How does the Analytical Hierarchy Process differ from a simple scoring model? Is it worth the extra effort?
What will be an ideal response?
The Analytical Hierarchy Process (AHP) is a four-step process that consists of structuring the hierarchy of criteria, allocating weights to criteria, assigning numerical values to evaluation dimensions, and evaluating project proposals. Primary differences between the two approaches are that AHP takes a more rigorous view of the assignment of criteria weights and values to the evaluation dimensions. Differences among evaluation scale items are not necessarily equal and can be adjusted as managers and decision makers see fit. The resulting product sums have meaning, unlike the values computed in a simple scoring model. AHP methodology can dramatically improve the project selection process over use of the simple scoring model. AHP is not without limitations and does require more effort to configure and use. The authors caution against using a project screening tool that has a poor cost/benefit ratio, so determination of the value derived from use of AHP versus a simple scoring model can best be made on a case-by-case basis.
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Using the capital asset pricing model, the cost of equity capital for a company in this industry with a debt-to-equity ratio of 0.01, asset beta of 2.27, and a marginal tax rate of 23% is closest to:
Boris Duarte, CFA, covers initial public offerings for Zellweger Analytics, an independent research firm specializing in global small-cap equities. He has been asked to evaluate the upcoming new issue of TagOn, a U.S.-based business intelligence software company. The industry has grown at 26 percent per year for the previous three years. Large companies dominate the market, but sizable “pure-play” companies such as Relevant, Ltd., ABJ, Inc., and Opus Software Pvt. Ltd also compete. Each of these competitors is domiciled in a different country, but they all have shares of stock that trade on the U.S. NASDAQ. The debt ratio of the industry has risen slightly in recent years. Company Sales (in millions) Market Value Equity (in millions) Market Value Debt (in millions) Equity Beta Tax Rate Share Price Relevant Ltd. $752 $3,800 $0.0 1.702 23% $42 ABJ, Inc. $843 $2,150 $6.5 2.800 23% $24 Opus Software Pvt. Ltd. $211 $972 $13.0 3.400 23% $13 Duarte uses the information from the preliminary prospectus for TagOn’s initial offering. The company intends to issue 1 million new shares. In his conversation with the investment bankers for the deal, he concludes the offering price will be between $7 and $12. The current capital structure of TagOn consists of a $2.4 million five-year noncallable bond issue and 1 million common shares. Other information that Duarte has gathered: Currently outstanding bonds $2.4 million five-year bonds, coupon of 12.5 percent, with a market value of $2.156 million Risk-free rate of interest 5.25% Estimated equity risk premium 7% Tax rate 23% A. 17%. B. 21%. C. 24%.
Emara Company sells two generators—Model A and Model B—for $456 and $394, respectively
The variable cost of Model A is $406 and of Model B is $304. The company will generate lower revenues but a higher net income if it sells more of Model B than Model A. Indicate whether the statement is true or false