Interest Rates

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1.

Part 1: Interest Rates

Many managers do not understand the various ways that interest rates can affect business decisions. For example, if your company decided to build a plant with a 30-year life and short-term debt financing (renewed annually), the cost of the plant could skyrocket if interest rates were to return to their previous highs of 12% to 14%. On the other hand, locking into high, long-term rates could be very costly also with a long period when low short-term interest rates were to be available. As you can see, the ability to know your economic environment and its impact on projected interest rates can be crucial to making good financing decisions.

Describe two to three macroeconomic factors that influence interest rates in general. Explain the effects of each factor on interest rates.

Now think about the industry in which you are employed or one in which you have past experience. To what macroeconomic factors is your industry most sensitive?

Describe two contemporary factors that seem to be impacting your industry today, and identify their impacts on the interest rates experienced within your chosen industry.

Support your comments with your own experiences, the weekly resources, and/or additional research. Use APA throughout and provide appropriate in-text citations and references.

Part 2: Stock Valuation, Risk and Returns

Stock valuation

https://www.youtube.com/watch?v=DSn1HThfb5w

https://www.youtube.com/watch?v=jfcRUzKZZE8

https://notendur.hi.is/ajonsson/kennsla2008/stock_valuation.pdf

Risk and Returns

https://www.youtube.com/watch?v=3BIIiUyr3-w

The links above contain information on stock valuation, risk and returns. Please review each one of them. Based on the knowledge gained from the materials presented in the links above, complete the following activities:

Present a detailed discussion of what you learned about stock valuation. Provide examples of how your company have used the concepts. Do you believe financing a company’s operation using stock is better than financing with bonds? Why or why not? Support your discussion with a numerical example.

Based on the materials presented in the “Risk and Return” video, present a discussion on why the materials are important in financial decision making. How would you incorporate risk and return in your financing decisions?

2.

In the link below, you will explore how companies compute their cost of capital by computing a weighted average of the three major components of capital: debt, preferred stock, and common equity. The firm’s cost of capital is a key element in capital budgeting decisions and must be understood in order to justify capital projects. In addition, you will also learn capital budgeting techniques including Payback, Net Present Value, Internal Rate of Return, etc.

Cost of Capital:

https://www.youtube.com/watch?v=B8JZhQofRTs

For this Discussion, imagine the following scenario:

You are the director of operations for your company, and your vice president wants to expand production by adding new and more expensive fabrication machines. You are directed to build a business case for implementing this program of capacity expansion. Assume the company’s weighted average cost of capital is 13%, the after-tax cost of debt is 7%, preferred stock is 10.5%, and common equity is 15%. As you work with your staff on the first cut of the business case, you surmise that this is a fairly risky project due to a recent slowing in product sales. As a matter of fact, when using the 13% weighted average cost of capital, you discover that the project is estimated to return about 10%, which is quite a bit less than the company’s weighted average cost of capital. An enterprising young analyst in your department, Harriet, suggests that the project be financed from retained earnings (50%) and bonds (50%). She reasons that using retained earnings does not cost the firm anything, since it is cash you already have in the bank and the after-tax cost of debt is only 7%. That would lower your weighted average cost of capital to 3.5% and make your 10% projected return look great.

Based on the scenario above, post your reactions to the following questions and concerns:

What is your reaction to Harriet’s suggestion of using the cost of debt only? Is it a good idea or a bad idea? Why? Do you think capital projects should have their own unique cost of capital rates for budgeting purposes, as opposed to using the weighted average cost of capital (WACC) or the cost of equity capital as computed by CAPM? What about the relatively high risk inherent in this project? How can you factor into the analysis the notion of risk so that all competing projects that have relatively lower or higher risks can be evaluated on a level playing field?

 
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Database Prototyping Assignment

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Database Prototyping Assignment

Case Studies

Corporate Finance
Ross, Westerfield, Jaffe, and Jordan
12th edition
Chapters 8-11 & 13 Case Studies
Input boxes in tan
Output boxes in yellow
Given data in blue
Calculations in red
Answers in green
NOTE: Some functions used in these spreadsheets may require that
the “Analysis ToolPak” or “Solver Add-in” be installed in Excel.
To install these, click on “Tools|Add-Ins” and select “Analysis ToolPak”
and “Solver Add-In.”

Chapter 8

Chapter 8
Financing East Coast Yachts Expansion Plans with a Bond Issue
Input area:
Years to maturity 20
Required return 7.50%
Amount needed $ 50,000,000
Face value $ 1,000
Coupon rate 7.50%
Tax rate 21%
Year bond is called 7
Spread above Treasury 0.40%
Treasury rate at call 4.80%
Treasury rate at call 8.20%
Output area:
2) Price of coupon bond
# of coupon bonds needed
Price of zero coupon bond
# of zeroes needed
3) Repayment of coupon bonds
Repayment of zeroes
4) Year 1 interest payments:
Pretax coupon payment
Aftertax coupon payment
Value of zero in one year
Zero coupon growth
Zero coupon bond
5) Make whole price
Make whole price

Chapter 9

Chapter 9
Stock Valuation at Ragan Engines
Input area:
Shares owned by each sibling 150,000
Ragan EPS $ 5.35
Dividend to each sibling $ 320,000
Ragan ROE 21%
Ragan required return 18%
EPS DPS Stock price ROE R
Blue Ribband Motors Corp. $ 1.19 $ 0.19 $ 16.32 10.00% 12.00%
Bon Voyage Marine, Inc. 1.26 0.55 13.94 12.00% 17.00%
Nautilus Marine Engines (0.27) 0.57 23.97 N/A 16.00%
Industry average
Nautilus EPS w/o write-off $ 2.07
Output area:
1) Total earnings
Payout ratio
Retention ratio
Growth rate
Total dividends next year
Total equity value
Value per share
2) Industry EPS
Industry payout ratio
Industry retention ratio
Industry growth rate
Year Total dividends
1
2
3
4
5
6
Stock value in Year 5
Total stock value today
Value per share
3) Industry PE
Ragan PE (original assumption)
Ragan PE (revised assumption)
Stock price implied by
industry PE
4) Total earnings
Cash cow value
Percentage not attributable to
growth opportunities
Percentage attributable to
growth opportunities
5) ROE

Chapter 10

Chapter 10
A Job at East Coast Yachts
Input area:
10-year annual return Standard deviation
Bledsoe S&P 500 Index Fund 11.04% 18.45%
Bledsoe Small-Cap Fund 16.14% 29.18%
Bledsoe Large Company Stock Fund 12.15% 24.43%
Bledsoe Bond Fund 6.93% 9.96%
Risk-free rate 3.20%
Company stock expected return 16.00%
Company stock standard deviation 58.00%
Output area:
Bledsoe S&P 500 Index Fund
Bledsoe Small-Cap Fund
Bledsoe Large Company Stock Fund
Bledsoe Bond Fund
Company stock

Chapter 11

Chapter 11
A Job at East Coast Yachts, Part 2
Input area:
10-year annual return Standard deviation
Bledsoe Large Company Stock Fund
Bledsoe Bond Fund
Risk-free rate
Correlation 0.15
Output area:
Weight of stock fund Portfolio E(R) Portfolio standard deviation
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Dominant portfolio:
Weight of stock fund
Weight of bond fund
Standard deviation
Expected return
Minumum variance portfolio:
Weight of large cap stock fund
Weight of bond fund
Expected return
Variance
Standard deviation
Sharpe optimal portfolio: (Using Solver)
Weight of large cap stock fund
Sharpe ratio
Weight of large cap stock fund
Weight of bond fund
Expected return
Standard deviation
Sharpe ratio

Chapter 13

Chapter 13
The Cost of Capital for Swan Motors
Input area:
Bond maturity Book value Price YTM
3/1/19 $ 920,000,000 94.347 2.028%
3/1/21 $ 1,380,000,000 92.625 2.754%
BV of debt $ 2,300,000,000
BV of equity per share $ 10.190
Stock price $ 232.36
Shares outstanding 129,800,000
Beta 1.400
3-month Treasury bill rate 0.06%
Market risk premium 7.00%
Tax rate 21%
Output area:
2) RE from CAPM
3) Company Beta
Ford 0.97
General Motors 1.44
Honda 0.74
Toyota 0.54
Fiat Chrysler 0.49
Volkswagen 1.97
Daimler Chrysler 1.55
Industry Average
RE with industry beta
4) Book value Percent of total Quoted price Market value Percent of total Yield to Maturity Book values Market values
3/1/19
3/1/21
Totals
5) Book value of debt
Book value of equity
Book value of company
Market value of equity
Market value of company
WACC using book value
WACC using market value
 
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BUSINESS DISCUSSION 2

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INSTRUCTIONS DISCUSSION 2

After reading the chapters in this module, review the following three (3) topics below. Choose and post your response to one (1) topic. Then review and reply to a classmate who posted on a different topic. For example, if you posted a reply to topic #1, review and reply to a classmate who posted on topic #2 or #3.

l

#1 Chapter 3 Distinguishing Between an Infatuation and a Good Opportunity Many people become excited about an idea to start a business, but it is not necessarily a good investment opportunity. Explain a business idea you have from the perspective of its ability to be a profitable company.
#2 Chapter 4 What to Ask

You have decided to purchase a franchise and have set up a meeting with the franchisor. Discuss the kinds of questions you would ask them and, also, what kinds of questions you anticipate the franchisor would ask.
#3 Chapter 5 Outside Manager/Reluctant Family  You are getting older and must consider how your business will be run. You have had a tremendous manager working with you for the last 30 years, and a son who has a degree but is not interested in the business. Discuss the implications of this situation and some possible solutions to maintain the legacy of the business

l

In order to earn the full points for this assignment, you must:

· Begin your post with the Chapter # and topic

· Clearly and accurately explain your answer based on factual information. (25 points)

· Include examples, illustrations and/or applications in your answer. If you copy information from the Internet, you must cite your source. (25 points)

· Respond to one of your classmate’s post on one of the OTHER topics. (25 points)

· Explain the reason for your agreement or disagreement or why you think the post is important, and/or provide examples of the point(s) made. Just replying “I agree with you” does not constitute a valid reply. (25 points)

 
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Netflix Case Study

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Case Preparation:

Remember, the cases are graded per the rubric. Any analysis details should be covered in an appendix. The BoD would want your recommendations with the proper support.  Do not go to the Internet to find, for example, a SWOT analysis and use it for your case.  You are expected to do the research and develop your own strategic analysis.

In doing your cases you will need a minimum of five references outside the Case material from Thompson.  The Thompson information is to get you started. (Do not use just the data from the case.) One of the references should be the company’s latest 10K report. Wikipedia and QuickMBA type sources do not count.  Certainly do not use websites that develop term papers or do strategy analysis on these cases and publish them. Use current business websites to find out about recent developments.

The case study analysis allows you to apply your knowledge to the real world. Your goal is to identify the major problem confronting the subject company and provide a strategic solution for the problem. Each of the companies that you will be studying faces different situations in the marketplace. Your analysis of the case using strategic management tools and tools that you have learned in other classes will allow you to interpret what is going on in the companies in the marketplace. To fully understand the case you will need to collect data and interpret it. You must also isolate the critical issues that the company faces.  Remember that in the words of Lord Kelvin, “that anything that cannot be expressed in numbers represents knowledge that is of a poor and uncertain kind.” You will have to get into the numbers, ratios, annual performance change, etc.

After identifying the critical issues you can generate alternatives to address the company’s competitive situation. Evaluating these alternatives allows an organization to select one course of action. With a course of action defined the strategic manager can then provide a plan for implementation this is what you are to do on the case studies. Always refer to the rubric for the critical points to cover. The format for the case studies should be as follows.

In addition to the APA cover page, you need a one page, single spaced executive summary for the case as noted below. This one-page report should use headings and subheadings to identify the critical issues. Begin with your understanding of the situation in a problem statement. Follow this with a concise presentation of your analysis and the alternatives you see. Recommend one course of action and support that recommendation with facts and other information, such as competitor’s moves. The last item is presents a plan for implementation. After the one-page summary you proceed with the body of your presentation.  The summary page should encapsulate your understanding to the problems facing the company, a brief summary of the strategic analysis, financial analysis, the alternatives considered and a single recommendation with an implementation plan.

After the executive summary page, you are to use standard APA formatting and a 4 to 5 page expansion upon the points you have made in the executive summary. Tables, charts, graphs, etc. are to be put in the appendix and referenced from the body of your paper. Deductions may be taken for papers where the body is longer than six pages. Remember, in management you must get your thoughts across quickly if you expect your work to be read. Long reports generally wind up in a stack awaiting reading at some future date (which never comes).

Case Study Report Format:

Your report should include:

I.          NSU Cover page (1 page in length).  It will present the name of the case and the author(s) of the report.

II.         Executive Summary (1 page in length).

The Executive Summary is a concise overview of the report.  The Case Study Report should be written from the perspective of an outside consultant, writing to the Board of Directors of the firm.  It notes the essential points of the report and should have the following sections:

A.              Problem Statement: State the main problem facing the firm (or industry) in one, succinct sentence.

B.               Analysis: Summarize the main findings of your analysis.  You may use bullet points, bold, italics – any means to convey and highlight the key factors you have determined based on your analysis. Don’t repeat items from the body of your report like the SWOT.  Summarize the major issues.

C.               Alternatives:  State briefly (one sentence or a bullet point each) 2 or 3 alternative courses of action that could be implemented

D.              Recommendation:  Choose one course of action and support your choice.

E.               Implementation:  Briefly (2 or 3 sentences) present how the plan would be implemented.  This tests the viability of the choice.  For example, your plan would demonstrate that the company has the people, financial resources and time to implement your recommendation.

 

These bullets should appear in your paper. The following is a precise format of the Case Studies.

 

FORMATTING for Executive Summary:

·  Single-space

·  One inch all margins

·  Use bullet points, lists, or other means to convey information briefly.  Further explanation can be found in the main body of the report.

·  Use headings and subheadings to organize the material in an easy to read and understandable manner that highlights the essential points of your analysis.

·  Do not include a summary or overview of the firm in your report.  All parties are knowledgeable and need no background presented.

 

The body of your paper should be in standard APA format, with appropriate references.

 

Remember that cases are graded per the rubric. The Case Study rubric can be found in the Rubric file.

 

 

 

Netflix 10K

https://ir.netflix.com/secfiling.cfm?filingID=1065280-16-47&CIK=1065280

 
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