Question 1
Below is the assignment I have been trying to solve for the past two days. I am losing my mind because I am not grasping how to calculate and get the answers that are needed or seem correct. Can anyone help please. Answer the following questions in an Excel document. Solve using Excel formulas (preferred) or clearly write out the steps you took to calculate your answers. Round any dollar amounts to the nearest dollar ($1,500,074) and any percentages to two decimals (9.56%). 1. Market prices are $1,035 for bonds, $19 for preferred stock, and $35 for common stock. There will be sufficient internal common equity funding (i.e., retained earnings) available such that the firm does not plan to issue new common stock. Calculate the firm?s weighted average cost of capital. 2. In part a we assumed that Nealon would have sufficient retained earnings such that it would not need to sell additional common stock to finance its new investments. Consider the situation now, when Nealon?s retained earnings anticipated for the coming year are expected to fall short of the equity requirement of 47 percent of new capital raised. Consequently, the firm foresees the possibility that new common shares will have to be issued. To facilitate the sale of shares, Nealon?s investment banker has advised management that they should expect a price discount of approximately 7 percent, or $2.45 per share. Under these terms, the new shares should provide net proceeds of about $32.55. What is Nealon?s cost of equity capital when new shares are sold, and what is the weighted average cost of the added funds involved in the issuance of new shares? The balance sheet that follows indicates the capital structure for Nealon Inc. Flotation costs are (a) 15 percent of market value for a new bond issue, and (b) $2.01 per share for preferred stock. The dividends for common stock were $2.50 last year and are projected to have an annual growth rate of 6 percent. The firm is in a 34 percent tax bracket. What is the weighted average cost of capital if the firm?s finances are in the following proportions? This is what the table lists: TYPE OF FINANCING PERCENTAGE OF FUTURE FINANING Bonds (8%,$1,000 par,16-yr maturity) 38% Preferred stock (5,000 shares outstanding, $50 par, $1.50 dividend) 15% Common equity 47% Total 100% a. Market prices are $1,035 for bonds, $19 for preferred stock, and $35 for common stock. There will be sufficient internal common equity funding (i.e., retained earnings) available such that the firm does not plan to issue new common stock. Calculate the firm?s weighted average cost of capital. b. In part a we assumed that Nealon would have sufficient retained earnings such that it would not need to sell additional common stock to finance its new investments. Consider the situation now, when Nealon?s retained earnings anticipated for the coming year are expected to fall short of the equity requirement of 47 percent of new capital raised. Consequently, the firm foresees the possibility that new common shares will have to be issued. To facilitate the sale of shares, Nealon?s investment banker has advised management that they should expect a price discount of approximately 7 percent, or $2.45 per share. Under these terms, the new shares should provide net proceeds of about $32.55. What is Nealon?s cost of equity capital when new shares are sold, and what is the weighted average cost of the added funds involved in the issuance of new shares?,Hello Rachel. Thank you for helping me last time. I received almost all the point on that assignment and was also able to answer additional questions the instructor had for me.
Question 2
The case study assignments will focus on Orrstown Financial Services, Inc., ticker ORRF. Beginning with Financial Statements in 2006 compute the common size balance sheet and income statements. The Balance Sheet will normalize all line items to 100% of Total Assets; the Income Statement will normalize all line items to 100% of Net Revenue. Calculate and demonstrate not just the common size statements but also % change by year. Choose a relevant competitor in the market to Orrstown Financial Services and complete the same analysis and compare/contrast. How well has Orrstown performed to date versus its peer? Why the difference(s)? What is different between the two lending institutions? Additionally, compare Orrstown Financial Services versus industry metrics. Has Orrstown under- or over-performed the industry? Why/why not? What is the difference between Orrstown?s performance, its peer and the industry? (Hint: GET YOUR HEAD OUT OF THE FINANCIAL STATEMENTS! Read all filings and understand the economics of the industry and the economy.) As part of this analysis, a written understanding of industry economics (national and regional) must be completed. Review Orrstown?s annual reports and stated strategies? Have these strategies been followed? Review past annual reports. In 2009 Orrstown named a new president and Chief Executive? What are his/her credentials? Has this individual performed well or poorly? Why/why not? Finally, comment on the quality of the Financial Statements issue by Orrstown. Do they explain the performance of the equity over time? Are the Financial Statements supporting equity valuation or not? Why/why not? This assignment must include common size statements, proven understanding and knowledge of the industry, and conclusions taken from common size and equity valuation. It will be relevant to discuss not just the changes in the common size statements but to overlay equity performance seeing how Financial Statements interact with market valuation of equity pricing.
Question 3
Equity and Debt Assignment: due 20 Mar 2011 3 to 5 page paper in APA format American Superconductor As you know from reading through the background materials, the decision to use debt or equity to raise money is not a decision taken lightly by management. So when several years ago, in 2003 American Superconductor decided to raise funds through equity it was definitely a major decision that required intense discussions at the highest levels of management. Read the article below about American Superconductor and do some of your own research using the CyberLibrary and internet search engines. You can also take a look at the official American Superconductor webpage. Assignment Expectations: After doing your research, apply what you learned from the background materials and write a three to five page paper answering the following questions: What are the advantages and disadvantages for AMSC to forgo their debt financing and take on equity financing? Do you agree with their decision? How can a company's cost of equity be determined? Is there a tax deduction from the use of debt financing? Please explain. Explain both of your answers thoroughly. Be sure to support your opinions on these assignment questions with references to the background materials or to other articles in your paper. Read the article below available in Proquest: American Superconductor switch ; Westboro company plans to raise money through a stock offering Andi Esposito. Telegram & Gazette. Worcester, Mass.: Aug 26, 2003. pg. E.1 Abstract (Article Summary) "AMSC's management and board of directors believe the decision to forgo a secured debt financing and to adopt an equity financing strategy under current market conditions is in the best interests of our shareholders," said Gregory J. Yurek, chief executive officer of AMSC. The 265-employee company has operations in Westboro and Devens and in Wisconsin. Finally, the Northeast blackout "shined a lot of light on the problems we have been talking about as a company for three to four years," Mr. Yurek said. AMSC products, such as a system installed this year in the aging Connecticut grid and high temperature superconductor power cables and other devices bought by China for its grid, are designed to improve the cost, efficiency and reliability of systems that generate, deliver and use electric power. "We are a company with products out there solving problems today," he said.
Question 4
Bentley Corporation has several divisions. All operations keep their own accounting books and have chosen the appropriate method of revenue recognition. Information on Divisions: Bargain Electronics Division Bargain Electronics Division sells computers through agents in various cities. Revenue is recognized at the point of sales. Agents send orders and down payments to our company. The division then ships the goods F.O.B. shipping point directly to the customers. Additional Financial Data: Orders for fiscal year 2012 $600,000 Down Payments collected in 2012 $550,000 Billed and shipped in 2012 $520,000 Freight billed in 2012 $12,000 Commissions paid to Agents (after ship to customer) 8% Warranty Returns as % of Sales 1% Barry's Construction Division The Barry Construction Division was working on one project and used the percentage of completion revenue recognition method for 2012 fiscal year. Contract for new retail mall building Total Contract Amount $54,000,000 Contract Grant Date August 14, 2012 Construction Began September 1, 2012 Estimated Cost to Complete at beginning of contract $40,000,000 Estimated Time to Complete Project 2 years As of December 31, 2012 Construction costs incurred to date $10,600,000 Billings to date $12,000,000 Expected costs to complete $31,800,000 Bead's Magazine Distribution Division Our magazine distribution division sells to national quickmart stores. Our division allows for up to 30% of sales in returns. For the past 4 years, returns have averaged 26%. We record revenue based on revenue recognition when the right of return exists. Total Sales for 2012 $7,000,000 Sales Still Available for return for 6 months $2,100,000 Actual Returns on Sales not returnable 25% 2011 Sales collected in 2012 $1,200,000 2011 Sales returned in 2012 23% Required: Calculate the revenue to be recognized in fiscal year 2012 for each division of Bentley Corporation in accordance with generally accepted accounting principles. Show all calculations for full credit. (Points : 40)
Question 5
Shareholder Value Added Homework Shareholder Value Analysis Notes and Exercise Shareholder Value Analysis (SVA) is one member of the family of techniques for determining the market value of a firm based on the drivers of its projected cash flows. Other cash-based techniques include Cash Flow Return on Investment (CFROI) and Total Shareholder Return (TSR). SVA is superior to other techniques because valuations are derived from explicitly identified or postulated drivers of value in a strategic framework. SVA starts with fundamental financial theory: the value of an asset is the net present value of its cash flows over the life of the asset. In SVA, the firm is the asset to be valued. One identifies or postulates the drivers of firm cash flows over the life of the firm and integrates the drivers into a model, which generates the estimated free cash flows on a year-by-year basis. Let's look at the drivers of cash/value. 1. Sales growth rate: Everything else being constant, the higher the sales growth rate, the greater the projected cash flows. 2. Operating profit margin: The higher the profit margin (sales - cash operating expenses), the greater the cash flows. 3. Tax rate: The higher the tax rate, the lower the after tax net cash flow. 4. Working capital investment: Increased sales require greater investments in working capital (inventories, cash, receivables, offset by simultaneous financing provided by accounts payable and accruals), which decrease cash flows accordingly. 5. New fixed capital investment: An expansion (growth in sales) of the business requires a larger base of fixed capital investments, which will decrease cash flows. This is equivalent to total projected capital investment for the year less depreciation. 6. Competitive advantage period: In a perfectly competitive market there are no superior profits to be had, given that all firms must price at marginal cost if they want to make sales. However, by making use of technology, positioning oneself in emerging or high growth industries, through superior customer service/relationship management and by developing a differentiated or niche product, firms will be able to set prices above marginal costs. Firms strive to achieve competitive advantage and thus the flexibility to sell at higher prices and realize higher profit margins. The more a firm is able to exploit a competitive advantage and maintain it over time, the more successful it will be and the higher its cash flows. The competitive advantage period affects the estimate of the sales growth rate and the cash profit margin over time. For example, an analysis of Microsoft's core competencies and its ability to develop and maintain competitive advantage over time could provide the basis estimation g at 20% per year for the next five years, 15% per year for years 6-10 and then leveling out after year 10. The cash profit margin would reflect the loss of superior competitive advantage over time accordingly, perhaps being estimated at 35% for years 1-5, 25% for years 6-10 and 10% after year 10. The greater the competitive advantage, the greater the cash flows and the calculated shareholder value. 7. Cost of capital: The cost of capital represents the expectations of stakeholders (stock and bondholders). When the firm earns more on its assets than expected/required by stakeholders, value is created for shareholders. The management actions taken by the firm have an effect on the firm's cost of capital and, the lower the cost of capital, the greater the (net present) value of the firm. Management would be able to decrease the firm's cost of capital and create shareholder value by financing the firm's capital structure with the optimal proportion of debt and by identifying ways to decrease the systematic risk of the firm's investments. Model: Firm Value = PV free cash flows over the forecast period + residual value beyond the forecast period + firm's marketable securities. 1. PV free cash flows over the forecast (competitive advantage) period = Base sales * sales growth * cash profit margin * after-tax cash income rate - new capital investment - incremental working capital investment to support increased sales, over the period that the company is projected to maintain a competitive advantage. Expected cash flows are calculated for each year of the forecast (competitive advantage) period and discounted by the cost of capital. In the Microsoft example above, the forecast (competitive advantage) period of cash flows would be years 1-5 and years 6-10. 2. Residual value after the forecast (competitive advantage) period has expired and the firm's sales and earnings level out: The residual value is the present value of cash flows after expiration of competitive advantage. After some period, the ability of the firm to earn profits greater than the normal economy-wide risk-adjusted return on capital may dissipate. For example, competitors may enter the market and provide work-alike or superior products, or patents might expire. Should this point be reached, no incremental capital investments or additional investments in working capital are required; only maintenance-level investments are required. The expected cash flows are the same each year after the competitive advantage period, or perpetuity. The present value of a perpetuity, you will recall, is just the expected cash flow divided by the discount rate/cost of capital for a no growth perpetuity, or by the cost of capital less the constant growth rate for a growth perpetuity. 3. The firm's marketable securities: We add marketable securities because 1 and 2 above represent the value generated by investments in the business. Marketable securities guarantee liquidity in contingencies and are not considered an investment in the firm's income generating assets. Work through the model to understand the relationships among the value drivers and how the model is used to derive the estimate for firm value. The model provides flexibility by allowing the analyst to 'tweak' the driver values to fit the specific situation for the firm being analyzed. If we want to derive the value of equity, we can simply subtract the market value of the firm's debt from Firm Value, which is the sum of 1, 2, and 3 above (Equity value = Firm Value - Debt). We can then compare the 'fair value' of equity we derived using SVA with the market value equity (# shares outstanding * price per share) to obtain an indication of whether the firm is under- or over-valued. The use of the Shareholder Value Added (SVA) methodology developed by Rappaport extends far beyond a technique for estimating the value of the firm. It is the integration of SVA valuation methodology into a strategic context that makes it especially useful to managers. SVA can be used to evaluate strategic alternatives: Which ones add value? What can be done to create value? How can we extend the competitive advantage period and keep profit margins high? The same answers we arrive at in building a world class strategic plan are the same ones supporting the creation of shareholder wealth in the SVA model. Do the following SVA Exercise: The following information is given: ? Baseline (last year) sales: $250 million ? Sales growth rates: Base year = 15% with a fade rate of 1% a year for years 1-10: (increasing sales due to sustained competitive advantage and a differentiated product)[source: Strategic Plan]. Fade rate is the rate of decline per year (each year) from a base year. ? Sales growth rate in year 10 and forward: 5% (in year 11, the competition has caught up and the market has reached maturity) [source: Strategic Plan] ? Profit margin: Base year = 20%, with a fade rate of 1% a year for years 1-10: (during the period of competitive advantage, the firm can charge higher prices, but its profit margin slowly declines as competition increases) [source: Strategic Plan] ? Profit margin in year 10 and going forward: 10% [source: Strategic Plan] ? Fixed capital investment rate: 15% (for every dollar of new sales, we need an additional investment in fixed plant and equipment of $.15) [source: historical relationship] ? Working capital investment rate: 8% (for every dollar of new sales we need an additional investment in inventories and receivables of $.08) [source: historical relationship] ? Cash tax rate: 39% [source: historical relationship] ? Cost of capital: 11% [source: current yield on firm's debt and the cost of equity estimated using the Capital Asset Pricing Model, weighted average based on the target capital structure] ? Marketable securities: $20 million ? Market value of firm's debt: $50 million ? The firm has 5 million shares of common stock outstanding selling at: o Scenario 1 = $50/share and o Scenario 2 = $70/share. As indicated, the values assigned to drivers link directly to the strategic plan and the associated strategic analysis. In arriving at these estimates strategic alternatives have been evaluated for their value creation potential, with the set of strategies selected that create the most shareholder wealth. A template has been provided as an attachment -- fill in the shaded cells to answer the following four questions: 1. What is the PV of operating cash flows over the competitive advantage period? 2. What is the residual value of the firm after the period of competitive advantage? 3. What is the value of the firm's equity? 4. Compare the market value of equity ($50/share) with the estimate provided by SVA for scenario 1. What recommendations would you make to top management based on your analysis? Now compare the market value of equity ($70/share) with your SVA estimate. What would you recommend now?
