Expert answer:6-1 Final Project Milestone Three: Capital Budgeti
Solved by verified expert:For this milestone, submit a draft of the Capital Budgeting Data section of the final project, along with your supporting explanations. Base your calculations on the data provided in this case study. Be sure to substantiate your claims. Submit your calculations on the designated tab of the Final Project Student Workbook and your supporting explanations as a Microsoft Word document. This milestone will be used in your final project. For additional details, please refer to the Final Project Guidelines and Rubric document and the Milestone Three Guidelines and Rubric document in the Assignment Guidelines and Rubrics section of the course.
fin550_final_project_student_workbook__7_.xlsx
fin550_milestone_three_guidelines_and_rubric.pdf
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Milestone One: Time Value of Money (please fill in shaded YELLOW cells, row 6D – 6H)
Interest Rate
8%
FCF1
FCF2
FCF3
FCF4
FCF5
Amounts*
Pv*
0,00
Total Pv*
*In millions
0,00
Pv=FVN/(1+I)^N
$0,00
PV(I,N,0,FV)
$0,00
$0,00
$0,00
Explanations:
FCF (Free Cash Flow) is the net change in cash generated by the operations of a
business during a reporting period, minus cash outlays for working capital, capital
expenditures, and dividends during the same period. FCF is a strong indicator of
the ability of an entity to remain in business.
Note: For this part of the Milestone, please use page 43 -capital lease payments
under property.
Interest Rate (given) – in our scenario we will use 8% interest rate. This rate is an
implicit rate, the average rate that lease consumers face on the current market.
Milestone Two: Stock Valuation and Bond Issuance (please fill in the shaded YELLOW cells)
PART I: STOCK VALUATION
Dividend from Financial Statements:
Year
Cash
Div/share ($)
Dividend
Yield
Stockholder’s
Stock Price
Equity (in millions)
2012
2013
2014
#DIV/0!
#DIV/0!
#DIV/0!
1. Stock Valuation – The new dividend yield if the company increased its dividend per share by 1.75
Year
Cash
Dividend
Div/Share ($) Yield
+1.75
2012
1,75 #DIV/0!
2013
1,75 #DIV/0!
2014
1,75 #DIV/0!
Stockholder’s
Stock Price
Equity (in millions)
0
0
0
#DIV/0!
#DIV/0!
#DIV/0!
2. The dividend yield if the firm doubled it’s outstanding shares
Year
Cash
Div/Share ($)
2012
2013
2014
Dividend
Yield
0
0
0
#DIV/0!
#DIV/0!
#DIV/0!
Stockholder’s
Stock Price
Equity (in millions) doubled
0
#DIV/0!
0
#DIV/0!
0
#DIV/0!
3. The rate of return on equity (i.e., the cost of stock) based on the new dividend yield you calculated above
Year
Cash
Stock Price
Div/Share ($)
+1.75
2012
1,75 #DIV/0!
2013
1,75 #DIV/0!
2014
1,75 #DIV/0!
PART II: BOND ISSUANCE
Return on
Investment
#DIV/0!
#DIV/0!
Curent Bonds from Financial Statements
Present Value
Periods
Interest
Payments
Future Value
PV
N
I
PMT
FV
($2.963)
40 Semi-annual payment: 2036-2016 = 20 years *2 = 40 periods
2,9375 Interest paid semi-annually: 5.875%/2 = 2.9375%
0 This bond does not make regular PMT except for interest
CALCULATING FV (please see help on the right hand side)
1. The new value of the bond if overall rates in the market increased by 5%
Present Value
Periods
Interest
Payments
Future Value
PV
N
I
PMT
FV
($2.963)
40
Please adjust interest
0
CALCULATING FV (please see help on the right hand side)
2. The new value of the bond if overall rates in the market decreased by 5%
Present Value
Periods
Interest
Payments
Future Value
PV
N
I
PMT
FV
($2.963)
40
Please adjust interest
0
CALCULATING FV (please see help on the right hand side)
3. The value of the bond if overall rates in the market stayed exactly the same
– identical to CURRENT BOND VALUE from Financial Statements
LOW cells)
Explanations:
Cash Dividend – distribution of the corporate income. They are not expen
appear on Income Statement.
Note: Part of Statement of Cash Flows. Please be aware that corporation
Dividend Yield – annual cash dividend per share of common stock divided
of a share of the common stock (Dividend yield = Annual Dividend/Curren
Note: Current Stock Price is not part of the Financial Statements – calcula
for Dividend Yield
per share by 1.75
yield you calculated above
Stockholder’s Equity = Assets – Liabilities. Equity represents the ownersh
Owners are called stockholders because they hold stocks or shares of the
every corporate manager is to generate shareholder value.
Return on Equity – for this part we will modify and use return on investm
Using the formula: Dividend (+1.75)/+[(new price-old price)/old price]
Note – for this part, you will need extra price from 2011
Bonds are a long-term debt for corporations. In buying a bond, the bondto the corporation. The borrower promises to pay specified interest rate
lifetime and at the maturity, payback the entire principle. In case of bank
have priority over stockholders for any payment distributions.
Bonds = Debt……………Bondholders = Lenders
Stock=Equity…………….Stockholders = Owners
Calculation: Please note that for bond calculations, only one bond is used
February 1, 2015 is the origination date. The value on financial statement
PV (Present value). Maturity date is assumed for February 2036 and paym
adjusted to February 1 and August 1.
The following Senior-Note was used from page 44:
Calculation: Please note that for bond calculations, only one bond is used
February 1, 2015 is the origination date. The value on financial statement
PV (Present value). Maturity date is assumed for February 2036 and paym
adjusted to February 1 and August 1.
6-2016 = 20 years *2 = 40 periods
: 5.875%/2 = 2.9375%
egular PMT except for interest
ee help on the right hand side)
The following Senior-Note was used from page 44:
5.875% Senior Notes; due December 16, 2036; interest payable semi-ann
December 16
PV (Present Value) = 2,963 million
Our scenario: 5.875% Senior Notes; due February 1, 2036; interest payab
February 1 and August 1
PV (Present Value) = 2,963 million
5.875%+5% = 10.875%/2 = 5.4375%
ee help on the right hand side)
5.875%-5% = 0.875%/2 = 0.4375%
ee help on the right hand side)
FV (Future Value Calculation) – using Excel Formula
Step 1) Select Formulas
Step 2) Click on Financial
Step 3) Select FV – you will see the formula below
Step 4) Enter the following:
Rate – enter as decimal, no % sign. Example: 4% as 0.04
Nper – number of period. Enter a whole number. Example 50
Pmt – payment. Our example does not assume regular payments disbursi
Pv – Present value. Enter as negative. Example $1,000 should be -1000
Type – leave blank
te income. They are not expenses and do not
ase be aware that corporation list 5 years worth of
hare of common stock divided by the market price
ield = Annual Dividend/Current Stock Price).
Financial Statements – calculated using the formula
quity represents the ownership of a corporation.
ey hold stocks or shares of the company. The goal of
areholder value.
dify and use return on investment instead.
w price-old price)/old price]
e from 2011
s. In buying a bond, the bond-owner lends money
to pay specified interest rate during the loan’s
ntire principle. In case of bankruptcy, bondholders
ment distributions.
ers
ers
ulations, only one bond is used and we assume
e value on financial statements will be considered
ed for February 2036 and payment schedule
page 44:
ulations, only one bond is used and we assume
e value on financial statements will be considered
ed for February 2036 and payment schedule
page 44:
36; interest payable semi-annually on June 16 and
bruary 1, 2036; interest payable semi-annually on
: 4% as 0.04
mber. Example 50
me regular payments disbursing principal
ple $1,000 should be -1000
Milestone Three: Capital Budgeting Data (please fill in the shaded YELLOW cells)
Initial Outlay
Cash Flows (Sales)
– Operating Costs (excluding Depreciation)
– Depreciation Rate of 20%
Operating Income (EBIT)
– Income Tax (Rate 35%)
After-Tax EBIT
+ Depreciation
Cash Flows
CF1
CF2
–
$0
Select from drop
downs below:
NPV
IRR
$0,00
#NUM!
WACC
CF3
CF4
–
CF5
–
–
Capital Budgeting Example Set-up
Initial investment $65,000,000
Straight-line Depreciation of 20%
Income Tax @35%
WACC of 8% approximately. (HD WACC was abou
Cash Flow (which in this case are Sales Revenues
CF1: $50,000,000
CF2: $45,000,000
CF3: $65,500,000
CF4: $55,000,00
CF5: $25,000,000
Operating Costs
CF1: $25,500,000
CF2: $25,500,000
CF3: $25,500,000
CF4: $25,500,000
CF5: $25,500,000
WACC- why do we use WACC rate for new proje
doesn’t earn more percent than WACC, the corp
abandon the project and invest money elsewher
Initial Investment – always negative. Corporation
money (“lose” it till they recover it via sales) in o
benefit.
ng Example Set-up
nt $65,000,000
preciation of 20%
ACCEPT
REJECT
proximately. (HD WACC was about 8.83%)
h in this case are Sales Revenues) are as follows:
we use WACC rate for new projects? If the project
ore percent than WACC, the corporation should
oject and invest money elsewhere.
nt – always negative. Corporation has to invest
t till they recover it via sales) in order to gain future
Milestone Four: Interest Rate Implication (please fill in shaded YELLOW cells)
1. Original Scenario from Milestone 1 – Time Value of Money using 8%
Interest Rate
8,00%
FCF1
Amounts*
FCF2
FCF3
FCF4
FCF5
113
111
108
101
97
Pv*
(104,63)
(95,16)
(85,73)
(74,24)
(66,02)
Total Pv*
*In millions
(425,78)
2. Change in interest rate and its implications – Lower Interest Rate (5%)
Interest Rate
FCF1
Amounts*
FCF2
FCF3
FCF4
FCF5
113
111
108
101
97
Pv*
(113,00)
(111,00)
(108,00)
(101,00)
(97,00)
Total Pv*
*In millions
(530,00)
3. Change in interest rate and its implications – Higher Interest Rate (15%)
Interest Rate
FCF1
Amounts*
FCF2
FCF3
FCF4
FCF5
113
111
108
101
97
Pv*
(113,00)
(111,00)
(108,00)
(101,00)
(97,00)
Total Pv*
*In millions
(530,00)
Explanation:
We will use Milestone 1 and Time Value of Money for Milesotne 4
analysis
Two cases will be analyzed:
Lower Interest Rate at 5%
Higher Interest Rate at 15%
SUMMARY TAB
TAB 1
Note: This process could take up t
1. Time Value of Money
FALSE
TAB 2
FALSE
FALSE
FALSE
PART I – Stock Valuation
FALSE
FALSE
FALSE
PART II – Bond Issuance
Current Bond Value
FALSE
$9.433,58
New Value +5%
FALSE
FALSE
5,4375
$24.634,04
New Value – 5%
FALSE
FALSE
0,4375
$3.528,32
ote: This process could take up to 20 seconds
TAB 3
Capital Budgeting
FALSE
FALSE
FALSE
TAB 4
Interest Rate Implication
FALSE
FALSE
$9.785.570,71
50%
FIN 550 Milestone Three Guidelines and Rubric
Overview: For the final project, you will use this case study to prepare a financial analysis report for Home Depot Inc. You will include in your analysis the
background calculations and managerial analysis for each of the following topics: time value of money, stock and bond valuation, and capital budgeting. You will
also discuss macroeconomic variables that might impact the company’s financial decision making and strategic objectives. These topics will be covered over four
milestones to be submitted throughout the course before you submit the final project. Note that while these elements may seem separate and unrelated,
together they will present a well-rounded view of the company’s finances with regard to the topics.
In this milestone, you will submit a draft of the Capital Budgeting Data section of the final project, along with your supporting explanations.
Prompt: Provide your recommendation on a potential investment project for Home Depot Inc. based on the net present value (NPV) and internal rate of return
(IRR). Compare these calculations for their use in evaluating a potential investment. Complete your calculations on the designated tab in the Final Project Student
Workbook.
Specifically, the following critical elements must be addressed:
IV.
Capital Budgeting Data
A. Suppose the company is considering a potential investment project to add to its portfolio. Calculate the following items:
1. The net present value (NPV) of the project
2. The internal rate of return (IRR) of the project
B. What are the implications of these calculations? In other words, based on each of the calculations, and being mindful of the need to balance
portfolio risk with return, would you recommend that the company pursue the investment? Why or why not? Be sure to substantiate your
claims.
C. What is the difference between NPV and IRR? Which one would you choose for evaluating a potential investment and why? Be sure to support
your reasoning with evidence.
Guidelines for Submission: Your paper must be submitted as a 2- to 3-page Microsoft Word document, not including your calculations, which should be
completed on the designated tab in the Final Project Student Workbook. Use double spacing, 12-point Times New Roman font, and one-inch margins. Sources
should be formatted according to APA style.
Instructor Feedback: This activity uses an integrated rubric in Blackboard. Students can view instructor feedback in the Grade Center. For more information,
review these instructions.
Rubric
Critical Elements
Capital Budgeting Data:
Potential Investment
Capital Budgeting Data:
Pursuing the Investment
Capital Budgeting Data:
Difference
Articulation of Response
Proficient (100%)
Accurately calculates requested figures
Needs Improvement (80%)
Calculates figures, but with gaps in
accuracy or detail
Analyzes the implications of each
Analyzes the implications of each
calculation on the recommendation to
calculation on the recommendation to
pursue the investment, substantiating
pursue the investment, but response or
claims
substantiation is cursory or illogical
Accurately characterizes the difference
Characterizes the difference between
between NPV and IRR and explains which NPV and IRR and explains which would
would be chosen for evaluating a
be chosen for evaluating a potential
potential investment and why, supporting investment and why, but response is
reasoning with evidence
cursory or inaccurate or evidence is not
supportive
Submission has no major errors related
Submission has major errors related to
to citations, grammar, spelling, syntax, or citations, grammar, spelling, syntax, or
organization
organization that negatively impact
readability and articulation of main ideas
Not Evident (0%)
Does not calculate figures
Value
30
Does not analyze the implications of each
calculation on the recommendation to
pursue the investment
30
Does not characterize the difference
between NPV and IRR and does not explain
which would be chosen for evaluating a
potential investment and why
30
Submission has critical errors related to
citations, grammar, spelling, syntax, or
organization that prevent understanding of
ideas
Earned Total
10
100%
…
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