Historical Performance And Risk Profile Of Dominos Pizza Homework Answer

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Question :

Project Outline

What is this project?

This project provides an opportunity to get some hands-on experience applying corporate finance theory and models to real firms. In the process, you will get a chance to:

  1. Evaluate the historical performance and the risk profile of a firm
  2. Calculate the firm’s current leverage and cost of capital
  3. Analyze its capital structure, and decide whether the firm is under or over leveraged, and how to move to the optimal capital structure.

How is the project structured?

  1. This is a group project.
  2. Each group will be assigned a company to analyze.
  3. Each member will be responsible for doing the entire analysis for the company.
  4. At the end of the process, the group will write a single report.

How will the project be graded?

  1. Each group will receive one grade and every group member will receive the same grade.
  2. There is a checkout list available in the course website with all the items you are expected to cover in your analysis. If correctly answered, they sum up 50 points.
  3. After turning in your report, I will choose the three best reports in my opinion to be presented and discussed in class. Each group will have 10 minutes for presentation and up to 10 minutes for Q&A from me and from the class. After the three presentations and discussions, the class will vote. The top, second, and third group with more points will receive, respectively, 5, 3, and 1 extra points in their project grade.

Who polices the group?

  1. You do.
  2. If there is any problem with a particular group member or you feel you don’t fit in a given group, please come and talk to me as soon as possible.

Project Format

  1. Be organized, both in the word document and the excel.
  2. Do not repeat the obvious. Thus, describing the regression procedure for estimating betas is not necessary, but explaining your choice for inputs and how to interpret the output is necessary.
  3. Use tables to summarize data and findings. Include the sources of your data (Bloomberg/Morningstar/…)
  4. Please be brief: max. 8 pages double space) including everything (graphs, tables,…. The cover page should include your group letter, firm name and names of all members.
  5. Submit a word document, not a pdf. Include your group letter and your firm in the file label. Attach the excel file as well (same identification please).

Data sources

The school has a Bloomberg lab available to all students. This is the best and most complete source of data. The interface and keyboard can be a bit intimidating but there are help guides and online tutorials. It is not necessary for the project but certainly a good investment of your time if you want to pursue a career in finance. I provide next some free and user-friendly alternatives equally reliable.

Enter the firm’s name or ticker on top and check the Financials tab. Five years old figures from the Income Statement, the Balance Sheet and the Cash Flow statement can be downloaded for free. That should be enough for this analysis. You can export them in an excel file. Use the most recent full-year data as your current data.

Historical quotes (from which you can calculate returns) are available in the same web address, in the tab called Performance>Price History. You can export them in an excel file. Check the other tabs for a lot information and ratios on the company.

Indices (sector indices as well as market indices, like the S&P500) are available in many websites. 

To become familiarized with the company, visit its website and look for the most recent Annual Report. It is usually available under Investors information or similar. Alternatively, just Google it.

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Answer :

Evaluate the historical performance and the risk profile of a firm

For the purpose of evaluating the historical performance of the company, it is require to observe various financial and non-financial factor of the company. Domino's Pizza, Inc. (DPZ) belong to the restaurants industry in the consumer cyclical sector. It operate as pizza Delivery Company in United States and all across the world. It operate through the three segment US store, international franchise, and supply chain. It offer pizza under the brand name of Dominos and provide it through the one of the largest food chain in the world. It has 17100 store in the 90 market. It has been founded in 1960 and headquartered in Ann Arbor, (Michigan Hoang,  & Phung, 2019).

Performance of the business organization can affect from the various kind of internal and external factors such as current ratio, average collection period, government policy, technical update, and consumer test and management policy. Company has moved on to e- commerce website in 2007 by rolling out the mobile phone to achieve the largest market share. It has also elite the efficient team members to build the store for pizza delivery. It has reached global revenue at $ 1.20 billion in 2007. In 2012 company has also offer various other product besides the pizza. Company has appointed the boards of directors as per the listing agreement of New York Stock exchange. As the food offering company it has faced the higher competition but has also survived in the market since long. Company has performed well in the previous years as it has grown its revenue by 25.69% which indicate the optimum utilization of the business strategies and marketing policy.  Company has achieved the net profit of 400.70 million in 2020 which show the 50% increasing trend from the last 5 years (Iqbal, & Usman, 2018). As per the industry Benchmark Company’s stock has performed well and provide the higher share price in the market (Haseeb, Hussain, Kot, Androniceanu, & Jermsittiparsert, 2019).Business Performance Of Company

Growth rate for the company has been 26.80% from 2014 to 2019. It indicate the appropriate business performance of the company. While S&P growth rate is 9% in the past 5 years. CAGR of PBJ ETF has been extend to 2.70%. Management of the company has determines the financial growth by establishing the expansion plan, financial goal, staffing needs accomplishment, reducing the labour turnover rate.

Earning volatility is the measuring the associate risk and estimation of the share price in the market. Cost of capital affect the market price of the share.

Cost of Capital3.93%4.01%4.15%4.36%6.62%

In the above case various cost of capital of the company avaabe that can provide the volatility of the share price.

Bankruptcy costs incurred by the company when it has higher debt capital. In the given case company has following debt capital:-

Total Debt of LT debt$4,114,449.00
Current Portion of LT debt$43,349.00
Interest Expense (Dec 2019)$150,818.00

In the above case, bankruptcy cost is high which need to be reduce in the future financial year so that profitability can be maintain.

Agency cost incurred by the agent on behalf of the principle and it also include current debt covenants. Company has $4,459,430.96 which indicate the higher amount of risk association in capital structure.

Present Values

PV LT debt$3,276,400.46
PV LT (Current Portion)$41,939.82
PV of Coupons$927,020.68
PV Operating Leases$214,070.00
Market Value of Debt$4,459,430.96

Company has appropriate management discipline as it has better human resource management to advertise recruitment, hiring skilled staff for the business. Marketing management provide the product, plan promotion in the market. Company also use the information system that help to increase the decision making capability.

Financial flexibility of the company is higher as it has market capitalization of equity capital $11,322,007.20 and debt capital of $4,350,498.00. Company can redeem the debt capital to reduce the debt equity ratio as it has spare fund available with it.

For the risk analysis of the company several factors need to be analysed such as liquidity, volatility, debt capital level and capital structure. Beta of the company will be consider as the quantitative analyses for the company. While volatility estimation is done based on last 3 month performance (Uzliawati,Yuliana, Januarsi, & Santoso, 2018). Also, when the risk is analysed for any business it is very important to consider other cost which are involved in the business, like agency cost, bankruptcy cost, etc. Agency cost is the cost on internal transfers of the company, as the company has various franchise the company faces high agency cost, and for other company to own a franchise of Dominos it cost around £120,000 to £240,000. Also, as per the market conditions it is very important to analyse the bankruptcy cost of company. Amid the pandemic and other economic situations, company can face issues for the next two years, and the bankruptcy cost of company is dependent on its credit policy for accounts receivable and the dependency of company of outsider’s debt.  Company has the higher risk if the consumer changes there preference in the market. It also affected by the food borne illness ass it is food providing company. It can also observed that company has faced the various risk due to increasing cost of labour , material, advertisement and insurance premium. It also did not have the long term contract to supply the raw material which can cause higher process in the future. Fluctuation in the stock price is also higher risk for the company. If the stock process change then it can affect the goodwill and profit of the company. Dividend policy of dominos, competitor action, market speculation and other factors can affect the company stock price. Following are the BETA value of the company:-BETA value

From the above it can be observed that company has the higher levered beta as compare to unlevered beta value. Levered beta is the systematic risk of the stock that affect due to political environment, recession in market and other macro-economic factors. Domino's Pizza, Inc. (DPZ) has higher leveraged beta value that provide the higher risk for the shareholder. It is require to reduce the beta of leverage by the top management so that risk can be optimise.net sales chart

Calculate the firm’s current leverage and cost of capital

Leverage is the strategies used by the top management for the fund invested in the business so that optimum utilization can be done for the fund. It also indicate that how much fund has been procure from the debt capital of the company. Market value for the debt capital is $ 4459430.96 which show the lower value as compare to the equity capital of the company. Company is majorly financed with equity capital that indicate the lower risk of the capital structure (Herciu, & Ogrean, 2017).

Market Capitalization$11,322,007.20

Current portion LT debt$43,394.00
Current Operating Lease Liabilities$33,318.00
Long term debt, less current portion$4,071,055.00
Operating Lease Liabilities$202,731.00

From the above it can be seen that company has the lower debt equity ratio and show the lower capital structure risk. As it has majorly funded with the owners capital. It also help to hold the controlling interest in the company that will lead to make the appropriate decision from the owner’s perspective (Susetyo, 2017).

Company use the financial leverage because it help to avoid the increase the share issued and help to increase the value by investing in the assets. Share price of the company also remain same as it does not dilute in the other share.

It can also generate the loss for the company if the value of the assets reduce due to market impact. High leverage provide the adverse impact on the profit and provide the loss for the business.

Cost of capital of the company has also been showing that WACC has been increased by 0.09% in the current year and lead to increase the cost of the fund paid by the company. It is require to control cost of capital so that profitability of the company can be increase by the management.

D/(D+E) Ratio = 28.26%0.00%-28.26%
Beta for the  Stock =0.430.31-0.12
Cost of Equity    =4.63%3.93%-0.70%
After Tax    
 Interest Rate on Debt =2.45%2.91%0.46%
WACC 4.02%3.93%-0.09%

cost of equity and beta

The above graph show that cost of equity and beta: debt ratio has been increasing from the previous years and indicate the market inflation in increasing trend. Management need to prepare the optimum strategies to keep the cost of capital at minimum level so that cost can be reduce to increase the profitability (AlHares, 2020).

Analyse its capital structure, and decide whether the firm is under or over leveraged,

Capital structure of the company provide the data analyses of the fund involved in the business. It help to understand the equity fund and debt fund invested in business. If the debt capital is higher in the company then it means that capital risk is high. It will impaired the goodwill of the business as it investors does not attract to the company who have higher capitals structure risk (Vartiainen, Masson,  Breyer, Moser, & Román Medina, 2020)

Equity capital $  3,415,759.00  $  3,039,921.00 
Debt capital $  4,350,498.00  $  3,531,584.00 

From the above data it can be observed that debt capital of the company has been higher by 15.98% in the current year as compare to previous year and it is also higher than then equity capital of current year. Hence it can be conclude that company is having higher debt equity ratio and provide the higher risk for the fund associated. Cost of debt capital is also higher that led to increase the cost and provide the adverse impact on profitability. It can be said that higher reliance on debt has increased the interest liability of the company which not stands at $150,818. The company should take measures to lower its dependency on outsider’s debt as it increases the risk, and it impacts the owners of company as it is a negative trait. Hence, the ideal capital structure will be a mix of equity and debt where credit ratings of the company is improved and the company will be able to deliver better results in terms of revenue and profit.

It is to be understood that underleveraged mean that company is having the lower amount of debt capital invested in the business. And if the company is having the higher amount not of debt capital then it will be over leveraged for the business.

In the above case it can be seen that Dominos Company is having the higher debt to equity ratio which indicate the over leveraged ratio for the company. It has higher capital structure risk for the business. It is require to reduce the capital risk by increasing the equity capital and reducing the debt capital.

How to move to the optimal capital structure

For the optimum capital structure, top management need to prepare the appropriate strategies for the fund procurement. It will led to manage the fund for the business at minimum cost. Company should redeem the debt fund as soon as possible so that finance cost will also be minimised. Equity capital should be increased by issuing the equity share capital so that ownership stake will increase and controlling interest will remains with owners.