...will define capital budgeting and discuss some of the components of this decision making tool. It will also discuss some of the concerns that go along with Capital Budgeting. The Basics of Capital Budgeting What is Capital Budgeting? Organizations looking to expand their business through asset acquisition create a capital budget (Paden, n.d.). Capital budgets exclusively are associated with real estate, equipment and other potential assets used to evaluate asset impact and the potential benefit to the organization. Capital Budgeting is the process in which a business determines whether a project or investment venture are worth pursuing. It is the process of analyzing investment opportunities and deciding which one to accept (Berk & DeMarzo, 2014). Potential ventures are evaluated and the potential expenditures or investments are ranked. Usually, these types of business decisions are for large purchases or investments. Steps of Capital Budgeting There are seven steps involved in capital budgeting (Hofstrand, 2013). They are: 1. Identify long-term goals of the organization 2. Identify potential investment prospects for meeting long-term goals identified in Step 1 3. Estimate and analyze the relevant cash flows of the investment proposal identified in Step 2 4. Determine the fiscal feasibility of each proposal in Step 3 5. Choose the project...
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...1. What are the four major types of firm in the U.S, how are they defined, and what are the key differences between them? I understand from the course text that within the context of corporate finance the four types of firms in the U.S. are sole proprietorship, limited liability companies, partnerships and corporations (Berk & DeMarzo, 2011). These four firms are fundamentally different in their makeup and operations. To begin with a corporation is a legally defined artificial being with legal powers such as the ability to enter into contracts, acquire assets and incur obligations amongst others. I believe that corporations are one of the most recognizable business structures today as their span is wide spread and various corporations are in the news at any given point in time. Essentially they have a separate identity from the owners of the company and there may be many owners who participate as shareholders of a corporation. From the very name, a sole proprietorship is a business in which there is a single owner who is solely responsible for making business decisions and a partnership consists of two or more individuals who share the responsibility of running the company. A sole proprietorship is the most common form of business organization as it is easy to form and offers the owner complete control. Within a partnership each partner contributes money, property or skill with the expectation to share in the profits and losses of the business. From a corporate context the...
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...Module 9 Essay BUS550: Business Finance 01/19/2015 1. What is a constant interest coverage policy and how does it impact the levered value of a project? The constant interest coverage policy is an alternative leverage policy. The Constant interest coverage policy utilizes a target fraction for the firm, dependent upon each projects free cash flow to determine the leverage a firm and its projects specifically. This in turn will help the firm take advantage of the corporate tax shield. “With a constant interest coverage policy, the value of the interest tax shield is proportional to the project’s unlevered value”. (Berk & DeMarzo, 2011) The constant interest coverage policy takes targeted interest into account for the project’s free cash flow to increase leverage and determine the project’s total value. 2. Why should issuance costs and mispricing costs be included in the assessment of the project’s value? How do you include them? Issuance cost is another cost of doing business for the specific project and should be included as a cost of the project, which will in turn lower the NPV of the project during the assessment. One would include issuance cost by subtracting the issuance cost just as with the investment cost during the NPV calculation. Mispricing costs are also subtracted from the NPV of the project and are to be included during evaluation. 3. Why is it important to calculate the value of the interest tax shield if a firm adjusts its...
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...AIRWAYS LIMITED (QTG.AX) in the transportation industry. 1. Which stock would be more sensitive to a change in economic condition? Please answer by referring to and interpreting the value of an appropriate measurement obtained in Part I. Follow the Excel’s spreadsheet outputs for Q5.1 and Q5.2. When the stocks bate is over 1 in the stock markets, this mean the stock would be more sensitive (Berk, Demarzo, Harforo, Ford, Mollica & Finch 2014, p371). The two companies’ bate value are 1.2496 and 1.5029, they are both over 1%, but the second company more highest that the first one. This is because the second one is in the transportation industry, they have dull season or peak period. Therefore the second company is more sensitive to a change in economic condition. 2. How closely do your first and second stocks move together? Please answer by referring to and interpreting the value of an appropriate measurement obtained in Part I. To see the spreadsheet outputs for Q5.3, the two companies’ correlation coefficient are (0.0023) and the correlation is between 1 and -1 (Berk, Demarzo, Harforo, Ford, Mollica & Finch 2014, p362). The tendency is tend to move together and the correlation is (0.4153) to close to 1. 3. Based on your results in Part I, is each of your stocks underpriced or overpriced? And why? Consequently, which recommendation would you make for each stock, “Buy/Hold” or “Sell/don’t buy”? We can see the spreadsheet outputs for Q7.1 and Q7.2. The NAB...
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...before interests and taxes (EBIT) was evaluated from the consolidated revenue and operating expenses. Corporate overhead Corporate overhead (assuming they are all fixed overhead) was not included in the calculation of EBIT since overhead costs are fixed and will be incurred in any case. They are not incremental to the project and should not be included in the calculation of incremental earnings (Berk & DeMarzo 2007). Net working capital From Liedtke’s projections of the balance sheet for Mercury Athletic Footwear, net working capital was computed from the difference between current assets and current liabilities, which allowed the increase in net working capital to be calculated. From the historical financial statements of Mercury Athletic Footwear, the increase in net working capital for 2007 was determined by calculating the difference between the net working capital in 2007 and 2006. Free cash flows The free cash flows (FCF=EBIT×(1-τ_c )+Depreciation-CapEx-∆NWC) from 2007 to 2011 was then determined from the figures calculated from the base case projections (Berk & DeMarzo 2007). From Liedtke’s assumptions, which assumed a cost of debt of 6%, 40% tax rate and a debt to total capital ratio of 0.2, the cost of equity and equity to total capital ratio was calculated. Given the debt to total capital ratio, the equity to total capital ratio was determined to be 0.8. The capital asset pricing model (CAPM) was used to calculate the cost of equity (Ellingham &...
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...ÁNALISIS CRÍTICO DE LOS MODELOS DE GESTIÓN DE EFECTIVO En el diario acontecer de las organizaciones desde siempre se realizan actividades como venta y compra de artículos, todas ellas llevadas a cabo mediante diferentes medios de pago principalmente efectivo o sus equivalentes, pues es el medio más común a la vez que útil, pues ofrece liquidez y con ésta, rapidez en las transacciones de las compañías, por lo que resulta de vital importancia la excelente administración del mismo con el fin de asegurar la continuidad de algunas operaciones y obtener beneficios ofrecidos por proveedores. Ahora bien, según Berk y Demarzo [1] “ hay tres razones por las que una compañía tiene efectivo: Satisfacer sus necesidades cotidianas, Compensar la incertidumbre asociada con sus flujos de efectivo y Cumplir requerimientos bancarios”. Sin embargo, no resulta conveniente tener todo el efectivo que se posee disponible para usarlo en la operación, pero tampoco es conveniente no contar con este cuando se requiere, por lo que se genera el interrogante: ¿Cuál es el nivel óptimo de efectivo que debe tener una compañía? Pues bien, con el fin de resolver el interrogante planteado muchos autores han emitido diferentes opiniones al respecto pero otros desarrollaron modelos para la determinación de este saldo óptimo destacándose entre estos: William Baumol, Merton Miller y Daniel Orr y William Beranek, los cuales resulta interesante describir en el desarrollo del presente escrito. En lo relacionado...
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...Chapter 18 Capital Budgeting and Valuation with Leverage 18-1. Explain whether each of the following projects is likely to have risk similar to the average risk of the firm. a. The Clorox Company considers launching a new version of Armor All designed to clean and protect notebook computers. b. Google, Inc., plans to purchase real estate to expand its headquarters. c. Target Corporation decides to expand the number of stores it has in the southeastern United States. While there may be some differences, the market risk of the cash flows from this new product is likely to be similar to Clorox’s other household products. Therefore, it is reasonable to assume it has the same risk as the average risk of the firm. A real estate investment likely has very different market risk than Google’s other investments in Internet search technology and advertising. It would not be appropriate to assume this investment as risk equal to the average risk of the firm. An expansion in the same line of business is likely to have risk equal to the average risk of the business. The theme park will likely be sensitive to the growth of the Chinese economy. Its market risk may be very different from GE’s other division, and from the company as a whole. It would not be appropriate to assume this investment as risk equal to the average risk of the firm. d. GE decides to open a new Universal Studios theme park in China. a. b. c. d. 18-2. Suppose Caterpillar, Inc., has 665 million shares...
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...Capital Budgeting Assignment 2 Ebony N. Robinson FIN 534: Financial Management January 30, 2011 Professor: Dr. Glenn L. Stevens Strayer University Abstract The Net Present Value rule states that when making an investment decision, choose the project with the highest NPV. If the objective is to maximize wealth, then “the NPV rule always gives the correct answer (Berk and DeMarzo, 2011).” According to the text, we use the NPV rule to evaluate capital budgeting decisions, making decisions that maximize NPV (Berk and DeMarzo, 2011). Determining which projects to accept or reject is based on whether or not the project has a positive NPV. NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. Based upon the principle of this rule, a project with a positive NPV is accepted because it ensures that the future value of that same dollar will be greater. The following scenario is provided to evaluate Bauer Industries’ project to manufacture lightweight trucks. Bauer Industries is an automobile manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight trucks. Bauer plans to use a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental free cash flow projections (in millions of dollars): | ...
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...UNIVERSIDAD EXTERNADO DE COLOMBIA FACULTAD DE ADMINISTRACIÓN DE EMPRESAS DIRECCIÓN DE DESARROLLO PEDAGÓGICO FORMATO UNICO DE PROGRAMA DE MATERIA Identificación de la Asignatura Programa académico Nombre de la Materia Docente Centro que orienta la materia Pre-requisito(s): Co-requisito(s): MAESTRÍA EN GESTIÓN Y EVALUACIÓN DE PROYECTOS DE INVERSIÓN Finanzas Corporativas Pablo Vélez Valencia Código Materia pablovelezv@gmail.com Centro de Gestión de Información y Semestre o Modulo Módulo I Finanzas Fundamentos de finanzas y Intensidad (horas) 24 Matemáticas Financieras Créditos 2 Justificación Toda decisión que se toma en una empresa tiene implicaciones financieras, lo que exige el desarrollo de conceptos y habilidades necesarias para entender, analizar y actuar de manera correcta sobre las mismas. Propósitos Formativos Objetivo General Desarrollar los conceptos y destrezas necesarios para que los estudiantes comprendan la gestión financiera empresarial como una herramienta que permite maximizar el valor de la empresa y de su trabajo. El curso se concentra en cuatro temas principales: a) b) c) d) La maximización del valor de la empresa como función objetivo El estudio y la toma de decisiones de inversión La financiación y la estructura óptima de capital La devolución de efectivo a los participantes Al finalizar la asignatura el estudiante estará en capacidad de: 1. Entender la relación entre riesgo y rendimiento, e identificar la diferencia entre el riesgo sistemático...
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...Assignment 2: Capital Budgeting Craig Kung Strayer University February 5, 2011 Abstract Bauer Industries wants to investigate the decision to have an additional division added that constructs lightweight trucks. Bauer found that the project would take 10 years to complete. This paper analyzes several scenarios that affect the Net Present Value (NPV) of the Free Cash flow projections from Year 0 to Year 10. The comparison of the various options will aid Bauer Industries in formulating a wise decision. Keywords: investments, capital budget, earnings, forecast, NPV Introduction To invest or not to invest, that is the question. That is the main question that businesses ask when an opportunity to invest in a capital project presents itself. Capital projects are normally long term ventures that require substantial amounts of capital funding. With as much funding and planning necessitated for such extraordinary projects, a very meticulous assessment must be made. So how does a company choose whether or not to invest in a capital project? They use proven analytical methods to evaluate the profitability of the project. Ye Sudong and Robert Tiong (2000), authors of NPV-AT-RISK METHOD IN INFRASTRUCTURE PROJECT INVESTMENT EVALUATION (2000) explain that “the project evaluation methods may systematically be classified into three categories: methods based on return, methods based on risk, and methods based on return and risk” (p. 227). The methods that...
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...The Facts Consider the following two, completely, separate, economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together- in good times all prices rise together and in bad times, they fall together. In the second economy, stock returns are independent-one stock increasing in price has no effect on the prices of other stocks. Assuming you are risk-averse and could chose one of the two economies in which to invest, which one would you chose. What Does Risk Averse Mean? There are numerous ways to describe what risk averse means; however, an accurate description of a risk averse investor is primarily an investor when faced with two investments with a similar expected return (but different risks), will prefer the one with the lower risk. So this person prefers low risk over higher risk and that preference drives their decision making. With this in mind, great care must be taken to examine the facts set, not through my own eyes (perspective), but through the perspective of a person who is indeed risk averse. A risk-averse investor dislikes risk, and therefore will stay away from adding high-risk stocks or investments to their portfolio and in turn will often lose out on higher rates of return. Investors looking for "safer" investments will generally stick to index funds and government bonds, which generally have lower returns. This leads me to hypothesize that to get the correct answer to the...
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...carefully, and you will hear two recurring words: "money" and "infrastructure”. It takes money to create a solid infrastructure that adequately supports a franchise system's operations. Without that infrastructure, you won't make money (Larson, 2001).” A successful company continuously thinks of ways to promote their firm and products. When a company needs to raise additional cash to undertake new projects, management has to determine what type of safety measures to take to finance its investment. Capital structuring is “when corporations raise funds from outside investors, they must choose which type of security to issue. The most common choices are financing through equity alone or financing through a combination of debt and equity (Berk & DeMarzo, 2011, p. 451).” In this paper, we will be taking a look at this company who will need $27,000,000.00 to finance a major project in the company. The company is expected to generate a total of $25,780,000.00 in earnings next year with addition to the new project. The company currently has 5 million shares outstanding, with price of $19.25 per share. We will take look at the figures and determine should the company issue stocks or issue debts to finance the new project. Comparing Earnings per Share Earnings per share (EPS) are calculated by taking the net earnings and dividing it by the outstanding stock. The earnings per share for the issuing stock is found by taking next year’s earnings (25,780,000.00) and dividing it by...
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...returns are independent of each other. Which is the best investment? Economy One In the first economy, all stock move together, up and down as the market does. Our textbook refers to this type of economy as systematic risk. This can also be called “undiversifiable, or market risk.” (Berk, 303) This type of economy is affected by the volatility of the marketplace, and any world and nation events that can occur, to drive the price of stocks up and down. In good economic times, in which housing is booming, a good job market, and retail has received good sales for this investment period, the outcome of your investment in this economy would be considerably well. In which all stock performed to their capability, and a high rate of return is expected. This is due there were no affects on the performance of the stock from the outside to drive the price down. In the second economy option for the investor to invest in, this economy offers the same rates of return as the first economy. The examples of 30% and -15% expected rates of returns are the same for each stock. This type of economy is often referred to as “independent, unsystematic, firm-specific, idiosyncratic, diversifiable risk.” (Berk, 303). Economy one was affected by outside market changes which fluctuates the stock prices for all the stocks that particular market. In economy number two, the types of changes that are driven by the stock in this economy, are each...
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...[pic] Ford Motor Company By Mario Torres Dr. Lawrence Shao Finance 534 September 9, 2010 Table of Contents Executive Summary Company Overview A. Conduct research on the company’s operations and locations and summarize the company’s financial status for the past 3 years. 1. Operations, locations, markets, and lines of business. 1. Comparison of Ford’s financial statements for the past 3 years. Ratio Analysis A. Perform three year trend and ratio analysis for 2007, 2008, and 2009. Stock Price Analysis A. Research the company’s common stock price. 1. Research the S&P for the past five years. 2. Chart the price movement in the company’s common stock against the S&P movement. Conclusion Executive Summary Ford, General Motors, and Chrysler known as the “Big Three Automakers” faced some hard times and had to find a way to survive or possibly be forced into bankruptcy. General Motors and Chrysler accepted a loan package from the federal government while the Ford Motor Company decided to try and make it on its own. The loan package given to GM and Chrysler came with strict conditions that it cut its labor costs and reorganize its debt obligations. Skip to next paragraphFord, however, decided to try and improve its competitive position without the assistance that federal loans provided GM and Chrysler. In order to accomplish this, Ford had to reduce its own costs to stay on a level playing...
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...Assignment 2: Company 2 Analysis Introduction Salesforce.com operates in the application software industry offering cloud computing solutions focusing on customer relationship management. Cloud computing services help firms to store data, to retrieve prospect information, and to track leads and progress. The system also helps firms to forecast sales opportunities available in the market as well as map customer routes to the digital marketing platforms. SAlesforce.com has two lines of business including the Sales Cloud, Service Cloud, Marketing Cloud and Community. The sales cloud offers sales force automation opportunities in the market including data storage, retrieval and customer prospecting information including sales leads, progress and forecasts. The service cloud enables firms to address customer service and support needs including mailing and telephone communication services to customers. Lastly, the Marketing cloud offers crucial customer information needed to target certain customer demographics such as favorite sites visited. The Community cloud offers firms a platform to engage specific customer categories using apps. Lastly, the analytics cloud helps firms to deploy sales marketing and service operations using data gathered though apps. Historical and Pro-Forma Financial Statements (Yahoo Finance, 2015) | 2015 | 2014 | 2013 | 2016[est] | Total Revenue | 5,373,586 | 4,071,003 | 3,050,195 | 7,132,457.05 | Cost of Revenue | 1,289,270 | 968,428...
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