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Case Analysis: MGM Mirage Case Solution & Answer

Case Analysis: MGM Mirage Case Solution

As Casino generated almost 50% or close revenue among the overall revenue of the company, which indicates that the Casinos are the backbone of the firm’s revenue. Food and Beverage unit generated almost 17% to 18% of the overall revenue and ranked as the second big contributor of the revenue. However, there are several items to be discussed but to keep the analysis simple the analyst found that the overall net profit of the company is low as, the company has a strong and huge capital structure but it isstill earning only 4% to 7% of profit on its revenue. Nonetheless, it has seen that the net profit is increasing in last two years but it isstill very low as compared to the capital composition. Conclusively, it can be said that the company is just focusing to increase its revenue by bearing higher expenses and neglecting the profit growth.

Ratio Analysis

            Ratio analysis has been used to evaluate the key performance areas of the company and therefore, only three key areas were evaluated including the Profitability, Liquidity and Solvency. Furthermore, the calculations are in the spreadsheet and charts are at the end of paper to make better understanding of the ratios.

Liquidity Ratios

Current Ratio, Quick Ratio and Cash Ratios were used to evaluate the liquidity of the company and findings reveals that current ratio was close to 1 and quick ratio showed almost the similar amount, the reason behind close values of these ratios is that the company has invested a low amount in inventories and prepaid expenses. Furthermore, the company has a low cash holding and therefore, the cash ratio is almost 0.25 in all the years.

Solvency Ratios

            Debt ratio, Equity Ratio and Debt to equity ratios were used to evaluate the solvency of the company and the analyst found that the company has a high leverage as, the debt ratio was almost 76% in all the years indicating a high solvency risk. On the other hand, the Debt to Equity ratio was almost 3 times in all the years indicating that the debt is almost triple of the shareholder’s equity. This shows dual analysis as either the company has been stuck up in high amount of debt or either the investors havea deep trust in company’s policies and operational efficiencies, which is why they are investing in the company.

Profitability Ratios

            ROA, ROE and another from of ROE which is known as the DuPont identity has been used in these analysis. However, the findings suggest that the ROE is ranging from 7% to 11% showing a low contribution of equity towards profit generation. On the other hand, the ROA indicated that it was 2% to 3% in all the years while this also indicates low performance of the firm’s assets. Finally, the DuPont identity suggested that same rate as of ROE sowing low or below average efforts of Equity towards profit generation.

DCF Valuation

            DCF valuation model was used to analyze the terminal growth and the foreseeable future inflows for the company. Moreover, the only assumption made to this analysis was that the growth rate will be 3% as, the company is not speedily growing and the other assumption was that the EBIT will grow at 5%. Afterwards, it was found that the company will have a Free Cash flows after tax of almost 283 million in 2003 which will be grown to almost 518 million in the last year of analysis. However, the terminal value will be 4.6 billion which indicates that the company will be able to earn a cash flows of 4.6 billion over its life time. Finally, the NPV of the company was calculated at WACC which was 8.15% and it was suggested that the company will have a NPV of 1.4 billion………………

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