Capital Budgeting Analysis



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1. In practice, what are the most popular capital budgeting techniques? Why do you think the top three techniques are so popular?


2. A Bishop Companies perpetual bond provides a 5% coupon payment. Several potential investors have a required rate of return of 17%. What would be the value of a Bishop Companies perpetual bond? (Use an Excel Spreadsheet to calculate your answer.)


3. Kimyata is considering purchasing some bonds from the Bishop Companies. She has a required rate of return of 13%. For Kimyata, how much would a 12% typical paying Bishop Companies 20-year coupon bond be worth? (Use an Excel Spreadsheet to calculate your answer.)


4. If you have a good friend, what type of OTC investment would you recommend? Why?


5. How are preferred stocks bonds? How are they different?


6. In what ways do personal values and culture influence ethics?


7. Which of the Ten Principles of Financial Management is your least favorite? Why?


Scenario 1

Keishuna is a consultant for the owners of a ten-year-old car dealership. The owners currently operate under a partnership agreement. One of the owners is in bad health. In the future, the owners would like to open dealership across the countries. They ask you for advice on plotting the financial future of their dealership. After conducting your analysis, in your executive summary, you provide guidance on the most viable legal structure for the company and suggestions on how to value the dealership. (Note: To answer this question, write a short executive summary discussing the viable legal structure and valuation methods.)


Scenario 2

You are the CFO of a Fortune 100 company. Your firm recently purchased a rival firm for $1.75 billion in a stock and cash offer. You have a portfolio of independent projects. Three is your lucky number. You always include the number three when you play the lottery. For the fiscal year ending May 31, 2022, your company has allotted $100 million to invest in capital projects. They also allotted $100 million for state political lobbying efforts. You think the $100 million for lobbying should have been cut by 75% and the difference added to the capital projects budget. After calculating the net present value of each project in your portfolio, you have the following values:

Project A: $50 million

Project B: $40 million

Project C: $10 million.

Also, Project D had a net present value of $90 million.

How many projects are your company able to invest in? Which project or projects would you recommend? What about Project D?


Scenario 3

Ron really wants Tiffany to invest in his company – Bishop Companies. Ron’s company plans to begin offering annual dividends of $.39 starting next year. Ron reminds Tiffany about taking Dr. Minor’s finance course at LOC. His CFO expects their dividend to grow at 3.17% annually for the foreseeable future. Tiffany’s credit union is offering long term CD rates of 5.9%. Currently, Ron’s company’s stock is trading at $3.75.


Calculate the intrinsic value of the Bishop Companies’ stock. At the stock price you calculated, would the Bishop Companies’ stock be a good stock for Tiffany to purchase? Why or why not? What is the market value if there are 1 million outstanding shares?


Scenario 4

Tiffany decides to invest in the Bishop Companies. However, she doesn’t want to put all her eggs in one basket. So, she has Yosvany split the money in her a long-tern CD with 60% invested in the Bishop Companies and 40% invested in Erisha Industries. Since you may have incorrectly made some calculations previously, assume that the expected return and standard deviation of the Bishop Companies is 16% and 21.30% respectively. The expected return and standard deviation of Erisha Industries is 18% and 26.30% respectively. The correlation coefficient between Delta and Epsilon is 0.71.


What is the expected return of the portfolio? Relatively speaking, assume that the combined portfolio’s coefficient of variation is better than its coefficient of variation when compared to the other two investments. How would you explain this apparent contradiction?


Scenario 5

You are the CFO of the Bishop Companies. You are working on the team considering taking the Bishop Companies public. You have prepared a pro forma financial statement for the next four years including ratio analysis. You assume that the year four after tax cashflow will continue indefinitely. Your projection assumes an initial investment infusion from the IPO of $100 million. You use the five capital budgeting techniques you learned in Dr. Minor’s class to evaluate the viability of the IPO for would be investors.


Your firm has summed the following components to calculate your firm’s required rate of return:

Firm Investment Flexibility Rate: 6%;

Expected Inflation Rate: 4.5%; and

Company Risk Premium: 6.5%.


Using your pre-assigned set of pro forma financial statements and the Exam 4 answer key template, you will complete the following analyses:

1. capital budgeting analysis using the five capital budgeting techniques discussed in Unit 4 and

2. pro forma financial statement analysis using the ratio analysis matrix in your pre-assigned set of financial statements.


After you complete your analysis, answer the following questions:

A. What can you say about the Bishop Companies’ projected profitability?

B. With an “A” being excellent and an “F” being horrible, how would you grade the Bishop Companies’ overall projected efficiency?

C. What can you say about the company’s projected working capital?

D. How attractive would an investment in the Bishop Companies to a would-be investor?

E. Based upon your analysis, would you invest in the Bishop Companies if you had the opportunity?

F. Which method of evaluation do you feel most confident?

G. Why do you feel so confident about this evaluation method?

(Note: To receive full credit for your answer, you must use an Excel spreadsheet(s) for your calculations. Be sure to name each capital budgeting evaluation technique you use before each set of calculations.)

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