Expert answer:Capital plans
Expert answer:Word document of 2–3 pagesAssume that you applied for a position in UPC’s internal audit department after 5 years in the finance department. As a senior internal auditor, one of your assignments is to design and implement controls over capital budgets and review control effectiveness. Your company is required by the Sarbanes Oxley Act of 2002 (SOX) to report material weaknesses in internal controls.You created the attached spreadsheet to verify the growth rate used in calculating cost of capital. You identified many inconsistencies with the data used by the finance department. The discrepancies led to a higher cost of capital for the truck replacement project. Therefore, UPC decided to lease trucks instead. Further, you are aware that the finance director is the one who approves capital projects and makes procurement and leasing decisions. The finance director owns a truck leasing company, and proposals have been received from his leasing company.You have been instructed to respond to the following tasks:Identify and explain 5 or more audit objectives for UPC’s capital plans.Provide a report of your audit, and discuss any SOX reportable issues.Recommend internal controls to address identified and perceived control weakness in UPC capital plans.Some managers have complained that the process of accepting projects does not consider qualitative factors. What qualitative factors will you recommend? Are there any associated risks?
137234_ip_student.xlsx
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Internet Research Results
Check the Cash Flow Statement for Dividends Paid
Result: dividends were paid in 2008, 2009 and 2010 or 3 consecutive years
Under “Company”, click on “Key Statistics”. Find a) beta and b) Dividend Payout Ratio
Result:
Beta =
0.68
Payout =
0.57
Calculations: Part A
Calculate the expected growth rate of UPC using the CAPM.
g=Plowback Ratio * ROE
Payout =
0.57
ROE =
0.14
g=
0.0606
UPS Statistics as of 12/31/2010
Description
Statistics
2008
2010
2010
Beta
Payout Ratio
0.57
Price Per Share (05/06/10 Close)
$33.96
Number of Common Shares Outstanding
########
ROE
0.141
Dividends Paid
$1,709,000,000 ######## ########
Net Income
$4,395,000,000 ######## ########
Common Equity
$17,714,000,000 ######## ########
0.68
Calculated ROE
Calculated Dividend Per Share
0.25
2009
0.13
Part A Answer
g=
Part B Answer
g=
0.14
$0.90
0.0606
0.0208
Calculations: Part B
Calculate the expected growth rate using the Constant Growth (or Gordon Growth) Model.
For a constant growth stock: D1 = D0(1 + g), D2 = D1(1 + g) = D0(1 + g)2, and so on.
D0 = Current Dividend in dollars (per share)
D1 = the next expected dividend or assumed to be paid 1 year from now
D1= D0(1+g);
g is equal to “g” in Part A
D1=
0.9571
P0=D1/(rs-g)
***Note: g is a new “g” different from the one in Part A
P0 = Current Stock Price
g = rs – (D1/ P0)
rs = Required Rate of Return
rs = rf + b(rM – rf)
rf = risk-free interest rate (or RRF); use 1% or interest rate on a three-month U.S. Treasury Bill is a good
rf = 0.0100
b = beta (use your company’s beta)
rM = expected return on the market
(rM – rf) =Market Risk Premium; assume 5.5% =
Therefore, rM =
rs =
0.0650
0.0474
g = rs – (D1/ P0)
Calcalut g in
g=
0.0208
0.0550
easury Bill is a good
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