FIN 620 UMD Long term Financial Management ACME Iron Executive Summary Capstone This week we will continue our discussion of financial issues. Please conti

FIN 620 UMD Long term Financial Management ACME Iron Executive Summary Capstone This week we will continue our discussion of financial issues. Please continue contributing to and participating in the discussions. Below is a complete description of the Final individual Paper.

Course Deliverable: Review the scenarios 1 through 9. Assemble a report responding to the tasks you have been given by the Controller. Structure your report so it is clear which task you are addressing. Summarize the results of each task in the body of your report and refer to the detailed supporting calculations contained in your excel work sheet.

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Frequently Asked Questions:

· How long should my paper be in terms of pages?

Since this is a comprehensive report to management it should be summarized with an executive summary, contain details on each scenario analysis with supporting calculations. Expectations should be 10-12 pages including cover page, executive summary and references. You should also include an Excel sheet with all detailed calculations with each problem clearly titled and references to any templates or material from other sources.

· Who is the audience for my paper?

This is a report which will go to your immediate supervisor and Acme’s senior management. As you are preparing your report ask yourself “is the information that I am including important and relevant to my supervisor and senior management?”

Rubric:

Learning Competency

Highly Proficient

Proficient

Low/No Proficiency

90 – 100

70 – 89

0 – 69

1 Communication: Learners demonstrate ability to communicate clearly both orally and in writing.

2 Critical Thinking: Learners demonstrate ability to apply logical, step-by-step decision-making processes to formulate clear, defensible ideas and to draw ethical conclusions.

3 Quantitative Reasoning: Learners demonstrate the ability to use mathematical operations and analytical concepts and operations to address problems and to inform decision-making.

4 Financial Management Knowledge: Learners will demonstrate applied understanding of financial management concepts as used in the professions.

5 Integrated Thinking and Application: Apply knowledge of accounting and financial management in an integrated way to solve problems faced by individuals and organizations.

6 Data/Information Analysis: Learners gather and analyze data and information for information sharing, problem solving, decision making and other purposes. GROUP PROJECT TASK 1
CAPM
FEBRUARY 16, 2020
AYOADE ADEMILUYI, FLORENCE AKADJE, TANJA DETWILER, ANTHONY GECKELER, DESIREE
PORQUET, JAY STEVENS
UMGC
Task 1 with Financials
Introduction: As a special analytical group set up by ACME Iron by the firm’s Controller, you
have been tasked to respond to the following issues raised in a meeting with the CFO. You and
your team must look over several prospective financial strategies to aid in the successful growth
of ACME Iron.
You are to work over an 10 week period on several projects, detail your work as you proceed on
these projects, and assemble the report for the CFO to make to the board on the items listed
while you work in a team environment. Management will be looking at the team over this period
on how well they self-organize and analyze the research areas which will include:
·
Capital investment analysis
·
CAPM – Capital Asset Pricing Model determination for the company
·
WACC – Weighted Average Cost of Capital computations
·
EVA – Economic Value Analysis
·
MVA – Market Value Added
·
Capital structure of the company
·
Dividend policy
·
Stock repurchase and option pricing strategy
·
Bankruptcy risk analysis
·
Decision Tree Creation
·
Real option analysis of projects
The CFO wants to test your team out on a simple project in the first task before you get into
preparing items for his board presentation in subsequent tasks and projects. He wants to see
how well you perform tasks as a team as well as how accurate and thoughtful you are in your
work. Details are important to him as well as good organization/presentation and
communication.
Financial Statements for use on Tasks
Here are the financial statements you are to use in this exercise:
Balance
Sheet
ACME Iron
Assets
Current assets:
2014
2015
change
100,
Cash
500,000
600,000
1,000,000
1,025,000
110,000,000
117,000,000
000
25,0
Investments
00
7,00
Inventories
0,000
750,
Accounts receivable
Pre-paid expenses
11,750,000
12,500,000
2,500,000
2,600,000
000
100,
000
Other
0
0
125,750,000
133,725,000

7,97
Total current assets
Fixed assets:
2014
2015
5,000
change
10,0
Property and equipment
180,000,000
190,500,000
0
0
55,000,000
65,000,000
Leasehold improvements
00,000

10,0
Equity and other investments
00,000
20,0
Total fixed assets
Other assets:
235,000,000
2014
255,500,000
2015
00,000
change
(5,00
Goodwill
70,000,000
0,000)
75,000,000
70,000,000
(5,0
00,000)
435,750,000
459,225,000
Current liabilities:
2014
2015
Accounts payable
40,500,000
42,400,000
0,000
Accrued wages
85,000,000
90,500,000
0,000
Total other assets
75,000,000
23,4
Total assets
75,000
Liabilities and owner’s equity
change
1,90
5,50
855,
Accrued compensation
10,000,000
10,855,000
000
673,
Income taxes payable
4,024,000
4,697,000
current portion of LT debt
5,500,000
10,350,000
0
0
145,024,000
158,802,000
000
4,85
Other
Total current liabilities
Long-term liabilities:
2014
2015
0,000

13,778,000
change
5,00
Long term debt
125,000,000
130,000,000
0,000
Total long-term liabilities
125,000,000
130,000,000
0,000
5,00
Owner’s equity:
Common stock
2014
122,000,000
2015
122,000,000
change

Preferred stock
16,725,000
16,725,000

Accumulated retained earnings
27,001,000
31,698,000
7,000
165,726,000
170,423,000
7,000
435,750,000
459,225,000
4,69
4,69
Total owner’s equity
Total liabilities and owner’s
equity
23,4
75,000
Task 1
Reach out to team members and assign roles. You all need to contribute. Rotating
responsibilities is a suggested strategy in this team environment.
Capital Asset Pricing Model (CAPM):
Your team needs to investigate certain items to compute the required rate of return of your
company. The expected market return for the coming year is 6%, you need to find the current
rates for the 10 year Treasury bond to establish a risk-free rate. Please remember to cite your
source of this data and justify your reasoning for using this source or data.
Your team will also need to find a rationale for estimating beta since you do not have a long
history on the stock market since you are recently listed. You realize that ACME Iron is capital
intensive so the beta for the company will be influenced by this point. Since ACME Iron is an
iron producer its beta should be in line with similar companies. Your team will need to analyze
other companies or this industry to come up with a beta calculation for ACME Iron. Please
document your investigation, sources and justify your choice of beta for Acme.
Concept Check: The Capital Asset Pricing Model is a model that separates market risk from individual
asset risk. We look at Market risk through the lens of inflationary impact on asset returns and the
opportunity cost of the risk free rate. Market risk effects all assets so we utilize Beta as a measure of the
volatility of price changes in the particular asset we are analyzing versus the market of that particular
asset class.
Helpful Hint: Discuss strategy of finding financial resources with your team. Sources should be
current and dependable. Government resources are usually the best since they are free of charges
and free of bias.
Answer:
The Capital Asset Pricing Model (CAPM) describes the relationship between a stock’s expected
rate of return and its risk. A higher expected rate of return comes with a higher risk for the
investor. The formula for CAPM is the risk-free rate of return plus a risk premium for the higher
rate of return (corporatefinanceinstitute.com, 2020).
The formula for CAPM is:
Rs = Rf + b * (Rm – Rf)
For ACME Iron the numbers are
Rs = 0.0159 +1.62 * (0.06-0.0159)
Rf = 0.0159 (Treasury.org, 02.14.2020). The risk-free rate is equal to the 10-year Treasury bond
rate. The rate for the 10-year treasury bond is taken directly from the Treasury web site, a
Government website. 0.0159 was the latest rate on February 14, 2020.
Rm= 0.06
B = 1.62 (stern.nyu.edu, 02.16.2020) To calculate the beta, we will need to look at the steel
industry average beta, which is 1.62 per the beta by section website. Data is as of January 2020
for industries in the US with the number of firms included. Beta can be calculated in other ways
but ACME company does not have a stock rate of return and does not have a long trading history
so we use the average beta. A further Internet search for the average beta of steel companies
confirmed the beta of 1.62 (Lippincott Library, 2018 and Stanford University, NA).
A beta of 1 means that the stock price moves with the market. A beta less than 1 means that the
stock price is less volatile than the market; and a beta of more than 1 means that the stock price is
more volatile than the market. ACME Iron stock’s beta is more than 1; and, thus, is more volatile
than the market (corporatefinanceinstitute.com, 2020).
When pulling into the formula the return is below:
Rs = Rf + b (Rm – Rf) = 1.59 + 1.62 * (6.00-1.59)
1.59 + 1.62 * 4.41
1.59 + 7.14
= 8.73% rate of return
ACME Iron is very capital intensive. Its capital is greatly funded with debt. The debt to equity
ratio is 169% (288,802/170,423). This makes ACME Iron a risky investment and justifies the
higher-than-market beta.
References
Corporatefinanceinstitute.com. (2020). Capita Asset Pricing Model (CAPM). Retrieved from
https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-capmformula/
Lippincott Library. (2018, January 25). Where can I find the current and historical betas?
Retrieved from https://faq.library.upenn.edu/business/faq/45560
Stanford University. (NA). Where can I find current and historical betas for companies and/or
industries. Retrieved from https://businessfaq.stanford.edu/where-can-i-find-current-andhistorical-betas-companies-andor-industries
Stern.nyu.edu. (2020). Betas by sector (US). Retrieved from
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/Betas.html
Treasury.gov. (2020, February 14). Daily Treasury yield curve rates. Retrieved from
https://www.treasury.gov/resource-center/data-chart-center/interestrates/pages/TextView.aspx?data=yieldYear&year=2020
Task 2
How do we compute the WACC in this circumstance?
The WACC (weighted average cost of capital) is simply a company’s cost of capital in
which each category of capital ends up being proportionately weighted (Ramtohul, 2016). In the
case of ACME iron, the WACC will be determined by computing the proportions of debt and
equity of the firm, the after tax cost of debt and the cost of equity
After-tax cost of debt =Before-tax cost of debt x (100% – incremental tax rate) = 8 %*(
100%-40%) = 4.80%
Cost of equity=Risk Free Rate + Beta Coefficient × Market Risk Premium= 8%
Acme’s Proportions of debt (w d) for 2015 = debt/ (debt +equity) = (10,350,000 +
130,000,000) / (122,000,000 + 16,725,000 +31,698,000 + 10,350,000 + 130,000,000) =
140,350,000 / 310,773,000 = 0.45161= 45.16%
Acme’s Proportion of equity (We) for 2015= (122,000,000 + 16,725,000 + 31,698,000) /
(122,000,000 + 16,725,000 + 31,698,000 + 10,350,000 + 130,000,000) = 170,423,000 /
310,773,000 = 0.54838 = 54.84%
Therefore, ACME iron’s WACC, which is calculated using the following formula = W e*
Cost of equity (Re) + W d *After-tax cost of debt (Rd*(1 – T) w) will be equal to=
0.54838*0.08+ 0.45161*0.048 = 0.065548 or 6.55%
Why do we need to be concerned with the WACC?
Firstly we need to be concerned with the WACC because it is needed when calculating
NPVs of projects to discount the future cash flows of the projects to the present value. Therefore
the higher the WACC the lower the projects NPV and vice versa. Also, we need to be concerned
with WACC because form an investor’s point of view it is the opportunity cost of capital that the
investor will invest in the company. If the rate of return the company generates is less than
WACC, investors will be less likely to invest in such a company.
Any insights into the capital structure of ACME Iron?
Capital structure is the combination of equity and debt a company uses to end up
financing its overall growth and operations (Martin & Baker, 2013). In 2015 Acme’s capital
structure comprised of 54.84% equity & 45.16% debt. Also the company’s debt to equity ratio in
2015 of =140,350,000 / 170,423,000 = 0.82354 was greater than the industry average of 0.4 for
the year 2015 (Csimarket, 2019). Therefore, Acme aggressively financed its growth using debt
rather than equity when compared to its competitors
Running head: TEAM 2 PROJECT: TASK 3
Team Project: Task 3
Anthony Geckeler
Ayoade Ademiluyi
Desiree Porquet
Florence Akadje
Jay Stevens
Tanja Detwiler
February 28, 2020
1
TEAM 2 PROJECT: TASK 3
2
Executive Summary
As we continue to illustrate Acme’s strategic financial plan, we need to show the CFO and
management team an example of the application of the previously constructed WACC. Acme is
planning the construction of a new loading ramp for its single iron mill. The initial cost of the
investment is $1 million. Efficiencies from the new ramp are expected to reduce costs by
$100,000 for the life of the plant which is currently estimated at another 30 years. Acme has an
after-tax cost of debt of 8% and a cost equity of 12% (they are currently funded equally by debt
and equity). In this task, we will find out when the project breaks even on a simple cash basis
(simple payback period) and on a discounted cash basis (discounted payback period). Also, we
will determine if Acme should pursue the capital investment of constructing a new loading ramp
by calculating the NPV.
WACC
Our first step in this analysis is to determine the WACC, which we explained from our task last
week. This step is significant because it gives us a discount rate to calculate the NPV. WACC is
the cost of each capital component multiplied by its proportional weight and then summed, as
shown below. In this case, the capital components are split evenly 50/50. The cost of debt is 8%,
and the cost of equity is 12%. This gives us a WACC of 10%, through the calculations shown
below:
TEAM 2 PROJECT: TASK 3
Capital Component
3
Proportion
Cost
Proportion X Cost
Equity
50%
12%
6%
Debt
50%
8%
4%
WACC
SUM of Column =
10%
This calculation gives us our discount rate for calculating NPV at 10%. Acme should not pursue
the capital investment unless the return was higher than 10%. We also use this discount rate of
10% for the calculation of the discounted payback period to find out when the project will break
even.
Cash Flows
First, we need to find the annual cash flows after-tax. This calculation is done by taking the
savings of the project and subtracting depreciation to get to EBIT. Depreciation, in this case, is
done on a straight-line method with the 1-million-dollar asset being evenly depreciated over 30
years. Next, we subtract taxes and assume a 40 percent tax rate. Then we add back our
depreciation because we are only looking at cash flows, and we only subtracted the deprecation
previously to calculate the tax amount. Our annual cash flow after taxes then is $73,333.33:
TEAM 2 PROJECT: TASK 3
4
Cost of Project
1,000,000.00
Savings of Project
100,000.00
Less Depreciation
33,333.33
EBIT
Less Taxes
66,666.67
40%
26,666.67
Add Backs
33,333.33
Annual Cash Flows after Tax
73,333.33
Payback Period
For the calculation of the payback period with simple cash flows, we take our initial cash
outflow of 1,000,000 in year 0 and add the cash savings of $73,333.33 after each year to it (see
below on the left). The break-even point is where the Sum of CF turns from a negative to a
positive, which, in our case, is between years 13 and 14. To find out exactly when, we divide the
left-over sum of cash flows from year 13 by the cash inflow in year 14: 46,666.71/73,333,33=
0.64 +13 years = 13.64 years. This number is not very realistic because it neglects the cost of
capital. A more realistic calculation is the discounted payback period calculation (UMUG, 2020,
Capital Investment Decisions).
TEAM 2 PROJECT: TASK 3
5
For the calculation of the payback period with discounted cash flows, we calculate the present
values for each of the 30 cash inflows (PV=$73,333.33/(1+0.1)^YEAR) and then calculate the
sum of cash flows after each year (UMGC, 2020, Capital Investment Decisions). With a discount
rate of 0.1, the present values of the cash inflows decrease steadily with each year, so that, with
discounted cash flows, the project does not break even within its lifetime (The Sum of CFs
remains negative throughout its lifetime). Since it is not breaking even, the project should be
rejected.
Year
Simple CFs
Sum of CFs
Year
Discounted CFs
Sum of CFs
0 (1,000,000.00) (1,000,000.00)
0 (1,000,000.00)
(1,000,000.00)
1 73,333.33
(926,666.67)
1 66,666.66
(933,333.34)
2 73,333.33
(853,333.34)
2 60,606.06
(872,727.28)
3 73,333.33
(780,000.01)
3 55,096.42
(817,630.86)
4 73,333.33
(706,666.68)
4 50,087.65
(767,543.21)
5 73,333.33
(633,333.35)
5 45,534.23
(722,008.98)
6 73,333.33
(560,000.02)
6 41,394.75
(680,614.23)
7 73,333.33
(486,666.69)
7 37,631.59
(642,982.64)
8 73,333.33
(413,333.36)
8 34,210.54
(608,772.10)
9 73,333.33
(340,000.03)
9 31,100.49
(577,671.61)
10 73,333.33
(266,666.70)
10 28,273.17
(549,398.43)
11 73,333.33
(193,333.37)
11 25,702.88
(523,695.55)
12 73,333.33
(120,000.04)
12 23,366.26
(500,329.29)
13 73,333.33
(46,666.71)
13 21,242.05
(479,087.24)
14 73,333.33
26,666.62
14 19,310.96
(459,776.28)
15 73,333.33
99,999.95
15 17,555.42
(442,220.86)
TEAM 2 PROJECT: TASK 3
6
16 73,333.33
173,333.28
16 15,959.47
(426,261.39)
17 73,333.33
246,666.61
17 14,508.61
(411,752.78)
18 73,333.33
319,999.94
18 13,189.64
(398,563.14)
19 73,333.33
393,333.27
19 11,990.59
(386,572.55)
20 73,333.33
466,666.60
20 10,900.53
(375,672.02)
21 73,333.33
539,999.93
21 9,909.57
(365,762.45)
22 73,333.33
613,333.26
22 9,008.70
(356,753.74)
23 73,333.33
686,666.59
23 8,189.73
(348,564.01)
24 73,333.33
759,999.92
24 7,445.21
(341,118.80)
25 73,333.33
833,333.25
25 6,768.37
(334,350.43)
26 73,333.33
906,666.58
26 6,153.07
(328,197.36)
27 73,333.33
979,999.91
27 5,593.70
(322,603.67)
28 73,333.33
1,053,333.24
28 5,085.18
(317,518.49)
29 73,333.33
1,126,666.57
29 4,622.89
(312,895.60)

30 73,333.33
1,199,999.90
30 4,202.63
(308,692.97)
NPV
The Net Present Value or NPV is very important in determining if the project should be pursued
or not. The Net Present Value will allow us to determine the cash flows received in today’s
dollars. A million dollars today will not be worth the same amount in 30 years. So, we need to
discount all the cash inflows to present value, add them up and subtract the initial investment to
get to the NPV (which is a dollar amount). A project with a negative NPV should be rejected;
and a project with a positive NPV should be accepted (UMUC, 2020, NPV and IRR).
TEAM 2 PROJECT: TASK 3
7
Knowing the discount rate is 10%, the annual cash flows are $73,333.33 each year and the initial
cash outlay is $1,000,000, we can put these numbers in excel and use the NPV formula in excel
to get a -$308,692.97 Net Present Value. As seen below:
Discount
Rate
Year
After tax annual cash flows
Year
10%
After tax annual cash flows
0
-1,000,000.00
16
73,333.33
1
73,333.33
17
73,333.33
2
73,333.33
18
73,333.33
3
73,333.33
19
73,333.33
4
73,333.33
20
73,333.33
5
73,333.33
21
73,333.33
6
73,333.33
22
73,333.33
7
73,333.33
23
73,333.33
8
73,333.33
24
73,333.33
9
73,333.33
25
73,333.33
10
73,333.33
26
73,333.33
11
73,333.33
27
73,333.33
TEAM 2 PROJECT: TASK 3
8
12
73,333.33
28
73,333.33
13
73,333.33
29
73,333.33
14
73,333.33
30
73,333.33
15
73,333.33 NPV
-308,692.97
Conclusion and Recommendations
Since the project has a negative NPV of -$308,692.97, it should be rejected. The discounted
payback period calculation (which is more realistic than the simple payback calculation) comes
to the same conclusion as the NPV: The project should be rejected.
ACME Iron’s discount rate is very high, which leads to a negative NPV. ACME Iron could try to
lower its discount rate, which means lowering its WACC. It could lower its WACC by reducing
the weight of its expensive cost of equity (Cost of Equity is 12%). It could do so by increasing
the weight of its debt and obtaining loans with lower interest rates.
TEAM 2 PROJECT: TASK 3
9
Reference
UMGC. (2020). Capital investment decisions – payback period. Retrieved from
https://learn.umuc.edu/d2l/le/content/444475/viewContent/17279707/View
UMGC. (2020). Net Present Value (NPV) and Internal Rate of Return (IRR). Retrieved from
https://learn.umuc.edu/d2l/le/content/444475/viewContent/17279695/View
Task 4 – ACME IRON’s Real Option
Initial Investment
Discount Rate
Annual cash flows
YEAR
1
2
3
4
5
6
7
8
9
10
NPV
Good Results
$
(50.000.000)
10%
$
15.000.000
CASH FLOWS
15.000.000,00
15.000.000,00
15.000.000,00
15.000.000,00
15.000.000,00
15.000.000,00
15.000.000,00
15.000.000,00
15.000.000,00
15.000.000,00
$ 42.168.506,59
Bad Results
$
(50.000.000)
10%
$
2.000.000
CASH FLOWS
$
2.000.000
$
2.000.000
$
2.000.000
$
2.000.000
$
2.000.000
$
2.000.000
$
2.000.000
$
2.000.000
$
2.000.000
$
2.000.000
$ (37.710.865,79)
Real Option
Initial Investment
Discount Rate
Annual Cash Flows
$
YEAR
NPV
(50.000.000)
10%
$
8.500.000
CASH FLOWS
1
8.500.000,00
2
8.500.000,00
3
8.500.000,00
4
8.500.000,00
5
8.500.000,00
6
8.500.000,00
7
8.500.000,00
8
8.500.000,00
9
8.500.000,00
10
8.500.000,00
$ 2.228.820,40
Capital Budegeting Decision Tree
Good Results (50%
of $15 million
annual cash flows)
Test
Enterprise System
Test
Enterprise System
($50 million)
No Test
Risk Adjusted Cost of Capital
Experience with the focus of the project
0,5%
Chance of changes to estimated variables
0,5%
Potential Changes in …
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You are welcome to choose your academic level and the type of your paper. Our academic experts will gladly help you with essays, case studies, research papers and other assignments.

Admissions

Admission help & business writing

You can be positive that we will be here 24/7 to help you get accepted to the Master’s program at the TOP-universities or help you get a well-paid position.

Reviews

Editing your paper

Our academic writers and editors will help you submit a well-structured and organized paper just on time. We will ensure that your final paper is of the highest quality and absolutely free of mistakes.

Reviews

Revising your paper

Our academic writers and editors will help you with unlimited number of revisions in case you need any customization of your academic papers