CAPITAL BUDGET DECISION MAKING FOR AN ORGANIZATION—PART 3
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.
RESOURCES
Be sure to review the Learning Resources before completing this activity.
Click the weekly resources link to access the resources.
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.
