Interest Rate Implication Analysis

Anonymous
timer Asked: Feb 9th, 2019
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Question Description

Specifically, the following critical elements must be addressed:

V. Macroeconomic Items: The CEO of the company is convinced that financial analysis should hinge only on what is happening internally within the company. Convince him otherwise based on the following:

  1. Analyze the implications of interest rate changes on any of the calculations you performed. Be sure to substantiate your claims.
  2. How might an issue (negative or positive) within the overall stock market impact the company’s stock valuation numbers, other financialvariables, or its overall portfolio management? Be sure your response is supported by evidence.
  3. Analyze the impact of any external factor (i.e., external to the company) discussed throughout the course on the company’s financial position. Besure to justify your reasoning.


Please see the attachment for section 4 only (INTEREST RATE IMPLICATIONS. The above questions apply to this section only. The formulas have already been filled in. Just need the questions answered.

Unformatted Attachment Preview

Milestone One: Time Value of Money (please fill in YELLOW cells) Interest Rate FCF - Years Amounts* 8% FCF - 2015 FCF - 2016 FCF - 2017 5,052.00 3,546.00 (3,718.00) Pv* (4,677.78) Total Pv* *In millions (4,766.43) Pv=FVN/(1+I)^N (3,040.12) PV(I,N,0,FV) 2,951.47 Explanations: FCF (Free Cash Flows) 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. This is a strong indicator of the ability of an entity to remain in business. Note: For Milestone One, please use the Free Cash Flows from the United Parcel Service 2017 Annual Report for the years 2015, 2016, and 2017 located on Page 2 of the Report. Interest Rate (given) - For purposes of this exercise, use 8% interest rate. ted by the operations of or working capital, d. This is a strong ws from the United 2016, and 2017 located e 8% interest rate. Milestone Two: Stock Valuation and Bond Issuance (fill in the YELLOW cells) PART I: STOCK VALUATION Dividend from Financial Statements: Read the Explanations to the right of the calculation cells for specific information on the data. Year Cash Div/share ($) 2015 2016 2017 2.92 3.12 3.32 Dividend Yield Stockholder's Equity (in millions) 3.00% 2.70% 2.60% 2,491 429 1,030 Stock Price 97.33333333 115.5555556 127.6923077 1. Stock Valuation - The new dividend yield if the company increased its dividend per share by 1.75 Year 2015 2016 2017 Cash Div/Share ($) +1.75 4.67 4.87 5.07 Dividend Yield 4.80% 4.21% 3.97% Stockholder's Equity (in millions) 2,491 429 1,030 Stock Price 97.33333333 115.5555556 127.6923077 2. The dividend yield if the firm doubled it's outstanding shares Year Cash Div/Share ($) 2015 2016 2017 1.46 1.56 1.66 Stockholder's Equity (in millions) -doubled 1.50% 4,982 1.35% 858 1.30% 2,060 Dividend Yield Stock Price 97.33333333 115.5555556 127.6923077 3. The rate of return on equity (i.e., the cost of stock) based on the new dividend yield you calculated above Year 2015 2016 2017 Cash Div/Share ($) Stock Price +1.75 4.67 97.33333333 4.87 115.5555556 5.07 127.6923077 Return on Investment CALCULATE ROI 5.73% (Dividends + Capital gain)/ Divide 5.34% (D1 + (P1-P0)) / PO PART II: BOND ISSUANCE Newly issued 10-year bond Present Value Periods Interest Payments Future Value PV N I PMT FV Calculate the Present Value in the three scenarios below ($138,973) 20 0.025 5,000 $100,000 Semi-annual payment: 2017-2027 = 10 years *2 = 20 periods Interest paid semi-annually: 5.00%/2 = 2.5% This bond make regular semi-annual payments of interest. Future Value in 20 years - Enter as a positive number 1. The new value of the bond if overall rates in the market increased by 2% Present Value Periods Interest Payments Future Value PV N I PMT FV ($121,319) 20 0.035 Please adjust interest 5000 $100,000 2. The new value of the bond if overall rates in the market decreased by 2% Present Value Periods Interest Payments Future Value PV N I PMT FV ($160,090) 20 0.015 Please adjust interest 5000 $100,000 CALCULATING PV (see help on the right hand side of the s 3. The value of the bond if overall rates in the market stayed exactly the same - identical to CURRENT BOND VALUE from Financial Statements cells) calculated above ds + Capital gain)/ Divided by the original Price Explanations: Note: 1. The dividends declared and paid by UPS for 2015, 2016, a second page of the 2017 UPS Annual Report. 2. The dividend yield for 2015, 2016, and 2017 are found on t UPS Annual Report. 3. Stockholder's/Shareholder's equity for 2015, 2016, and 201 page of the UPS Annual Report. Dividend Yield - annual cash dividend per share of common sto of a share of the common stock. (Dividend yield = Annual Divide Note: Current Stock Price is not part of the Financial Statement for Dividend Yield Stockholder's Equity = Assets - Liabilities. This represents the Owners are called stockholder because they hold stocks or share of every corporate manager is to generate shareholder value. Note: Shareholder's Equity for 2015, 2016 and 2017 will be f UPS Annual Report. Return on Equity - for this part we will modify and use return o Using the formula: Dividend (+1.75)/+[(new price-old price)/old narios below 7 = 10 years *2 = 20 periods nual payments of interest. as a positive number Bonds are a long-term debt for corporations. By buying a bond, t the corporation. The borrower promises to pay specified interest and at the maturity, payback the entire principle. In case of bank priority over stockholders for any payment distributions. Bonds = Debt...............Bondholders = Lenders Stock=Equity................Stockholders = OwnersCalculation: For purposes of this exercise, assume that UPS issues a new t will mature in 2027. The Future Value of this bond is therefo issued in December 2017 at a market rate of 5.0% fixed for 1 payments made semi-annually. What is the Present Value of scenarios in Part II: Bond Issuance. The coupon rate, which annual PMTs for this bond is 10%. %+2% = .00%/2 = % .00%-2% = %/2 = % PV (Present Value Calculation) - using Excel Formula Step 1) Select Formulas Step 2) Click on Financial Step 3) Select PV - you will see the formula below Step 4) Enter the following: Rate - enter as decimal, no % sign. Example: 4% as 0.04 if p Nper - number of periods where dividends are paid. For exam Pmt - payment - The semiannual payment of dividends in do Fv - Future value. Enter as positive. Example 1,000 should b Type - leave blank n the right hand side of the sheet) Updated: 10/2018 by RFB nd paid by UPS for 2015, 2016, and 2017 are found on the S Annual Report. 15, 2016, and 2017 are found on the second page of the 2017 r's equity for 2015, 2016, and 2017 are found on the second port. dividend per share of common stock divided by the market price ck. (Dividend yield = Annual Dividend/Current Stock Price) ot part of the Financial Statements - calculated using the formula ts - Liabilities. This represents the ownership of a corporations. because they hold stocks or share of the company. The main goal to generate shareholder value. for 2015, 2016 and 2017 will be found on page 2 of the 2017 art we will modify and use return on investment instead. +1.75)/+[(new price-old price)/old price] r corporations. By buying a bond, the bond-owner lends money to promises to pay specified interest rate during the loans lifetime he entire principle. In case of bankruptcy, bondholders have any payment distributions. olders = Lenders holders = OwnersCalculation: e, assume that UPS issues a new ten-year bond for 100,000 that ture Value of this bond is therefore $100,000. The bond was a market rate of 5.0% fixed for 10 years, with interest lly. What is the Present Value of this bond using the three suance. The coupon rate, which is used to calculate the semis 10%. on) - using Excel Formula see the formula below % sign. Example: 4% as 0.04 if paid annually. If paid semiannually 4/2 = 2% 0.02 here dividends are paid. For example, a 10 year bond pays diviends annually. N = 10. nual payment of dividends in dollars positive. Example 1,000 should be 1,000 If semiannualy 10 X 2 = 20 N=2 semiannualy 10 X 2 = 20 N=20 Milestone Three: Capital Budgeting Data (fill in YELLOW cells) Initial Outlay CF1 ($65,000,000) Cash Flows (Sales) - Operating Costs (excluding Depreciation) - Depreciation Rate of 20% Operating Income (EBIT) - Income Tax (Rate 25%) After-Tax EBIT + Depreciation Cash Flows ($65,000,000) NPV IRR $50,000,000 $25,500,000 (13,000,000) 11,500,000 2,875,000 8,625,000 13,000,000 21,625,000 $15,404,422.60 19% Time value for money (TVM) is the concept of worth for money at the present time (now) as compared to the same at a fu amount of money is worth more the sooner it is received. Stock is a unit of ownership. The return on investment to the shareholders of UPS is 5.73% and 5.34% in 2016 and 2017 respectively. From the dividend the increase in yield as a result of purchasing units of stock in UPS, hence returns. Bonds (fixed income security) is a debt instrument by companies for the purpose of raising funds a specific amount of mon time and which has a periodic interest payment obligation at agreed intervals. In issuance of bonds, the present value of the bond is affected by interest rates in the market. When the interest rate goes value of the bond decreases by $17,654 ($138,973 - $121,319) whereas, when rates go down the present value of the sam ($160,090 - $138,973). Stock pricing is another process altogether which is not affected by dividend yielding. Positive net present value (NPV) figure is okay to warrant acceptance of a capital project. The internal rate of return which of interest that will give an NPV of zero. Changes in interest rates have an effect on the net present value. The closer the interest rates are to the internal rate of desirable it will be, since break-even point will be arrived at quicker. Of the three: 5%, 8% and 15%; the most desirable opt WACC CF2 CF3 $45,000,000 $25,500,000 (13,000,000) 6,500,000 1,625,000 4,875,000 13,000,000 17,875,000 $65,500,000 $25,500,000 (13,000,000) 27,000,000 6,750,000 20,250,000 13,000,000 33,250,000 9% CF4 CF5 $55,000,000 $25,500,000 (13,000,000) 16,500,000 4,125,000 12,375,000 13,000,000 25,375,000 Select from drop down below: ACCEPT ACCEPT time (now) as compared to the same at a future date. In this case, an 16 and 2017 respectively. From the dividend yield in the periods, and se of raising funds a specific amount of money for a specific period of in the market. When the interest rate goes up by 2% the present rates go down the present value of the same goes up by $21,117 al project. The internal rate of return which is at 19% refers to the rate e interest rates are to the internal rate of return (IRR) the more ee: 5%, 8% and 15%; the most desirable option would be 15%. $25,000,000 $25,500,000 (13,000,000) (13,500,000) (3,375,000) (10,125,000) 13,000,000 2,875,000 Capital Budgeting Example Set-up ACCEPT Initial investment $65,000,000 REJECT Straight-line Depreciation of 20% Income Tax @25% WACC: use 9% (UPS WACC was about 9.43%) Cash Flow (which in this case are Sales Revenues) are as follows: CF1: $50,000,000 CF2: $45,000,000 CF3: $65,500,000 CF4: $55,000,000 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 projects? If the project doesn’t earn more percent than WACC, the corporation should abandon the project and invest money elsewhere. Initial Investment - always negative. Corporation has to invest money ("lose" it till they recover it via sales) in order to gain future benefit. Milestone Four: Interest Rate Implication (fill in YELLOW cells) 1. Original Scenario from Milestone 1 - Time Value of Money using 8% Interest Rate 8.00% FCF - 2015 FCF - 2016 FCF - 2017 5,052.00 3,546.00 (3,718.00) Amounts* Pv* (4,677.78) Total Pv* *In millions (4,766.43) (3,040.12) 2,951.47 2. Change in interest rate and its implications - Lower Interest Rate (5%) Interest Rate 5.00% FCF - 2015 FCF - 2016 FCF - 2017 5,052.00 3,546.00 (3,718.00) Amounts* Pv* (4,811.43) Total Pv* *In millions (4,816.01) (3,216.33) 3,211.75 3. Change in interest rate and its implications - Higher Interest Rate (15%) Interest Rate Amounts* 15.00% FCF - 2015 FCF - 2016 FCF - 2017 5,052.00 3,546.00 (3,718.00) Pv* (4,393.04) Total Pv* *In millions (4,629.68) (2,681.29) 2,444.65 Explanation: Use Milestone One and Time Value of Money for Milestone Four an Two cases will be analyzed: Lower Interest Rate at 5% Higher Interest Rate at 15% ...
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DENIQUE
School: Boston College

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Running Head: INTEREST RATE IMPLICATIONS

Interest Rate Implications
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1

INTEREST RATE IMPLICATIONS

2

Interest Rate Implications
1. Analyze the implications of interest rate changes on any of the calculations you
performed. Be sure to substantiate your claims.
Macroeconomic variables include fiscal policies, interest rates, and GDP. It would not be
entirely correct to analyze the impact of interest changes based on internal factors based on
the company. This is because the factors internal to the company are the credit score of the
company as well as the guarantee that the company will offer against the credit facility it's
seeking. When the rate of inflation, for instance, is high, the interest rates would also ri...

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Anonymous
Tutor went the extra mile to help me with this essay. Citations were a bit shaky but I appreciated how well he handled APA styles and how ok he was to change them even though I didnt specify. Got a B+ which is believable and acceptable.

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