Expert answer:13 questions in the attached word file. The excel file is attached to be used to assist in completing the questions.
finance_formulas_mba620_project_4.xlsm
mba_620_project_4.docx
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Inputs
Single
Cash Payment
Finance Formu
Output
#1 FV of Cash Today
#2 PV of Cash in Future
Cash Today
Years
Yield
FV
1,000
5.00
3.00%
1,159
= ∗ ( + )
Stream of
Constant
Cash Payments
#3 FV of Annuity
#4 PV of Annuity
Beg. Cash
Annuity
Pay/Year
Years
Yield
FV
= ( +
0
1,000
1
20
5.00%
33,066
− )/ ) ∗
+ ∗ ( + )
Stream of
Growing
Cash Payments
#6 PV: Growth Annuity
#7 FV: Growth Annuity
First Payment
Growth Rate
Pay/Year
Years
100
3.00%
1
10
Yield
5.00%
PV
875
+
= (
)( −
−
−
Bond Price,
Yield, and
Duration
)
#9 Bond Price
Settle
Maturity
Coupon
Pay/Year
Yield
Price
=
=
#10 Yield to Maturity
3/1/2015
3/1/2025
5.00%
2
6.00%
92.56
Excel Price Function
Project
Valuation:
IRR, NPV, and
Payback
#13 IRR
Yr
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
CF0
CF1
CF2
CF3
CF4
CF5
CF6
CF7
CF8
CF9
CF10
CF11
CF12
CF13
CF14
CF15
CF16
CF17
CF18
CF19
CF20
IRR
#14 NPV
Yr
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Discount Rate
(10,000)
500
1500
2000
3000
5000
3000
10.12%
Excel IRR Function
Mortgage
Analytics:
Amortizing
Loans
#16 Monthly Payment
or
Principal
Pay/Year
Years
Coupon Rate
Payment
PMT Function
#17 Mthly Pay w Balloon
20,000
12
5
5.00%
377
377
Pmt = / ( 1 – (1/1+r)) x Prin
Weighted
Average
Cost of Capital
#20 WACC
Equity
Market Value
Equity Cost
50
10.0%
MVe
Re
Debt
Debt Value
Debt Cost
50
6.0%
WACC
8.00%
=
MVd
Rd
+
+
+
Finance Formulas
All Yields and Coupons are “annual rates”.
Yields are “bond equivalent yields”
Payments occur at the end of the period.
#2 PV of Cash in Future
Cash in Future
Years
Yield
PV
1,159
5.00
3.00%
1,000
Goal Seek:
To solve for an “Input” for a given “Output”, use Goal Seek.
Goal Seek is in the Data worksheet in the What If drop-down.
= /( + )
#4 PV of Annuity
#5 Annuity Payment
Annuity
Pay/Year
Years
Yield
Balloon Pay
PV
+
−
1,000
1
20
5.00%
0
12,462
∗
– Balloon/( +
PV
Pay/Year
Years
Yield
Payment
PMT Function
)
#7 FV: Growth Annuity
100
5.00%
1
5
Yield
12.00%
=
+
−
+
) ∗
First Payment
Growth Rate
Pay/Year
Yield
PV
100.00
5.00%
1
12.00%
1,429
694
− + )
−
=
#10 Yield to Maturity
Price
Coupon
Pay/Year
Par Amount
Settle Date
Maturity
=(
#8 PV: Perpetual Growth Annuity
First Payment
Growth Rate
Pay/Year
Years
FV
100,000
1
15
3.00%
8,377
8,377
−
#11 Modified Duration
92.56
5.00%
2
100
2/1/2015
2/1/2025
Settle
Maturity
Yield
Coupon
Pay/Year
Duration
3/1/2015
3/1/2025
5.00%
5.0%
2
7.79
6.00%
YTM
CF0
CF1
CF2
CF3
CF4
CF5
CF6
CF7
CF8
CF9
CF10
CF11
CF12
CF13
CF14
CF15
CF16
CF17
CF18
CF19
CF20
Discount Rate
NPV
(10,000)
500
1500
2000
3000
5000
3000
10.12%
0
Excel Duration Function
#15 PayBack
Yr
Cost
1
CF1
2
CF2
3
CF3
4
CF4
5
CF5
6
CF6
7
CF7
8
CF8
9
CF9
10
CF10
11
CF11
12
CF12
13
CF13
14
CF14
15
CF15
16
CF16
17
CF17
18
CF18
19
CF19
20
CF20
(10,000)
500
1500
2000
3000
5000
3000
Payback Term
4.6
NPV = σ = / (1+r)
#17 Mthly Pay w Balloon
Principal
Pay/Year
Years
Coupon Rate
Balloon
PMT
#18 Balance Outstanding
100,000
12
10
5.00%
15,000
964
Excel Payment Formula
Principal
At Period t
Term
Pay/Year
Coupon Rate
Balance
100,000
60
30
12
5.00%
91,829
= [( − ( + ) − )/( − ( + )− ]*P
Cum.
-9500
-8000
-6000
-3000
2000
5000
5000
5000
5000
5000
5000
5000
5000
5000
5000
5000
5000
5000
5000
5000
100.0
100.5
100.6
100.7
4.6
5.3
6.5
7.5
8.5
9.5
10.5
11.5
12.5
13.5
14.5
15.5
16.5
17.5
18.5
19.5
#19A Years to Maturity
#19A Periods to FV
Principal
Coupon
Payment
Pay/Year
Years
M=
100,000
5.00%
10,000
1
14.2
− − /
/[ + , ]
Present Value
Future Value
Annual Rate ( r )
Period/Yr
No. of Periods
100
200
5.00%
12
166.7
= + − (Assets/Equity)
FINANCIAL RATIO ANALYSIS
Inputs
Company Name:
BALANCE SHEET
ASSETS
Cash & Investments
Accounts Receivable
Inventories
Other
Total Current Assets
Long Term Assets
Total Assets
LIABILITIES & NW
Accounts Payable
Notes payable;
Other Current
Total current liabilities
Long Term Debt
Total Liabilities
Equity
Company # 1
Company # 2
ABC
XYZ
210
180
150
20
560
1200
1760
200
170
140
10
520
1180
1700
290
30
160
480
670
1150
610
280
20
150
450
750
1200
500
Financial Ratio Formulas
Profitability Ratios
Gross Margin: = Gross Profit/Sales
Operating Margin: = EBIT/Sales
Net Profit Margin: = Net income/Sales
Return on Equity (ROE): = Net Income/Book Value of Equity
Return on Assets (ROA) = Net Income / Book Value of Assets
Earnings per Share = Earnings / Shares Outstanding
Liquidity Ratios
Current Ratio: = Current Assets/Current Liabilities
Quick Ratio: = (Cash + Accounts Receivable)/Current liabilities
Cash Ratio: = Cash/Current Liabilities
Working Capital Ratios
Cash Conversion Cycle:
Accounts Receivable Days: = Accounts Receivable/Sales/365
Accounts Payable Days: = Accounts Payable/Sales/365
Inventory Days: = Inventory/Sales/365
Cash Conversion Cycle = AR Days + Inventory Days – AP Days
Turnover Ratios:
A.R. Turnover: = Sales/Accounts Receivable
A.P. Turnover: = Cost of Sales/Accounts Payable
Inventory Turnover: = Cost of Sales/Inventory
Enterprise Value
Market Capitalization = Market Price per share X Shares Oustanding
Total Debt
Cash & Investments
Enterprise Value = Market Cap + Debt – Cash & Invest.
Debt to Enterprise Value = Debt / Enterprise Value
Net Debt = Debt – Cash & Investments
Debt Coverage Ratios
EBIT/Interest Coverage: = EBIT/Interest
EBITDA/Interest Coverage: = EBITDA/Interest
Leverage Ratios
Asset Turnover: = Sales/Total Assets
Debt-Equity Ratio: = Long-Term Debt/Equity
Debt-to-Capital Ratio: = Total Debt/(Total Equity + Total Debt)
Equity Multiplier = Total Assets/Equity
Valuation Ratios
Market-to-Book Ratio: = Market Value of Equity/Book Value of Equity
Price-Earnings Ratio: = Share Price/Earnings per Share
Cash Flow per Share = Net Cash Flow / Shares Outstanding
DuPont Formula
Net Profit Margin = Net Income / Sales
Asset Turnover = Sales / Total Assets
Equity Multiplier = Total Assets / Equity
ROE = Net Profit Margin X Asset Turnover X Equity Multiplier
NCIAL RATIO ANALYSIS
Company # 1
ABC
Company # 2
XYZ
386
235
151
15
6
130
15
50
65
400
275
125
13
7
105
24
45
36
150
8
1200
650
200
5
1000
700
P&L STATEMENT
Sales
Cost of Sales
Gross Profit
Operating Expense
Depreciation
EBIT (Oper. Income)
Taxes
Interest Expense
Net Income
MARKET DATA
Shares Outstanding
Share Market Price
Market Capitalization
Market Value of Debt
Edit by deleting rows for all except 10 selected ratios
Copy-and-Paste sections below for the Exhibits in paper
Company
ABC
XYZ
ROA
Earnings per Share
39.1%
33.7%
16.8%
10.7%
3.7%
0.43
31.3%
26.3%
9.0%
7.2%
2.1%
0.18
Liquidity Ratios
Current Ratio
Quick Ratio
Cash Ratio
ABC
XYZ
1.17
0.81
0.44
1.16
0.82
0.44
Profitability Ratios
Gross Margin
Operating Margin
Net Profit margin
ROE
Working Capital Ratios
Cash Conversion Cycle:
Accounts Receivable Days
Accounts Payable Days
Inventory Days
Cash Conversion Cycle
Turnover Ratios:
Acct. Rec. Turnover
Acct. Pay. Turnover
Inventory Turnover
Enterprise Value
Market Capitalization
plus Total Debt
minus Cash and Investments
Enterprise Value
Debt/EV
Net Debt
Net Debt/EV
Coverage Ratios
EBIT/Interest Coverage
EBITDA/Interest Coverage
Leverage Ratios
Asset Turnover
Debt-Equity Ratio
Debt-Capital Ratio
Equity Multiplier
Valuation Ratios
Market-to-Book Ratio
Price-Earnings Ratio
Cash Flow / Share
DuPont Formula
Net Profit Margin
Asset Turnover
Equity Multiplier
ROE
ABC
XYZ
170.2
155.1
274.2
141.8
255.5
127.8
37.82
27.38
2.1
0.8
1.6
2.4
1.0
2.0
ABC
XYZ
1,200.0
1,150.0
210.0
2,140.0
0.54
940.0
0.44
1,000.0
1,200.0
200.0
2,000.0
0.60
1,000.0
0.50
ABC
XYZ
2.60
2.72
2.33
2.49
ABC
XYZ
0.22
1.10
0.52
2.89
0.24
1.50
0.60
3.40
ABC
XYZ
1.97
0.1
0.39
2.00
0.1
0.16
ABC
XYZ
16.84%
0.22
2.89
9.00%
0.24
3.40
10.66%
7.20%
Company # 1
ABC
Company # 2
XYZ
65
36
4
2
5
2
(10)
(20)
(5)
20
56
(15)
(50)
(4)
10
(16)
20
15
5
5
45
15
10
5
10
40
(20)
30
(50)
(2)
(42)
59
151
210
(20)
30
0
(3)
7
31
169
200
CASH FLOW
Cash from Operations:
Net Income
Non-Cash Expenses
Depreciation
Amortization and other
Changes in Working Capital
Accounts Receivable Increase
Inventories Increase
Prepaid Expenses Increase
Accounts Payable Increase
Cash from Operations
Cash from Investing:
Securites: Buys
Securities: Maturing
Securities: Sales
Plant & Equipment Buys
Cash from Investing
Cash from Financing
Debt Paydown
Notes Payable Increase
Repurchase of Common Stock
Dividends Paid
Cash from Financing
Net Cash Flow
Cash: Beginning of Year
Cash: End of Year
As the manager of the pension fund, considering different investment options will help you make
better decisions for your company and your clients. Please respond to the following questions,
providing supporting data and showing your calculations.
Before starting your calculations, review the following materials:
•
•
•
time value of money analysis and The Time Value of Money
valuing perpetuities and annuities and Discounted Cash Flow Applications
amortizing a loan
Question 1: If the pension plan invests $95 million today in 10-year US Treasury bonds (riskless
investment with guaranteed return) at an interest rate of 3.5 percent a year, how much will it have by
the end of year 10?
Question 2: If the pension plan needs to accumulate $14 million in 13 years, how much must it
invest today in an asset that pays an annual interest rate of 4 percent?
Question 3: How many years will it take for $197 million to grow to be $554 million if it is invested in
an account with a quoted annual interest rate of 5 percent with monthly compounding of interest?
Question 4: The pension plan also invests in physical assets. It is considering the purchase of an
office building today with the expectation that the price will rise to $20 million at the end of 10 years.
Given the risk of this investment, there should be a yield of 10 percent annually on this investment.
The asking price for the lot is $12 million. What is the annual yield (internal rate of return) of the
investment if the purchase price is $12 million today and the sale price 10 years later is $20 million?
Should the pension plan buy the office building given its required rate of return?
Question 5a: The pension plan is also considering investing $70 million of its cash today at a 3.5
percent annual interest for five years with a commercial bank. How much will the $70 million grow to
at the end of 5 years?
Question 5b: Now take the amount of your answer in Ques 5a, and assume this money is invested
in an annuity due with the first payment made at the beginning of the 6th year. The annuity due
makes a total of 15 yearly (equal) payments. How much will the annual payments be from years 6 to
20, if the rate at which these payments are discounted is also 3.5 percent?
Question 6: The pension plan is about to take out a 10-year fixed-rate loan for the purchase of an
information management system for its operations. The terms of the loan specify an initial principal
balance (the amount borrowed) of $4 million and an APR of 3.75 percent. Payments will be made
monthly. What will be the monthly payment? How much of the first payment will be interest, and how
much will be principal? Use the Excel PMT function to provide the answers to these questions.
Submit your Time Value of Money Report and Calculations to the dropbox below. Be sure to show
your calculations in Excel and provide a narrative analysis in PowerPoint. Your narrative analysis
should summarize the results of your analysis and make recommendations for the benefit of the
company.
As the manager of the pension fund, you are frequently targeted by software companies peddling
investment simulation software. You have finally narrowed down your choice to two applications.
You need to analyze the options by calculating NPV, IRR, and Payback Period based on their
purchase price and savings to your company over time. Your staff has prepared a cash-flow table to
help you. Year zero shows the purchase price of each application, and the figures listed for years 13 represent the savings to the company in successive years.
Year
Application I
Application II
Year
Application I
Application II
0 (today)
-$1.5 million
-$1 million
1
$0.8 million
$0.5 million
2
$0.7 million
$0.24 million
3
$0.3 million
$0.6 million
You are considering three possible scenarios.
Question 7: If the payback period is two years, which application should be selected?
Question 8: If the required rate of return is 15 percent, which application should be selected?
Question 9: If the selection criterion is IRR, which application should be selected?
Respond to questions 7, 8, and 9 above by submitting a single, integrated report that shows your
supporting data and calculations. Finally, provide a recommendation and rationale for purchasing
either Application I or Application II.
Submit your Basic Capital Budget Analysis Report and Calculations to the dropbox below. Be sure to
show your calculations in Excel and provide a narrative analysis in PowerPoint. Your narrative
analysis should include your recommendation and rationale for purchasing either Application I or
Application II.
Another one of your responsibilities as CFO is to determine the suitability of new and current
products. Your CEO has asked you to evaluate Android01. That task will require you to combine
data from your production analysis from Project 2 with data from a consultant’s study that was done
last year. Information provided by the consultant is as follows:
•
•
•
•
•
•
•
•
initial investment: $120 million composed of $50 million for the plant and $70 million net
working capital (NWC)
yearly expenses from year 1 to year 3: $30 million
yearly revenues from year 1 to year 3: $0
yearly expenses from year 4 to year 10: $55 million
yearly expected revenues from year 4 to year 10: $95 million
yearly expenses from year 11 to year 15: $60 million
yearly expected revenues from year 11 to year 15: $105 million
You are to calculate NPV using the “expected values”. The actual cash flow may be variable
(risky) and that is the reason why the discount rate is greater than the riskless rate.
This concludes the information provided by the consultant.
You also have the following information:
•
•
Assume that both expenses and revenues for a year occur at the end of the year. NWC pays
the bills during the year, but has to be replenished at the end of the year.
Android01 is expected to cannibalize the sales of Processor01 while also reducing the
variable costs for the production of Processor01. From years 4 to 10, revenues are expected
to fall by $5M, whereas variable costs will go down by $1 million. Processor01 is to be
phased out at the end of the 10th year.
•
At the end of the 15th year, the plant will be scrapped for a salvage value of $10 million.
NWC will be recovered.
Question 10: Calculate the expected cash flows from the Android01 project based on the
information provided.
Question 11: Calculate the NPV for a required rate of return of 6.5 percent. Also calculate the IRR
and the Payback Period.
Before starting your calculations, review the following materials on NPV, IRR and Payback Period.
Also review:
Capital Budgeting
Cost of Capital
Submit your Cash Flow Report and Calculations to the dropbox below. Be sure to show your
calculations in Excel and provide a narrative analysis in PowerPoint. Your narrative analysis should
summarize the results of your analysis and make recommendations for the benefit of the company.
After you have submitted your Basic Captial Budget Analysis Report and Cash Flow Report, proceed
to the next step, where you will calculate the cost of capital and determine an appropriate capital
structure.
The firm decides to raise $30 million by selling equity and debt. The investment bankers hired by
your firm contact potential investors and come back with the following numbers:
•
•
Debt that pays $1 million coupons a year and $18 million maturity value after 10 years will
sell for $20 million.
Equity that pays expected dividends of $1.2 million starting next year and growing at a rate of
3 percent per year thereafter sells for $10 million.
Question 12: Calculate the cost of debt, equity, and the WACC.
Before starting your calculations, review the following materials:
•
•
cost of capital and choice of financing
equity, debt, and preferred stock
Submit your Cost of Debt Report and Calculations to the dropbox below. Be sure to show your
calculations in Excel and provide a narrative analysis in PowerPoint. Your narrative analysis should
summarize the results of your analysis and make recommendations for the benefit of company.
Finally, your firm has decided to spin off Android01 and Processor01 as a separate firm. The owners
of the new firm will be equity holders and debt holders. After speaking with potential investors,
investment banks have identified two possible capital structures (structure of equity and debt
ownership):
•
Debt holders receive debt that pays them coupons of $2 million a year, and $30 million after
20 years (these are expected values as the coupons and principal payments are not riskless,
the debt buyers realize the firms could default). They price the debt using a discount rate of 4
percent. Equity holders receive expected dividends of $3 million starting from year 5, and
growing at a rate of 4 percent per year (a growing perpetuity). They price the equity using a
discount rate of 7.5 percent.
•
Debt holders receive debt that pays them coupons of $1 million a year, and $12 million after
20 years (these are expected values as the coupons and principal payments are not riskless,
the debt buyers realize the firms could default). They price the debt using a discount rate of
3.5 percent. Equity holders receive expected dividends of $3.9 million starting from year 5,
and growing at a rate of 4.5 percent per year (a growing perpetuity). They price the equity
using a discount rate of 7 percent.
Your firm receives all the proceeds from the sale debt and equity. Since the firm is selling debt and
equity, it wants to sell using the capital structure that provides them with the most money (sum of
whatever debt and equity sells for).
Prepare a Capital Budgeting and Cost of Capital report that answers the following Question 13.
Question 13: Which particular capital structure should be chosen for the spin-off?
Here. the firm is the seller of a physical asset for which it gets all the money today. Therefore you do
not have to calculate NPV etc. It is not making an investment it is receiving money by selling the
subsidiary. You have to calculate the price at which debt sells and the price at which equity sells.
You have to calculate the price of debt using the annuity formula and the price of equity using the
growing perpetuity formula. Then add the two to get total money raised by selling subsidiary.
Whichever financing gives more total money should be the preferred financing.
Before starting your calculations, review the following materials:
•
•
cost of capital and choice of financing
equity, debt, and preferred stock
Submit your Capital Budgeting and Cost of Capital Report
…
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