Cost of Capital, Capital Structure, and Capital Budgeting Analysis
Order ID 53563633773 Type Essay Writer Level Masters Style APA Sources/References 4 Perfect Number of Pages to Order 5-10 Pages
Cost of Capital, Capital Structure, and Capital Budgeting Analysis
Purpose of the project
In this project, you are supposed to be a financial manager working for a big corporation and you have to apply the knowledge obtained from this course to determine the cost of debt, cost of preferred stock, cost of common equity, capital structure, and the weighted average cost of capital (WACC) for a publicly-traded company of your choice. You will use the WACC as the discount rate to conduct capital budgeting analysis for a project that the firm is considering and then decide whether it should be accepted or not.
Outline for the project
- Executive Summary
Summarize the results and analysis of the report.
- Estimate Capital Structure
Estimate the firm’s weights of debt, preferred stock, and common stock using the firm’s balance sheet (book value).
Estimate the firm’s weights of debt, preferred stock, and common stock using the market value of each capital component.
- Compute Weighted Average Cost of Capital (WACC)
Estimate the firm’s before-tax and after-tax component cost of debt;
Estimate the firm’s component cost of preferred stock;
Use three approaches (CAPM, DCF, bond-yield-plus-risk-premium) to estimate the component cost of common equity of the firm.
Calculate the firm’s weighted average cost of capital (WACC) using market-based capital weights or book value of debt.
- Cash Flow Estimation & Capital Budgeting Analysis
We assume that the company you selected is considering a new project. The project has 6 years’ life. This project requires initial investment of $180 million to construct building, and purchase equipment, and $12 million for shipping & installation fee. The fixed assets fall in the 5-year MACRS class.
The salvage value of fixed assets is $25 million. The number of units of the new product expected to be sold in the first year is 870,000 and the expected annual growth rate is 10%. The sales price is $250 per unit and the variable cost is $175 per unit in the first year. The required net operating working capital (NOWC) is 18%. The company is in the 33% tax bracket.
The project is assumed to have the same risk as the corporation, so you should use the WACC you obtained from prior steps as the discount rate. The project is assumed to have the same risk as the corporation, so you should use the WACC you obtained from prior steps as the discount rate.
Compute the depreciation basis and annual depreciation of the new project. (Please refer to table 11 A-2 MACRS allowances)
Estimate annual cash flows for the 6 years.
Draw a time line of the cash flows.
For this section of the project, students should follow and use the Cash Flow Estimation Excel Template File provided under the “Example Files for Term Project” folder.
- Capital Budgeting Analysis
Using the WACC you obtained from step (3) for the publicly-traded company as discount rate, apply capital budgeting analysis techniques (NPV, IRR, PI, and Payback Period) to analyze the new project.
Discuss whether the project should be taken and summarize your report.
Other information regarding the project
You will inform the instructor of the company you choose for approval. Students have to choose different companies. If several students want to use the same company, the first student to inform the instructor will have priority; the others will have to pick another company. Please make sure to post your company selection under the “Term Project” discussion thread.
Students should submit two files:
A Microsoft Word file which is the written report of your analysis. Your project should be well-organized and typed in a Word, document but you must attach the necessary Excel workbook with your report. The style and organization part of the project account for 10 percent of the grade.
An Excel file which is the outcome of your analysis. Please note that you should show formulas in Excel for all calculations.
Avoid firms that are losing money (airlines and other distressed firms).
Try to choose a small firm that operates in an industry that’s familiar to you. Try to avoid firms that operate in several industries (conglomerates such as GE) or companies whose performance depends on commodity prices (XOM, VLO, PD, ABX) so your analysis doesn’t become too complex.
DO NOT USE THE COMPANIES BELOW
AAPL, CVS, COST, GOOG, HD, SBUX, TGT, WMT, WAG, OMX.
This project should be well-organized and typed in a Word document but you must attach the necessary Excel workbook with your report
QUALITY OF RESPONSE NO RESPONSE POOR / UNSATISFACTORY SATISFACTORY GOOD EXCELLENT Content (worth a maximum of 50% of the total points) Zero points: Student failed to submit the final paper. 20 points out of 50: The essay illustrates poor understanding of the relevant material by failing to address or incorrectly addressing the relevant content; failing to identify or inaccurately explaining/defining key concepts/ideas; ignoring or incorrectly explaining key points/claims and the reasoning behind them; and/or incorrectly or inappropriately using terminology; and elements of the response are lacking. 30 points out of 50: The essay illustrates a rudimentary understanding of the relevant material by mentioning but not full explaining the relevant content; identifying some of the key concepts/ideas though failing to fully or accurately explain many of them; using terminology, though sometimes inaccurately or inappropriately; and/or incorporating some key claims/points but failing to explain the reasoning behind them or doing so inaccurately. Elements of the required response may also be lacking. 40 points out of 50: The essay illustrates solid understanding of the relevant material by correctly addressing most of the relevant content; identifying and explaining most of the key concepts/ideas; using correct terminology; explaining the reasoning behind most of the key points/claims; and/or where necessary or useful, substantiating some points with accurate examples. The answer is complete. 50 points: The essay illustrates exemplary understanding of the relevant material by thoroughly and correctly addressing the relevant content; identifying and explaining all of the key concepts/ideas; using correct terminology explaining the reasoning behind key points/claims and substantiating, as necessary/useful, points with several accurate and illuminating examples. No aspects of the required answer are missing. Use of Sources (worth a maximum of 20% of the total points). Zero points: Student failed to include citations and/or references. Or the student failed to submit a final paper. 5 out 20 points: Sources are seldom cited to support statements and/or format of citations are not recognizable as APA 6th Edition format. There are major errors in the formation of the references and citations. And/or there is a major reliance on highly questionable. The Student fails to provide an adequate synthesis of research collected for the paper. 10 out 20 points: References to scholarly sources are occasionally given; many statements seem unsubstantiated. Frequent errors in APA 6th Edition format, leaving the reader confused about the source of the information. There are significant errors of the formation in the references and citations. And/or there is a significant use of highly questionable sources. 15 out 20 points: Credible Scholarly sources are used effectively support claims and are, for the most part, clear and fairly represented. APA 6th Edition is used with only a few minor errors. There are minor errors in reference and/or citations. And/or there is some use of questionable sources. 20 points: Credible scholarly sources are used to give compelling evidence to support claims and are clearly and fairly represented. APA 6th Edition format is used accurately and consistently. The student uses above the maximum required references in the development of the assignment. Grammar (worth maximum of 20% of total points) Zero points: Student failed to submit the final paper. 5 points out of 20: The paper does not communicate ideas/points clearly due to inappropriate use of terminology and vague language; thoughts and sentences are disjointed or incomprehensible; organization lacking; and/or numerous grammatical, spelling/punctuation errors 10 points out 20: The paper is often unclear and difficult to follow due to some inappropriate terminology and/or vague language; ideas may be fragmented, wandering and/or repetitive; poor organization; and/or some grammatical, spelling, punctuation errors 15 points out of 20: The paper is mostly clear as a result of appropriate use of terminology and minimal vagueness; no tangents and no repetition; fairly good organization; almost perfect grammar, spelling, punctuation, and word usage. 20 points: The paper is clear, concise, and a pleasure to read as a result of appropriate and precise use of terminology; total coherence of thoughts and presentation and logical organization; and the essay is error free. Structure of the Paper (worth 10% of total points) Zero points: Student failed to submit the final paper. 3 points out of 10: Student needs to develop better formatting skills. The paper omits significant structural elements required for and APA 6th edition paper. Formatting of the paper has major flaws. The paper does not conform to APA 6th edition requirements whatsoever. 5 points out of 10: Appearance of final paper demonstrates the student’s limited ability to format the paper. There are significant errors in formatting and/or the total omission of major components of an APA 6th edition paper. They can include the omission of the cover page, abstract, and page numbers. Additionally the page has major formatting issues with spacing or paragraph formation. Font size might not conform to size requirements. The student also significantly writes too large or too short of and paper 7 points out of 10: Research paper presents an above-average use of formatting skills. The paper has slight errors within the paper. This can include small errors or omissions with the cover page, abstract, page number, and headers. There could be also slight formatting issues with the document spacing or the font Additionally the paper might slightly exceed or undershoot the specific number of required written pages for the assignment. 10 points: Student provides a high-caliber, formatted paper. This includes an APA 6th edition cover page, abstract, page number, headers and is double spaced in 12’ Times Roman Font. Additionally, the paper conforms to the specific number of required written pages and neither goes over or under the specified length of the paper.
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