Utilizing Data Driven Analysis in Making Business Decisions
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Utilizing Data Driven Analysis in Making Business Decisions
Signature Assignment for ACC202 Module 5 SLP
Differential analysis involves knowing which costs are relevant, i.e., future costs that vary among alternatives. It is important to know what information to use and not just how to execute the analysis.
Herrestad Company receives an offer to make a new product, called C, for a new customer. The customer wants to buy 1,000 units. Product C has the same cost structure as product B with three exceptions. The new customer is only willing to pay $150 per unit, direct materials costs will decrease by $12 per unit and Herrestad does not have to incur any variable selling and administrative expenses.
Make a list of the expenses and amounts that are relevant for this decision. How much with the sale of this product contribute to the profitability of Herrestad?
What if the company only pays $140 per unit? How does this change the contribution towards profitability?
If you were the manager, would you accept this order? What considerations, other than financial would enter into your decision?
This is a Signature Assignment for ACC202 Module 5 SLP.
There are 2 specific learning outcomes: 1) apply business theories, models, and concepts to guide analysis of problems and situations and 2) utilize data driven analysis in making business decisions.
In this SLP assignment for Module 5 our emphasis will be on understanding the concept of relevant costs. You will be summarizing all of what you learned the in the Cases, SLPs and TDs.
For this assignment, go to the Yahoo Stock Screener and use this page to find a publicly traded company that you find interesting. The company should not be a bank or a financial institution of any kind including insurance companies.
Write a two-to-three-page paper discussing what you find interesting about this company, and whether or not you think this company will have a successful future. Get to the company’s web site, into the “investors relations” section and provide some financial highlights of your company for the past year. Indicate which stock exchange the company is listed on and what was the past 12-month rate of return (% gain or loss) to investors who bought shares of this company a year ago and sold the shares yesterday. This rate of return is called the one-year Holding Period Return, or HPR. Also state what is the most recent price of the shares on the company?
In addition, discuss briefly some information about the top management team including the CEO and CFO.
One specialized type of security is called an equity future. This is a contract that guarantees you a share of a particular company to be delivered to you not today, but sometime in the future, at a price that is determined by the market right now. This price is usually called the futures price of the stock (note – the term is plural – “futures”). If you ‘buy’ these futures, you don’t pay for the shares now.
You are actually signing a contract whereby you are committed to pay that price in a particular date in the future, and you are guaranteed to receive one share of the company at that time, irrespective of its actual market price at that future date. Suppose for example that the futures price of the XYZ company is $40. Suppose you ‘buy’ a 6-months futures contract. If six months later the share price is $45, you gain $5 per share. If the market price in 6 months is only $35, then you lose $5.
Using the Yahoo Finance take a look at the five-year chart for your reference company (the one you chose for SLP1). Using this chart and other information you can find on this company, write a paper answering the following question:
What do you think would the futures price of 100 shares of your reference company to be delivered to you in one year be right now?
The paper is to be two pages long. You DO NOT need to use complex mathematical formulas for these assignments. Instead, think about how much do you think the market value of 100 shares of your company will be in one year? In considering the possible answer, please reflect also on the following:
Do you expect the price of the shares in one year to be much higher? Or lower? Or only a little bit higher?
How risky the stock is? Is its price prone to wild swings up and down? Or has the price been relatively stable the last few years?
What alternative investments you have access to. What rate does your bank give you on a savings account or certificate of deposit? The greater return you can get on other investments, the less you would be willing to pay for an equity future.
Using Yahoo! Finance find the value of beta for your reference company. Write a two-page paper discussing the following items:
- What is the estimated beta coefficient of your company? What does this beta mean in terms of your choice to include this company in your overall portfolio?
- Given the beta of your company, the present yield to maturity on U.S. government bonds maturing in one year (currently about 4.5% annually) and an assessment that the market risk premium (that is – the difference between the expected rate of return on the ‘market portfolio’ and the risk-free rate of interest) is 6.5%, use the CAPM equation in order to find out what is the present ‘cost of equity’ of your company? Explain what is the meaning of the ‘cost of equity’.
- Choose two other companies, look up their “Beta” and report the names of these companies and their betas. Suppose you invest one third of your money in each of the stocks of these companies. What will the beta of the portfolio be? Given the data in (b), what will the Expected Rate of Return on this portfolio be? Do you feel that the three-stock portfolio is sufficiently diversified or does it still have risk that can be diversified away? Explain.
In a two-page report explain your answers thoroughly with references to the background materials. Make sure to demonstrate a strong understanding of the concept of beta and the risk/return trade off.
Every company has capital projects. The company you have selected must need something! Be it a new wing to the building, a new product line to be funded, a new piece of equipment, find one new acquisition your company needs.
Once you have identified the new possible investment item, what problems are you going to have in estimating the cash flow that might be emanating from the initial investment and problems in getting it funded? Issues might be:
- Politics (getting it through committees)
- Public Relations
Identify a potential capital project for your company describe such a project and write a short summary of the problems you see in getting the funding to see it through.
The paper should be two to three pages in length, and should have references to the background materials or other sources you found for this paper. It must discuss both the estimates of the initial investments and the annual incremental after-tax cash flow that is expected to emanate from the investment.
Examine the structure and activities in your organization and identify two projects or events that required an investment. One should be a ‘current project’ and the other long-term investment project.
For each project or event, identify the preferable source of funding. You may not have access to the actual source of funding so limit your paper to the source YOU feel is most appropriate. Then explain why you feel that source is most appropriate.
Your explanation is the most important part of this paper. You should include references to the background materials or other articles and a discussion of the main concepts of this module as they relate to your choice of funding.
The paper should be two pages in length.
Utilizing Data Driven Analysis in Making Business Decisions
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