1. Evaluate JC Penney’s performance in the last few years, both qua...

Question
1. Evaluate JC Penney’s performance in the last few years, both qualitatively and quantitatively. Why are they in trouble? Is it due to bad luck or bad management or both? To what extent are their current troubles due to economic versus financial distress?

2. Assume that JC Penney will experience a $1.5 billion net income loss for 2013 and that a cash balance of $1.0 billion is required for JCP to operate efficiently. Create a pro forma sources and uses statement to estimate JCP’s external funding required by year-end 2013 (similar to the sources and uses statement for 2012 in Exhibit 7). How much external funding will JCP need over the next year (i.e. between year-end 2012 and year-end 2013)?

3. Using the static trade-off framework we have used in class, what do you think is a sensible long-term target capital structure for JC Penney? I expect you to derive both a qualitative analysis, as well as a (rough) quantitative target, in the form of a target leverage ratio and a target coverage ratio.

4. Over the next year, what financial actions do you suggest that JC Penney undertake, in order to maximize the value to its shareholders? You should consider the alternatives of a debt issue (of non-investment grade debt at a 6% coupon) and a public equity issue. (Note: I do not expect you to undertake any valuation of JC Penney.)

5. What effect did Bill Ackman have on the company? Were his interests appropriately aligned with those of shareholders? How do you assess the board’s decisions regarding CEO appointments? Was Ron Johnson the right choice as the CEO?
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Answer 1:
JC Penney has been witnessing deterioration in performance over the last few years. Ratios are an important tool in assessing performance and it can be seen that all sets of ratios have declined over the period 2010 – 2012, as summarized in Exhibits 1 and 2. The profits were negative in the periods 2011 and 2012 and the extent of losses were also higher, which shows that the company is doing a poor job with respect to wealth addition to shareholder’s wealth.
Steep decline in liquidity ratios along with rising levels of debt and leverage pose threat to the long term sustainability since the company does not have adequate cash and profits to
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        Backtrace
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        • 15. vendor/laravel/framework/src/Illuminate/Routing/ControllerDispatcher.php:43
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        • 17. vendor/laravel/framework/src/Illuminate/Routing/Route.php:205
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        25.29mstwenty4_siteHomeworkLibraryController.php#97
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        Backtrace
        • 16. app/Http/Controllers/HomeworkLibraryController.php:97
        • 17. vendor/laravel/framework/src/Illuminate/Routing/Controller.php:54
        • 18. vendor/laravel/framework/src/Illuminate/Routing/ControllerDispatcher.php:43
        • 19. vendor/laravel/framework/src/Illuminate/Routing/Route.php:260
        • 20. vendor/laravel/framework/src/Illuminate/Routing/Route.php:205
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        8.65mstwenty4_siteHomeworkLibraryController.php#97
        Backtrace
        • 21. app/Http/Controllers/HomeworkLibraryController.php:97
        • 22. vendor/laravel/framework/src/Illuminate/Routing/Controller.php:54
        • 23. vendor/laravel/framework/src/Illuminate/Routing/ControllerDispatcher.php:43
        • 24. vendor/laravel/framework/src/Illuminate/Routing/Route.php:260
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        6.08mstwenty4_siteHomeworkLibraryController.php#97
        Backtrace
        • 21. app/Http/Controllers/HomeworkLibraryController.php:97
        • 22. vendor/laravel/framework/src/Illuminate/Routing/Controller.php:54
        • 23. vendor/laravel/framework/src/Illuminate/Routing/ControllerDispatcher.php:43
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        • 25. vendor/laravel/framework/src/Illuminate/Routing/Route.php:205
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        2.47mstwenty4_siteHomeworkLibrary.php#201
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        Backtrace
        • 20. app/Models/HomeworkLibrary/HomeworkLibrary.php:201
        • 26. app/Http/Controllers/HomeworkLibraryController.php:105
        • 27. vendor/laravel/framework/src/Illuminate/Routing/Controller.php:54
        • 28. vendor/laravel/framework/src/Illuminate/Routing/ControllerDispatcher.php:43
        • 29. vendor/laravel/framework/src/Illuminate/Routing/Route.php:260
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        18.09mstwenty4_siteHomeworkLibraryRepository.php#30
        Bindings
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        Backtrace
        • 14. app/Repositories/HomeworkLibraryRepository.php:30
        • 15. vendor/laravel/framework/src/Illuminate/Cache/Repository.php:397
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        • 18. app/Repositories/HomeworkLibraryRepository.php:39
        • 19. app/Http/Controllers/HomeworkLibraryController.php:139
      • select * from `subjects` where `subjects`.`id` in (19)
        910μstwenty4_siteHomeworkLibraryRepository.php#30
        Backtrace
        • 19. app/Repositories/HomeworkLibraryRepository.php:30
        • 20. vendor/laravel/framework/src/Illuminate/Cache/Repository.php:397
        • 21. vendor/laravel/framework/src/Illuminate/Cache/CacheManager.php:419
        • 23. app/Repositories/HomeworkLibraryRepository.php:39
        • 24. app/Http/Controllers/HomeworkLibraryController.php:139
      • select * from `solutionslibrary_files` where `solutionslibrary_files`.`solutionlib_id` = 27969 and `solutionslibrary_files`.`solutionlib_id` is not null and `publish` = 'question' order by `order` asc, `id` asc
        5.62mstwenty4_siteHomeworkLibrary.php#260
        Bindings
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        Backtrace
        • 15. app/Models/HomeworkLibrary/HomeworkLibrary.php:260
        • 16. app/Transformers/HomeworkLibrary/HomeworkLibraryTransformer.php:58
        • 19. vendor/league/fractal/src/TransformerAbstract.php:128
        • 20. vendor/league/fractal/src/TransformerAbstract.php:107
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        1.06mstwenty4_siteHomeworkLibrary.php#260
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        Backtrace
        • 15. app/Models/HomeworkLibrary/HomeworkLibrary.php:260
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        • 19. vendor/league/fractal/src/TransformerAbstract.php:128
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        840μstwenty4_siteHomeworkLibrary.php#260
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        Backtrace
        • 15. app/Models/HomeworkLibrary/HomeworkLibrary.php:260
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        • 19. vendor/league/fractal/src/TransformerAbstract.php:128
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