Business Finance - Management Week 10 Assignment- Managerial Finance

Module 3 Assignment: Capital Budget Decision Making for an Organization

Report prepared by: Replace this text with your name.

Date: Replace this text with the submission date.

Walden University

MBAX 6070: Managerial Finance

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Executive Summary

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Part 1: Short-Term Working Capital Considerations

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Part 2: Long-Term Working Capital Considerations: Time Value of Money and Bonds

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Part 3: Long-Term Working Capital Considerations: CAPM, Stock Valuation, and Project Evaluation Tools

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References

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Include appropriately formatted references to support your Assignment. Refer to the Assignment guidelines for further information on the requirements.

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Week 19 Assignment

Managerial Finance

Capital Budget Decision Making for an Organization- Part 3

Note: In Weeks 8 and 9, you submitted Part 1 and Part 2 of the Module 3 Assignment. You will complete and submit Part 3 and the executive summary this week.

As a reminder, you will continue to play the role of a consultant who has been hired by a mid-sized company that recently became public to provide some recommendations related to their short-term and long-term financial needs. Your first project is to analyze the short- and long-term capital budget needs of the company. You will prepare and submit a 3- to 5-page report, including an executive summary in which you synthesize your recommendations for the following fiscal year, along with the Excel spreadsheet provided with your calculations. Explain your findings and your recommendations.

For each of the items in your report, you will complete the calculations in the Module 3 Assignment Part 1 Template and will then use that financial information to develop your report to the owner using the Module 3 Assignment Part 2 Template. In your report, be sure to include relevant citations from the Learning Resources, the Walden Library, and/or other appropriate academic sources to support your work.

To prepare for this Assignment:

· Return to the Module 3 Assignment Part 1 Template to continue completing the calculations.

· Return to your Module 3 Assignment Part 2 Template to complete Part 3 of your report, as well as the executive summary. 

Submit your synthesis of financial data related to long-term financing needs for an organization, to include the following:

Part 3: Long-Term Working Capital Considerations: CAPM, Stock Valuation, and Project Evaluation Tools (1–2 pages, plus calculations in Excel)

· CAPM and Required Return: The company has a beta of 1.1, and the closest competitor has a beta of 0.30. The required return on an index fund that holds the entire stock market is 11%. The risk-free rate of interest is 4.5%. By how much does your company’s required return exceed your competitor’s required return?

· Constant Growth Valuation: The company is expected to pay $1.80 per share dividend at the end of the year (i.e., D1 = $1.80). The dividend is expected to grow at a constant rate of 4% a year. The required rate of return on the stock, rs, is 10%. What is the stock’s current value per share?

· Nonconstant Growth Valuation: The company recently paid a dividend, D0, of $2.75. It expects to have nonconstant growth of 18% for 2 years followed by a constant rate of 6% thereafter. The firm’s required return is 12%.

· How far away is the horizon date?

· What is the firm’s horizon, or continuing, value?

· What is the firm’s intrinsic value today, P0?

· Weighted Average Cost of Capital: The company has a target capital structure of 35% debt and 65% common equity, with no preferred stock. Its before-tax cost of debt is 8%, and its marginal tax rate is 40%. The current stock price is P0 = $22.00. The last dividend was D0 = $2.25, and it is expected to grow at a 5% constant rate. What is its cost of common equity and its WACC?

· Capital Budgeting Criteria: The company has an 11% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows: 

· What is each project’s NPV?

· What is each project’s IRR?

· What is each project’s MIRR? (Hint: Consider Period 7 as the end of Project B’s life.)

· From your answers to parts a, b, and c, which project would be selected? If the WACC was 18%, which project would be selected?

· Construct NPV profiles for Projects A and B.

· Calculate the crossover rate where the two projects’ NPVs are equal.

· What is each project’s MIRR at a WACC of 18%?

Executive Summary (page 1 of your report)

Provide the company owner with a 1-page executive summary of your findings and recommendations. Address the following in your executive summary:

· Briefly identify the purpose of your report.

· Concisely summarize the results of your financial analysis of the company’s short- and long-term capital budget needs.

· Synthesize your recommendations for how the company can raise money in the short-term and long-term to continue to add value to the organization.

Week 10 Learning Resources

Managerial Finance

The Capital Asset Pricing Model (CAPM)

Assessing the relationship between a systemic risk and expected return is one of the most important aspects of choosing an investment. The capital asset pricing model (CAPM) describes this relationship. As a manager who makes or has input in investing decisions, you can apply this model to determine how risky security may be and what sort of returns you could expect to be generated. Through these resources, you will examine the capital asset pricing model.

· Brigham E. F., & Houston, J. F. (2022). Risks and rates of return. In  Fundamentals of financial management (16th ed., pp. 273–308). Cengage Learning.

· Kermode, M. (2011, October 15).  Example of the capital asset pricing model using Excel  Links to an external site.  [Video]. YouTube. https://www.youtube.com/watch?v=9PmDyGShF4I Note: The approximate length of this media piece is 10 minutes.

· McClure, B. (2021, May 4).  What beta means when considering a stock’s risk  .Links to an external site.  https://www.investopedia.com/investing/beta-know-risk/

· Taylor, C. (n.d.).  How to calculate CAPM in Excel  .Links to an external site.  https://www.sapling.com/8696905/calculate-capm-excel

· MoneyChimp.com. (n.d.).  CAPM calculator  Links to an external site. . http://www.moneychimp.com/articles/valuation/capm.htm

Stock Valuation

Consider a publicly traded company that you know well and search for its stock price. If possible, consider what it was worth 3 months ago, 1 year ago, or 5 years ago. It is likely that you will find some fluctuations. What determines the current price and those fluctuations? Although there are likely to be multiple factors, those factors reflect that organization’s stock valuation at different points in time. Using these resources, you will explore the concept of stock valuation, including determining the valuation for the current and projected worth of a stock to determine whether an investment is undervalued or overpriced.

· Brigham E. F., & Houston, J. F. (2022). Stocks and their valuation. In  Fundamentals of financial management (16th ed., pp. 319–346). Cengage Learning.

· Subjectmoney. (2013, January 3).  Dividend discount model (DDM) - Constant growth dividend discount model - How to value stocks  Links to an external site.  [Video]. YouTube. https://www.youtube.com/watch?v=n76Pz3HOBPo

· Kugele, L. (2015, August 5).  E 1 non-constant growth stock - Step-by-step  Links to an external site.  [Video]. YouTube. https://www.youtube.com/watch?v=Ub-1e0H4uT0

· Finance Formulas. (n.d.).  Preferred stock  .Links to an external site.   https://financeformulas.net/Preferred_Stock.html

Project Evaluation Tools

Managers evaluate possible projects using the capital budgeting process so that they can choose ones that will prove beneficial and add value to their organizations. They can apply this process in scenarios where the organization is considering buying a new building, purchasing new equipment, or offering new training programs to their employees. They will use multiple evaluation tools to determine whether the new undertakings will be acceptable or unacceptable according to the goals of the organization. Using these resources, you will explore the concepts related to capital budgeting, including the evaluation tools that are used in this process.

· Brigham E. F., & Houston, J. F. (2022). The basics of capital budgeting. In  Fundamentals of financial management (16th ed., pp. 389–420). Cengage Learning.

· Brigham E. F., & Houston, J. F. (2022). The cost of capital. In  Fundamentals of financial management (16th ed., pp. 360–388). Cengage Learning.

· I Hate Math Group, Inc. (2012, July 30).  How to calculate WACC (simple example) weighted average cost of capital  Links to an external site.  [Video]. YouTube. https://www.youtube.com/watch?v=XL20IFTYdBY

· Carlson, R. (2021, February 9).  Net present value (NPV) as a capital budgeting methodLinks to an external site. . https://www.thebalancesmb.com/net-present-value-npv-as-a-capital-budgeting-method-392915

· Carlson, R. (2019, November 13).  Payback period in capital budgetingLinks to an external site. . https://www.thebalancesmb.com/payback-period-in-capital-budgeting-392916

· Carlson, R. (2020, June 29).  What is the weighted average cost of capital?  Links to an external site.  https://www.thebalancesmb.com/calculate-weighted-average-cost-of-capital-393130

· Jan, O. (2019, June 5).  Modified internal rate of return  Links to an external site. . Xplaind. http://xplaind.com/882858/modified-internal-rate-of-return

· Good Calculators. (2021).  WACC calculator  Links to an external site. . https://goodcalculators.com/wacc-calculator/

· Walden University, LLC. (2021).  How to calculate NPV and IRR  Download How to calculate NPV and IRR [PDF]. Walden University Blackboard. https://waldenu.instructure.com

· Walden University, LLC. (2021).  What are NPV and IRR? [Video]. Walden University Canvas. https://waldenu.instructure.com