GC-FIN
650 Entire Course
Click Link Below To Buy:
Contact Us:
Hwcoursehelp@gmail.com
GC-FIN 650 Entire Course
FIN650
FIN 650 Grand Canyon Week 1 Discussion 1
Respond to the questions posed in the Mini Case at the end of
chapter 1 of the textbook by drafting an e-mail to Michelle DellaTorre in which
you respond to the questions. Post your e-mail as a reply to this discussion
thread. As follow up discussion, respond to two e-mails drafted by your
classmates asking any questions you may have or for clarification of their
explanations.
FIN 650 Grand Canyon Week 1 Discussion 2
This discussion thread will be used to discuss the practice
problems completed in this module. After completing the problems, submit your
answers to the instructor. Your instructor will specify which problems will be
reviewed for discussion. Post your answers to the posted problem to this
discussion thread and discuss any challenges you had with completing the
problems, tips that helped you arrive at the correct answers, and/or questions
you may still have.
FIN 650 Grand Canyon Week 2 Discussion 1
Your stockbroker suggests you concentrate your portfolio on stocks
with low P/E ratios. She explains that these firms are likely to be out of
favor with investors because they have a low price relative to their current
earnings. Is this necessarily a good investment practice? Why or why not?
FIN 650 Grand Canyon Week 2 Discussion 2
This discussion thread will be used to discuss the practice
problems completed in this module. After completing the problems, submit your
answers to the instructor. Your instructor will specify which problems will be
reviewed for discussion. Post your answers to the posted problem to this
discussion thread and discuss any challenges you had with completing the
problems, tips that helped you arrive at the correct answers, and/or questions you
may still have.
FIN 650 Grand Canyon Week 3 Discussion 1
How would companies benefit from running sensitivity analysis? How
do they determine the most relevant items to evaluate?
FIN 650 Grand Canyon Week 3 Discussion 2
This discussion thread will be used to discuss the practice
problems completed in this module. After completing the problems, submit your
answers to the instructor. Your instructor will specify which problems will be
reviewed for discussion. Post your answers to the posted problem to this
discussion thread and discuss any challenges you had with completing the
problems, tips that helped you arrive at the correct answers, and/or questions
you may still have.
FIN 650 Grand Canyon Week 4 Discussion 1
The book identifies five steps in the financial plan. Which
step(s) is (are) the most critical? Explain your rationale.
FIN 650 Grand Canyon Week 4 Discussion 2
This discussion thread will be used to discuss the practice
problems completed in this module. After completing the problems, submit your
answers to the instructor. Your instructor will specify which problems will be
reviewed for discussion. Post your answers to the posted problem to this
discussion thread and discuss any challenges you had with completing the
problems, tips that helped you arrive at the correct answers, and/or questions
you may still have.
FIN 650 Grand Canyon Week 5 Discussion 1
Share repurchases have grown significantly over the past decade or
two. In fact, a recent radio commentator suggested that the current rise in share
prices (both the S&P 500 and the Dow Jones averages are trading at historic
highs as of this writing) is due not to superior company performance, but to
the increased volume of money flowing into the stock market from corporate
share repurchases. Does this sound like a valid explanation for an increase in
share prices? Why or why not?
FIN 650 Grand Canyon Week 5 Discussion 2
This discussion thread will be used to discuss the practice
problems completed in this module. After completing the problems, submit your
answers to the instructor. Your instructor will specify which problems will be
reviewed for discussion. Post your answers to the posted problem to this
discussion thread and discuss any challenges you had with completing the
problems, tips that helped you arrive at the correct answers, and/or questions
you may still have.
FIN 650 Grand Canyon Week 6 Discussion 1
What are the components of WACC? Which component has the most
significance in the total? Over which component does management have the greatest
influence?
FIN 650 Grand Canyon Week 6 Discussion 2
This discussion thread will be used to discuss the practice
problems completed in this module. After completing the problems, submit your
answers to the instructor. Your instructor will specify which problems will be
reviewed for discussion. Post your answers to the posted problem to this
discussion thread and discuss any challenges you had with completing the
problems, tips that helped you arrive at the correct answers, and/or questions
you may still have.
FIN 650 Grand Canyon Week 7 Discussion 1
How should a firm determine its dividend distribution policy?
Discuss three different viewpoints (management, stockholders, and lenders).
FIN 650 Grand Canyon Week 7 Discussion 2
This discussion thread will be used to discuss the practice
problems completed in this module. After completing the problems, submit your
answers to the instructor. Your instructor will specify which problems will be
reviewed for discussion. Post your answers to the posted problem to this
discussion thread and discuss any challenges you had with completing the
problems, tips that helped you arrive at the correct answers, and/or questions
you may still have.
FIN 650 Grand Canyon Week 8 Discussion 1
Reflect upon your experiences and the concepts studied throughout
the course. In your own words, explain what maximizing shareholder wealth is
all about. What is or was the most difficult concept to grasp throughout the
course? What are some tips you would share with future students taking the
course.
FIN 650 Grand Canyon Week 8 Discussion 2
This discussion thread will be used to discuss the practice
problems completed in this module. After completing the problems, submit your
answers to the instructor. Your instructor will specify which problems will be
reviewed for discussion. Post your answers to the posted problem to this
discussion thread and discuss any challenges you had with completing the
problems, tips that helped you arrive at the correct answers, and/or questions
you may still have.
FIN 650 Grand Canyon Week 1 Benchmark Case study
Corporate Governance
Over the past few years, the number of start-up companies
attracted to either doing business themselves in the cloud, or specifically
creating applications for others to use in the cloud, has grown significantly.
A few but very promising enterprises have launched applications in “container”
technology, which enables companies, programmers, or other enterprises to both
launch and run applications solely in the cloud.
There is still a lot of room in this emerging marketplace, and you
are diving in. The product you’ve developed has a unique angle to tap into the
local-grown/local-made/local-paid movement that’s also growing larger every
day. Your initial market is your own small city, which operates independently
but which is linked economically and via public safety provision to another
small city sitting directly across a river separating the two. Once you’ve been
able to launch your company in your city, you plan to approach the “sister city”
leaders, then the county, state, and eventually go national. It’s too soon now,
but your future plans entail an IPO offering to accomplish all this.
Eventually, you hope to be able to re-imagine your product to go global. You
have big plans, are close to being tapped out financially and you now need to
plan for additional investors.
Address the following considerations as they apply to your product
launch.
1. Describe an agency relationship and how it may/will take shape
for your small company. As the sole employee and investor in your startup, what
agency conflicts might arise?
2. Six months have transpired, and you’ve been able to add two
employees. In this new arrangement, what agency disputes might now develop that
need to be addressed, and how might you address them? What resources do you
need to use or consider?
3. Another three months have passed. You are now ready to expand
to your sister city and you need more capital. You decide the wisest path is to
sell some stock to outside investors, but you will maintain control over your
company by holding onto the majority of the stock. In this new scenario, what
type of agency conflict might occur? How can you address this in advance?
4. The IPO was a success, and you have a robust number of
shareholders. With board support, you determine it is time to hire a financial
manager to help your firm achieve current goals and set new ones appropriate to
the firm’s growth strategy. What professional strengths and skills will an
individual seeking this position need to possess?
5. Another consideration you feel you need to address at this
point, now that your firm’s stock is publicly traded, is how to sustain the
high ethical standards you’ve fostered thus far as you move into the firm’s
future. What strategies can your management team implement to conduct your
business with both personal and professional integrity? What steps can you take
to ensure that ethical considerations for financial and other management
decisions are embedded into the firm’s culture?
6. Congratulations – you are now at Year One, and everything is
moving along faster than you anticipated. While this is great, you are at the
point where you need to raise additional capital from outside lenders. With
this decision, what type of agency costs might the company incur? How might a
lender mitigate any agency costs?
7. Year Two rolls around. Your company has been able to expand
beyond your local communities and into to localities and governments in half
the counties of the state. The stakes are getting bigger and you welcome the
idea of high-level input to ensure the company keeps growing and expanding. You
cash out the majority of your stock and turn the company over to an elected
board of directors. Neither you nor any other stockholders own a controlling
interest (which is also the situation at most public companies). List six
potential managerial behaviors the new board might take that could harm your
company’s value, and what steps overall can put into place to avoid or mitigate
these.
8. You are also aware from your prior career and from your
research, that corporate governance can affect shareholder value. This greatly
concerns you, as you still have lofty plans for your company’s growth and
eventual global trajectory. Questions you’ve identified that need to be
addressed at this stage include: a) What is corporate governance?; b) What five
corporate governance provisions are internal to a firm and are under its
control?; c) What characteristics of the board of directors usually lead to
effective corporate governance?; d) What characteristics of the board of
directors signal ineffective or problematic governance practices?; e) How can
regulatory agencies and legal systems affect corporate governance? If there are
differences in local versus national levels, expand upon these.
9. Lastly, one of your new board members is very concerned with
“blockholders.” What is block ownership? How does it affect corporate
governance? Explain the pros and cons.
Prepare this assignment according to the guidelines found in the
APA Style Guide, located in the Student Success Center. An abstract is not
required.
This assignment uses a rubric. Please review the rubric prior to
beginning the assignment to become familiar with the expectations for
successful completion.
You are required to submit this assignment to Turnitin. Please
refer to the directions in the Student Success Center.
FIN 650 Grand Canyon Week 2 Assignment
Financial Analysis and Proposal Component 1
Throughout this course, you will prepare a comprehensive financial
analysis and proposal (excluding tables, figures, and addenda) that will
demonstrate your understanding of key financial concepts, strategies, and
practices. After selecting a company to profile, you will construct a
comparative financial analysis of your selected company’s financial position
with that of a prime competitor, for example, Amazon and Netflix, Microsoft and
Oracle, or Bank of America and JPMorgan Chase & Co. Following the nine-step
assessment process detailed inAssessing a Company’s Future Financial Health,
your financial analysis and proposal will be composed of four separate
component assignments in Topics 2, 4, 6, and 8.
Financial Analysis and Proposal Assignment: Overall
In this topic, you will select a publicly-traded company and a chief
competitor and submit both names to the instructor for approval by the end of
the topic.Note: You will need to have this step finalized before you can
complete the assignment detailed below, so it is in your best interest to
select and obtain approval as soon as possible.
In your selection process, consider only a company and competitor
that are both publicly-traded and which enjoy extensive analytical coverage to
ensure access to sufficient financial data to complete this four-part
assignment successfully.
As you develop your analysis, research the market at each step for
relevant data on your chosen company/competitor, including financial reports
and market information. Disclose all assumptions you set forth (e.g., revenue
growth projections, expense controls) and provide supporting rationale and
quantifiable evidence behind those assumptions. As your financial analysis and
proposal develops over the span of the course, you will synthesize the
analytical and research data and outcomes of the nine-step assessment process
in order to assess 1) the long-term financial health of the chosen company, and
2) the suitability in recommending the company (versus the competitor) as a
long-term investment opportunity.
Financial Analysis and Proposal Component 1: Analysis of the
Fundamentals
For this assignment, apply the first two steps of the nine-step
assessment process detailed in Assessing a Company’s Future Financial
Health(i.e., Step 1: Strategy and Step 2: Revenue Outlook) to compose a
comprehensive overview of the company/competitor pairing you’ve selected and
which has been approved by your course instructor. Use the “Analysis of the
Fundamentals” resource provided in the topic materials to present your findings
as per below:
1. Using the most recent U.S. Securities and Exchange Commission
(SEC) 10-K reports for your company and chosen competitor, provide a brief yet
succinct comparative analysis for a) the business overall, b) products and
services, c) customers, d) goals, e) strategies, f) market positions, g)
general risk factors, h) quantitative and qualitative market risk factors, i)
competitors, j) competitive technology, k) regulatory considerations, and l)
operating characteristics. Use the “Analysis of the Fundamentals” resource
provided in the topic materials to present your findings.
2. Download most recent annual financial statements for your
company and chosen competitor (i.e., balance sheets, income statements, and
statement of cash flows). Perform a ratio analysis on the current financial
reports, interpret the results, and provide a brief discussion regarding the
overall revenue outlook. To successfully complete this assignment, please show
all ratio analysis calculations.
Note: You will be required to re-submit this assignment, revised
to incorporate all instructor feedback, along with the other three component
assignments as one comprehensive submission in Topic 8. To save time later in
the course, consider addressing any feedback soon after this assignment has
been graded and returned to you.
Prepare this assignment according to the guidelines found in the
APA Style Guide, located in the Student Success Center. An abstract is not
required.
This assignment uses a rubric. Please review the rubric prior to
beginning the assignment to become familiar with the expectations for
successful completion.
You are required to submit this assignment to Turnitin. Please
refer to the directions in the Student Success Center.
FIN 650 Grand Canyon Week 3 Case Study
Fixed Income Securities
Congratulations. You have been promoted to vice president and
director of your mid-size firm’s pension fund management team located in
Cincinnati, OH. Before you have even had the opportunity to settle into your
new office, your senior vice president tapped you to take her place and present
an investment seminar to “a group of investment decision-makers” comprised of
government analysts from all over the tri-state area but that is the extent of
the information you’ve been provided. After doing some quick research, you’ve
identified that the specific target audience for this presentation is composed
primarily of individuals with little or no professional investment experience
who are attending this seminar to build their skills.
In order to address the range of information these individuals
need to know and the likely range of questions that may crop up, you’ll need to
be able to:
1. Describe the essential characteristics of a bond and how these
characteristics interact to determine bond value, inclusive of how both the
interest rate and coupon rate influence bond value and pricing.
2. Summarize call provisions and sinking fund provisions. Explain
how these types of provisions individually make bonds more or less risky for a)
an investor, and b) the issuer.
3. The value of an asset whose value is based on expected future
cash flows is determined by the present value of all future cash flows the
assets will generate. Given the case scenario and target audience provided,
select and discuss a simple asset situation that could apply to exemplify this
concept.
4. Define what it means when a bond is callable. Provide two
measures you can review to understand what type of returns to expect if the
bond is called or if it is not called.
5. Describe the type of returns one could one expect with a
callable bond trading at a premium price and provide your rationale. Explain
the significance of the designation “premium price.” Discuss why or why not a
callable bond trading at a premium price would be an appropriate investment for
the target audience’s organizations.
6. Select an example scenario appropriate to the seminar’s target
audience Write a general expression for the yield on a probable debt security
(rd) and define these terms in regards to that hypothetical security: real
risk-free rate of interest (r*), inflation premium (IP), default risk premium
(DRP), liquidity premium (LP), and maturity risk premium (MRP).
7. Define the nominal risk-free rate (rRF) and provide an example
relevant to your target audience of a specific security that can be used as an
estimate of rRF.
8. Describe interest rate risk and reinvestment rate risk and how
these relate to the maturity risk premium. Based on reinvestment rate risk,
provide an example on how a 1-year bond or a 10-year bond would be a better
investment for a typical community as represented by those attending your
seminar.
9. Select an example appropriate to your seminar target audience
to explain the concepts of a) term structure and interest rates and b) yield
curve.
10. Review corporate bankruptcy law. If a firm were to default on
its bonds, describe how the company assets could be/would be liquidated. What
is a likely outcome for bondholders? Select and describe an example scenario
that applies to your seminar attendees’ organizations.
Prepare this assignment according to the guidelines found in the
APA Style Guide, located in the Student Success Center. An abstract is not
required.
This assignment uses a rubric. Please review the rubric prior to
beginning the assignment to become familiar with the expectations for
successful completion.
You are required to submit this assignment to Turnitin. Please
refer to the directions in the Student Success Center.
FIN 650 Grand Canyon Week 4 Assignment
Financial Analysis and Proposal Component 2
Throughout this course you will prepare a comprehensive financial
analysis and proposal (excluding tables, figures, and addenda) that will
demonstrate your understanding of key financial concepts, strategies and
practices. After selecting a company to profile, you will construct a
comparative financial analysis of your selected company’s financial position
with that of a prime competitor, for example, Amazon and Netflix, Microsoft and
Oracle, or Bank of America and JPMorgan Chase & Co. Following the nine-step
assessment process detailed in Assessing a Company’s Future Financial Health,
your financial analysis and proposal will be composed of four separate
component assignments in topics 2, 4, 6, and 8.
For this assignment, apply the following two steps of the
nine-step assessment process detailed in Assessing a Company’s Future Financial
Health(i.e., Step 3: Investments in Assets and Step 4: Economic Performance)to
compose further assessment of the company/competitor pairing analysis as below:
1. Review the Management’s Discussion and Review (MDR), aka the
Management’s Discussion and Analysis (MDA) section, which can be obtained from
the SEC 10-K reports. Develop pro-forma financial statements for your
company/competitor for the next 5 years. Pro-forma financial statements require
us to make conservative assumptions about future growth; as such, your
discussion must justify and support any assumptions you have made in developing
the pro-formas.
2. Discuss current strategy (ies) used by the company/competitor
and any relevant future investments required to support the business unit (s)
strategy(ies) to achieve higher ROI and market position.
Perform a ratio analysis on the two pro-forma financial statements
you’ve developed (company and competitor), and provide a discussion regarding
future profitability and competitive performance as well as any significant
changes you observe. To successfully complete this assignment, please show all
ratio analysis calculations.
Note: You will be required to re-submit this assignment, revised to
incorporate all instructor feedback, along with the other three component
assignments as one comprehensive submission in Topic 8. To save time later in
the course, consider addressing any feedback soon after this assignment has
been graded and returned to you.
Prepare this assignment according to the guidelines found in the
APA Style Guide, located in the Student Success Center. An abstract is not
required.
This assignment uses a rubric. Please review the rubric prior to
beginning the assignment to become familiar with the expectations for
successful completion.
You are required to submit this assignment to Turnitin. Please
refer to the directions in the Student Success Center.
FIN 650 Grand Canyon Week 4 Problem Set 2
Complete the following problems from Chapter 12 in Financial
Management: Theory and Practice:
Chapter 12:
Topics: Additional Funds Needed, Forecasted Statements and Ratios,
Financing Deficits
Problems: 12-2, 12-4, 12-5, 12-7, 12-8, 12-9
General Instructions:
Use the Topic 4 Excel Resource (if needed). Please show all work
for each problem. You are not required to submit this assignment to Turnitin.
FIN 650 Grand Canyon Week 5 Case Study
Risk and Return
You have recently graduated with a major in finance and landed a
financial planner job with Barney Smith Inc., a large financial services
corporation. Your first assignment is to invest $100,000 for a client. Because
the funds will be invested in a new business the client plans to start at the
end of the year, you have been instructed to plan for a 1-year holding period.
Further, your boss has restricted you to the investment alternatives shown in
Table 1 on the attached resource, “Topic 5 Assignment Graphic Tables.”
(Disregard for now the items at the bottom of the data; you will fill in the blanks
later.)
Note that the estimated returns of American Foam (Am. Foam), a
bedding company, do not always move in the same direction as the overall
economy. For example, when the economy is below average, consumers purchase
fewer mattresses than they would if the economy were stronger. However, if the
economy is in a flat-out recession, a large number of consumers who were
planning to purchase a more expensive inner-spring mattress may purchase a
cheaper foam mattress instead. Under these circumstances, we would expect
American Foam’s stock price to be higher if there is a recession than if the
economy was just below average.
Barney Smith’s economic forecasting staff has developed
probability estimates for the state of the economy, and its security analysts have
developed a sophisticated computer program that was used to estimate the rate
of return on each alternative under several state of the economy scenarios.
Alta Industries (Alta Inds) is an electronics firm; Repo Men collects past-due
debts; and American Foam, as per above, manufactures mattresses and various
other foam products. Barney Smith also maintains an “index fund” which owns a
market-weighted fraction of all publicly traded stocks; you can invest in that
fund, and thus obtain average stock market results.
Given the situation as described, answer the following questions.
1- Describe investment returns, and what “best case” and “worst
case” returns you might hope to achieve for your new client. What is the return
on an investment that costs $1,000 and is sold after one year for $1,100? Would
you recommend this type of investment for your task at hand?
2- Explain why the Treasury bill’s (aka, T-bill) return is
independent of the state of the overall economy? Do T-bills promise a
completely risk-free return? Provide your rationale.
3- Why are Alta Ind.’s returns expected to move with the economy
whereas Repo Men’s are expected to move counter to the economy?
4- Calculate the expected return (), the standard deviation (?p),
and the coefficient of variation (CVp) for the portfolio profiled in Table 1.
Provide your answers with calculations.
5- How does the risk of this two-stock portfolio compare with the
risk of the individual stocks if those stocks were held in isolation? In what
ways do “portfolio effects” impact how investors think about the risk of
individual stocks?
6- If you decided to hold a simple one-stock portfolio, and
consequently were exposed to more risk than diversified investors, could you
expect to be compensated for all of your risk; that is, could you earn a risk
premium on that part of your risk that you could have eliminated by
diversifying? Explain.
7- Describe how market risk is measured for individual securities.
How are beta coefficients calculated? Calculate beta using the following
historical returns for the stock market and for another company, P.Q. Unlimited
(PQU) as per Table 2 on the attached resource, “Topic 5 Assignment Graphic
Tables.” Note: Use the Excel formula function to calculate beta and interpret
your results.
8- Write out the Security Market Line (SML) equation and use it to
calculate the required rate of return on each alternative. Compare the expected
rates of return with the required rates of return. How do these perform against
your predictions?
9- Does the fact that Repo Men has an expected rate of return less
than the T-bill rate of return make any sense? Why or why not?
10- What would be the market risk and the required return of a
50-50 portfolio of Alta Industries and Repo Men? Or of Alta Industries and
American Foam? Based on your analysis and conclusions, which would you
recommend to your client?
Prepare this assignment according to the guidelines found in the
APA Style Guide, located in the Student Success Center. An abstract is not
required.
This assignment uses a rubric. Please review the rubric prior to
beginning the assignment to become familiar with the expectations for
successful completion.
You are required to submit this assignment to Turnitin. Please
refer to the directions in the Student Success Center.
FIN 650 Grand Canyon Week 6 Assignment
Financial Analysis and Proposal Component 3
Throughout this course, you will prepare a comprehensive financial
analysis and proposal (excluding tables, figures, and addenda) that will
demonstrate your understanding of key financial concepts, strategies, and
practices. After selecting a company to profile, you will construct a
comparative financial analysis of your selected company’s financial position
with that of a prime competitor, for example, Amazon and Netflix, Microsoft and
Oracle, or Bank of America and JPMorgan Chase & Co. Following the nine-step
assessment process detailed in Assessing a Company’s Future Financial Health,
your financial analysis and proposal will be composed of four separate component
assignments in Topics 2, 4, 6, and 8.
For this assignment, apply the next three steps of the nine-step
assessment process detailed in Assessing a Company’s Future Financial
Health(i.e., Step 5: External Financing Need, Step 6: Target Sources of
Finance, and Step 7: Viability of 3-5 Year Plan) to compose further assessment
of the company/competitor pairing analysis as below:
1. Current financial plan. Interpret current equity valuations in
order to recommend strategic solutions regarding future financial goals. Consider
how stock splits and stock dividend allocations can impact the plan.
2. Future external financing needs. To support growth, companies
need capital, and external financial needs are vital any firm’s future success.
Describe external financing needs sufficient to support your ongoing analytical
assumptions and pro forma financial statements for your chosen company and
competitor.
3. Access to target sources of external financing. You will need
to consider the amount of financing, timing, length of time required, and
deferability of financing options.
4. Viability of a 3-5 Year Plan. Assess the consistency of the
plan with the firm’s goals, and the achievability of both the operating plan
and the financing plan you are proposing.
Note: You will be required to re-submit this assignment, revised
to incorporate all instructor feedback, along with the other three component
assignments as one comprehensive submission in Topic 8. To save time later in
the course, consider addressing any feedback soon after this assignment has
been graded and returned to you.
Prepare this assignment according to the guidelines found in the
APA Style Guide, located in the Student Success Center. An abstract is not
required.
This assignment uses a rubric. Please review the rubric prior to
beginning the assignment to become familiar with the expectations for
successful completion.
You are required to submit this assignment to Turnitin. Please
refer to the directions in the Student Success Center.
FIN 650 Grand Canyon Week 6 Problem Set 3
Complete the following problems from Chapters 7, 14, and 15 in
Financial Management: Theory and Practice:
Chapter 7:
Topics: Equity Valuation Models, Preferred Stock Valuation Model,
and Free Cash Flow Valuation Model
Problems: 7-3, 7-4, 7-5, 7-9, 7-12, 7-13, 7-14, 7-17, 7-18, 7-20
Chapter 14:
Topics: Dividend Distribution Policies and Alternative Dividend
Policies
Problems: 14-9, 14-10
Chapter 15:
Topics: Break-Even Point and Capital Structure Analysis
Problems: 15-7, 15-8, 15-9
General Instructions:
Use the Topic 6 Excel Resource (if needed). Please show all work
for each problem. You are not required to submit this assignment to Turnitin.
FIN 650 Grand Canyon Week 7 Case Study
Project Valuation and Risk Analysis
Iron Ore What? (IOW) Casting Company is considering adding a new
line to its product mix. Sydney Johnson, a recently minted MBA, will be
conducting the capital budgeting analysis. The new production line would be set
up in unused space in IOW’s main plant. The machinery invoice price totals approximately
$250,000, with another $20,000 in shipping charges and $30,000 to install the
equipment, for a total requirement estimated at $300,000. The machinery has an
economic life of 4 years, and IOW has obtained a special tax ruling that places
the equipment in the Modified Accelerated Cost Recovery System (MACRS) 3-year
class. After 4 years of use the machinery is expected to have a salvage value
of $25,000.
The new product line would generate incremental sales of 1,350
units per year for 4 years at an incremental cost of $100 per unit in the first
year, excluding depreciation. Each unit can be sold for $200 each in the first
year. The sales price and cost are expected to increase by 3% per year due to
inflation. Further, to handle the new line, the firm’s net working capital
would have to increase by an amount equal to 15% of sales revenues. The firm’s
tax rate is 40%, and its overall weighted average cost of capital is 12%.
1. Calculate and provide the annual sales revenues and costs
(other than depreciation). Why is it important to include inflation when
estimating cash flows?
2. Construct 4 years of annual incremental operating cash flow
statements for IOW Casting Company. Estimate the required net working capital
for each year, and the cash flow due to investments in net working capital.
Calculate the after-tax salvage cash flow.
3. Calculate the net cash flows for each of the 4 years. Based on
these cash flows, what are the project’s NPV, IRR, MIRR, PI, payback, and
discounted payback? Do these indicators suggest the project should be
undertaken? Explain.
4. What does the term “risk” mean in the context of capital
budgeting? To what extent can risk be quantified, and, when risk is quantified,
is the quantification based primarily on statistical analysis of historical
data or on subjective, judgmental estimates? Provide your rationale.
5. Describes sensitivity analysis and discuss a) its primary
weakness; and b) its primary usefulness? For the IOW project, perform a
sensitivity analysis on the unit sales, salvage value, and cost of capital.
Assume that each of these variables can vary from its expected, or “base-case”
value by ± 10%, ± 20%, and ± 30%. Include a sensitivity diagram, and discuss
the results.
6. Assume that Sydney Johnson is confident of her estimates of all
the variables that affect the project’s cash flows exceptunit sales and sales
price. If product acceptance is poor, unit sales could be only approximately
1,000 units a year and the unit price would be set at $150. Conversely, an excellent
consumer response could produce sales of 2,000 units and a unit price of $220.
Sidney believes that there is a 25% chance of poor acceptance, a 25% chance of
excellent acceptance, and a 50% chance of average acceptance (the base case).
What is the worst-case NPV? The best-case NPV? Use the worst-, base-, and
best-case NPVs and probabilities of occurrence to find the project’s expected
NPV, standard deviation, and coefficient of variation.
7. Explain scenario analysis and any problems, issues, or concerns
that surround this type of projection.
8. Define simulation
No comments:
Post a Comment