BUS 505: Final Project

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Your final project for this course is to prepare a financial analysis. This final project takes a close look at
two corporations, Bayer and Monsanto. Bayer is considering a bid for United States seed company
Monsanto (Snider, 2016). For purposes of this project, you will act as the Chief Financial Officer of
Monsanto Corporation, analyzing financial documents and determining whether Monsanto should
indeed go forward with acceptance of the purchase. The project is divided into three milestones, which will be submitted at various points throughout the
course to scaffold learning and ensure quality final submissions. Preliminary milestones will be submitted
in Modules Four and Six. The final submission will occur in Module Eight. Milestone 1: Evaluation of the Proposal Due in Module 4 Milestone 2: Evaluation of an Alternative Opportunity Due in Module 6 Milestone 3: Final Project Submission Due in Module 8 In this assignment you will demonstrate your mastery of the following course outcomes:
[CO1] Analyze financial reports to determine a firm’s performance. [CO2] Apply the strategic planning processes necessary to manage the long- and short-term
financial activities of the firm. [CO3] Perform valuation of financial instruments. [CO4] Evaluate the appropriateness of an investment using applicable economic, industry,
and competitive analysis. Background Information (applies to Milestones One through Three):
Bayer is a life science firm with a more than 150-year history and core competencies in the areas of
healthcare and agriculture. With its innovative products, it contributes to finding solutions major
challenges, such as a growing and aging world population requiring improved medical care and an
adequate supply of food. Bayer addresses these issues by preventing, alleviating and treating diseases,
and helping to provide a reliable supply of high-quality food, feed and plant-based raw materials. Bayer
Pharmaceutical is Bayer‘s largest division in terms of total sales. This division focuses on researching,
developing and marketing innovative medicines with a positive cost-benefit ratio primarily in the
therapeutic areas of cardiology, oncology, gynecology, hematology and ophthalmology. To safeguard
long-term growth, Bayer is currently seeking increase its investment in research and development. Besides expanding early research, Bayer is concentrating on the clinical development of active drug
substance candidates in the therapeutic areas of cardiology, oncology, hematology and gynecology. In
addition, it is selectively expanding and supplementing its development portfolio through licensing
agreements and acquisitions. The Crop Science Division of Bayer, on the other hand, focuses on
improvement in agricultural sustainability, crop yields and quality, as well as the leveraging of digitization
to help make products safer (Bayer, 2016). Bayer’s aim is to help shape the future of the agricultural
industry with innovative offerings that increase its productivity, thus generating profitable and
sustainable growth for Crop Science and its customers and enabling the production of sufficient food,
animal feed and renewable raw materials for a growing world population despite the limited amount of
available arable land. This strategy is complementary to its Animal Science Division, which produces
animal feed products. Bayer Crop Science Division’s current strategy is to enhance its Crop Protection
and Environmental Science portfolio, expand its Seeds business, and to lead the way in innovation and
develop holistic solution (Bayer AG, 2016). For purposes of this discussion, assume that Bayer aims to
build on its expertise in the integration of seed technology with chemical and biological crop protection. For purposes of this project, assume that Bayer is seeking to acquire Monsanto Corporation. Monsanto,
along with its subsidiaries, is a leading global provider of agricultural products for farmers. Through its
seeds, biotechnology-trait products, herbicides and precision agriculture tools, Monsanto (Monsanto,
2016) seeks to provide farmers with solutions that help improve productivity, reduce the costs of farming
and produce better foods for consumers and better feed for animals. Monsanto has a worldwide
distribution, sales and marketing organization for its agricultural-productivity products. In a growing
number of locations throughout the world, it produces directly or contracts with third-party growers for
corn seed, soybean, vegetable, cotton, canola and other seeds. The global market for its “Seeds and
Genomics” segment is increasingly competitive. Both its row crops and its vegetable seed businesses
compete with numerous multinational agrichemical and seed marketers globally, and with hundreds of
smaller companies regionally. Bayer’s proposal would pair Monsanto, the world's largest seed company, with drug-maker Bayer's
growing seed and crop protection portfolio. Upon announcement of the possibility of such a bid, shares
of St. Louis-based Monsanto (MON) rose by 8.7% (Kirchfield, et. al., 2016). Across 2015, immediately
following announcement of a possible merger between the two firms, Bayer's growing agribusiness
division saw sales rise 9% to $11.8 billion, while its healthcare sales rose 19% to $26 billion, as market
participants reacted to news of the possible merger. Overall, Bayer's 2015 sales rose 12%, to $52.8 billion
(Business Wire, 2014). On the other hand, Monsanto, which makes seeds (corn, cotton, fruits and other
vegetables) and crop protection chemicals such as RoundUp, reported sales of $15 billion in its 2015
fiscal year. This was a 5% decline from the previous year (Daily Management Review, 2016). See Table 1,
below, for an alternative view of these results. Prompt:
In this project, you will assume that Bayer is considering a bid for United States seed company Monsanto
(Snider, 2016). For purposes of this project, assume that you are Chief Financial Officer of Monsanto Corporation. Bayer’s proposal would pair Monsanto, the world's largest seed company, with drug maker
Bayer's growing seed and crop protection portfolio. Upon announcement of the possibility of such a bid,
shares of St. Louis-based Monsanto (MON) rose by 8.7% (Kirchfield, et. al., 2016). Across 2015,
immediately following announcement of a possible merger between the two firms, Bayer's growing
agribusiness division saw sales rise 9% to $11.8 billion, while its healthcare sales rose 19% to $26 billion.
Overall, Bayer's 2015 sales rose 12%, to $52.8 billion (Business Wire, 2014). On the other hand,
Monsanto, which makes seeds (corn, cotton, fruits and other vegetables) and crop protection chemicals
such as RoundUp, reported sales of $15 billion in its 2015 fiscal year. This was a 5% decline from the
previous year (Daily Management Review, 2016). Assume that Monsanto is taxed (TC) at a rate of 35%
and its cost of debt (RD) is 12%. See Table 1, below, for an alternative view of this data. In the context of
Bayer’s proposal, assume that Bayer’s Beta is 1.24. For purposes of valuation of cash flows in the context
of Bayer’s proposal, consider Monsanto’s discounted cash flow for only the upcoming 1 year of sales, and
assume that Monsanto is expected to grow at a rate of 3% in the current year. Assume also that
Monsanto’s current sales are projected to be $15,239,000, while its equity holdings are estimated to be
$9,141,333 and its debt is $12,359,333. Assume that Monsanto’s Profit Margins and Total Asset Turnover
are unchanged from 2015 levels. EBIT, depreciation, capital spending, and the change in net working
capital will grow at the same rate as sales, which is expected to grow at a rate of 3% across this year,
while capital investment will remain stable
As an alternative proposal means of increasing shareholder value, as Chief Financial Officer of Monsanto,
you have also been asked to evaluate a management proposal to expand Monsanto’s existing operations
to pesticide production, yielding an increase in sales of $3,950,000. In the context of this alternative
proposal, assume that there is no excess capacity, and the increase in fixed asset needs would be equal
to 70% of this increase in sales, while cost of sales would run 20% of sales, using a percentage of sales
approach. Also assume that Monsanto issues dividends at a rate of 1.98% of net sales, and thus the
firm’s retention ratio is 98.2%. Assume that Monsanto’s current total level of sales is $15,239,000, while
the division involved in this project is expected to yield sales of $2,950,000 in the current year. .Assume
that the proposed project has a risk and weighted average cost of capital similar to that of Monsanto,
and a firm beta similar to that of Monsanto.
Upon receipt of Bayer’s proposal, your company’s Board of Directors has directed you, as Chief Financial
Officer of Monsanto Corporation, to review key statistics and other information and report to the Board
on the following:
1. Taking account of background information and other information supplied here, determine whether
to accept or reject this proposal for $62B. For purposes of this analysis, consider discounted adjusted
cash flow for only the current year, in which the firm is anticipated to grow at a rate of 3%. Evaluate each
of the following:
a. From given information (Table 7 will aid you in making these calculations, and has been provided for
this purpose):
(i) Ascertain Monsanto’s weighted average cost of capital (WACC) and use this along with the firm’s
growth rate to determine the discounted value of adjusted cash flows. Employ the discounted value of
adjusted cash flows to determine how this offer compares to the present value of the firm’s adjusted
cash flow (CFA*), using the firm’s WACC. (ii) Explain the importance that this has for the firm, and for shareholders, noting that this is an issue
which you have not covered in previous Milestones - and thus you will use this additional measure
alongside measures prepared in Milestone One, as you complete Milestone Three. Use information from
all assigned readings to support your analyses.
b. Justify your decision to accept or reject this offer using additional evidence drawn from ratio
analysis, financial statement analysis, or time and trend analysis, refining your Milestone One analyses as
applicable, given information covered in subsequent modules, and given current sales, equity and debt
information included here.
2. With respect to the firm’s alternative proposal, determine:
a. The extent to which Monsanto will have to take on additional debt, given that it wishes to retain its
current dividend ratio and does not wish to sell additional equities.
b. Calculate the firm’s sustainable growth rate and internal growth rate and use these measures to
analyze a decision to accept this alternative proposal. Use these measures and concepts covered in
assigned readings including EFN, DuPont Identity and leverage, Modules One through Eight, to explain
the importance of these measures to shareholder interests.
Use evidence and assigned readings covered to this point to support your determinations. Present your
analysis in a 4-6 page double-spaced document using 12 pt. Times New Roman font. Use APA formatting. References Bayer. (2016). Bayer Global Annual Report. Bayer AG (2016). Bayer: Science for a better life. Bloomberg. (2016). United States rates and bonds. Business Wire. (2014). Merck Announces Sale of Consumer Care Business to Bayer AG for $14.2 Billion .
Berkshire Hathaway Business Wire. Daily Management Review. (2016). Reports of Takeover Interests Causes Monsanto Shares to Jump. Daily
Management Review. Kirchfield, A., David, R. and Nair, D. (2016). Bayer considers the offer of Monsanto. Bloomberg News. Monsanto (2016). Annual Report. Snider, M. (2016). Chemical firm Bayer makes $62B offer for Monsanto. USA Today. ValuePro. (2016). ValuePro. Yahoo Finance. (2016). MON cash flow. Yahoo Finance. (2016). MON balance sheet. Yahoo Finance. (2016). MON income statement annual. Immediate Results from the Bayer Announcement in 2015
Monsanto (MON) Share Price Increased 8.7% Bayer Crop Science Division Sales increased 9% to $11.8 billion Bayer Healthcare Division Sales Increased 19% to $26 billion Bayer Pharmaceutical Sales Increased 12%, to $52.8 billion Monsanto Sales Decreased 5% to $15 billion Table 1 Immediate Results from the Bayer Announcement in 2015
ValuPro Net Online Valuation of MONSANTO CORPORATION - 2015
Return on Assets 8.56 Return on Equity 14.93 Sales ($mil) 14,757 Investment Rate (% of Rev) 4.78 Growth Rate (%) 13.5 Working Capital (% of Rev) 29.19 Net Oper. Profit Margin (%) 21.3 Short-Term Assets ($mil) 11141 Tax Rate (%) 30.584 Short-Term Liab. ($mil) 4055 Stock Price ($) 86.74 Equity Risk Premium (%) 3 Shares Outstanding (mil) 533.8 Company Beta 1.05 10-Yr Treasury Yield (%) 500% Value Debt Out. ($mil) 2.054 Bond Spread Treasury (%) 1.5 Value Pref. Stock Out. ($mil) 0 Preferred Stock Yield (%) 7.5 Company WACC (%) Table 2 ValuePro Net Online Valuation
Monsanto Co. 2015 (Bloomberg Market Rates)
MON:US
Current Price 106.00 (USD) Open 106.80 Day Range 109.69-109.54 Volume 18,049,774 Previous Close 106 52 Week Range 81.22-120 1 Year Return -7.06% YTD Return 10.94% Current P/E Ratio (TTM) 23.67 8% Earnings Per Share (USD) (TTM) 4.62
Market Cap (B USD) 47.747 Shares Outstanding 436.845 Price/Sales (TTM) 3.65 Dividend Indicated Gross Yield 1.98% Sector Materials Industry Chemicals Sub-Industry Agricultural Chemicals Table 3 Monsanto Co. Rates
Income Statement - Monsanto Corp.
Period Ending 31-Aug-15 31-Aug-14 31-Aug-13 Total Sales 15,001,000 15,855,000 14,861,000 Cost of Sales 6,819,000 7,281,000 7,208,000 Gross Profit 8,182,000 8,574,000 7,653,000 Research Development 1,580,000 1,725,000 1,533,000 Selling General and
Administrative 2,686,000 2,774,000 2,550,000 Non Recurring 393,000 - - Others - - - Total Operating Expenses - - - 3,523,000 4,075,000 3,570,000 - 31,000 Operating Expenses Operating
Income or Loss Income from Continuing Operations
Total Other 71,000 Income/Expenses Net
Earnings Before Interest
and Taxes 3,594,000 4,075,000 3,601,000 Interest Expense 433,000 248,000 172,000 Income Before Tax 3,161,000 3,827,000 3,429,000 Income Tax Expense 864,000 1,078,000 915,000 Minority Interest -11,000 -22,000 -43,000 Net Income from
Continuing Ops 2,286,000 2,727,000 2,471,000 Discontinued Operations 28,000 13,000 11,000 Extraordinary Items - - - Effect of Accounting
Changes - - - Other Items - - - 2,314,000 2,740,000 2,482,000 - - - 2,314,000 2,740,000 2,482,000 31-Aug-15 31-Aug-14 31-Aug-13 Cash and Cash
Equivalents 3,701,000 2,367,000 3,668,000 Short Term Investments 47,000 40,000 254,000 Net Receivables 3,182,000 3,466,000 3,042,000 Inventory 3,496,000 3,597,000 2,947,000 Other Current Assets 199,000 205,000 166,000 Non-recurring Events Net Income
Preferred Stock and Other
Adjustments
Net Income Applicable to Common Shares
Table 4 Monsanto Income Statement
Balance Sheet - Monsanto Corp.
Period Ending
Assets
Current Assets Total Current
Assets 10,625,000 9,675,000 10,077,000 Long Term Investments 42,000 92,000 237,000 Property Plant and
Equipment 4,973,000 5,082,000 4,654,000 Goodwill 4,061,000 4,319,000 3,520,000 Intangible Assets 1,332,000 1,554,000 1,226,000 Accumulated
Amortization - - - Other Assets 610,000 746,000 496,000 Deferred Long Term
Asset Charges 277,000 450,000 454,000 Total Assets 21,920,000 21,918,000 20,664,000 Liabilities
Current Liabilities
Accounts Payable 4,359,000 3,756,000 Short/Current Long Term 687,000
Debt 315,000 63,000 Other Current Liabilities 438,000 517,000 Total Liabilities 3,950,000 540,000 14,930,000 14,043,000 8,105,000 Stockholders’ Equity
Misc. Stocks Options
Warrants - - - Redeemable Preferred
Stock - - - Preferred Stock - - - Common Stock 6,000 6,000 6,000 Retained Earnings 10,374,000 9,012,000 Treasury Stock -4,140,000
12,053,000 10,032,000 Capital Surplus 11,464,000 10,003,000 10,783,000 7,188,000 Other Stockholder Equity -2,801,000 -1,114,000 -1,278,000 Total Stockholder
Equity 6,990,000 7,875,000 12,559,000 Net Tangible
Assets 1,597,000 2,002,000 7,813,000 Table 5 Monsanto Balance Sheet
Cash Flow - Monsanto Corp.
Period Ending 31-Aug-15 31-Aug-14 31-Aug-13 Net Income 2,314,000 2,740,000 2,482,000 Operating Activities, Cash Flows Provided By or Used In
Depreciation 716,000 691,000 615,000 Adjustments to Net Income 240,000 233,000 113,000 Changes in Accounts Receivables 68,000 -172,000 222,000 Changes in Liabilities 457,000 482,000 -129,000 Changes in Inventories -425,000 -650,000 -192,000 Changes in Other Operating Activities -273,000 -292,000 -414,000 Total Cash Flow from Operating Activities 3,108,000 3,054,000 2,740,000 Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures -967,000 -1,005,000 -741,000 Investments 4,000 235,000 Other Cash Flows from Investing Activities -56,000
Total Cash Flows from Investing Activities 217,000 -1,235,000 -253,000 -1,019,000 -2,095,000 -777,000 Financing Activities, Cash Flows Provided by or Used in
Dividends Paid -966,000 -932,000 -976,000 Sale Purchase of Stock -698,000 -6,834,000 -705,000 Net Borrowings 1,238,000 -5,536,000 127,000 Other Cash Flows from Financing Activities -36,000 -48,000 -10,000 Total Cash Flows from Financing Activities -430,000 -2,259,000 -1,485,000 Effect of Exchange Rate Changes -325,000 -1,000 -93,000 Change In Cash and Cash Equivalents 1,334,000 -1,301,000 385,000 Table 6 Monsanto Statement of Cash Flows
Valuation
Component Previous 3-Year
Average EBIT $ 3,511,347 Depreciation $ 674,000 Taxes* $ 1,228,971 Change in NWC $ 227,911 Capital
Spending $ (1,000,000) CFA* $ 3,728,464 Year
1 Firm Value
Note that all values are in thousands. This
table may be used to present your NPV
calculations. Discount factor
Discounted
CFA* NPV $ 12,359,933 NPV-Debt Debt Table 7 Monsanto Firm Valuation Using Average Expected Sales Based on 3-Year Average of Previous Results