CAPITAL BUDGET DECISION MAKING FOR AN ORGANIZATION—PART 1MODULE 3 ASSIGNMENT OVERVIEWIn this module, you will complete a three-part Assignment that is submitted over the course of 3 weeks. This week, you will complete and submit Part 1. You will complete and submit Part 2 in Week 7 and Part 3 in Week 8.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.RESOURCESBe sure to review the Learning Resources before completing this activity.Click the weekly resources link to access the resources. WEEKLY RESOURCESTo prepare for this Assignment:Download the Module 3 Assignment Part 1 Template.Download the Module 3 Assignment Part 2 Template. Note: Be sure to keep a copy of your completed Assignment this week, as you will be adding to the same file for your Weeks 7 and 8 Assignments. BY DAY 7Submit 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 AInventory conversion period = 88 daysAverage collection period (ACP) = 54 daysPayables deferral period = 30 daysCompetitor BInventory conversion period = 90 daysACP = 44 daysPayables deferral period = 30 daysAssume 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
1
$0.0000
$0.0000
#DIV/0!
2
$0.0000
#DIV/0!
#DIV/0!
#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
t 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