Analyze financing options to maximize investor value

Competencies

In this project, you will demonstrate your mastery of the following competencies:

• Analyze financial and investment decisions that add value to the organization
• Analyze financing options to maximize investor value

Scenario

You are a financial analyst for the chosen business that you selected during your Module Two Journal assignment. Your supervisor has discovered last minute that your business’s board of directors is looking for updates on the business’s financial health. Your supervisor has asked you to write a report regarding the business’s current financial health and the available financial options for improving the business. You’ve also been asked to make recommendations as to which options the business should choose to best support its financial health. Your supervisor will then use your report to present to the business’s board of directors, whose members all have varying levels of knowledge in terms of finance.

Directions

Using the business you chose from the Project Two Business Options List, create a report for your supervisor to share with the board of directors during their presentation. Keep in mind that your report needs to be easy for someone unfamiliar with finance to understand, as not all of the board members for your business fully understand finance.

Using Mergent Online, locate the most recent quarterly financial statements for your chosen company, and use these statements to support your analysis throughout the project. Refer to the Project Two Financial Assumptions document located in the Supporting Materials section for the assumptions you need in order to analyze the three available financial options outlined in the Financial Analysis section of the project directions.

You are encouraged to use the Project Two Financial Analyst Report template located in the What to Submit section to help complete this project.

Specifically, you must address the following:

1. Financial Analysis: In this section of the report, you will use the most recent quarterly financial statements for your chosen business and the Project Two Financial Formulas spreadsheet (located in the What to Submit section) to calculate appropriate financial formulas for assessing the business’s financial health. You will also analyze all three available financial options for improving the business based on your calculations and the provided Project Two Financial Assumptions document.
   1. Financial Calculations: Calculate accurate financial formulas to assess the business’s current financial health. Specifically, you must calculate the following:
      • Working capital
      • Current ratio
      • Debt ratio
      • Earnings per share
      • Price/earnings ratio
      • Total asset turnover ratio
      • Financial leverage
      • Net profit margin
      • Return on assets
      • Return on equity
   2. Working Capital Management: Explain the impact of working capital management on the business’s operations. Provide examples to support your claims.
   3. Bond Investment: Analyze the risks and benefits of the business choosing to invest in a corporate bond, including the necessary ethical considerations, appropriate calculations, and examples to support your analysis.
   4. Capital Equipment: Analyze the risks and benefits of the business choosing to invest in capital equipment, including the necessary ethical considerations, appropriate calculations, and examples to support your analysis.
   5. Capital Lease: Analyze the risks and benefits of the business choosing to purchase a capital lease, including the necessary ethical considerations, appropriate calculations, and examples to support your analysis.
2. Financial Evaluation: In this section of the report, you will evaluate the three available financial options for the business and recommend which option(s) are the best for the business to choose.
   1. Financing: Explain how a business finances its operations and expansion.
   2. Bond Investment: Assess the appropriateness of a bond investment as a financing option for the business’s financial health, using your financial analysis and other financial information to your support claims.
   3. Capital Equipment: Assess the appropriateness of a capital equipment investment as a financing option for the business’s financial health, using your financial analysis and other financial information to support your claims.
   4. Capital Lease: Assess the appropriateness of a capital lease purchase as a financing option for the business’s financial health, using your financial analysis and other financial information to support your claims.
   5. Short-Term Financing: Explain how potential short-term financing sources could help the business raise needed funds for improving its financial health. Base your response on the business’s current financial information.
   6. Future Financial Considerations: Describe the business’s likely future financial performance based on its current financial well-being and risk levels. Use financial information to support your claims.
3. Financial Recommendations: In this section of the report, you will recommend which financing option(s) are the best for the business to choose depending on its financial health.
   1. Financial Recommendation(s): Recommend the most appropriate financing option(s) based on the business’s financial health, including a rationale for why the option(s) are best.

 

FIN 320 Project Two Financial Assumptions 

Whenever a business needs to make an investment, the financial options associated with that investment must be carefully considered. This is true whether the business seeks to purchase something as simple as a new building or a piece of equipment, or something as complex as acquiring a new business. Business leaders need to be able to estimate cash flows from an investment and use the net present value (NPV) method to figure out if the investment is worthwhile.

This document includes lists for three financial options and their associated assumptions. For your Project Two assignment, analyze all three financial options provided, then select the option or options that add the most value to the business you have selected based on all the information you’ve gathered. Your recommendation should include careful analysis of NPV calculations, financial ratios, working capital analysis, and supportive documents.

Remember to evaluate each financial option in the context of the financial ratio analysis and working capital analysis to help you decide which option(s) to recommend to your chosen business in your Project Two assignment.

Financial Option 1: Purchase a $10 Million Building 

 

Rationale for investment: The business is considering environmental, social, and corporate governance (ESG) factors as part of its investment into a new building for its headquarters. The building itself will be a Leadership in Energy and Environmental Design (LEED)-certified building, but the new site being considered currently houses a large, inactive gas station that sold both gasoline and diesel fuel. The new site also has a sizable repair facility left over that was used for deliveries and tractor-trailer trucks for more than 50 years. While some restoration was performed on the site prior to the new building’s construction, the previous owner ran out of funds before they were ever able to bring the site up to

 

LEED standards. Four large fuel tanks remain on the site, and they will also need to be addressed per LEED standards.

Assumptions to consider:

 

• $10 million cash purchase
• Building generates additional net profits after tax of $1.25 million per year
• 20 year expected useful life of building
• Salvage value: $1.5 million
• Discount rate is 10%

 

Financial Option 2: Purchase of $25 Million in Equipment 

 

Rationale for investment: The business’s current equipment is efficient, but it uses a substantial amount of electricity. Operating the production line also creates significant waste material, including waste plastics. The business is looking into purchasing newer, more environmentally friendly equipment that will still allow it to be at least as efficient in production as it is now.

 

Assumptions to consider:

 

• Annual cash flows generated with equipment: $4 million
• Discount rate is 12%

 

• 15-year useful life
• No salvage value

 

Financial Option 3: $30 Million Investment in Bonds 

 

Rationale for investment: The business that’s offering these bonds for sale contracts with another business in China to assemble computer components. The Chinese business is known to have used child labor in the past, but claims it has stopped this practice. However, the U.S. business selling these bonds has not investigated to verify whether these claims are true or not.

 

Assumptions to consider:

 

• 10-year bond
• 8% coupon
• Priced at a discount: $95
• Discount rate is 9%