CAPITAL BUDGET DECISION MAKING FOR AN ORGANIZATIONPART 2
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.
WEEKLY 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 2 of your report. Note: Be sure to keep a copy of your completed Assignment this week, as you will be adding to the same file for your Week 8 Assignment.
BY DAY 7
Submit your synthesis of financial data related to long-term financing needs for an organization, to include the following:
PART 2: LONG-TERM WORKING CAPITAL CONSIDERATIONS: TIME VALUE OF MONEY AND BONDS (12 PAGES, PLUS CALCULATIONS IN EXCEL)
Future Value: If the company deposits $2 million in a bank account that pays 6% interest annually, how much will be in the account after 5 years?
Present Value: What is the present value of a security that will pay $29,000 in 20 years if securities of equal risk pay 5% annually?
Required Interest Rates: The company owner has said she will retire in 19 years. She currently has $350,000 saved and thinks she will need $800,000 at retirement. What annual interest rate must she earn to reach that goal, assuming she does not save any additional funds?
Future Value of an Annuity: Find the future values of these ordinary annuities. Compounding occurs once a year.
$500 per year for 8 years at 14%
$250 per year for 4 years at 7%
$700 per year for 4 years at 0%
Present Value of an Annuity: Find the present values of these ordinary annuities. Discounting occurs once a year.
$600 per year for 12 years at 8%
$300 per year for 6 years at 4%
$500 per year for 6 years at 0%
Bond Valuation: The company has two bonds in their investment portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 8.2%. Bond C pays an 11.5% annual coupon, while Bond Z is a zero-coupon bond.
Assuming that the yield to maturity of each bond remains at 8.2% over the next 4 years, calculate the price of the bonds at each of the following years to maturity. Explain any observed differences from the pricing calculations of the two bonds.
Years to MaturityPrice of Bond CPrice of Bond Z4 3 2 1 0
Yield to Maturity and Yield to Call: The owner is interested in investing some retained earnings in corporate bonds. She is considering the following:
Bond A has a 7% annual coupon, matures in 12 years, and has a $1,000 face value.
Bond B has a 9% annual coupon, matures in 12 years, and has a $1,000 face value.
Bond C has an 11% annual coupon, matures in 12 years, and has a $1,000 face value.
Each bond has a yield to maturity of 9%.
a. Before calculating the prices of the bonds, identify whether each bond is trading at a premium, at a discount, or at par.
b. Calculate the price of each of the three bonds.
c. Calculate the current yield for each of the three bonds.
Cash Conversion Cycle
(a)
Inventory Conversion Period
Average Collection Period
Payables Deferral Period
Cash Conversion Cycle
(b)
Annual Sales
divided into 365 days
Average Sales per Day
Average Collection Period
Investment in Receivables
(c)
Step 1: Inventory Balance
Annual Sales
Cost of Goods Sold
divided into 365 days
Inventory Conversion Period
Enter figures below
days
days
days
0 days
365 days
0 days
–
$
$
$
75% percent of sales
365 days
0 days
–
Inventory
$
–
Step 2: Inventory Turnover Ratio
Annual Sales
Inventory
Turnover Ratio
$
$
–
(d)
Competitor A
$
#DIV/0!
times a year
days
days
days
0 days
Competitor B
days
days
days
0 days
sion Cycle
Additional Funds Needed
Last year’s Sales
Sales to Increase (in percent)
Total Liabilities and Equity = Assets
Accounts Payable
Notes Payable
Accrued Liability
Profit Margin
Retained
Required increase in Assets
Spontaneous increase in Payables and Accruals
Increase in Retained Earnings
Assets/Sales
Next year’s Sales (forecasted)
Change in Sales
Additional Funds Needed
#DIV/0!
#DIV/0!
$
$
$
#DIV/0!
#DIV/0!
Cross-Exchange Rate
$1 to Israeli shekels
$1 to Japanese Yen
Cross-Exchange Rate
#DIV/0! Yen/Shekel
Future Value
Present Value
Interest Rate
Interest Rate
# of Periods
# of Periods
Starting Value
Lump Sum in the Future
Future Lump Sum
$
–
Present Value
$0
Required Interest Rates
Present Value
in savings
Future Value
needed at retirement
Additional funds
Number of Periods
Required Interest Rate
years
#NUM!
a)
Future Value of an Annuity
# of Periods
# of Periods
Payments (per period)
Payment per period
$
–
Future Value of an Annuity
Present Value
b)
Interest Rate
# of Periods
# of Periods
Payments (per period)
Payment per period
$
–
Future Value of an Annuity
Present Value
c)
Interest Rate
# of Periods
# of Periods
Payments (per period)
Payment per period
$
–
$0.00
Present Value of an Annuity
Interest Rate
Future Value
$0.00
Present Value of an Annuity
Interest Rate
Future Value
c)
Present Value of an Annuity
Interest Rate
Future Value
b)
a)
Interest Rate
Present Value
$0.00
Bond Valuation
Face Value
Yield to Maturity
Coupon Bond C
Coupon Bond Z
Years to Maturity
4
3
2
1
0
Price of Bond C
$0.00
$0.00
$0.00
$0.00
$0.00
Price of Bond Z
$0.00
$0.00
$0.00
$0.00
$0.00
Price of each of the three bonds
Basic Input Data
Bond A
Bond B
Years to maturity
Coupon rate
Par value
Periodic payment
$0
$0
Yield to maturity
9%
9%
Price
Current yield
Bond C
$0
9%
$0.00
$0.00
$0.00
Current Yield
Bond A
#DIV/0!
Bond B
#DIV/0!
Bond C
#DIV/0!
CAPM and Required Return
Market Beta
1.0
Required Return
Risk-Free Rate
Market Premium
0.00%
Your Company
Risk-Free Rate
Market Premium
Company Beta
Required Return
Closet Competitor
Risk-Free Rate
Market Premium
Competitor’s Beta
Required Return
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Difference in Required Return
0.00%
Constant Growth Valuation
Expected Dividend
Constant Growth
Required Rate of Return
Current Value per Share
#DIV/0!
Non-Constant Growth Valuation
Paid Dividend
Non-Constant Growth x 2 years
Constant Growth thereafter
Required Rate of Return
Cash Flow at Horizon or Continuing Date
Horizon Timeline Years
Dividends
Cash Flow
Present Value
Intrinsic Stock Value
#DIV/0!
0
$0.0000
1
$0.0000
$0.0000
#DIV/0!
2
$0.0000
#DIV/0!
#DIV/0!
#DIV/0!
3
$0.0000
$0.0000
Weighted Average Cost of Capital
Debt
Common Equity
Cost of Debt
Tax Rate
Current Stock Price
Last Dividend Paid
Expected Constant Growth
Next Dividend
Internal Equity
WACC
$
#DIV/0!
#DIV/0!
Year
Project A
Project B
Difference
0
1
$0
WACC
Capital Budgeting Criteria
2
3
4
$0
11%
$0
$0
WACC
NPV @ 11%
Project A
$0.00
Project B
$0.00
5
$0
6
$0
7
$0
$0
18%
NPV @ 18%
Project A
$0.00
Project B
$0.00
IRR @ 11%
Project A
#NUM!
Project B
#NUM!
MIRR @ 11%
Project A
#DIV/0!
Project B
#DIV/0!
Discount Rate
0.0%
10.0%
11.0%
18.1%
20.0%
24.0%
30.0%
NPV-A
$0
$0
$0
$0
$0
$0
$0
Crossover Rate
MIRR @ 18%
Project A
#DIV/0!
Project B
#DIV/0!
NPV-B
$0
$0
$0
$0
$0
$0
$0
#NUM!
Comparison Project A vs Project B
$1
$1
$1
$1
$1
$1
$0
$0
$0
$0
$0
1
2
3
4
Series1
5
Series2
t A vs Project B
5
6
7
Module 3 Assignment:
Capital Budget Decision Making for an Organization
Report prepared by: Replace this text with your name.
Date: Replace this text with the submission date.
Walden University
WMBA 6070: Managerial Finance
1
Executive Summary
Replace this text with your executive summary.
2
Part 1: Short-Term Working Capital Considerations
Replace this text with introductory information. Add or remove headings as necessary.
[Heading]
Replace or remove this text. Add or remove headings as necessary.
[Sub-Heading]
Replace or remove this text. Add or remove headings as necessary.
3
Part 2: Long-Term Working Capital Considerations: Time
Value of Money and Bonds
Replace this text with introductory information. Add or remove headings as necessary.
[Heading]
Replace or remove this text. Add or remove headings as necessary.
[Sub-Heading]
Replace or remove this text. Add or remove headings as necessary.
4
Part 3: Long-Term Working Capital Considerations: CAPM,
Stock Valuation, and Project Evaluation Tools
Replace this text with introductory information. Add or remove headings as necessary.
[Heading]
Replace or remove this text. Add or remove headings as necessary.
[Sub-Heading]
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5
References
[Please delete this note before submitting your Assignment. For more information about
formatting your reference list, please visit the following site:
https://academicguides.waldenu.edu/writingcenter/apa/references.]
Include appropriately formatted references to support your Assignment. Refer to the
Assignment guidelines for further information on the requirements.
6
