Correlation Tools

Question 1

Deliverable Length: 600-800 words

Next, using the sample data provided, prepare a chart similar to the one in the downloaded file to indicate whether the correlation between Variables A and B were found to be positive, negative, or minimal. Provide explanation and justification for your decisions.

In your own words, explain what it means if the correlation of 2 variables is positive, negative, or minimal (close to 0), and give an example of each.

• What do you deduce from the correlations? Explain if you believe these to be short or long-term objectives and outcomes.
• What are the implications for Big D Incorporated regarding their client in the outdoor sporting goods?
• What are the implications for the penetration into the indoor sporting goods market?
• Also, how can you use the correlation tools to identify the variables in the research toward the expansion into the indoor sporting goods market?

Question 2

You need to help EIS decide whether to go ahead with the Pathrite system or not. Provide all relevant information and analysis,including a computation of the net present value and internal rate of return of the Pathrite system project.

This case is about capital budgeting. However, some of the issues that you will need to grapple with are raised in the modules covering Stock Valuation and Capital Markets. Keep in mind that there is a lot of information in the case: regarding each piece of information, ask yourself whether it’s relevant or not and if relevant, how. Keep in mind also that cost of capital is a conceptual quantity that can be measured using several pieces of information. Capital Budgeting is not a mechanistic exercise, not in the forecasting of cashflows and not in the estimation of cost of capital.

Note that you should use the weighted average cost of capital formula to compute the cost of capital, viz. WACC = (proportion of equity in the firm’s liability structure)(cost of equity capital) + (proportion of debt in the firm’s liability structure)(cost of debt capital)(1-marginal tax rate).