Choose A Publicly Traded Company For My Approval

Choose A Publically Traded Company Please Get My Approval For Your Co

Choose a publically traded company (please get my approval for your company so that two students cannot choose the same company) and analyze its financial ratios, capital structure, cost of capital, and perform a capital budgeting analysis for a proposed project. The project requires estimating the company's financial health and determining whether to accept a hypothetical investment based on detailed financial analysis and discounted cash flow methods.

Paper For Above instruction

Introduction

Choosing an appropriate publicly traded company is the first critical step in this comprehensive financial analysis. The selected company serves as the foundation for evaluating financial health, capital structure, and investment decision-making. The analysis will apply principles learned in financial management courses such as FIN6352 and ACC6351, including financial ratio analysis, capital structure estimation, cost of capital calculation, and capital budgeting techniques, culminating in a decision on whether to proceed with the proposed project.

Company Selection and Approval

The initial step involves selecting a publicly traded company and obtaining approval from the instructor to ensure no duplication among classmates. Ideally, the company should be well-established and diverse in its financial activities, but it should not belong to the financial sector (e.g., banking, insurance, or investment firms) due to the incompatibility of their financial statements with the project’s analytical methods.

Financial Ratio Analysis

The core of the project involves performing a detailed financial ratio analysis. This includes calculating and analyzing liquidity ratios (such as current and quick ratios), asset management ratios (like inventory turnover and receivables turnover), debt management ratios (debt-to-equity, interest coverage ratio), profitability ratios (net profit margin, return on assets, return on equity), and market value ratios (price-earnings, market-to-book ratios).

In addition, a trend analysis over recent fiscal years will be conducted to assess the company's growth trajectory and overall financial stability. Comparing these ratios with industry benchmarks or peer companies will help in identifying strengths and weaknesses of the company. This comparative analysis provides insights into operational efficiency, financial leverage, profitability, and valuation multiples, essential for informed investment and financing decisions.

Estimating Capital Structure

The project requires estimating the firm's capital structure by analyzing both the book values from the balance sheet and the market values of debt, preferred stock, and common equity. Book value estimates involve reviewing the latest financial statements, whereas market value estimates require stock price data and bond yields, considering the current market conditions. This dual approach provides a comprehensive view of the company's leverage and financial risk profile, essential for subsequent cost of capital calculations.

Calculating Cost of Capital

The next step involves calculating the components of the company's weighted average cost of capital (WACC). This begins with estimating the cost of debt, which involves calculating the firm's before-tax cost of debt based on existing bonds and loans, adjusting for the applicable corporate tax rate. If tax information is unavailable, it can be estimated from historical tax payments.

The cost of preferred stock is estimated through dividend discount models or yield approaches, considering the preferred dividends and price.

For the cost of equity, three methodologies are recommended: the Capital Asset Pricing Model (CAPM), the Dividend Discount Model (DCF), and the bond-yield-plus-risk-premium approach. Each provides a different perspective on the expected return required by shareholders, incorporating risk assessments based on market data and firm-specific factors.

The WACC is then computed using market value weights, combining these component costs into a single discount rate that reflects the company's overall cost of raising capital.

Cash Flow Estimation for the New Project

The project involves estimating annual cash flows over an 8-year horizon, considering an initial investment of $210 million (including land, construction, installation, and shipping). The assets fall into the 7-year MACRS depreciation class, and salvage value is projected at $38 million. Sales forecasts are based on an initial 880,000 units at a unit price of $266, growing annually at 9%. Variable costs are initially $179 per unit, increased annually by 2.8% to account for inflation, with fixed costs and working capital needs estimated accordingly.

Calculating depreciation involves deriving the basis from the initial investment and applying MACRS depreciation schedules. The cash flows include operating cash inflows, tax effects, changes in net operating working capital, and salvage proceeds. The calculation must account for tax impacts, working capital investments, and depreciation benefits, producing an annual cash flow stream for analysis.

Capital Budgeting Techniques and Sensitivity Analysis

Using the previously calculated WACC as the discount rate, the project’s feasibility is evaluated through various capital budgeting methods including NPV (Net Present Value), IRR (Internal Rate of Return), MIRR (Modified Internal Rate of Return), profitability index (PI), payback period, and discounted payback period. These metrics provide alternative perspectives on whether the project adds value.

Furthermore, sensitivity analysis explores how variations in key variables such as sales growth rate, unit costs, fixed costs, sales price, and the discount rate influence the NPV and IRR. Scenario analysis, where multiple variables are altered simultaneously, enhances understanding of the project’s robustness under different market and operational conditions.

Final Evaluation and Recommendations

The culmination of all analyses will be a comprehensive assessment of whether the project should be accepted. Based on the financial performance, capital structure, cost of capital, and projected cash flows, a recommendation will be made. The conclusion will summarize key findings, risks, and sensitivities, providing a clear basis for decision-making.

Conclusion

This project exemplifies applied financial management, requiring integration of ratio analysis, capital structure estimation, cost of capital calculation, and capital budgeting. The rigorous evaluation supports strategic investment decisions, aligning corporate financial policies with market realities.

References

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  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley Finance.
  • Graham, J. R., & Harvey, C. R. (2001). The Theory and Practice of Corporate Finance: Evidence from the Field. Journal of Financial Economics, 60(2-3), 187-243.
  • Ross, S. A., Westerfield, R. W., & Jaffe, J. (2019). Corporate Finance. McGraw-Hill Education.
  • Myers, S. C. (2001). Capital Structure. Journal of Economic Perspectives, 15(2), 81-102.
  • Higgins, R. C. (2018). Analysis for Financial Management. McGraw-Hill Education.
  • Damodaran, A. (2015). The Hidden Risks in Financial Statements. Journal of Applied Corporate Finance, 27(4), 63-70.
  • Fama, E., & French, K. (2004). The Capital Asset Pricing Model: Theory and Evidence. Journal of Economic Perspectives, 18(3), 25-46.
  • Ezra, M., & Yu, J. (2020). Estimating Cost of Capital and the Effect of Market Conditions. Financial Analysts Journal, 76(4), 68-86.

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