business finance

Mid-term Assessment – Summer II - 2021 Written assignment (essay) Activity brief – 4 mini essays BCO222 – Business Finance II Online campus Professor: Miguel Corte-Real. Email: [email protected]

Description Please read the four cases below, and answer the corresponding questions.

Format This activity must meet the following formatting requirements:

• Font size 12 • Double-spaced • 3000 words • Harvard Referencing System • pdf only

Goal(s) The student should be able to demonstrate the learning of the above outcomes making the link between the material covered during the seminars and the research requested to answer each of the questions.

Due date Date: WEEK 4, August 23th, 2021, 14:00hrs

Weight towards final grade

This activity has a weight of 50% towards the final grade.

Learning outcomes

The Student should be able to demonstrate the knowledge gathered during the seminars in reference to the following topics:

• Investment in Long-Term Assets/Capital Investment Analysis

• Capital Investment Decision Analysis and Free Cash Flows

• Financial Leverage and Capital Structure Policy

Assessment criteria

Please refer to: Rubric written assignment provided below.

CASE 1 (25 points) From the video shared in the class “How The Economic Machine Works” (please see link to the video: https://www.youtube.com/watch?v=PHe0bXAIuk0) by Ray Dalio – what have you learned? (please do not describe the video since I watched it – I would like to know what you have learned – as discussed in the video by Ray Dalio the macroeconomic cycle has direct implications on the cost of capital and the capital budgeting decision criteria) – please elaborate in a detailed manner and link your answer to the material discussed in class. (25 points) CASE 2 (25 points) You just graduated from European University and in your first job as an analyst at Joma Sports Goods is to evaluate two new capital budgeting proposals. Since this is your first assignment after University you have been asked to provide a detailed financial analysis by providing a recommendation and the reasons for that decision. The mini-project states the following: Provide an evaluation of 2 proposed projects, both with a 5 year expected lives and identical initial outlays of $10,000. Both of these projects involve additions to Joma Sports Joma created a new highly successful tennis shirt product range, and as a result, the required rate of return on both projects has been established at 12%. The expected FCF (free cash flows) for each of the projects are as follow:

Project A Project B Initial Outlay -$110,000 -$110,000 Inflow year 1 20,000 40,000 Inflow year 2 30,000 40,000 Inflow year 3 40,000 40,000 Inflow year 4 50,000 40,000 Inflow year 5 70,000 40,000

In the process of evaluation these projects, please respond to the following questions:

1) Why is the capital-budgeting process important?

2) Why is it difficult to find exceptional profitable projects?

3) What is the payback period on each project? If Joma imposes a 3-year maximum acceptable period, which of these projects should be accepted?

4) What are the potential criticisms of the payback period?

5) Determine the NPV for each of the projects. Should these projects be accepted?

CASE 3 (15 points) Nike Sport Industries is considering a new project with a 4-year life with the following cost of revenue data. This project will require an investment of $140,000 in new equipment. This new equipment will be depreciated down to zero over 4 years using the simplified straight-line method and has no salvage value. This new project will generate additional sales revenue of $112,000 while additional operating costs, excluding depreciation, will be $68,000. Nike marginal tax rate is 35%. What is the project’s free cash flow in year 1? CASE 4 (35 points) 1. On the back of the current COVID-19 and macroeconomic situation the European Central Bank asked the European Banks to refrain from or limited the dividends distribution – describe on your own views and considering the material we covered during classes the trade-off between paying dividends and retaining (reinvesting) firm profits. 2. Suppose I own 10% of the Yonex Sports Industries. An equivalent to 30,000 shares of common stock, which most recently traded for a price of $98 a share. The company has since declared its plans to engage in a two-for-one stock split.

1) What will my financial position be after the stock split, compared to my current position? (Assume the stock price falls proportionally)

2) The executive vice-president is charge of finance believes the price will not fall in proportion to the size of the split and will only fall 45% because she thinks the pre-split price is above the optimal price range. If she is correct, what will be my net gain from the split?

Rubric: written assignment

Criteria Accomplished (A) Proficient (B) Partially proficient (C) Borderline (D) Fail (F) Problem identification

The business issue has been correctly identified, with a competent and comprehensive explanation of key driving forces and considerations. Impact on company operations has been correctly identified. Thorough analysis of the issue is presented.

The student correctly identified the issue(s), taking into account a variety of environmental and contextual drivers. Key case information has been identified and analyzed.

The student correctly identified the case (issues), considering obvious environmental/contextual drivers. There is evidence of analysis, but it lacks depth.

The student correctly identified the issue(s) but analysis was weak. An absence of context – the work is basically descriptive with little analysis.

The student failed to correctly identify the issue(s); analysis was incorrect or too superficial to be of use; information was misinterpreted.

Information gathering

The student showed skill in gathering information and analyzing it for the purposes of filling the information gaps identified. Comprehensive and relevant.

Relevant information gaps were identified and additional relevant information was found to fill them. At least two different types of sources were used. The student demonstrates coherent criteria for selecting information but needs greater depth.

The student correctly identified at least one information gap and found relevant information, but which was limited in scope. Some evidence of sound criteria for selecting information but not consistent throughout. Needs expansion.

An information gap was identified and the student found additional information to fill it. However, this was limited in scope. Weak criteria for the selection of necessary information.

Information was taken at face value with no questioning of its relevance or value. Gaps in the information were not identified or were incorrect.

Conclusions The student evaluated, analyzed, synthesized all information provided to create a perceptive set of conclusions to support the decisions and solutions.

The student evaluated, analyzed and synthesized to create a conclusion(s) which support decisions and solutions.

The student reached conclusions, but they were limited and provided minimal direction for decision-making and solutions.

The conclusion was reasonable but lacked depth and would not be a basis for suitable strategy development.

The student formed a conclusion, but it was not reasonable. It was either unjustified, incorrect or unrelated to the case in hand.

Solutions The student used problem solving techniques to make thoughtful, justified decisions about difficult and conflicting issues. A realistic solution was chosen which would provide maximum benefit to the company. Alternative solutions were explored and ruled out.

The student used problem solving techniques to make appropriate decisions about complex issues. Relevant questions were asked and answered. A realistic solution was chosen. Alternatives were identified, explored and ruled out.

The student used problem- solving techniques to make appropriate decisions about simpler issues. The solution has limited benefit but does show understanding of implications of the decision. Alternatives were mentioned but not explored.

The student used problem solving techniques to make decisions about simpler issues but disregarded more complex issues. Implications of the decision were not considered. Alternatives were not offered.

The student formed a conclusion, but it was not reasonable. It was either unjustified, incorrect or unrelated to the case in hand.