Start reviewing and responding to the postings of your classmates as early in the week as possible. Respond to at least two of your classmates. Participate in the discussion by asking a question, providing a statement of clarification, providing a point of view with a rationale, challenging an aspect of the discussion, or indicating a relationship between one or more lines of reasoning in the discussion.
Do you agree with their position? Why or why not?
STUDENT 1:
Amanda Dennis
A project cash flow forecast includes cost estimates for a project, as well as a schedule of when you will incur those costs. This forecast also displays the project’s revenue and a schedule of when you will receive that revenue (Marker, 2024).
One way to ensure a project’s cash flow forecast is accurate is to utilize a forecast calendar, which will include payment due dates based on the supplier or vendor’s payment terms, and show the true cost of the project. A forecast calendar can help organize the various phases of the project, with each phase showing a breakdown of the work to be completed. Including payment due dates will ensure there are no missed or late payments made to vendors. Reviewing the vendors’ contracts will ensure the payment terms are correct. The forecast calendar should also include all costs associated with the project, such as direct and indirect costs. In addition to the outgoing cash flow side of the project, the calendar should also include incoming cash flow. This will include payments that are due from customers.
In addition to utilizing a forecast calendar, one can ensure there are open lines of communication between the various departments involved in the project. Each department provides important figures for the forecast. Maintaining open lines of communication will ensure any updates that are needed to the forecast are made.
One last way to ensure the accuracy of a cash flow forecast is to create multiple scenarios. This can include the best-case scenario, worst-case scenario, and the most likely to occur. An example of a possible scenario could include possible tariffs that could occur on purchased materials from overseas.
Capital Structure
Debt is one of the two main ways a company can raise money in the capital markets. Companies benefit from debt because of its tax advantages; interest payments made as a result of borrowing funds may be tax-deductible (Tuovila, 2024). Using equity in a company’s capital structure can be more expensive, but the benefit is a capital structure based on equity does not need to be paid back.
While both types of capital structures have their advantages and disadvantages, I would have to lean towards using a debt-based capital structure. Companies that have a high leverage ratio and an aggressive capital structure tend to have higher growth rates than those that utilize an equity-based capital structure.
To continue to monitor how much debt the company has leveraged, it’s important to conduct a debt-to-equity (D/E) analysis and compare it to the industry’s averages. If the company is seen as having too much debt financing, future investors can view it as a credit risk. The key is to find a good balance of both debt and equity in the capital structure.
References
Marker, A. (2024, March 20). Project-based cash flow analysis guide. Smartsheet. Retrieved May 6, 2024, from https://www.smartsheet.com/content/project-cash-flow
Tuovila, A. (2024, February 25). Capital structure definition, types, importance, and examples. Investopedia. Retrieved April 4, 2024, from https://www.investopedia.com/terms/c/capitalstructure.asp
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STUDENT 2:
Kassandra Coleman
As an analyst forecasting a project’s cash flow can be difficult and you can encounter many risks. To be as accurate as possible there are a variety of techniques you can use to include a multitude of formulas such as the net present value (NPV) and the Weighted Average Cost of Capital Calculations (WACC). This can present you with a better picture of your project’s outcomes. In important part of forecasting cash flow is that it provides a more complete picture to investors as “published profits can be manipulated, whereas cash generated by a company cannot” (Fight, 2006).
In addition to formulas, you can use historical analysis which is the “starting point for projecting a firm’s future performance under future conditions” (Fight, 2006). Looking at how a company or is similar project has done in the past is a good predictor on how it will progress. Another way to project is by using forecasting models such as the Monte Carlo Simulation which is “used to predict the probability of a variety of outcomes when the potential for random variables is present” (Kenton, 2023). There is no absolute way to alleviate risk however a study found that when “companies use financial analysts to provide cash flow forecasts, the accuracy of earnings forecasts improves, while understanding of cash flow persistence and accruals also increases” (Oh et al., 2020).
In some cases, firms use more debt in their capital structure to enhance the owners’ return on their investments. This would be considered the trade-off theory verse the pecking-order theory. The trade-off theory there is an “optimal amount of debt for any individual firm” (Ross, 2021) verse the pecking order theory where there is no level of debt. An example of the trade-off theory was employed by Coca-Cola whereas the pecking order theory was utilized by Intel.
In 2014 The Coca-Cola Company (Coke) had a long-term debt of $19,063 million and a net income of $45,998 million. The debt ratio at Coke is optimal and is maximizing its market capitalization value at their debt levels. The company has a long-term debt of less than one year’s current net earnings. Consequently, a single year earnings can pay the debt. Intel is a company that follows the pecking order theory, particularly because of its high-risk industry. Although the company is large, considering the technology industry is forever changing at a rapid pace, the company struggles to remain relevant, which creates the industry to be high risk. Because of the large market and competition, the company has to create innovative products and quickly get them to market. This causes a problem by not allowing revenue to fund the company’s growth, and the firm has to rely on debt to satisfy the market. (Business, 2019)
Based off the examples alone the trade-off theory would seem to be superior. In addition, the trade-off theory appears to the more ethical and less risky. However, ultimately it appears to be up to the circumstances in which each firm finds themselves in on how to pursue investments.
References:
Business, D. (2019). Trade-off and Pecking-order Theories. Elijah Clark & Associates. https://elijahclark.com/trade-off-and-pecking-order-theories/
Fight, A. (2006). Cash flow forecasting. Elsevier/Butterworth-Heinemann. Fight A. Cash Flow Forecasting. Butterworth-Heinemanhttps://search-ebscohost-com.su.idm.oclc.org/login.aspx?direct=true&db=e900xww&AN=130272&site=ehost-live&scope=site
Kenton, W. (2023, March 26). Monte Carlo Simulation. Investopedia. https://www.investopedia.com/terms/m/montecarlosimulation.asp
Oh, H. M., Park, S. B., & Kim, J. H. (2020). Do Analysts’ Cash Flow Forecasts Improve Firm Value? International Journal of Financial Studies, 8(4), 60. https://doi.org/10.3390/ijfs8040060
Ross, S. (2021). Corporate Finance (13th ed.). McGraw-Hill Higher Education (US). https://digitalbookshelf.southuniversity.edu/books/9781264112180
