Essay Instructions: Your Task
Assume that you now work in the Head Office of Warner plc. Your boss MS Weetman, the chief Financial Officer, has asked you to review two investment proposals sent to Head Office by the Manufacturing Division
Prepare a report for Ms Weetman
The report should be presented in 4 clearly defined sections to cover the following 4 specific tasks.
Estimate the "Weighted Average Cost of Capital" (WACC) for Wanner plc.
(the process you adopt is more important than the final figure you arrive at so ensure you clearly explain the sources of your data, your assumption and your calculation) < weighting 20%>
Advise Warner on how the WACC figure might sensibly be used in appraising capital < Weighting 20%>
Apprise the new product proposal using any techniques you think are appropriate and make a clear recommendation as to whether the project should be accepted. < weighting 30%>
Identify the sources of long term finance available to the company and on the facts given advise on how the 2 projects should be funded if the board decide to go ahead with both of them < weighting 30%>
I will send you a handout file which is tell you the task and information of Warner plc. that you will use the figure for calculation part. And also I will send u an example which my friend done in last semester. In example file you will see there are 4 tasks which are nearly the same but the company is different. You might follow the structure in example I sent you.
There are faxes for this order.
Excerpt From Essay:
Essay Instructions: Question:
In each of the theories of capital structure, the cost of equity rises as the amount of debt increases. So why don?t financial managers use as little debt as possible to keep the cost of equity down? After all, isn?t the goal of the firm to maximize share value (and minimize shareholder costs)?
(Hint -you need to explain the difference between cost of equity and the weighted average cost of capital)
Excerpt From Essay:
Essay Instructions: We will pay $300.00 for the completion of this order.
In this project, you are supposed to be a financial manager to apply the financial knowledge obtained from the course to estimate the cost of debt, cost of preferred stock, cost of common equity, capital structure, and the weighted average cost of capital (WACC) for a publicly-traded company of your choice. Then you are required to use the WACC as the discount rate to perform capital budgeting analysis of a project that the firm is considering.
(1) Read the Instructions for the Final Project carefully. Please let me know if you have any questions.
(2) You should inform the instructor of the company you choose before your formally start the project. Students should analyze different firms. If several students happen to select the same company, the first student who informs the instructor has the priority, so other students have to change their company selections.(Therefore, do not do a company that is too common)
(3) Financial data and industry ratios are available in the UHV online library.
(4) Your project should be well-organized and typed in a WORD file (Office 2003 version). Attach the necessary tables and/or worksheets with your report. The style and organization of the project accounts for 10 points. List the references that you cited or used in your project. The Final Project Grade Sheet may help you understand the contribution of each part of the project to your overall grade.
INSTRUCTIONS TO THE PROJECTS:
Cost of Capital, Capital Structure,
and Capital Budgeting Analysis
1. Purpose of the project:
In this project, you are supposed to be a financial manager working for a big corporation and you have to apply the knowledge obtained from the financial management (FIN6352) course to determine the cost of debt, cost of preferred stock, cost of common equity, capital structure, and the weighted average cost of capital (WACC) for a publicly-traded company of your choice. You will use the WACC as the discount rate to conduct capital budgeting analysis for a project that the firm is considering and then decide whether it should be accepted or not.
2. Outline for the project:
(1) Executive Summary (10 points)
- Summarize the results and analysis of the report.
(2) Financial Ratio Analysis (40 points)
- Perform trend analysis of the key financial ratios (i.e., liquidity ratios, asset management ratios, debt management ratios, profitability ratios, market value ratios) of the company.
- Perform industry (or benchmark companies) comparison analysis of the key financial ratios of the company.
- Based on the financial ratio analysis results, evaluate the financial performance of the company.
(3) Estimate Capital Structure (25 points)
- Estimate the firm¡¯s weights of debt, preferred stock, and common stock using the firm¡¯s balance sheet (book value).
- Estimate the firm¡¯s weights of debt, preferred stock, and common stock using the market value of each capital component.
(4) Compute Weighted Average Cost of Capital (WACC) (35 points)
- Estimate the firm¡¯s before-tax and after-tax component cost of debt;
- Estimate the firm¡¯s component cost of preferred stock;
- Use three approaches (CAPM, DCF, bond-yield-plus-risk-premium) to estimate the component cost of common equity of the firm.
- Calculate the firm¡¯s weighted average cost of capital (WACC) using market-based capital weights.
(5) Cash Flow Estimation (40 points)
- We assume that the company you selected is considering a new project. The project has 8 years¡¯ life. This project requires initial investment of $120 million to purchase land, construct building, and purchase equipment, and $8 million for shipping & installation fee. The fixed assets fall in the 7-year MACRS class. The salvage value of fixed assets is $30 million. The number of units of the new product expected to be sold in the first year is 800,000 and the expected annual growth rate is 8%. The sales price is $200 per unit and the variable cost is $150 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized inflation rate of 3%. The required net operating working capital (NOWC) is 12% of sales. The company is in the 40% tax bracket. The project is assumed to have the same risk as the corporation, so you should use the WACC you obtained from prior steps as the discount rate.
- Compute the depreciation basis and annual depreciation of the new project. (Please refer to table 12-3 MACRS allowances)
- Estimate annual cash flows for the 8 years.
- Draw a time line of the cash flows.
(6) Capital Budgeting Analysis (40 points)
- Using the WACC you obtained for the publicly-traded company as discount rate, apply capital budgeting analysis techniques (NPV, IRR, MIRR, PI, Payback, Discounted Payback) to analyze the new project.
- Perform a sensitivity analysis for the effects of key variables (e.g., sales growth rate, cost of capital, unit costs, fixed costs, sales price) on the estimated NPV or IRR in order to demonstrate the sensitivity of the model.
- Discuss whether the project should be taken and summarize your report.
3. Other information regarding the project:
(1) Avoid firms in the financial sector. Their financial statements are not compatible with the type of model we study in this class. Generally, financial firms have 4-digit SIC codes 6000s.
(2) You will inform the instructor of the company you choose. Students have to choose different companies. If several students want to use the same company, the first student to inform the instructor will have priority; the others will have to pick another company.
(3) Your project should be well-organized and typed in a Word document and attach the necessary Excel worksheets with your report. The style and organization of the project is important.
Financial Data and Industry Ratios Resources
(1) In the database D&B Key Business Ratios, you can find some key industry & business ratios. Other books, reference & print resources include 1) Almanac of Business and Industrial Financial Ratios 2) Industry Norms and Key Business Ratios 3) Robert Morris Associates (RMA) Annual Statement Studies.
(2) In the database Mergent Online, you can find financial data and information for most U.S. publicly-traded firms.
Individual Term Project Grade Sheet
Final Ratio Analysis
Estimate Capital Structure
Cash Flow Estimation
Capital Budgeting Analysis
Style and Organization
Perform capital budgeting analysis for a publicly traded company
1. Estimate the component cost of capital: Student applies capital asset pricing model to estimate cost of equity component. Can correctly estimate cost of debt and cost of equity. Students use various methods for each component cost.
2. Obtain the capital structure and calculate the weighted average cost of capital: Student must correctly estimates weights on capital components using book values and market values. Student correctly estimates cost of capital.Student researches financial reports and finds the target capital structure. Student presents a comparison against other firms in the industry.
3. Calculate net cash flows for an expansion project:Student correctly estimates Operating Cash Flows (OCF), correctly uses the adjustments to Net Operating Working Capital (NOWC) and calculates the Salvage Cash Flows. Student uses models that consider inflation rates, multiple depreciation schedules and different salvage values.
4. Evaluate an expansion project: Student correctly calculates NPV and IRR in order to evaluate the project. Student documents his/her conclusion. Student applies other tools to evaluate the project. Student includes results for scenario analysis and uses sensitivity analysis for the main input variables.
Excerpt From Essay:
Essay Instructions: SINGLE SPACED...........
THE COST OF CAPITAL FOR GOFF COMPUTER, INC.
You have recently been hired by Goff Computer, Inc. (GCI), in the finance area. GCI was founded
eight years ago by Chris Goff and currently operates 74 stores in the Southeast. GCI is privately
owned by Chris and his family and had sales of $97 million last year.
GCI primarily sells to in-store customers. Customers come to the store and talk with a sales
representative. The sales representative assists the customer in determining the type of com-
puter and peripherals that are necessary for the individual customer's computing needs. After
the order is taken, the customer pays for the order immediately, and the computer is assembled
to fill the order. Delivery of the computer averages 15 days, but is guaranteed in 30 days.
GCI's growth to date has been financed from its profits. Whenever the company had suffi-
cient capital, it would open a new store. Relatively little formal analysis has been used in the
capital budgeting process. Chris has just read about capital budgeting techniques and has
come to you for help. The company has never attempted to determine its cost of capital, and Chris
would like you to perform the analysis. Since the company is privately owned, it is difficult to deter-
mine the cost of equity for the company. You have determined that to estimate the cost of capital for
GCI, you will use Dell as a representative company. The following steps will allow you to calculate this
1. Most publicly traded corporations are required to submit 10Q (quarterly) and 10K (annual) re-
ports to the SEC detailing their financial operations over the previous quarter or year, respec-
tively. These corporate filings are available on the SEC Web site atwww.sec.gov. Go to the SEC
Web site, follow the "Search for Company Filings" link, the "Companies & Other Filers" link,
enter "Dell Computer," and search for SEC filings made by Dell. Find the most recent 10Q and 10K
and download the forms. Look on the balance sheet to find the book value of debt and the book
value of equity. If you look further down the report, you should find a section titled either "Long-
term Debt" or "Long-term Debt and Interest Rate Risk Management" that will list a breakdown of
Dell's long-term debt.
2. To estimate the cost of equity for Dell, go to finance.vahoo.com and enter the ticker symbol
"DELL." Follow the various links to find answers to the following questions: What is the most
recent stock price listed for Dell? What is the market value of equity, or market capitalization?
How many shares of stock does Dell have outstanding? What is the beta for Dell? Now go back
to finance.yahoo.com and follow the "Bonds" link. What is the yield on 3-month Treasury bills?
Using the historical market risk premium, what is the cost of equity for Dell using the CAPM?
3. Go to investor.reuters.com and find the list of competitors in the industry. Find the beta for each
of these competitors, and then calculate the industry average beta. Using the industry average
beta, what is the cost of equity? Does it matter if you use the beta for Dell or the beta for the
industry in this case?
4. You now need to calculate the cost of debt for Dell. Go to www.nasdbondinfo.com. enter Dell
as the company and find the yield to maturity for each of Dell's bonds. What is the weighted
average cost of debt for Dell using the book value weights and the market value weights? Does
it make a difference in this case if you use book value weights or market value weights?
5. You now have all the necessary information to calculate the weighted average cost of capital
for Dell. Calculate the weighted average cost of capital for Dell using book value weights and
market value weights assuming Dell has a 35 percent marginal tax rate. Which cost of capital
number is more relevant?
6. You used Dell as a representative company to estimate the cost of capital for GCI. What are
some of the potential problems with this approach in this situation? What improvements might
Excerpt From Essay:
I really do appreciate HelpMyEssay.com. I'm not a good writer and the service really gets me going in the right direction. The staff gets back to me quickly with any concerns that I might have and they are always on time.
I have had all positive experiences with HelpMyEssay.com. I will recommend your service to everyone I know. Thank you!
I am finished with school thanks to HelpMyEssay.com. They really did help me graduate college..