Analysis of Provided Financial Information (Coursework Sample)

Instructions
1. Save this MS Word document (template) to your computer as follows:
If the current term is:Save the MS Word document (template) using the following file naming convention:Spring 1MBA_C604_S8W1-15_Final_YourLastName_YourFirstInitialSpring 2MBA_C604_S8W2-15_Final_YourLastName_YourFirstInitialSummer 1MBA_C604_M8W1-15_Final_YourLastName_YourFirstInitialSummer 2MBA_C604_M8W2-15_Final_YourLastName_YourFirstInitialFall 1MBA_C604_F8W1-15_Final_YourLastName_YourFirstInitialFall 2MBA_C604_F8W2-15_Final_YourLastName_YourFirstInitialWhere “15” = 20152. The instructor will make this final course assessment available to the class on the day and in the manner indicated in the course syllabus. Not later than the due date and time indicated in the course syllabus, (i) complete the assessment according any further directions stated below and (ii) submit it in the manner (via the Course Dropbox tool or RegisNet email using INsite) set forth in the Facilitator Expectations posting.
Five problems/questions comprise the final course assessment with maximum point values indicated below:
TopicMaximum points possibleYour points earnedEstimated minutes required to complete5 – Net present value analysis20156 – Capital budgeting and the cost of capital20207 – Working capital management20108 – Financial ratio analysis20309 – Projected financial statements and financing requirements2030Total100105
Students must complete this assessment individually, not in collaboration with others. The course syllabus sets forth the university’s academic integrity policy and the various sanctions that the university may impose on students for violations of that policy, including use of inappropriate sources of information on examinations.

Topic 5 (20 points)
The CEO of Southwest Manufacturing Company has asked for your analysis of and recommendation related to the proposed acquisition of an additional stamping machine for its principal manufacturing plant. Demand for the company’s products has risen to a level that exceeds its present productive capacity. An additional stamping machine will make it possible for the company to increase its production and sales by 15 percent, resulting in projected incremental relevant cash flows (after income taxes and the tax benefits of the “depreciation tax shield”) in each of the next five years, as indicated at right:YearProjected incremental cash flows1$20,000230,000340,000430,0005 20,000Total$140,000The equipment will cost $100,000 to purchase and install. Management estimates that its economic life will be five years, after which it will have no residual value. The company’s required rate of return on new investments (cost of capital) is 12.0 percent (or, 0.12).
Complete the NPV analysis of the stamping machine proposal, below. Regard all incremental relevant cash flows as “risky” and assume they occur at the end of years indicated, as listed above.
State your recommendation to the CEO, including the basis for it. Limit the length of your response to 50 words.
Complete the NPV analysis of the stamping machine proposal:Year (n)Relevant cash flowDiscount factorDiscounted cash flows“Time zero”---1200001217857.142300001223915.823400001228471.214300001219065.545200001211348.54NET PRESENT VALUE658.25State your recommendation to the CEO, including the basis for it. Limit the length of your response to 50 words.The Machine should be purchased. Any project with a positive NPV is ACCEPTABLE.


Topic 6 (20 points)
The VP–Operations of Southwest Manufacturing Company has asked for your review of her capital budgeting analysis, comparing two alternative machines the company is considering acquiring for one of its plants. Using the information provided in the table below, complete her analysis by computing the company’s cost of equity capital, rE, weighted average cost of capital, rWACC, and the equivalent annual cost (EAC) for each machine under consideration. State your recommendation to the VP with regard to selecting one of these machines.


Continued

Compute the company’s cost of equity capital, rE. Show computations in good form and label properly all amounts presented.rfBarmrfRe = rf + Ba (rm-rf)Company’s Costs0.0401.60.1250.0400.176Cost of Equity =17.6%Compute the company’s weighted average cost of capital, rWACC. Show computations in good form and label properly all amounts presented.EVReRdDT0.63 1.0 0.1760.0950.3700.400WACC = ((E/V) * Re) + [((D/V) * Rd)*(1-T)]= 0.11088+(0.03515) * (0.600)= 0.13197WACC =13.2%
Compute the equivalent annual cost (EAC) for each machine under consideration, ignoring “cost recovery” income tax deductions, the tax deductibility of ownership costs, and capital gains taxes upon the machine’s disposal). Show computations in good form and label properly all amounts presented.Machine XMachine YNPV138100115000Rate per Period(r)0.0950.095# of Periods (n)55EAC =r*NPV/ (1-(1+r)-n35963.5429947.92State your recommendation to the VP–Operations, including the basis for it. Limit the length of your response to 50 words.The WACC and Equity Costs show that the company’s costs are relatively low, and therefore the company can purchase a new machine. Machine Y is cost effective, as shown in the EAC calculation and hence should be chosen for purchase. 

Topic 7 (20 points)
The VP–Sales and Marketing of Southwest Manufacturing Company has asked for your analysis of her proposal to modify the company’s current terms of sale, “2/10, net/30.” She has proposed more generous terms – “3/5, net/30” – in order to promote increased sales and market share. She has acknowledged that more generous terms may also lead to increased bad debts. The business’ operating budget for the forthcoming fiscal year includes the following relevant information:
Budgeted unit sales, Q15,000,000unitsBudgeted unit selling, SP$20per unitBudgeted bad debts, BD1, as percent of sales0.01(or, 1.0 percent)Budgeted unit variable cost, VC (excluding BD1)$10per unitCombined effective income tax rate, t0.40 (or, 40.0 percent)Current interest rate on business’ debt, rD0.12 (or, 12.0 percent)In addition, based on the existing terms of sales:Discount percentage, CD10.02 (or, 2.0 percent)Discount period, DP110DaysUnder the proposed terms of sales:Discount percentage, CD20.03 (or, 3.0 percent)Discount period, DP2 5DaysEstimated bad debts, BD2, as percent of sales0.015(or, 1.5 percent)Continued

Compute the NPV of the company’s existing terms of sales based on its operating budget and other information provided, above. Show computations in good form and label properly all amounts presented.Units Variable costTotal costBad Debt CostTotal cost5000000105000000050000050500000Year Discounting rateInitial investment 1250500000Cash flow Present value NPV4898500048024509.898524509.8Compute the required sales volume, Q2, under the proposed terms of sale necessary to achieve the NPV of the existing credit policy – i.e., the “break even” unit sales volume. Show computations in good form and label properly all amounts presented.NPV =98524509.8Sales revenue=98524509.8*97%UNITS = 5000000=95568774.51UNIT PRICE ==98524509.8/5000000Less bad debt =95568774.51*98.5%=19.70=9413524289Variable Cost10Required sales9413524289/20Net 9.70=470676214 unitsDiscount rate3%Bad debt 1.5%
Topic 8 (20 points)
Demonstrate your ability to apply financial ratio analysis to common-sized financial statements. Analyze the common-sized balance sheet and income statement of FirstRate Company, included in the Topic 8 background paper, Financial Ratio Analysis. Identify the most significant:
Trends in the 20X0 – 20X4 common-sized financial information, and
Differences between the common-sized financial information of the company and its industry’s norms
Your analysis should indicate the basis on which you indentified trends or differences as significant, including the potential implications for FirstRate’s business or financial condition.
Limit your response to a maximum of 200 words. Spell-check and-grammar-and-style-check your completed response using MS Word’s tool for this purpose, being sure to correct any matters identified by these checking tools.Student’s response161 wordsThe current liabilities increase over the FYs 20X0-20X4. The increase in the current liabilities implies that the company has increased number of short-term obligations to be met in the current year. Likewise, the total current assets increased over the financial years, which is an implication that the company would likely be able to take care of the increased current liabilities.
The stockholder’s amount grew over the financial years, with the amounts of the retained earning growing as well. The implication of the increase in the stockholder’s equity is that the shareholders would most likely get increased dividends from their shares.
The difference between the common-sized financial information and industry norms of the company is that; it enables the company to compare its balance sheet items with those of the other similar firms, regardless of the sizes of the firms. It also enables the company to compare its percentages to the average percentages of...