Part 1 Capital Budget Decision Making

Description

In this three-part Assignment, you will analyze the short-term and long-term capital position and needs of a company and will prepare an internal memo to the CFO, along with accompanying calculations to support your recommendations.
You will play the role of a consultant who has been hired by a mid-sized company that recently went public to provide some recommendations related to their short-term and long-term financial needs. Your first project is to analyze the short- and long-term capital budget needs of the company. You will prepare and submit a 3- to 5-page report, including an executive summary in which you synthesize your recommendations for the following fiscal year, along with the provided Excel spreadsheet with your calculations. Explain your findings and your recommendations.
For each of the items in your report, you will complete the calculations in the Module 3 Assignment Part 1 Template and will then use that financial information to develop your report to the owner using the Module 3 Assignment Part 2 Template. In your report, be sure to include relevant citations from the Learning Resources, the Walden Library, and/or other appropriate academic sources to support your work.
Submit your synthesis of financial data related to short-term financing needs for an organization, to include the following:
PART 1: SHORT-TERM WORKING CAPITAL CONSIDERATIONS (1–2 PAGES, PLUS CALCULATIONS IN EXCEL)
Analyze the differences between gross working capital, net working capital, and net operating working capital and their relationship to the cash conversion cycle.
The company owner is considering a new venture that would require an additional $50,000 every month in inventory from a supplier over the next year. (Note: Use your creativity to come up with such a venture that can serve as a basis for your recommendations.) Explain the various short-term financing options available, including the advantages and disadvantages of each source. What do you recommend and why?
Assume that the company has an inventory conversion period of 64 days, an average collection period of 28 days, and a payables deferral period of 41 days.

What is the length of the cash conversion cycle?
If annual sales are $2,578,235 and all sales are on credit, what is the investment in accounts receivable?

How many times per year does the company turn over its inventory? Assume that the cost of goods sold is 75% of sales. Use sales in the numerator to calculate the turnover ratio.

Compare the cash conversion cycles of two competitors of your company using the following facts:

Competitor A
Inventory conversion period = 88 days
Average collection period (ACP) = 54 days
Payables deferral period = 30 days

Competitor B
Inventory conversion period = 90 days
ACP = 44 days
Payables deferral period = 30 days

Assume that the company’s sales are expected to increase from $5 million in 2020 to $6 million in 2021, or by 20%. Its assets totaled $3 million at the end of the prior fiscal year. The company is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2020, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 3%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast the additional funds needed for the coming year.

The company’s leadership team is very concerned about funding growth with new debt, given the existing liabilities. Propose strategies the company might consider to reduce its AFN.
In your financial analysis, you have identified possible opportunities in Israel to expand operations. The company owner wants to know if it may be more advantageous to exchange U.S. dollars for Japanese yen first and then obtain Israeli shekels to invest. You observed that in the spot exchange market, 1 U.S. dollar can be exchanged for 3.58 Israeli shekels or for 109 Japanese yen. What is the cross-exchange rate between the yen and the shekel; that is, how many yen would you receive for every shekel exchanged?
Based on your calculations, what are the options available to the company and potential financial benefits of each? What strategy do you recommend?Cash Conversion Cycle
(a)
Inventory Conversion Period
Average Collection Period
Payables Deferral Period
Cash Conversion Cycle
(b)
Annual Sales
divided into 365 days
Average Sales per Day
Average Collection Period
Investment in Receivables
(c)
Step 1: Inventory Balance
Annual Sales
Cost of Goods Sold
divided into 365 days
Inventory Conversion Period
Enter figures below
days
days
days
0 days
365 days
0 days
–
$
$
$
75% percent of sales
365 days
0 days
–
Inventory
$
–
Step 2: Inventory Turnover Ratio
Annual Sales
Inventory
Turnover Ratio
$
$
–
(d)
Competitor A
$
#DIV/0!
times a year
days
days
days
0 days
Competitor B
days
days
days
0 days
sion Cycle
Additional Funds Needed
Last year’s Sales
Sales to Increase (in percent)
Total Liabilities and Equity = Assets
Accounts Payable
Notes Payable
Accrued Liability
Profit Margin
Retained
Required increase in Assets
Spontaneous increase in Payables and Accruals
Increase in Retained Earnings
Assets/Sales
Next year’s Sales (forecasted)
Change in Sales
Additional Funds Needed
#DIV/0!
#DIV/0!
$
$
$
#DIV/0!
#DIV/0!
Cross-Exchange Rate
$1 to Israeli shekels
$1 to Japanese Yen
Cross-Exchange Rate
#DIV/0! Yen/Shekel
Future Value
Present Value
Interest Rate
Interest Rate
# of Periods
# of Periods
Starting Value
Lump Sum in the Future
Future Lump Sum
$
–
Present Value
$0
Required Interest Rates
Present Value
in savings
Future Value
needed at retirement
Additional funds
Number of Periods
Required Interest Rate
years
#NUM!
a)
Future Value of an Annuity
# of Periods
# of Periods
Payments (per period)
Payment per period
$
–
Future Value of an Annuity
Present Value
b)
Interest Rate
# of Periods
# of Periods
Payments (per period)
Payment per period
$
–
Future Value of an Annuity
Present Value
c)
Interest Rate
# of Periods
# of Periods
Payments (per period)
Payment per period
$
–
$0.00
Present Value of an Annuity
Interest Rate
Future Value
$0.00
Present Value of an Annuity
Interest Rate
Future Value
c)
Present Value of an Annuity
Interest Rate
Future Value
b)
a)
Interest Rate
Present Value
$0.00
Bond Valuation
Face Value
Yield to Maturity
Coupon Bond C
Coupon Bond Z
Years to Maturity
4
3
2
1
0
Price of Bond C
$0.00
$0.00
$0.00
$0.00
$0.00
Price of Bond Z
$0.00
$0.00
$0.00
$0.00
$0.00
Price of each of the three bonds
Basic Input Data
Bond A
Bond B
Years to maturity
Coupon rate
Par value
Periodic payment
$0
$0
Yield to maturity
9%
9%
Price
Current yield
Bond C
$0
9%
$0.00
$0.00
$0.00
Current Yield
Bond A
#DIV/0!
Bond B
#DIV/0!
Bond C
#DIV/0!
CAPM and Required Return
Market Beta
1.0
Required Return
Risk-Free Rate
Market Premium
0.00%
Your Company
Risk-Free Rate
Market Premium
Company Beta
Required Return
Closet Competitor
Risk-Free Rate
Market Premium
Competitor’s Beta
Required Return
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Difference in Required Return
0.00%
Constant Growth Valuation
Expected Dividend
Constant Growth
Required Rate of Return
Current Value per Share
#DIV/0!
Non-Constant Growth Valuation
Paid Dividend
Non-Constant Growth x 2 years
Constant Growth thereafter
Required Rate of Return
Cash Flow at Horizon or Continuing Date
Horizon Timeline Years
Dividends
Cash Flow
Present Value
Intrinsic Stock Value
#DIV/0!
0
$0.0000
#DIV/0!
1
$0.0000
2
$0.0000
#DIV/0!
#DIV/0!
$0.0000 #DIV/0!
3
$0.0000
$0.0000
Weighted Average Cost of Capital
Debt
Common Equity
Cost of Debt
Tax Rate
Current Stock Price
Last Dividend Paid
Expected Constant Growth
Next Dividend
Internal Equity
WACC
$
#DIV/0!
#DIV/0!
Year
Project A
Project B
Difference
0
1
$0
WACC
Capital Budgeting Criteria
2
3
4
$0
11%
$0
$0
WACC
NPV @ 11%
Project A
$0.00
Project B
$0.00
5
$0
6
$0
7
$0
$0
18%
NPV @ 18%
Project A
$0.00
Project B
$0.00
IRR @ 11%
Project A
#NUM!
Project B
#NUM!
MIRR @ 11%
Project A
#DIV/0!
Project B
#DIV/0!
Discount Rate
0.0%
10.0%
11.0%
18.1%
20.0%
24.0%
30.0%
NPV-A
$0
$0
$0
$0
$0
$0
$0
Crossover Rate
MIRR @ 18%
Project A #DIV/0!
Project B #DIV/0!
NPV-B
$0
$0
$0
$0
$0
$0
$0
#NUM!
Comparison Project A vs Project B
$1
$1
$1
$1
$1
$1
$0
$0
$0
$0
$0
1
2
3
4
Series1
5
Series2
ct A vs Project B
5
6
7
Module 3 Assignment:
Capital Budget Decision Making for an Organization
Report prepared by: Replace this text with your name.
Date: Replace this text with the submission date.
Walden University
WMBA 6070: Managerial Finance
1
Executive Summary
Replace this text with your executive summary.
2
Part 1: Short-Term Working Capital Considerations
Replace this text with introductory information. Add or remove headings as necessary.
[Heading]
Replace or remove this text. Add or remove headings as necessary.
[Sub-Heading]
Replace or remove this text. Add or remove headings as necessary.
3
Part 2: Long-Term Working Capital Considerations: Time
Value of Money and Bonds
Replace this text with introductory information. Add or remove headings as necessary.
[Heading]
Replace or remove this text. Add or remove headings as necessary.
[Sub-Heading]
Replace or remove this text. Add or remove headings as necessary.
4
Part 3: Long-Term Working Capital Considerations: CAPM,
Stock Valuation, and Project Evaluation Tools
Replace this text with introductory information. Add or remove headings as necessary.
[Heading]
Replace or remove this text. Add or remove headings as necessary.
[Sub-Heading]
Replace or remove this text. Add or remove headings as necessary.
5
References
[Please delete this note before submitting your Assignment. For more information about
formatting your reference list, please visit the following site:
https://academicguides.waldenu.edu/writingcenter/apa/references.]
Include appropriately formatted references to support your Assignment. Refer to the
Assignment guidelines for further information on the requirements.
6
WMBA_6070_Week_6_Assignment_Rubric
WMBA_6070_Week_6_Assignment_Rubric
Criteria
This criterion is
linked to a
Learning
OutcomeElement
1: Gross
Working Capital,
Net Working
Capital, and Net
Operating
Working Capital
This criterion is
linked to a
Learning
OutcomeElement
2: Short-Term
Financing
Options
Ratings
6.8 pts
100%
Student provides a
thorough and detailed
analysis of the differences
between gross working
capital, net working
capital, and net operating
working capital and their
relationship to the cash
conversion cycle.
6.32 pts
93%
Student provides a
detailed analysis of the
differences between
gross working capital,
net working capital, and
net operating working
capital and their
relationship to the cash
conversion cycle.
5.78 pts
85%
Student provides an
analysis of the
differences between
gross working capital,
net working capital, and
net operating working
capital and their
relationship to the cash
conversion cycle.
5.1 pts
75%
Student provides a
cursory or incomplet
analysis of the differe
between gross workin
capital, net working
capital, and net opera
working capital and t
relationship to the ca
conversion cycle.
6.8 pts
100%
Student provides a
thorough and detailed
proposal of the various
short-term financing
options available, the
advantages and
disadvantages of each
source, what option they
would recommend, and
why.
6.32 pts
93%
Student provides a
detailed proposal of the
various short-term
financing options
available, the advantages
and disadvantages of
each source, what option
they would recommend,
and why.
5.78 pts
85%
Student provides a
proposal of the various
short-term financing
options available, the
advantages and
disadvantages of each
source, what option they
would recommend, and
why.
5.1 pts
75%
Student provides a
cursory or incomplet
proposal of the vario
short-term financing
options available, the
advantages and
disadvantages of eac
source, what option t
would recommend, a
why.
WMBA_6070_Week_6_Assignment_Rubric
Criteria
This criterion is
linked to a
Learning
OutcomeElement
3: Cash
Conversion
Cycle
This criterion is
linked to a
Learning
OutcomeElement
4: Investment in
Accounts
Receivable
Ratings
6.8 pts
100%
Student calculates
the length of the
cash conversion
cycle. The
calculations are
correct.
6.8 pts
100%
Student calculates
the investment in
accounts receivable
if annual sales are
$2,578,235 and all
sales are on credit.
The calculations are
correct.
6.32 pts
93%
Student calculates the
length of the cash
conversion cycle. The
calculations are almost
completely correct, with
one or two minor errors.
6.32 pts
93%
Student calculates the
investment in accounts
receivable if annual sales
are $2,578,235 and all
sales are on credit. The
calculations are almost
completely correct, with
one or two minor errors.
5.78 pts
85%
Student inaccurately
calculates the length of the
cash conversion cycle.
While there are errors in
the calculations, student
demonstrates the correct
process.
5.78 pts
85%
Student inaccurately
calculates the investment in
accounts receivable if
annual sales are $2,578,235
and all sales are on credit.
While there are errors in
the calculations, student
demonstrates the correct
process.
5.1 pts
75%
Student inaccurately
calculates the length of t
cash conversion cycle.
There are errors in the
calculations and the stud
does not demonstrate the
correct process.
5.1 pts
75%
Student inaccurately
calculates the investme
in accounts receivable
annual sales are
$2,578,235 and all sale
are on credit. There ar
errors in the calculatio
and the student does n
demonstrate the correc
process.
WMBA_6070_Week_6_Assignment_Rubric
Criteria
This criterion is
linked to a
Learning
OutcomeElement
5: Turning Over
Inventory
This criterion is
linked to a
Learning
OutcomeElement
6: Comparing
Cash Conversion
Cycles
Ratings
6.8 pts
100%
Student calculates
how many times per
year the company
turns over its
inventory, assuming
that the cost of goods
sold is 75% of sales.
The calculations are
correct.
6.8 pts
100%
Student provides a
thorough and detailed
comparison of the cash
conversion cycles of two
competitors of their
company using the
provided facts.
6.32 pts
93%
Student calculates how
many times per year the
company turns over its
inventory, assuming that
the cost of goods sold is
75% of sales. The
calculations are almost
completely correct, with
one or two minor errors.
6.32 pts
93%
Student provides a
detailed comparison of
the cash conversion
cycles of two
competitors of their
company using the
provided facts.
5.78 pts
85%
Student inaccurately
calculates how many times
per year the company turns
over its inventory,
assuming that the cost of
goods sold is 75% of sales.
While there are errors in
the calculations, student
demonstrates the correct
process.
5.1 pts
75%
Student inaccurately
calculates how many
per year the company
over its inventory,
assuming that the cost
goods sold is 75% of
There are errors in the
calculations and the
student does not
demonstrate the corre
process.
5.78 pts
85%
Student provides a
comparison of the cash
conversion cycles of
two competitors of
their company using
the provided facts.
5.1 pts
75%
Student provides a
cursory or incomplete
comparison of the cash
conversion cycles of tw
competitors of their
company using the
provided facts.
WMBA_6070_Week_6_Assignment_Rubric
Criteria
This criterion is
linked to a
Learning
OutcomeElement
7: Forecasting
Additional Funds
Needed
This criterion is
linked to a
Learning
OutcomeElement
8: Reducing
AFN
Ratings
6.8 pts
100%
Student calculates the
forecasting of the
additional funds
needed for the
coming year using
the provided
information. The
calculations are
correct.
6.8 pts
100%
Student provides a
thorough and detailed
proposal of strategies the
company might consider
to reduce its AFN.
6.32 pts
93%
Student calculates the
forecasting of the
additional funds needed
for the coming year
using the provided
information. The
calculations are almost
completely correct, with
one or two minor errors.
6.32 pts
93%
Student provides a
detailed proposal of
strategies the company
might consider to
reduce its AFN.
5.78 pts
85%
Student inaccurately
calculates the forecasting
of the additional funds
needed for the coming year
using the provided
information. While there
are errors in the
calculations, student
demonstrates the correct
process.
5.1 pts
75%
Student inaccurately
calculates the forecast
of the additional funds
needed for the coming
using the provided
information. There are
errors in the calculatio
and the student does n
demonstrate the correc
process.
5.78 pts
85%
Student provides a
proposal of strategies
the company might
consider to reduce its
AFN.
5.1 pts
75%
Student provides a
cursory proposal of
strategies the company
might consider to
reduce its AFN.
WMBA_6070_Week_6_Assignment_Rubric
Criteria
This criterion is
linked to a
Learning
OutcomeElement
9: CrossExchange Rate
This criterion is
linked to a
Learning
OutcomeElement
10: Available
Options
Ratings
6.8 pts
100%
Student calculates
the cross-exchange
rate between the
yen and the shekel.
The calculations are
correct.
6.32 pts
93%
Student calculates the
cross-exchange rate
between the yen and the
shekel. The calculations
are almost completely
correct, with one or two
minor errors.
6.8 pts
100%
Student provides a
thorough and detailed
summary of what options
are available to the
company, including the
potential financial
benefits of each and what
strategy they would
recommend.
5.78 pts
85%
Student inaccurately
calculates the crossexchange rate between the
yen and the shekel. While
there are errors in the
calculations, student
demonstrates the correct
process.
6.32 pts
93%
Student provides a
detailed summary of
what options are
available to the
company, including the
potential financial
benefits of each and
what strategy they
would recommend.
5.78 pts
85%
Student provides a
summary of what
options are available to
the company, including
the potential financial
benefits of each and
what strategy they
would recommend.
5.1 pts
75%
Student inaccurately
calculates the crossexchange rate between
yen and the shekel. The
are errors in the
calculations and the stu
does not demonstrate th
correct process.
5.1 pts
75%
Student provides a
cursory or incomplete
summary of what opt
are available to the
company, including t
potential financial
benefits of each and w
strategy they would
recommend.
WMBA_6070_Week_6_Assignment_Rubric
Criteria
This criterion is
linked to a
Learning
OutcomeElement
11a: Writing:
Clarity
This criterion is
linked to a
Learning
OutcomeElement
11b: Writing:
Purpose
Ratings
4.25 pts
100%
Student’s writing is free
from spelling,
punctuation, and
syntax/grammar errors.
They use appropriate
sentence and paragraph
structure and present
content in a clear,
logical, and wellorganized manner.
3.95 pts
93%
Student’s writing is mostly
free from spelling,
punctuation, and
syntax/grammar errors.
They use appropriate
sentence and paragraph
structure and present
content in a clear, logical,
and well-organized
manner. There are one or
two minor errors.
3.61 pts
85%
Student’s writing has
some spelling,
punctuation, and/or
syntax/grammar errors.
They use appropriate
sentence and paragraph
structure but sometimes
present content in a
manner that is not clear,
logical, or wellorganized.
3.19 pts
75%
Student’s writing
contains many spe
punctuation, and/o
syntax/grammar er
They do not use, o
inconsistently use,
appropriate senten
paragraph structure
content lacks clarit
logic, and organiza
4.25 pts
100%
Student’s writing clearly
demonstrates awareness
of context, audience, and
purpose. Their writing is
scholarly/professional,
with appropriate tone, and
is free from bias. The
overall writing style
aligns with the
expectations for a
professional/workplace
setting.
3.95 pts
93%
Student’s writing
demonstrates awareness
of context, audience, and
purpose. Their writing is
scholarly/professional,
with appropriate tone, and
is free from bias. The
overall writing style
aligns with the
expectations for a
professional/workplace
setting. There are one or
two minor errors.
3.61 pts
85%
Student’s writing
demonstrates some
awareness of context,
audience, and purpose.
Their writing is
scholarly/professional, but
with inconsistent tone,
and/or may contain bias.
The overall writing style
is aligned to some extent
with the expectations for a
professional/workplace
setting.
3.19 pts
75%
Student’s writing
demonstrate awar
context, audience
purpose. Their wr
not scholarly/prof
with inappropriate
lacks scholarly vo
and/or contains bi
overall writing sty
aligned with the
expectations for a
professional/work
setting.
WMBA_6070_Week_6_Assignment_Rubric
Criteria
This criterion is
linked to a
Learning
OutcomeElement
11c: Writing:
Originality
This criterion is
linked to a
Learning
OutcomeElement
11d: Writing:
Credibility
Total Points: 85
PreviousNext
Ratings
4.25 pts
100%
Student’s writing
contains substantial
original thoughts or ideas
supported by appropriate
evidence, including
paraphrasing and direct
quotations from credible
sources.
4.25 pts
100%
Student’s writing
demonstrates full
adherence to
reference
requirements and
source attribution
(when applicable).
3.95 pts
93%
Student’s writing contains
mostly original thoughts or
ideas supported by
appropriate evidence,
including paraphrasing and
direct quotations from
credible sources. There are
one or two minor errors.
3.95 pts
93%
Student’s writing
demonstrates adherence to
reference requirements
and source attribution
(when applicable). There
are one or two errors in
source attribution or
reference formatting.
3.61 pts
85%
Student’s writing
contains some original
thoughts or ideas
supported by some
evidence, including
paraphrasing and direct
quotations from credible
sources.
3.61 pts
85%
Student’s writing
inconsistently adheres to
reference requirements and
source attribution (when
applicable). There are
several errors in source
attribution or reference
formatting.
3.19 pts
75%
Student’s writing
contains little evid
of original though
ideas, and there is
evidence that thou
and ideas are supp
by appropriate
evidence.
3.19 pts
75%
Student’s writing doe
adhere to reference
requirements and sou
attribution (when
applicable). There are
numerous errors or m
details in source attrib
or reference formattin

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