ALPHA ONE NOPAT

Product was developed, test marketed with the help of two of her classmates; Alpha One Software Corporation was up and running within one year. Venture capital was obtained to start up operations; a second round of venture financing helped Alpha One to move through its survival stage. Product success in the marketplace has allowed the venture to achieve such rapid sales growth that it now is able to get bank loans and issue long-term debt. The interest rate on the bank loan is 10 percent. An effective cost for the long-term debt will need to be determined; the cost of common equity was estimated using a risk-free rate of 7 percent and a risk premium of 13 percent.
Arlene Io has now reached the point of being able to consider whether Alpha One is adding economic value in terms of its net operating profit after taxes (NOPAT) and its weighted average cost of capital (WACC). Based on the most recent years’ financial statements (see end of mini case), Arlene was interested in answering the following:

A. What is Alpha One’s NOPAT? Why does NOPAT differ from the earnings after taxes?

NOPAT = 144,000 x (1 - .40) = 86,400

EAT = 36,000
NOPAT excludes interest financing costs on an after-tax basis (i.e., 84,000 x .60 = 50,400). Check: 86,400 – 36,000 = 50,400

B. Estimate the effective before-tax cost of the long-term debt.

% cost of bank loan = 10%
Interest on bank loan (notes payable) was: 10% x 100,000 = 10,000
% cost of long-term debt = interest/long-term debt
Interest paid on long-term debt: 84,000 (total interest) - 10,000 (interest on bank loan) = 74,000
74,000/500,000 = 14.8%

C. Estimate the effective after-tax cost of the bank loan and the long-term debt.

Bank loan: 10% x (1 - .40) = 6.0%
Long-term debt: 14.8% x (1 - .40) = 8.88% after-tax cost

D. Estimate the cost of common equity capital.

Using a risk-premium model: Cost of Equity = 7% + 13% = 20.0%

E. Determine the financial structure weights for the two interest-bearing debt components and the common equity.

$ Amount % Weight

Bank loan 100,000 11.8%

Long-term debt 500,000 58.8
Common equity 250,000 29.4

Total 850,000 100.0%

Note: common equity = common stock + retained earnings (100,000 + 150,000 =
250,000)

F. What is Alpha One’s WACC?

WACC = 6.0%(.118) + 8.88%(.588) + 20.0%(.294) = .71% + 5.22% + 5.88% = 11.81% or 11.8% rounded

G. Determine the dollar cost of financial capital used.

$ cost of financial capital used = amount of financial capital x WACC
850,000 x .118 = 100,300

H. Estimate Alpha One’s economic value added (EVA).

EVA = NOPAT - $ cost of financial capital used
EVA = 86,400 – 100,300 = -13,900

Alpha One Software Corporation

Income Statement 2007

|Net Sales | $1,500,000 |
|Cost of Goods Sold | -850,000 |
|Gross Profit | 650,000 |
|General & Administrative Expenses | -250,000 |
|Marketing | -206,000 |
|Depreciation | -50,000 |
|Earnings Before Interest and Taxes | 144,000 |
|Interest | -84,000 |
|Earnings Before Taxes | 60,000 |
|Income Taxes (40% rate) | -24,000 |
|Earnings After Taxes | $36,000 |
| | |

Alpha One Software Corporation

Balance Sheet 2007

|Cash | $20,000 |
|Accounts Receivable | 250,000 |
|Inventories | 350,000 |
| Total Current Assets | 620,000 |
|Fixed Assets, Net | 480,000 |
| Total Assets | $1,100,000 |
| | |
|Accounts Payable | 125,000 |
|Accrued Liabilities | 125,000 |
|Notes Payable | 100,000 |
| Total Current Liabilities | 350,000 |
|Long-Term Debt | 500,000 |
|Common Stock (20,000 shares) | 100,000 |
|Retained Earnings | 150,000 |
| Total Liabilities & Equity | $1,100,000 |

ALPHA SOFTWARE CORROP

MINI CASE: ALPHA ONE SOFTWARE CORPORATION 

The Alpha One Software Corporation was organized to develop software products that would provide Internet-based firms with information about their customers. As a result of initial success, the venture’s premier product allows firms with subscriber bases to predict customer profiles, retention, and satisfaction.
Arlene Io received an undergraduate degree in computer sciences and information systems from a major northeastern university four years ago. The Omega Subscriber Software Product was developed, test marketed with the help of two of her classmates; Alpha One Software Corporation was up and running within one year. Venture capital was obtained to start up operations; a second round of venture financing helped Alpha One to move through its survival stage. Product success in the marketplace has allowed the venture to achieve such rapid sales growth that it now is able to get bank loans and issue long-term debt. The interest rate on the bank loan is 10 percent. An effective cost for the long-term debt will need to be determined; the cost of common equity was estimated using a risk-free rate of 7 percent and a risk premium of 13 percent.
Arlene Io has now reached the point of being able to consider whether Alpha One is adding economic value in terms of its net operating profit after taxes (NOPAT) and its weighted average cost of capital (WACC). Based on the most recent years’ financial statements (see end of mini case), Arlene was interested in answering the following:

A. What is Alpha One’s NOPAT? Why does NOPAT differ from the earnings after taxes?

NOPAT = 144,000 x (1 - .40) = 86,400

EAT = 36,000
NOPAT excludes interest financing costs on an after-tax basis (i.e., 84,000 x .60 = 50,400). Check: 86,400 – 36,000 = 50,400

B. Estimate the effective before-tax cost of the long-term debt.

% cost of bank loan = 10%
Interest on bank loan (notes payable) was: 10% x 100,000 = 10,000
% cost of long-term debt = interest/long-term debt
Interest paid on long-term debt: 84,000 (total interest) - 10,000 (interest on bank loan) = 74,000
74,000/500,000 = 14.8%

C. Estimate the effective after-tax cost of the bank loan and the long-term debt.

Bank loan: 10% x (1 - .40) = 6.0%
Long-term debt: 14.8% x (1 - .40) = 8.88% after-tax cost

D. Estimate the cost of common equity capital.

Using a risk-premium model: Cost of Equity = 7% + 13% = 20.0%

E. Determine the financial structure weights for the two interest-bearing debt components and the common equity.

$ Amount % Weight

Bank loan 100,000 11.8%

Long-term debt 500,000 58.8
Common equity 250,000 29.4

Total 850,000 100.0%

Note: common equity = common stock + retained earnings (100,000 + 150,000 =
250,000)

F. What is Alpha One’s WACC?

WACC = 6.0%(.118) + 8.88%(.588) + 20.0%(.294) = .71% + 5.22% + 5.88% = 11.81% or 11.8% rounded

G. Determine the dollar cost of financial capital used.

$ cost of financial capital used = amount of financial capital x WACC
850,000 x .118 = 100,300

H. Estimate Alpha One’s economic value added (EVA).

EVA = NOPAT - $ cost of financial capital used
EVA = 86,400 – 100,300 = -13,900

Alpha One Software Corporation

Income Statement 2007

|Net Sales | $1,500,000 |
|Cost of Goods Sold | -850,000 |
|Gross Profit | 650,000 |
|General & Administrative Expenses | -250,000 |
|Marketing | -206,000 |
|Depreciation | -50,000 |
|Earnings Before Interest and Taxes | 144,000 |
|Interest | -84,000 |
|Earnings Before Taxes | 60,000 |
|Income Taxes (40% rate) | -24,000 |
|Earnings After Taxes | $36,000 |
| | |

Alpha One Software Corporation

Balance Sheet 2007

|Cash | $20,000 |
|Accounts Receivable | 250,000 |
|Inventories | 350,000 |
| Total Current Assets | 620,000 |
|Fixed Assets, Net | 480,000 |
| Total Assets | $1,100,000 |
| | |
|Accounts Payable | 125,000 |
|Accrued Liabilities | 125,000 |
|Notes Payable | 100,000 |
| Total Current Liabilities | 350,000 |
|Long-Term Debt | 500,000 |
|Common Stock (20,000 shares) | 100,000 |
|Retained Earnings | 150,000 |
| Total Liabilities & Equity | $1,100,000 |

homework help

Memorandum 
Date: 


Today 

To: 

Alice Carlo, President, Alberta Gauge Company, Ltd. 

From: 

I.M. Student 

Subject: 

Suggested revision of product-line income statement 

a. The product-line income statement presented is not suitable for analysis and 
decision making. The statement does not distinguish between variable and fixed 
costs, which hinders any analysis on the impact of volume changes on profit. In 
addition, the statement does not distinguish between costs that are directly 
related (traceable) to a product line from those that are shared among all 
products. 

14-44 

Chapter 14 - Decision Making: Relevant Costs and Benefits 

b. An alternative income statement format that would be more suitable for analysis 
and decision making would incorporate the contribution approach. Expenses 
would be classified in terms of variability and controllability such as: variable 
manufacturing, variable selling and administrative, direct fixed controllable by 
segment, direct fixed controllable by others, and common fixed. The common 
fixed costs would not be assigned to the product lines because such an 
allocation would be arbitrary. The contribution approach is more suitable for 
analysis and decision making because there is a meaningful assignment of costs 
to product lines. 
2. 

a. The suggested discontinuance of the R-gauges would be cost effective, but the 
suggestions relating to E-gauges and Q-gauges would not be cost effective. 
These conclusions are based on the following quarterly analysis. 

CASE 14-63 (CONTINUED) 

Unit selling price .............................. 
Unit variable costs 
Raw material ................................. 
Direct labor ................................... 
Variable manufacturing 
overhead ..................................... 
Shipping expenses ....................... 
Total ........................................... 
Unit contribution margin ................. 

E-Gauge 

R-Gauge 
$180 

$17 
20 

$31 
40 

$50 
60 

30 
4 

45 
10 

60 
10 

Increase (decrease) in units* 
E-gauge: 10,000 × 50% .............. 
Q-gauge: 8,000 × 15% ............... 
R-gauge: 5,000 × 100% .............. 
Increase (decrease) in total 
contribution margin ....................... 
Decrease (increase) in fixed costs 
Increase (decrease) in segment 
contribution .................................... 

71 
$19 

× (5,000) 

126 
$ 74 

× 1,200 

180 
$ 0 

× (5,000) 

$(95,000) 
80,000† 

– $20,000 
14-45 

$ 88,800 
(100,000) 

$ 

$(15,000) 

*Unit sales = sales dollars ÷ unit sales price 
†$100,000 

$90 

Q-Gauge 
$200 

0 
40,000 

$(11,200) 

$40,000 

Chapter 14 - Decision Making: Relevant Costs and Benefits 

b. Yes, the president was correct in eliminating the R-gauges. The R-gauge sales 
price covers only its variable cost and does not contribute anything to 
manufacturing overhead or promotion costs. Thus, the R-gauge has a zero
contribution margin. 
c. Yes, the president was correct in promoting the Q-gauge line rather than the Egauge line, because the unit contribution margin and contribution per labor 
dollar is greater for the Q-gauge line as follows: 

Unit contribution ........................................................... 
Contribution per direct-labor dollar ............................ 

E-Gauge 
$19.00 
.95 

Q-Gauge 
$74.00 
1.85 

CASE 14-63 (CONTINUED) 
However, the president’s decisions regarding promotion expense do not seem 
well conceived. The decreased promotion on the E-gauge line and the increased 
promotion on the Q-gauge line do not produce sufficient contribution to offset 
the promotional costs. 
d. No. The proposed course of action does not make effective use of capacity. The 
15 percent increase in production volume on the Q-gauge line will not require all 
of the capacity that has been released by discontinuing the R-gauge line or
reducing the E-gauge line by 50 percent. 
3. 

Yes. The qualitative factors that management should consider before it decides 
whether to drop the R-gauge line include: 
• Customer relations. The sale of E-gauges and Q-gauges may be related to the 
sale of R-gauges. 
• Labor relations. Reducing employment may create labor problems. 

14-46 

Chapter 14 - Decision Making: Relevant Costs and Benefits 

FOCUS ON ETHICS (See page 617 in the text.) 
This scenario addresses the effects of a decision to outsource, and as a result, close a 
department. 
Edgeworth is not acting ethically in asking Mint to withhold the ABC costing analysis 
data from Mello. To do so would be tantamount to deliberately risking that the company 
will incur unnecessary costs, which in turn could affect profitability negatively. 
Edgeworth is putting the well-being of himself and family above of the company’s best 
interests in making this request. 
Mint is correct to point out that the decision about how much weight should be placed 
on the ABC numbers, and how much on related issues of morale, quality and reliability, 
should derive from a “full and open discussion” with all the relevant parties present. In 
order that Edgeworth is well-prepared for this discussion, the outcome of which may 
greatly affect his organization, it is appropriate that Mint share the data with him ahead 
of that meeting. Mint should also provide the same data to any other interested party 
ahead of the meeting to promote a well-informed discussion of the topic. Doing so will 
facilitate a rational discussion and a sound decision to be reached at the meeting. 
[Final version] 

fedex

Financial Analysis for FedEx Corporation


EXECUTIVE SUMMARY

The modern air/ground express industry was pioneered with the founding of Federal Express in 1971; the corporation was created in 1998 as FDX Corporation and became FedEx Corporation in January 2000 (FedEx, 2013).
FedEx provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services, offering integrated business applications through operating companies competing collectively and managed collaboratively, under the respected FedEx brand. FedEx inspires its more than 290,000 employees to remain absolutely, positively focused on safety, the highest ethical and professional standards and the needs of their customers and communities (FedEx, 2013).
FedEx showed real grit in FY12. FedEx’s earnings per share increased 40 percent, and annual revenues exceeded $42 billion, a 9 percent increase, despite political gridlock in the United States, financial turmoil in Europe, a slowing Asian economy and volatile fuel prices. FedEx Ground delivered an 18.4 percent operating margins and accounting for more than half of FedEx operating profit. Online shipments spurred record volumes. More than one quarter of FedEx Ground lanes are now faster in terms of transit times than the competition, boosting service and customer satisfaction to unprecedented levels. As a result, including FedEx SmartPost, FedEx’s overall U.S. ground parcel-market share has increased to nearly 30 percent, doubling over the last decade. The rapid transformation of FedEx Freight paid off with a strong return to profitability. Revenues grew 8 percent year over year. Offering both priority and economy service options and industry-leading transit times have made FedEx Freight a market share leader (FedEx, 2013).
This paper addresses current status of FedEx Corporation and how they are performing. The paper addresses FedEx’s SWOT analysis giving their strengths, threats, weaknesses, and opportunities. The paper gives recommendations and then follows with justifications for those recommendations to FedEx’s Corporation management.
SWOT ANALYSIS

A SWOT analysis is a look at FedEx’s strengths, weaknesses, opportunities, and threats, and is a way to gain a detailed and thorough perspective on the company and its future.
Strength
* Strong brand image
* Unmatched reputation for on-time delivery
* Lots of planes, well-located hubs, great routes/landing rights
* Ranked as one of the best companies to work for many years in a row
* Great R&D, quite innovative
* Extensive capital expenditures
* Focus on customer satisfaction
* Clear leader in domestic express delivery market
* At present, drivers are independent contractors, unlike at UPS where they are unionized
Weakness
* High prices relative to competitors
* Not as strong internationally
* Lag UPS in the ground delivery market
* Not fully differentiable from UPS
* Very exposed to economic conditions and fuel prices
Opportunity
* Economy is beginning to recover, especially in Asia (China specifically)
* Currently offer services to 220+ countries and barring government intervention, can expand in them as it sees fit
* Continued globalization of the world marketplace means more contracts are available and at higher volumes as well
* Expansion of online retailing creates an increased need for on-time, hassle-free shipping
* Focus on taking away international market share from DHL and domestic ground delivery from UPS
Threats
* High fixed costs
* Drivers and other workers are trying to unionize
* Economic downturn has cut down on volume overall
* Many consumers and businesses are switching to slower delivery options to save money
* UPS is attempting to take away market share in the express delivery arena
* E-mail may take away from overnight document delivery market
FedEx possesses several strengths, weaknesses, opportunities, and threats; however in the end appears to be a financially strong company with a predictable future (Guenette, 2012).
RECOMMENDATIONS AND JUSTIFICATIONS

RECOMMENDATION#1: Should the firm increase their capital expenditures to increase competitiveness? This will almost always be true but what segments of the business get the most capital allocated to them and why?
Yes, by increasing competitiveness FedEx would increase revenue and reduce cost through tighter integration and consolidation, improve/increase productivity, and reduce capital expenditures. New capital expenditures would help the company make additional revenue (Collins, 2010).
RECOMMENDATION #2: Should the firm increase growth by acquiring other companies for synergies or grow internally? Do they have the infrastructure to grow internally? If they by a competitor, how will the merger be integrated in regards to culture, overlapping businesses, etc.
FedEx should increase growth internally. FedEx should invest in growth in a number of ways: people/training (customer service), capital (facilities and equipment upgrades), and advertising (product and services). Internal growth will inevitably cost money in the short-term, but the returns on these investments should outweigh the money spent over time. The business size will not necessarily increase because of internal growth, but the quality of the business will. As the US economy recovers in the coming years, consumers and small businesses will once again require more of the services that FedEx offers. FedEx should make it be known that FedEx Office is a retail storefront for which all of the company’s other services can be utilized.
RECOMMENDATION #3: Should the firm risk increasing their leverage (debt) to increase earnings and return on capital or keep the leverage the same (or even decrease it). If so, why and by how much.
Yes, FedEx should increase their leverage to increase earning because in the real world, where companies must pay taxes, leveraging a firm does create value because a firm can deduct interest payments against its corporate income taxes. Increasing leverage therefore creates tax savings and increases the value of the firm. FedEx managers should be cautioned that increasing leverage also increases risk. A highly leveraged firm may be overcome with debt and runs the risk of going bankrupt if it cannot pay off its debt.
Equity has a higher cost of capital, debt carries higher financial risk. As debt increases as a percentage of the company’s capital, leverage increases as well do as the chances of financial distress or default. Lowering financial leverage will absolutely lower the financial risk of the company; however, it may not lower the total risk.
RECOMMENDATION #4: Should they increase marketing spending? If so, by how much and where should it be allocated. Should online marketing spending and international marketing increase by more than print ads? Justify any additional spending that is recommended.
FedEx should increase its marketing spending by $200.5 million, with $125 million to be spent on advertising. When people need something delivered quickly, safely, and on-time, they say they need to “FedEx” it. FedEx should work to maintain a controlling stake in the express delivery market while stealing share from UPS in domestic ground delivery by further differentiating itself from UPS through actual innovation and service offerings and/or through manipulation in consumer perception. An issue with the shipping business is that buyers generally have little to no brand loyalty and incur negligible switching costs when changing from one provider to another. FedEx should secure more business partnerships, even at slightly lower margins, which will help to develop loyalty to the brand. (Amsler, Cullen, and Erdmenger, 2010).
RECOMMENDATION #5: How should they go about controlling costs including labor, health care, and pension liabilities? (GM and Ford need help in this department).

* Offer employees flexible work schedules.
* Don't pay overtime unless it is absolutely necessary. Go over the essential labor needs and figure out how to more efficiently get the work done without pushing the staff over 40 hours.
* Use a staffing agency to fill certain positions.
* Implement a periodic review process for analyzing the investment strategies utilized by the fund's investment managers. As part of this review process, develop a database of comparably-sized pension funds used by the company’s business peer groups and conduct an apples-to-apples comparison with the fund.
* Establish a set of conservative metrics to govern the method by which cost-of-living allowances (colas) are issued to the retired plan participants.
* Reduce the benefits covered by FedEx’s insurance plans. Plans with fewer benefits generally cost less than those with more generous ones. Businesses can implement this change by limiting the plans from which employees can choose. Some cash-strapped businesses are passing on a greater portion of the cost of coverage to employees. Instead of splitting the premium cost so that the employer pays 50 percent and the employee pays 50 percent; the employer shifts a greater portion of his share to the employee, so the employer now pays 25 percent and the employee pays 75 percent, but offer ways through a health reward program that could help offset a percentage of the cost.
* Provide employees the option to contribute to health savings accounts in lieu of health insurance or to supplement an existing plan. 

Financial Analysis for FedEx Corporation

EXECUTIVE SUMMARY 

source:homework help

The modern air/ground express industry was pioneered with the founding of Federal Express in 1971; the corporation was created in 1998 as FDX Corporation and became FedEx Corporation in January 2000 (FedEx, 2013).
FedEx provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services, offering integrated business applications through operating companies competing collectively and managed collaboratively, under the respected FedEx brand. FedEx inspires its more than 290,000 employees to remain absolutely, positively focused on safety, the highest ethical and professional standards and the needs of their customers and communities (FedEx, 2013).
FedEx showed real grit in FY12. FedEx’s earnings per share increased 40 percent, and annual revenues exceeded $42 billion, a 9 percent increase, despite political gridlock in the United States, financial turmoil in Europe, a slowing Asian economy and volatile fuel prices. FedEx Ground delivered an 18.4 percent operating margins and accounting for more than half of FedEx operating profit. Online shipments spurred record volumes. More than one quarter of FedEx Ground lanes are now faster in terms of transit times than the competition, boosting service and customer satisfaction to unprecedented levels. As a result, including FedEx SmartPost, FedEx’s overall U.S. ground parcel-market share has increased to nearly 30 percent, doubling over the last decade. The rapid transformation of FedEx Freight paid off with a strong return to profitability. Revenues grew 8 percent year over year. Offering both priority and economy service options and industry-leading transit times have made FedEx Freight a market share leader (FedEx, 2013).
This paper addresses current status of FedEx Corporation and how they are performing. The paper addresses FedEx’s SWOT analysis giving their strengths, threats, weaknesses, and opportunities. The paper gives recommendations and then follows with justifications for those recommendations to FedEx’s Corporation management.
SWOT ANALYSIS

A SWOT analysis is a look at FedEx’s strengths, weaknesses, opportunities, and threats, and is a way to gain a detailed and thorough perspective on the company and its future.
Strength
* Strong brand image
* Unmatched reputation for on-time delivery
* Lots of planes, well-located hubs, great routes/landing rights
* Ranked as one of the best companies to work for many years in a row
* Great R&D, quite innovative
* Extensive capital expenditures
* Focus on customer satisfaction
* Clear leader in domestic express delivery market
* At present, drivers are independent contractors, unlike at UPS where they are unionized
Weakness
* High prices relative to competitors
* Not as strong internationally
* Lag UPS in the ground delivery market
* Not fully differentiable from UPS
* Very exposed to economic conditions and fuel prices
Opportunity
* Economy is beginning to recover, especially in Asia (China specifically)
* Currently offer services to 220+ countries and barring government intervention, can expand in them as it sees fit
* Continued globalization of the world marketplace means more contracts are available and at higher volumes as well
* Expansion of online retailing creates an increased need for on-time, hassle-free shipping
* Focus on taking away international market share from DHL and domestic ground delivery from UPS
Threats
* High fixed costs
* Drivers and other workers are trying to unionize
* Economic downturn has cut down on volume overall
* Many consumers and businesses are switching to slower delivery options to save money
* UPS is attempting to take away market share in the express delivery arena
* E-mail may take away from overnight document delivery market
FedEx possesses several strengths, weaknesses, opportunities, and threats; however in the end appears to be a financially strong company with a predictable future (Guenette, 2012).
RECOMMENDATIONS AND JUSTIFICATIONS

RECOMMENDATION#1: Should the firm increase their capital expenditures to increase competitiveness? This will almost always be true but what segments of the business get the most capital allocated to them and why?
Yes, by increasing competitiveness FedEx would increase revenue and reduce cost through tighter integration and consolidation, improve/increase productivity, and reduce capital expenditures. New capital expenditures would help the company make additional revenue (Collins, 2010).
RECOMMENDATION #2: Should the firm increase growth by acquiring other companies for synergies or grow internally? Do they have the infrastructure to grow internally? If they by a competitor, how will the merger be integrated in regards to culture, overlapping businesses, etc.
FedEx should increase growth internally. FedEx should invest in growth in a number of ways: people/training (customer service), capital (facilities and equipment upgrades), and advertising (product and services). Internal growth will inevitably cost money in the short-term, but the returns on these investments should outweigh the money spent over time. The business size will not necessarily increase because of internal growth, but the quality of the business will. As the US economy recovers in the coming years, consumers and small businesses will once again require more of the services that FedEx offers. FedEx should make it be known that FedEx Office is a retail storefront for which all of the company’s other services can be utilized.
RECOMMENDATION #3: Should the firm risk increasing their leverage (debt) to increase earnings and return on capital or keep the leverage the same (or even decrease it). If so, why and by how much.
Yes, FedEx should increase their leverage to increase earning because in the real world, where companies must pay taxes, leveraging a firm does create value because a firm can deduct interest payments against its corporate income taxes. Increasing leverage therefore creates tax savings and increases the value of the firm. FedEx managers should be cautioned that increasing leverage also increases risk. A highly leveraged firm may be overcome with debt and runs the risk of going bankrupt if it cannot pay off its debt.
Equity has a higher cost of capital, debt carries higher financial risk. As debt increases as a percentage of the company’s capital, leverage increases as well do as the chances of financial distress or default. Lowering financial leverage will absolutely lower the financial risk of the company; however, it may not lower the total risk.
RECOMMENDATION #4: Should they increase marketing spending? If so, by how much and where should it be allocated. Should online marketing spending and international marketing increase by more than print ads? Justify any additional spending that is recommended.
FedEx should increase its marketing spending by $200.5 million, with $125 million to be spent on advertising. When people need something delivered quickly, safely, and on-time, they say they need to “FedEx” it. FedEx should work to maintain a controlling stake in the express delivery market while stealing share from UPS in domestic ground delivery by further differentiating itself from UPS through actual innovation and service offerings and/or through manipulation in consumer perception. An issue with the shipping business is that buyers generally have little to no brand loyalty and incur negligible switching costs when changing from one provider to another. FedEx should secure more business partnerships, even at slightly lower margins, which will help to develop loyalty to the brand. (Amsler, Cullen, and Erdmenger, 2010).
RECOMMENDATION #5: How should they go about controlling costs including labor, health care, and pension liabilities? (GM and Ford need help in this department).

* Offer employees flexible work schedules.
* Don't pay overtime unless it is absolutely necessary. Go over the essential labor needs and figure out how to more efficiently get the work done without pushing the staff over 40 hours.
* Use a staffing agency to fill certain positions.
* Implement a periodic review process for analyzing the investment strategies utilized by the fund's investment managers. As part of this review process, develop a database of comparably-sized pension funds used by the company’s business peer groups and conduct an apples-to-apples comparison with the fund.
* Establish a set of conservative metrics to govern the method by which cost-of-living allowances (colas) are issued to the retired plan participants.
* Reduce the benefits covered by FedEx’s insurance plans. Plans with fewer benefits generally cost less than those with more generous ones. Businesses can implement this change by limiting the plans from which employees can choose. Some cash-strapped businesses are passing on a greater portion of the cost of coverage to employees. Instead of splitting the premium cost so that the employer pays 50 percent and the employee pays 50 percent; the employer shifts a greater portion of his share to the employee, so the employer now pays 25 percent and the employee pays 75 percent, but offer ways through a health reward program that could help offset a percentage of the cost.
* Provide employees the option to contribute to health savings accounts in lieu of health insurance or to supplement an existing plan.
* Enroll all new and pre-vested employees in a defined-contribution plan. A defined-contribution plan dictates that the business is only required to provide its retirement fund match to an employee owned retirement account such as a 401k.
RECOMMENDATION #6: Should the firm expand overseas? If so, which markets should be focused on first and why?
FedEx has done a good job of moving into the international arena, but I feel they could make a bigger impact internationally. It is estimated that the international package market will grow by 5-6% in the coming years, which is nearly double the expected annual growth in world GDP. FedEx should continue investing capital in planes, vehicles and infrastructure, especially in Asia (China specifically), but also focus on penetrating into foreign markets by partnering with local carriers. FedEx has the technological innovation, cash, and capital necessary to elevate a foreign, regional player to the next level. FedEx should set up contracts that give it the option to purchase said companies for a given price if it sees a profitable future by operating and expanding into that market.
In conclusion, FedEx has the largest air fleet in the industry by far, and ships to more countries than its main competitors. The most important development to the industry and more importantly to FedEx is that of Globalization. With global uncertainty, a slowdown of Asia exports and weakness in the technology sector challenged FedEx Express in FY12. U.S. domestic and international priority package volumes were down; however, yield improvements helped FedEx Express maintain profitability. With the emerging e-commerce as well as the development of strong economies in East Asia, Eastern Europe, and the North and South American continents, FedEx certainly has the global economic trends on its side for success.

References

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