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Advanced Financial Management Assignment Project
- Number of Words: 2500
Create a company report and a financial model. The report should include your analysis and interpretation of the questions asked. Business writing should be used for all reports. Reports should include bullet points, graphs, and charts where appropriate. Key assumptions and estimates should be explained but equations should never be discussed or shown in the report.
The financial model should include all the financial analysis necessary to answer the questions and create your report. The financial model should look professional (formatting, labels, organized, etc.) and all equations should be linked (see Creating a Financial Model under the getting started tab). Use the Excel examples posted on D2L as a guide for the models, but do not copy directly from them.
- Each question is fully and correctly answered
- Excel solutions and explanation of estimation assumptions are included were applicable
- Very thoughtful and insightful
- Analysis and critical thinking evident
- Easy to find information (efficient use of headers, bullet points, graphs, etc)
- No fluff
- Clear and easy to follow logic
- No equations (efficiently refer to excel document)
- Wording, spelling, and grammar do not noticeably detract from the content
- Included all relevant equations and models required to answer the project problems
- Equations were used correctly
- Equations and models are created by the student (NOT copied from the class examples)
- The entire Excel document is formatted professional looking, and easy to read
- Excel document is setup like a financial model (i.e. all cells are linked)
Analyze a capital budgeting project and determine if the project will add value to the company.
- A company’s capital budgeting information is not made available to the public. The information you need to find the project’s expected cash flows is listed at the bottom of the document. Create a short narrative about a project your current company would undertake based on the information provided.
- Calculate the incremental cash flows for the project.
- Determine the discount rate for the project.
- We will use the firm’s annual WACC (calculated in the Discount Rate portion of the project) as the discount rate.
- Calculate the project’s NPV, IRR, PI and EAC
- Discuss the decision rule related to each and the pros and cons of using each evaluation tool. Make sure to include how you would determine if this project was better than a second mutually exclusive project.
- Calculate the project’s profitability ratios (profit margin and EBITDA margin) and interpret the results.
- Run a sensitivity analysis on NPV using a data table to determine what happens if the sales growth rate and project discount rate change. For the growth rate use a range between -9% and 15% increasing in 3% increments. For the discount rate, use a range between 4% and 14% increasing in 2% increments.
- Examine the NPV results in the data table. As a project manager explain how using the data table instead of just your original NPV estimate might change your final investment decision.
- Based on all the analysis you have done should you accept the project? Explain the main pros and cons.
Capital budgeting proposed project:
- The initial cost of the project is $20 million
- The project is expected to last for 4 years.
- The initial equipment cost will be depreciated at 20% each year and can be sold at the end of the project for $5 million.
Note: make sure you pay attention to the taxes paid on the sale.
- The firm’s tax rate is 35%.
- The firm has already spent $300,000 on marketing research for this project.
- The project is expected to make $9 million in sales the first year and sales are expected to increase by 5% every year until the end of the project.
- The project’s costs are 35% of sales each year.
Note: it will be easier to input these numbers into Excel as thousands. AKA for the $20 million investment only input $20,000 and adjust the rest of the numbers accordingly.
See the Finding the WACC Data section at the bottom of this document for more information about finding the variables.
- Calculate the current WACC for your company. The long-term average What do they tell you about your company? How would we use the WACC?
- Assume your company is taking on two new projects: a scale expanding project and a diversification (different industry project). Write a short narrative for each of these projects that matches your company’s goals.
- Explain why each project requires a different WACC and how you would estimate each of the WACCs.
- Identify or calculate the appropriate WACC for each of these projects. If you use other companies to help you identify an appropriate WACC identify the reasons why you picked that specific company/companies.
- Once the WACCs have been estimated, use them to determine if the company should invest in each of the projects. For simplicity’s sake, assume the diversification project and expansion project have the same cash flows as the capital budgeting project (above).
- Determine whether you should accept or reject the projects based on the appropriate discount rates.
Note: As long as all of the cells in the first part of the project were linked together all you need to do is replace the discount rate and tax rate with the updated numbers and report your findings.
Finding and Calculating the Variables
This section shows you how to find and calculate the estimates we will be using for our discount rates.
Note you can also find the data on, Yahoo Finance, MarketWatch, WSJ etc. Site the source used to find the data.
- Debt: Long term debt value from firm’s balance sheet (most recent year)
- Equity: current share price * # shares outstanding
- Expected return on equity: CAPM
- Risk free rate: 1.5%
- S&P 500 return: 8.18%
- Use the beta from project 1
- Expected return on debt: (Interest expense from current year)/(Long term debt from previous year)
Found on the income statement and balance sheet
- Tax rate: (Income before taxes from the most recent year)/(tax expense from the most recent year)
Note: if you get a weird tax rate such as a negative number just make a note of your findings and use the default tax rate of 35%).
Found in the income statement.
- Beta: The Beta’s for the other companies are typically listed on the overview page of the financial sites listed above. Note: you do not need to calculate them for this project.
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