M&M Pizza Harvard Case Solution & Analysis

M&M Pizza Case Solution 


M and M pizza is basically the finest quality pizza manufacturer in the US Franco. The company is utilizing its capacity with respect to production in order to capture greater market and also to attract greater number of costumers. In recent years, the share price is moving in lateral or horizontal trend with slow increasing trend. The profit is increasing slowly as the company has expected. The company wants to increase its revenue by issuing debt $ 500 million at 4% to repurchase their outstanding shares of same amount. This step to increase in capital would be beneficial for the potential investors although the number of shares outstanding would decrease. It would increase the dividend amount and share price of the potential/new investors.

The aim of the company is to increase the share price and dividend on each share for potential investors.The country Francostan is somehow favorable for the company in which in the increase in the product price is approximately zero for expected outlook. The Government debt rate for manufacturing and servicing industries is about 4%, which is favorable for the company to enhance its working capital. The country‘s ethical standards, rules and regulations or laws have been imposed for the betterment of country as well as for the business practices. The country’s revenue is earned through income tax which is about 20% of average per capital income. The population of Franco is about 20 million in which some residents have different views about the trade and organization practices. The company’s expectations about the share price and increasing dividend per share are satisfied as there is a continuous increase in the profit and revenue of the company.

Analysis and Recommendations

The company wants to increase its capital through $ 500 Million of issuing loan/ debt in order to repurchase outstanding shares of own company to increase share price and dividend for the potential investors and shareholders. It is also called Leverage Buy Out as the company repurchases its shares from the potential investors in order to increase its market value. The economic environment of the country is also favorable in which the government imposed policies rules and law for industry and business development.

 The company has 92% direct expenses including operating expenses and cost of sales. Therefore, 8% profit of total revenue has generated by the company although the company has strong financial back ground. The high cost will show negative impact on new investors or stockholders. The increase in expenses and decrease in net income has created negative impact on share price as already $ 25. The company would face financial problem in daily business activity because of high operating expenses.The company’s capital structure is based on 100% equity with no debt obligations. The company has 55% fixed assets and 45% current assets for operations. The required rate of return is 8% and Weighted Average cost of capital is 7%, which means that 7% opportunity cost for investors to invest in the company. The company has paid dividend of $ 125 million and outstanding shares are 62.5 million. The dividend per share is $2, which is quite stumpy..........................

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