Discussion board postings.
bhmith1m3467
11.docx1. Capital budgeting is a resource plan of how a firm invests its shares in order to increase its profits. Therefore, there are influences firms need to consider before any decisions on capital budgeting. PepsiCo implemented a new computer network system to decrease the time between customer order and delivery. The following are factors that need to be considered when making capital budgeting decision (Kent, 2011):
Factors significant to the company. Initially, a manager needs to ensure there is appropriate funding on hand for the firm to start a project by means of savings or short-term loan? Secondly, capital structure is the next factor. An example is if PepsiCo’s capital structure base on equity or debt? Another factor is the cost relevant; financial managers must review that PepsiCo would be able to withstand relevant cost short of any difficulties. Economic value assessment is the most significant factor so that company must choose profitable investment project (Kent, 2011).
The criteria of the initial investment (cost relevant) for a project is $617.8 million; 10% of PepsiCo’s 2012 profits. The projected profits from this stock is increased in sales by 5% the initial year then it increased the following year every year after that by .3%. PepsiCo’s expected necessary rate of return was 9%; thus, the calculation of NPV and payback period is by utilizing the formulas. The result would be presented for going with the project or passing it. If so, the basis must be known?
Calculation of the proposed return:
Payback Period
Year Cash Flow Cumulative Cash Flow
0 -617.8 -617.8
1 326.46 -290.34
2 197.4584 -92.8816
3 198.0508 105.1691
Thus, the payback period for the projected period is 3 years due to cash flows becoming positive in year 3.
NPV: (Amount shown are in millions)
NPV = CF1 / (1+r)1 + CF2 / (1+r)2 + CF3 / (1+r)3 – CF0
NPV = $65,819.46 / 1.09 + 66,016 /1.18 + 66,214 / 1.30 - $617.8
NPV = $1.750308 million. NPV is positive and larger than zero so the project would be accepted on the basis of NPV since it is the important method to relate share options.
Return on investment:
ROI will be computed to make sure that investment is getting the appropriate return
ROI = gain / cost of investment x 100
ROI = $1.750308 / $617.8 x 100
ROI = 0.28%
The rate of return on this project is also positive; therefore, would be accepted by management.
Angie
References
Baker, H. & English, P. (2011). Capital budgeting valuation [electronic resource]: financial analysis for today’s investment projects/H. Kent Baker, Philip English. n.p.: Hoboken, N.J.: Wiley, 2011. Retrieved on April 11, 2015 from http://site.ebrary.com.proxy-library.ashford.edu/lib/ashford/detail.action?docID=10483283
Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance. San Diego, CA: Bridgepoint
2. I would say that as a representative of management for IBM, I would want to bring up a few factors that would have to be considered before making this capital budgeting decision. I would have to say that the first thing would be if we have looked at other systems that maybe would not cost as much. Ten percent of your profits may not be a lo to a multi billion dollar company, but it is something to consider. That would mean the cost of the item is $9,279,300. Our profits last year was $92,793,000. The company also has a lose in profits from where they were in 2014 compared to 2013. The other thing I would look at is how many other industries and companies are using this product and what their feelings are about this. IBM could take out a loan and then repay it, but is this debt that the company should have?
The reason that I bring up these factors is that from what I can tell, IBM has been losing capital over the last few years. The stock has been relatively well and the dividends have been outcoming, but the company have not been meeting its economic goals. We have changed CEO's in the past few years trying to solve the problem. I do not see that this would happen again, but IBM was in a financial tailspin in the 1990's. The economy was in a recession back then, IBM has to sell off parts of its computer software and printers. They laid off employees of relocated them. I do not compare that to what we just went though as a country, but now is not a good time to make hasty economic decisions.
The way that I would see it is that IBM is a consulting and logistics company now. In their hay day, they use to make a punch system and software that could have been used. For the purposes of this discussion piece, we can use the information that has been gathered to see if it would be worth it numberwise. It look like for the last few years, IBM has been losing their total profits on an average of -4.55% for the last three years(-2.25% in 2012, -4.55% in 2013, and -6.98% in 2014) . This really makes no sense to make unwanted or unnecessary purchases or to gain any debt.
There is a link to their last five years of IBM annual investment reports, this shows that they have not gained much profit, in fact lost profit over this time:
http://www.marketwatch.com/investing/stock/ibm/financials
References:
Annual Financial for International Business Machines Corp. Retrieved on April 14,2015. http://www.marketwatch.com/investing/stock/ibm/financials
International Business Machines Corp. IBM. Retrieved on April 14, 2015. http://financials.morningstar.com/ratios/r.html?t=IBM
3. Investors favor PepsiCo’s dividend policy because it is consistent. Annually, PepsiCo has given dividends continually at a growing rate because of its earnings, new merchandise and $1 billion savings in 2014. PepsiCo placed itself surrounded by top businesses by distributing dividends successively for 41 years nonstop. Ever since 1965 on a quarterly basis, PepsiCo has managed to distribute dividends. Shareholders received $8.7 billion in 2014 from repurchases and dividends by PepsiCo. This organization can get money from their daily operations and from actions from the debt markets. The transactions in Venezuela impacted PepsiCo’s capability to discharge its monies to their investors because of the bolivars depreciation. PepsiCo bought their regular stocks in 2011 to help with the offset of its arrears (PepsiCo, 2014).
The dividend policy for PepsiCo is at the top of the market due to it being the only business that upholds continuous dividend stocks. Nonetheless enough interest and shares will be distributed to shareholders; thus investors are content with this policy. Even though PepsiCo’s shares are dependable, the company may vary their policy based on capital market conditions at the time. Whenever the capital market is promising, a liberal dividend policy is what PepsiCo would select. Although, on some instances, a conservative dividend policy is what PepsiCo chooses. This is because of the fast emerging procedures of PepsiCo that helps to obtain increased earnings thus their large returns (PepsiCo, 2014).
The dividend rate over the past 5 years for years (2010, 2011, 2012, 2013 and 2014) can be computed by the formula below:
Dividend rate = recent dividend x number of periods every year + extra dividend
In 2010, the dividend rate was $ 0.45 x 3 + $ 0.54 thus it is $1.890 per year. Comparable computations are completed for the succeeding years that show the following outcomes: 2011 - $2.025, 2012 - $2.1275, 2013 - $2.24, and 2014 - $2.5325. This company disclosed continuous increase in its dividends and the business experts mentioned PepsiCo’s 2015 dividend estimates would expectantly reach $2.92 (PepsiCo, 2014).
4. For my company, I am seeing that IBM has had dividend payouts since the year 1916. It has also raised its dividends each year for the last 19 years and has increased it by 10% or more for 11 years or more. IBM has paid off a fraction of its earnings to its shareholders in dividends each year, which is about 2%. IBM has paid out more in share buybacks than most companies but this guaranties that the shareholders get better return rates overall. The company uses this in a way to thanks its loyal shareholders, who the majority are IBM employees, for staying with them overall over the years.
The shares of IBM are also always high earners. IBM closed today at the NYSE at $164.13. IBM stocks are usually one of the highest on the floor. It has produced so well over the years, that it has split many times over, giving their investors more profit than once can imagine. To examine how their rates have been over the last 5 years, I have found the information and it shows that it has been a steady increase.
2010: (3 x .65) +(1 x .55) = $2.50 total
2011:(3 x.75) + (1x.65) =$2.90 total ( 1.16% increase)
2012: (1 x .75) +(3 x .85) = $3.30 total ( 1.14 % increase)
2013: ( 1 x.85) +(3 x .95) = $3.70 total ( 1.12 % increase)
2014: (1 x .95) + (3 + 1.1) = $4.25 total ( 1.14 % increase)
The increases seem to be pretty stead over the years, no real big changes in the rates. I think that now that IBM has gone more consulting and analytics, it seems that there is not really much growth happening. They are not rolling out any new products that are making the consumer go crazy for. Really though steady is not a bad thing for a company that has been around for 100 years.
References:
Green, T. 3 Stocks With an Enviable History of Increasing Dividends. Retrieved on April 15, 2015. http://www.fool.com/investing/general/2014/10/24/3-stocks-with-an-enviable-history-of-increasing-di.aspx
IBM SEC Filing. Retrieved on April 15, 2015. http://finance.yahoo.com/q/sec?s=IBM+SEC+Filings
International Business Machines Corporations Date and Dividends History. Retrieved on April 15, 2015. http://www.nasdaq.com/symbol/ibm/dividend-history
