FIN 550 Milestone Three Guidelines and Rubric
Overview: 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.
In this milestone, you will submit a draft of the Capital Budgeting Data section of the final project, along with your supporting explanations.
Prompt: Provide your recommendation on a potential investment project for Home Depot Inc. based on the net present value (NPV) and internal rate of return
(IRR). Compare these calculations for their use in evaluating a potential investment. Complete your calculations on the designated tab in the Final Project Student
Workbook.
Specifically, the following critical elements must be addressed:
IV.
Capital Budgeting Data
A. Suppose the company is considering a potential investment project to add to its portfolio. Calculate the following items:
1. The net present value (NPV) of the project
2. The internal rate of return (IRR) of the project
B. What are the implications of these calculations? In other words, based on each of the calculations, and being mindful of the need to balance
portfolio risk with return, would you recommend that the company pursue the investment? Why or why not? Be sure to substantiate your
claims.
C. What is the difference between NPV and IRR? Which one would you choose for evaluating a potential investment and why? Be sure to support
your reasoning with evidence.
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 on the designated tab in the Final Project Student Workbook. Use double spacing, 12-point Times New Roman font, and one-inch margins. Sources
should be formatted according to APA style.
Rubric
Critical Elements
Capital Budgeting Data:
Potential Investment
Capital Budgeting Data:
Pursuing the Investment
Capital Budgeting Data:
Difference
Articulation of Response
Proficient (100%)
Accurately calculates requested figures
Needs Improvement (80%)
Calculates figures, but with gaps in
accuracy or detail
Analyzes the implications of each
Analyzes the implications of each
calculation on the recommendation to
calculation on the recommendation to
pursue the investment, substantiating
pursue the investment, but response or
claims
substantiation is cursory or illogical
Accurately characterizes the difference
Characterizes the difference between
between NPV and IRR and explains which NPV and IRR and explains which would
would be chosen for evaluating a
be chosen for evaluating a potential
potential investment and why,
investment and why, but response is
supporting reasoning with evidence
cursory or inaccurate or evidence is not
supportive
Submission has no major errors related
Submission has major errors related to
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 the implications of each
calculation on the recommendation to
pursue the investment
30
Does not characterize the difference
between NPV and IRR and does not explain
which would be chosen for evaluating a
potential investment and why
30
Submission has critical errors related to
citations, grammar, spelling, syntax, or
organization that prevent understanding of
ideas
Earned Total
10
100%
Milestone One: Time Value of Money (please fill in YELLOW cells)
Interest Rate
8%
FCF1
Amounts*
FCF2
FCF3
FCF4
113
111
108
101
Pv*
(104.63)
($95.16)
($85.73)
($74.24)
Total Pv*
*In millions
(425.78)
Pv=FVN/(1+I)^N
PV(I,N,0,FV)
Explanations:
FCF5
97
($66.02)
FCF (Free Cash Flow) is the net change in cash generated by the o
business during a reporting period, minus cash outlays for working
expenditures, and dividends during the same period. This is a stro
the ability of an entity to remain in business.
Note: For this part of the Milestone, please capital lease payment
property. Usually Free Cash Flows (FCFs) are used to calculate NPV
Flow calculations will be covered later in the course and thus can’t
the initial Milestone #1 analysis.
Interest Rate (given) - in our scenario we will use 8% interest rate
implicit rate, the average rate that lease consumer face on the cu
net change in cash generated by the operations of a
eriod, minus cash outlays for working capital, capital
during the same period. This is a strong indicator of
ain in business.
estone, please capital lease payments under
ows (FCFs) are used to calculate NPV. Free Cash
red later in the course and thus can’t be used for
sis.
scenario we will use 8% interest rate. This rate is an
e that lease consumer face on the current market.
Milestone Two: Stock Valuation and Bond Issuance (please fill in the YELLOW cells)
PART I: STOCK VALUATION
Dividend from Financial Statements:
Year (fill in
Cash
what year you Div/share ($)
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
Purchase answer to see full
attachment