you want to measure the profitability of the company. So this is something we discussed in your lecture notes. You should have used the idea here to compute OPAT. You start from OPAT and then you compute the profitability measure. Asset turnover, profit margin, and ROA, those are the three key measures that we focused on in our lecture notes. What you should have found is that both companies appear to have similar profitability. If you look at our array, for example, the ROA ratios are very similar across Nike and VF Corporation. In terms of cash profitability, the difference is that here we start from cash flow from operations instead of OPAT divided by assets. Again, these are the numbers that you should have found. These should have come directly from the cash flow statement and the balance sheet. Again, what we see is that both companies have a significant profit and cash profitability. Perhaps Nike has a little bit higher cash profitability. In terms of the cash flow statement analysis, as we discussed in the lecture notes, we can learn a lot by looking at the cash flow statement. So I pulled out the main items here as I discussed in the instructions for the assignment, one of my goals was to force you to try to find this data, so I hope everybody found the most important items which are the cash flow from operations, the cash flow from investment, and the cash from financing, and of course the net change in cash at the end. In addition to this, I pulled out the stock repurchase item to allow me to talk about one issue here. So if we look at these cash flow statements, they are in terms of the signs. They look very similar. Both Nike and VF Corporation are generating positive cash flow from operations. They are investing in the business and returning cash to investors. So rather than borrowing more or issuing stock, what Nike and VF Corporation are doing, is to return cash to investors through stock repurchase. That's why I pulled out the stock repurchase figure here just to show you that this is a very common way that companies are using these days to return cash to investors. Notice that if we compare the dollar figures of investment like capital expenditures the cash flow from investment with stock repurchase, stock repurchase are significantly higher, we'll talk more about that at the end. Finally, the valuation ratios. Remember, the key thing to remember here is that we're focusing on valuation ratios that reflect value and profits for the company as a whole. So rather than doing price earnings ratios, for example, we are looking at value OPAT, I prefer these valuation ratios because they don't use net income which is a problematic measure and they reflect valuation for the company as a whole. Market-to-book refers to market value of assets divided by the book value of assets, that avoids problems with negative book value of equity, for example. Those are the numbers you should have found. What we see is that Nike has higher valuation ratio. So what's the overall analysis? This was an open question, so there are several possible reasonable good answers here. This is what I learned by doing this analysis. Overall, the companies look quite similar. They are both profitable. They both have adequate liquidity. They both have low leverage. Perhaps Nike has a little bit higher liquidity and a little bit lower leveraged than VF Corporation, so you could have mentioned that right. It was interesting that both companies are repurchasing stock and investing in the business, but if you look at the numbers, repurchases are larger. These companies are mostly returning cash to investors rather than investing cash to grow the business. This is related to this recent debate about investment in the US economy that we mentioned in the lecture notes briefly. So there are many practitioners and even the government that are concerned with the low rates of investment in the US economy. Many companies are spending more money repurchasing stock than investing in the business, so the Nike and VF Corporation seem to mark additional examples of that. Comparing the valuation ratios, what we saw is that Nike has greater future opportunities as we discussed in the lecture notes, the valuation ratio essentially measure future over past, or future over present. So the fact that Nike has higher valuation ratios means that investors expect future cash flows for Nike to be higher relative to VF Corporation compared to current ones.