As a reminder, you will continue to play the role of a consultant w
1-2 Pages, Executive Summary, plus Excel Calculations wk8 in 30 hours – please see attachments from previous weeks to help
Note: In Weeks 7 and 8, you submitted Part 1 and Part 2 of the Module 3 Assignment. You will complete and submit Part 3 and the executive summary this week.
As a reminder, you will continue to play the role of a consultant who has been hired by a mid-sized company that recently went public to provide some recommendations related to their short-term and long-term financial needs. Your first project is to analyze the short- and long-term capital budget needs of the company. You will prepare and submit a 3- to 5-page report, including an executive summary in which you synthesize your recommendations for the following fiscal year, along with the provided Excel spreadsheet with your calculations. Explain your findings and your recommendations.
For each of the items in your report, you will complete the calculations in the Module 3 Assignment Part 1 Template and will then use that financial information to develop your report to the owner using the Module 3 Assignment Part 2 Template. In your report, be sure to include relevant citations from the Learning Resources, the Walden Library, and/or other appropriate academic sources to support your work.
To prepare for this Assignment:
· Return to the Module 3 Assignment Part 1 Template to continue completing the calculations.
· Return to your Module 3 Assignment Part 2 Template to complete Part 3 of your report, as well as the executive summary.
By Day 7
Submit your synthesis of financial data related to long-term financing needs for an organization, to include the following:
Part 3: Long-Term Working Capital Considerations: CAPM, Stock Valuation, and Project Evaluation Tools (1–2 pages, plus calculations in Excel)
· CAPM and Required Return: The company has a beta of 1.1, and the closest competitor has a beta of 0.30. The required return on an index fund that holds the entire stock market is 11%. The risk-free rate of interest is 4.5%. By how much does your company’s required return exceed your competitor’s required return?
· Constant Growth Valuation: The company is expected to pay a $1.80 per share dividend at the end of the year (i.e., D1 = $1.80). The dividend is expected to grow at a constant rate of 4% a year. The required rate of return on the stock, rs, is 10%. What is the stock’s current value per share?
· Nonconstant Growth Valuation: The company recently paid a dividend, D0, of $2.75. It expects to have nonconstant growth of 18% for 2 years followed by a constant rate of 6% thereafter. The firm’s required return is 12%.
· How far away is the horizon date?
· What is the firm’s horizon, or continuing, value?
· What is the firm’s intrinsic value today, P0?
· Weighted Average Cost of Capital: The company has a target capital structure of 35% debt and 65% common equity, with no preferred stock. Its before-tax cost of debt is 8%, and its marginal tax rate is 40%. The current stock price is P0 = $22.00. The last dividend was D0 = $2.25, and it is expected to grow at a 5% constant rate. What is its cost of common equity and its WACC?
· Capital Budgeting Criteria: The company has an 11% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows:
· What is each project’s NPV?
· What is each project’s IRR?
· What is each project’s MIRR? (Hint: Consider Period 7 as the end of Project B’s life.)
· From your answers to parts a, b, and c, which project would be selected? If the WACC was 18%, which project would be selected?
· Construct NPV profiles for Projects A and B.
· Calculate the crossover rate where the two projects’ NPVs are equal.
· What is each project’s MIRR at a WACC of 18%?
Executive Summary (page 1 of your report)
Provide the company owner with a 1-page executive summary of your findings and recommendations. Address the following in your executive summary:
· Briefly identify the purpose of your report.
· Concisely summarize the results of your financial analysis of the company’s short- and long-term capital budget needs.
· Synthesize your recommendations for how the company can raise money in the short-term and long-term to continue to add value to the organization.
,
Module 3 Assignment: Part 2 Capital Budget Decision Making for an Organization
Report prepared by:
Date: December 18, 2022
Walden University
WMBA 6070: Managerial Finance
1
Part 2: Long-Term Working Capital Considerations: Time Value of Money and Bonds
Introduction
Long-term working capital requirements is the lifeblood of a company’s success. It is therefore important for business to critically evaluate its current capital decisions on its sustainability. It is against this backdrop that this paper evaluates the long-term working capital consideration of a mid-sized company that has been listed recently.
Future Value and Present Value
|
Future Value |
|
|
Interest Rate |
6.0% |
|
|
|
|
# Of Periods |
5 |
|
|
|
|
Starting Value |
$ 2,000,000 |
|
|
|
|
Future Lump Sum |
$ 2,676,451 |
If our company deposits $ 2,000,000 in an account paying an interest rate of 6 % for 5 years, there will be increase in its long-term working capital since the future value will be $ 676,451 more than the original amount deposited.
|
Present Value |
|
|
Interest Rate |
5.0% |
|
|
|
|
# Of Periods |
20 |
|
|
|
|
Lump Sum in the Future |
$ 29,000 |
|
|
|
|
Present Value |
$10,930 |
The present value of a security that promises $ 29,000 in 20 years is $ 10,930. This value is lower that the future value because of inflation effect which affects the value of money. As such the money to be received in future should be higher than the amount today to compensate the investors for decrease in value of money because of inflation.
Bonds
|
Bond Valuation |
||
|
Face Value |
$1,000 |
|
|
Yield to Maturity |
8.2% |
|
|
Coupon Bond C |
11.50% |
|
|
Coupon Bond Z |
0% |
|
|
Years to Maturity |
Price of Bond C |
Price of Bond Z |
|
4 |
$1,108.82 |
$729.61 |
|
3 |
$1,084.74 |
$789.44 |
|
2 |
$1,058.69 |
$854.17 |
|
1 |
$1,030.50 |
$924.21 |
|
0 |
$1,000.00 |
$1,000.00 |
As part of the long-term working capital our company has options of issuing bonds to finance its operations. Both bonds have same face value but different coupon rates and maturity period. The price of bond C is higher than the price of bond Z because bond C has coupon rate of 11.5% against the zero- coupon bond Z. The price of a bond decreases with a decrease in years of maturity because the risk of default on a bond increase as the maturity date gets closer. As the risk of default increases, the price of the bond decreases in order to compensate for the higher risk. Since the bond's maturity is a measure of the time until it must be redeemed and repaid, a decrease in the bond's maturity implies an increase in the risk of default. Therefore, the price of both bonds Cand Z decreases as the maturity decreases in order to account for the increased risk.
|
Basic Input Data |
Bond A |
Bond B |
Bond C |
|
Years to maturity |
12 |
12 |
12 |
|
Coupon rate |
7% |
9% |
11% |
|
Par value |
$1,000 |
$1,000 |
$1,000 |
|
Periodic payment |
$70 |
$90 |
$110 |
|
Yield to maturity |
9% |
9% |
9% |
|
|
|
||
|
Price |
$856.79 |
$1,000.00 |
$1,143.21 |
|
|
|
|
|
|
Current Yield |
|||
|
|
Bond A |
Bond B |
Bond C |
|
Current yield |
8.17% |
9.00% |
9.62% |
The current yield of a bond is an important metric for determining its potential as an investment. It is the annual amount of income received from the bond as a percentage of its market price. Knowing the current yield of a bond is important for our firm’s long-term working capital considerations because it helps us assess the risk of the investment, as well as the potential return. By knowing the current yield, our company can better evaluate whether or not it is a good investment based on our risk profile and the expected return (Fabozzi & Fabozzi,2021). It also allows us to compare different bonds and decide which one offers the best value. In addition, the current yield can help a firm adjust its working capital strategy accordingly in order to maximize our return on investment. A bond with a low current yield is generally better for our firm's long-term working capital considerations. Low current yields may indicate that the bond has a longer-term maturity, which means that the firm will be able to have access to the funds for a longer period of time. Additionally, a low current yield means that our firm will have a lower interest rate to pay, which will have a positive effect on their long- term working capital. In this regard our firms should issue bond A.
|
Type of the Bond |
Face Value |
Price of the bond |
|
|
Bond A |
$1,000 |
$856.79 |
Discount |
|
Bond B |
$1,000 |
$1,000.00 |
At par |
|
Bond C |
$1,000 |
$1,143.21 |
At a premium |
Conclusion
The time value of money is critical in long-term working capital planning. The information about the future and present value calculation provides insight to our company on the best course of actions (Cho et al.2021). For instance, the result has shown that by depositing $ 2million at 6% for 5 years our company will have over 2.6million after 5 years. Besides the current yield of various bond options has shown that our company should invest in a bond with low current yield since it indicates longer payment period hence long-term access to funds.
References
Cho, T., Grotteria, M., Kremens, L., & Kung, H. (2021). The Present Value of Future Market Power. Available at SSRN.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3921171
Fabozzi, F. J., & Fabozzi, F. A. (2021). Bond markets, analysis, and strategies. MIT Press.
2
,
Cash Conversion Cycle
| Cash Conversion Cycle | ||
| (a) | Enter figures below | |
| Inventory Conversion Period | 64 | days |
| Average Collection Period | 28 | days |
| Payables Deferral Period | 41 | days |
| Cash Conversion Cycle | 51 | days |
| (b) | ||
| Annual Sales | $ 2,578,235.00 | |
| divided into 365 days | 365 | days |
| Average Sales per Day | $ 7,063.6575 | |
| Average Collection Period | 28 | days |
| Investment in Receivables | $ 197,782.41 | |
| (c) | ||
| Step 1: Inventory Balance | ||
| Annual Sales | $ 2,578,235.00 | |
| Cost of Goods Sold | 75% | percent of sales |
| divided into 365 days | 365 | days |
| Inventory Conversion Period | 64 | days |
| $ 5,297.74 | ||
| Inventory | $ 339,055.56 | |
| Step 2: Inventory Turnover Ratio | ||
| Annual Sales | $ 2,578,235.00 | |
| Inventory | $ 339,055.56 | |
| Turnover Ratio | 7.60 | times a year |
| (d) | ||
| Competitor A | 88 | days |
| 54 | days | |
| 30 | days | |
