UHV FINC6352 Final project

You are supposed to be a financial manager to apply the knowledge obtained from the financial management (FINC6352) course to estimate the cost of debt, the cost of preferred stock, the cost of common equity, capital structure, and the weighted average cost of capital (WACC) for a publicly-traded company of your choice. You then use the WACC that you obtained from the previous steps as the discount rate to perform capital budgeting analysis for the project that a firm is considering.

(1) Read theInstruction to the Final Projectcarefully.

(2) You are expected to inform the instructor of the publicly-traded company you choose for your final project before you formally start the analysis. Students are expected to analyze different firms. If several students happen to select the same company, the first student who informs the instructor has the priority to analyze the company, and other students have to change their selections.

(3) Financial data are available in the UHV online library. The detailed information is given in theFinancial Data Sourcesfile.

(4) Your project should be well-organized and typed in aWORDfile. Attach the important tables with your report. The style and organization of the project account for 10 points.Please also submit your working spreadsheets in Excel.List the references that you cited in your project.TheFinal Project Grade Sheetmay help you understand the contribution of each part of the project to your overall grade.

(5) Please use the Final Project Submission Tool to submit your completed work. The final project due date & time is11:59pm on Sunday, May 10^th, 2015.

University of Houston-Victoria

FINC 6352- Financial Management

Individual Final Project

Cost of Capital, Capital Structure,

and Capital Budgeting Analysis

1. The purpose of the project:

In this project, you are supposed to be a financial manager to apply the knowledge obtained from the Financial Management (FINC6352) course to estimate the cost of debt, cost of preferred stock, cost of common equity, capital structure, and the weighted average cost of capital (WACC) for a publicly-traded corporation of your choice. You will use the estimated WACC as the discount rate to perform capital budgeting analysis for a hypothetical project (the information is given below) that is under consideration by the selected company, and decide whether the project should be accepted.

2. Outline for the project:

(1) Executive Summary (10 points)

-Summarize the major findings, results, and the analysis of the report.

(2) Financial Ratio Analysis (40 points)

You are expected to apply the knowledge obtained in Financial Management and Financial Statement Analysis (ACCT6351) to the key financial ratios of the selected company.

- Perform trend analysis of the key financial ratios (i.e., liquidity ratios, asset management ratios, debt management ratios, profitability ratios, market value ratios) of the company.

- Perform industry (or benchmark companies) comparison analysis of the key financial ratios of the company.

- Based on the financial ratio analysis results, discuss/evaluate the financial performance of the company.

(3) Estimate Capital Structure (25 points)

- Estimate the firm??s weights of debt, preferred stock, and common stock using the firm??s balance sheet (book value).

- Estimate the firm??s weightsof debt, preferred stock, and common stock using the market value of each capital component.

(4) Compute Weighted Average Cost of Capital (WACC)(35 points)

- Estimate the firm??s before-tax and after-tax component cost of debt; (Note: If the information about the current corporate tax rate is not available, you need to estimate the tax rate based on the historical tax payments).

- Estimate the firm??s component cost of preferred stock;

- Use three approaches (CAPM, DCF, bond-yield-plus-risk-premium) to estimate the component cost of common equity for the firm.

- Calculate the firm??s weighted average cost of capital (WACC) using the market-based capital weights.

(5) Cash Flow Estimation (40 points)

- We assume that the company that you selected is considering a new project. The project has 8 years?? life. This project requires initial investment of $380 million to purchase equipment, and $28 million for shipping & installation fee. The fixed assets fall in the 7-year MACRS class. The salvage value of the fixed assets is 15% of the purchase price (including the shipping & installation fee). The number of units of the new product expected to be sold in the first year is 1,680,000 and the expected annual growth rate is 9.5%. The sales price is $228 per unit and the variable cost is $165 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized inflation rate of 1.8%. The required net operating working capital (NOWC) is 11% of sales.Use the corporate tax rate obtained in Step (4) for this project. The project is assumed to have the same risk as the corporation, so you should use the WACC you obtained from prior steps as the discount rate. Note: you may revise the partial model in the fileCh11 P18 Build a Model.xlsprovided by the textbook (Posted in this final project learning module in Blackboard) for capital budgeting analysis, but you are NOT required to strictly follow this partial model. Actually, you are encouraged to build a model by yourself.

- Compute the depreciation basis and annual depreciation of the new project. (Please refer to Table 11A-2 MACRS allowances in the textbook)

- Estimate annual cash flows for the 8 years.

- Draw a time line of the cash flows.

(6) Capital Budgeting Analysis (40 points)

-Using the WACC obtained from in Step (4) as the discount rate for this project, apply capital budgeting analysis techniques (NPV, IRR, MIRR, PI, Payback, Discounted Payback) to analyze the new project.

- Perform asensitivity analysisfor the effects of key variables (e.g., sales growth rate, cost of capital, unit costs, sales price) on the estimated NPV or IRR in order to demonstrate the sensitivity of the model. TheScenario analysisof several variables simultaneously is encouraged (but not required). A PDF document namedSensitivity Analysis in Excelis provided in this learning module. The article introduces the Data Table method that you can use for performing sensitivity analysis in Excel.

- Discuss whether the project should be taken and summarize your report.

3. Other information regarding the project:

(1) Avoid the firms in the financial sector. The financial statements in the financial industry are not compatible with the type of models that we learned in this class. Generally, financial firms have 4-digit SIC codes from 6000 to 6999.

(2) Your need to inform the instructor of the publicly-traded company that you intend to analyze. Different students should use different companies for their projects. If two students happen to select the same company, the student who informed the instructor at first should have the priority, and the other student needs to pick another company and inform the instructor again.

(3) Your project should be well-organized and typed in a Word document and attach the important tables with your report. The style and organization of the project is also very important. It accounts for 10 points.Do not directly copy any contents from any other resources. Do not analyze the companies that were recently used in MBA Case Conferences, or other projects/courses that are highly related to this project. List the cited references in your project.

We can obtain the historical financial statements for a publicly-traded company from UHV online library. Please clickhttp://libguides.uhv.edu/content.php?pid=230772&sid=2399568to access the library online resources. In the databaseMergent Online, you can find financial data and information for most U.S. publicly-traded firms.

2. How to Obtain Industry ratios for Final Project?

For the financial ratios for your industry, please do the following:

? Go to the Library home page athttp://vcuhvlibrary.uhv.edu/

? In the box with the headingSearch by Subject,clickBusiness

? On the resulting page, click theIndustry Informationtab

? ClickEstatement Studieson the Reference Materials page (the second item)

? Assuming you are off-campus, you will need to identify yourself as a UHV student using the drop-down box at the top, then log in using your Blackboard login and password

? When you get to EStatement Studies, enter your NAICS code in the box with the heading?Search for an industry? and press ENTER or click Go>

? The resulting page offers the industry data available for your industry

? The EXPLANATIONS for the data are available from the About EStatement Studies tab (fourth from the left). These explanations tell you how the information is organized, what ratios are available, why there may be multiple ratios in each box and what that means, and much more. This is where you should go to understand what information is presented for the industries.