Milestone One: Time Value of Money

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timer Asked: Oct 12th, 2018
account_balance_wallet $25

Question Description

Instructions

For this milestone, submit a draft of the Time Value of Money 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.

For additional details, please refer to the Milestone One Guidelines and Rubric document. The paper must be submitted as a 2- to 3-page Microsoft Word document in APA style, not including your calculations. Do not make plagiarism and I will check it by the turnitin.

Specifically, the following critical elements must be addressed:

I. Time Value of Money

A. Calculate the following time value of money figures:

1. Calculate the present value of the company based on the given interest rate and expected revenues over time.

2. Suppose the risk of the company changes based on an internal event. Recalculate the present value of the company.

3. Suppose that a potential buyer has offered to buy this company in five years. Based on the present value you calculated above, what would be a reasonable amount for which the company should be sold at that future time?

B. What are the implications of the change in present value based on risk? In other words, what does the change mean to the company, and how would you, as a financial manager, interpret it? Be sure to justify your reasoning.

C. Based on the future value of the company that you calculated, and being mindful of the need to effectively balance portfolio risk with return, what recommendation would you make about purchasing the company as an investment at that price? Be sure to substantiate your reasoning.

Critical Elements

Proficient (100%)

Time Value of Money: Figures

Accurately calculates requested figures

Time Value of Money: Implications

Analyzes implications of change in present value based on risk, justifying reasoning

Time Value of Money: Future Value

Makes recommendation about purchasing company at future price, substantiating claims

Articulation of Response

Submission has no major errors related to citations, grammar, spelling, syntax, or organization

Unformatted Attachment Preview

Milestone One: Time Value of Money (please fill in YELLOW cells) Interest Rate 8% FCF1 FCF2 FCF3 FCF4 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 Explanations: FCF (Free Cash Flow) is the net change in cash generated by the o business during a reporting period, minus cash outlays for working expenditures, and dividends during the same period. This is a stro the ability of an entity to remain in business. FCF5 $0.00 Note: For this part of the Milestone, please capital lease payment property. Usually Free Cash Flows (FCFs) are used to calculate NPV Flow calculations will be covered later in the course and thus can’t the initial Milestone #1 analysis. Interest Rate (given) - in our scenario we will use 8% interest rate implicit rate, the average rate that lease consumer face on the cu net change in cash generated by the operations of a eriod, minus cash outlays for working capital, capital during the same period. This is a strong indicator of ain in business. estone, please capital lease payments under ows (FCFs) are used to calculate NPV. Free Cash red later in the course and thus can’t be used for sis. scenario we will use 8% interest rate. This rate is an e that lease consumer face on the current market. Milestone Two: Stock Valuation and Bond Issuance (please fill in the YELLOW cells) PART I: STOCK VALUATION Dividend from Financial Statements: Year (fill in Cash what year you Div/share ($) are using) Dividend Yield Stockholder's Stock Price Equity (in millions) 201# 201# 201# #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 (fill in Cash Dividend what year you Div/Share ($) Yield are using) +1.75 201# 1.75 #DIV/0! 201# 1.75 #DIV/0! 201# 1.75 #DIV/0! Stockholder's Stock Price Equity (in millions) 0 0 0 #DIV/0! #DIV/0! #DIV/0! 2. The dividend yield if the firm doubled it's outstanding shares Year (fill in Cash Dividend what year you Div/Share ($) Yield are using) 201# 0 #DIV/0! 201# 0 #DIV/0! 201# 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 (fill in Cash Stock Price what year you Div/Share ($) are using) +1.75 201# 1.75 #DIV/0! 201# 1.75 #DIV/0! 201# 1.75 #DIV/0! Return on Investment CALCULATE ROI (Dividends + Capital gain)/ Divided b (D1 + (P1-P0)) / PO PART II: BOND ISSUANCE Current 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 PMTs, assume zero coupon b 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 ells) Explanations: Cash Dividend - distribution of the corporate income. They are appear on Income Statement. Note: Part of Statement of Cash Flows. Please be aware that co 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 d per share by 1.75 d yield you calculated above ALCULATE ROI Dividends + Capital gain)/ Divided by the original Price 1 + (P1-P0)) / PO Stockholder's Equity = Assets - Liabilities. This represents the o Owners are called stockholder because they hold stocks or shar goal of every corporate manager is to generate shareholder val Return on Equity - for this part we will modify and use return o Using the formula: Dividend (+1.75)/+[(new price-old price)/old Note - for this part, you will need extra price from 2011 Bonds are a long-term debt for corporations. By buying a bond, to the corporation. The borrower promises to pay specified inte lifetime and at the maturity, payback the entire principle. In ca 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 bo that February 1st, 2015 is the origination date. The value on fin considered PV (Present value). Maturity date would be also ass payment schedule would be adjusted to February 1 and August available in 8-k 2006) 036-2016 = 20 years *2 = 40 periods lly: 5.875%/2 = 2.9375% e regular PMTs, assume zero coupon bonds see 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 December 16 PV (Present Value) = 2,963 million Our scenario: 5.875% Senior Notes; due February 1, 2036; inter February 1 and August 1 PV (Present Value) = 2,963 million 5.875%+5% = 10.875%/2 = 5.4375% see help on the right hand side) 5.875%-5% = 0.875%/2 = 0.4375% 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 payment Pv - Present value. Enter as negative. Example $1,000 should be Type - leave blank see help on the right hand side) Updated: 01/22/2018 by ZB of the corporate income. They are not expenses and do not . sh Flows. Please be aware that corporation list 5 years worth of 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 suing the formula - Liabilities. This represents the ownership of a corporations. r because they hold stocks or share of the company. The main ger is to generate shareholder value. rt we will modify and use return on investment instead. +1.75)/+[(new price-old price)/old price] eed extra price from 2011 or corporations. By buying a bond, the bond-owner lends money wer promises to pay specified interest rate during the loans payback the entire principle. In case of bankruptcy, bondholders rs for any payment distributions. olders = Lenders olders = Owners for bond calculations, only one bond was used and we assume origination date. The value on financial statements will be ). Maturity date would be also assumed for February 2036 and adjusted to February 1 and August 1. (issued in 2006 and details as used from page 44: cember 16, 2036; interest payable semi-annually on June 16 and llion Notes; due February 1, 2036; interest payable semi-annually on llion - using Excel Formula e the formula below sign. Example: 4% as 0.04 er a whole number. Example 50 does not assume regular payments. Assume zero coupon bond for our example. egative. Example $1,000 should be -1000 Milestone Three: Capital Budgeting Data (please fill in 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 - $0 NPV IRR $0.00 #NUM! WACC CF2 CF3 Select from drop down: ACCEPT ACCEPT CF4 - CF5 - - Capital Budgeting Example Set-up ACCEPT Initial investment $65,000,000 REJECT Straight-line Depreciation of 20% Income Tax @35% WACC of 8% approximately. (HD WACC was about 8.83%) 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: $55,000,00 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 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 (please fill in YELLOW cells) 1. Original Scenario from Milestone 1 - Time Value of Money using 8% Interest Rate 8.00% FCF1 FCF2 FCF3 FCF4 Amounts* Pv* 0.00 Total Pv* *In millions 0.00 0.00 0.00 0.00 2. Change in interest rate and its implications - Lower Interest Rate (5%) Interest Rate FCF1 FCF2 FCF3 FCF4 Amounts* Pv* 0.00 Total Pv* *In millions 0.00 0.00 0.00 0.00 3. Change in interest rate and its implications - Higher Interest Rate (15%) Interest Rate FCF1 FCF2 FCF3 FCF4 Amounts* Pv* 0.00 Total Pv* *In millions 0.00 0.00 0.00 0.00 Explanation: We will use Milestone 1 and Time Value of Money for Milestone 4 a Two cases will be analyzed: Lower Interest Rate at 5% Higher Interest Rate at 15% FCF5 0.00 FCF5 0.00 FCF5 0.00 Money for Milestone 4 analysis Milestone One Guidelines and Rubric Overview: Financial analysis involves examining historical data to gain information about the current and future financial health of a company. Financial analysis can be applied in a wide variety of situations to give business managers the information they need to make critical decisions. The ability to understand financial data is essential for any business manager. 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. For this milestone, you will submit a draft of the Time Value of Money section of the final project, along with your supporting explanations. Prompt: Calculate time value of money figures and use the results to support your explanations of the present and future value of Home Depot Inc. Complete your calculations on the designated tab in the Final Project Student Workbook. Specifically, the following critical elements must be addressed: I. Time Value of Money A. Calculate the following time value of money figures: 1. Calculate the present value of the company based on the given interest rate and expected revenues over time. 2. Suppose the risk of the company changes based on an internal event. Recalculate the present value of the company. 3. Suppose that a potential buyer has offered to buy this company in five years. Based on the present value you calculated above, what would be a reasonable amount for which the company should be sold at that future time? B. What are the implications of the change in present value based on risk? In other words, what does the change mean to the company, and how would you, as a financial manager, interpret it? Be sure to justify your reasoning. C. Based on the future value of the company that you calculated, and being mindful of the need to effectively balance portfolio risk with return, what recommendation would you make about purchasing the company as an investment at that price? Be sure to substantiate your reasoning. 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 in the Final Project Student Workbook. Use double spacing, 12-point Times New Roman font, and one-inch margins. Sources should be cited according to APA style. Rubric Critical Elements Proficient (100%) Time Value of Money: Figures Accurately calculates requested figures Needs Improvement (80%) Calculates figures, but with gaps in accuracy or detail Time Value of Money: Analyzes implications of change in Analyzes implications of change in Implications present value based on risk, justifying present value based on risk, but reasoning response or reasoning is cursory or illogical Time Value of Money: Future Makes recommendation about Makes recommendation about Value purchasing company at future price, purchasing company at future price, but substantiating claims response or substantiation is cursory or illogical Submission has no major errors related Submission has major errors related to Articulation of Response 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 implications of change in present value based on risk 30 Does not make recommendation about purchasing company at future price 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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School: UC Berkeley

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