Distinguish between fixed-ceiling budgeting and open-ended budgeting. Discuss the impetus for budget cutback, the tactics used in dealing with budget shortage, as well as the roles and effects of budget cutback. What factors should be considered by a government in reducing the size of government through privatization?

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Discussion Essay

Responses to the questions should be in essay format. Your answers must show originality, be straight to the point and not be more than 3 double-spaced pages to a question.

Distinguish between fixed-ceiling budgeting and open-ended budgeting. Discuss the impetus for budget cutback, the tactics used in dealing with budget shortage, as well as the roles and effects of budget cutback. What factors should be considered by a government in reducing the size of government through privatization?

Explicate how the USA should hedge its translation exposure through a balance sheet or forward hedge. Discuss the implications of US hedging actions. Elaborate on the temporal method of translation FE exposure. Define it and describe how it treats balance sheet, income statement and stockholders equity items.

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Transaction and Translation exposure

INSTRUCTIONS.

I. MUST NEED YOUR CONVICTION, CORRECTNESS, ELABORATION AND ELUCIDATION OF YOUR ANSWERS.
II. MUST BE SINGLE-SPACED AND 1 FULL-PAGE ESSAY FOR EACH QUESTION. WRITE A MINIMUM OF 3 PLUS PARAGRAPHS FOR EACH ESSAY.
III. You must read and follow this TEXT book for most of your answer: Eiteman, D. K., Stonehill, A. I., Moffett, M. H., & Kwok, C. (2022) MULTINATIONAL BUSINESS FINANCE 16th ed., Pearson. READ CHAPTER 10,11,12
IV. KEENLY OBSERVE THE INSTRUCTION AND USE PROPER CITATION

ESSAYS

A. We fear a revaluation of the currency of the US affiliate the Japanese Yen.
1) Explicate how the USA should hedge its translation exposure through a balance sheet or forward hedge.

2) Discuss the implications of US hedging actions.

C. Elaborate on the temporal method of translation FE exposure. Define it and describe how it treats balance sheet, income statement and stockholders equity items.

D. Expound on the current rate method of FE exposure. Define it and describe how it treats income statement, balance sheet and stockholders equity items.

E. Explicate hedging translation exposure through the balance sheet and forward in the current rate and the temporal method. Evaluate them as a hedging tool.

What are the probable values that the current investor group and the “bottom fisher” have placed on the company? Based on the information provided why would the private equity investor invest? Justify it with numerical support.

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Financial Planning Case Study

Metastasis Magnetics Corp. Part 2

Metastasis Magnetics Corp. (“MMC”) is now completing its first year of operations. The Company has raised the Series A round of financing as determined in Part 1. The three founders are at a crossroads. At the end of their first year, they will be close to running out of cash. Their current financial projections are quite aggressive. The projections suggest they need to raise additional capital of $14 million in a Series B to get to profitability and cash break even.

But their current investor group is “tired” and are actively seeking a buyer with the hope of a return of their original capital. There is a “bottom fishing” investor willing to price the company as a “fire sale”. The CEO recently pitched a private equity firm that may be willing invest the needed $14m (at a yet to be negotiated pre-money valuation) based on the projections, assuming that the company can be later sold for a 3x year 5 revenue. The founders, as a group, believe there is an equal probably of each outcome.

You have been approached by the company to become their investment banker. Your contingency fee using the basic Lehman formula is dependent on the sale price or investment. Before you take on this engagement to either sell the company or convince the private equity firm to invest, you must decide what is the company’s value today.

The company’s historical and projected financials are attached.

What are the probable values that the current investor group and the “bottom fisher” have placed on the company? (2 pts)

Based on the information provided why would the private equity investor invest? Justify it with numerical support. (7 pts) (Hint: you need to go back to chapter 12)

Using the Lehman formula what will be your fee in each case (return of capital, fire sale or private equity investment)? (1 pt)

 

How did COVID-19 affect retirement savings? What can be done to provide more protection for retirement savings? What was the most surprising thing you learned from this article?

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Finances Discussion

Answer the following questions regarding finances, policy, and government. Try to put yourself in the mindset of older adults as you answer some of the questions.

1. How soon do you yourself hope to retire? How will you work now to make this possible? When thinking about bio/psycho/social theory, how will you make sure all of your needs are met in
retirement? Cite material from class in your answer(in the power point)

2. Of the three ways to restore solvency to the Social Security trust fund—raising the retirement age, reducing benefits, and increasing revenues—which would you favor? Why? Cite specific class and textbook material in your answer. Think of the different theories and apply at least one in your answer.

3. Go to the website of the Social Security Administration (https://www.ssa.gov) and click on Apply for Retirement. Click on the link to When to Start Receiving Benefits
(https://www.ssa.gov/pubs/EN-05-10147.pdf Links to an external site.) and answer the following questions:
At what age will you receive the highest Social Security Benefit?
Can you keep working and still receive your Social Security Benefit?
If you delay retirement beyond age 65, should you still sign up for Medicare?
What happens if you fail to sign up for Medicare when you become eligible at 65?

4. The Center for Medicare and Medicaid services is a government organization that provides information for beneficiaries and for health care providers.
Go to the CMS website (www.cms.gov)and click on the link for Medicare.
Which three groups of people are eligible for Medicare benefits?
What are some of the services that Part B covers?
What benefits does Medicare provide for prescription drug coverage?

5. The following is an article from the Center for Retirement Research https://crr.bc.edu/wp- content/uploads/2020/06/IB_20-10.pdf Links to an external site.Read the article and answer the
following questions:
How did COVID-19 affect retirement savings?
What can be done to provide more protection for retirement savings?
What was the most surprising thing you learned from this article?

One disadvantage of IRR is that for a project, there may be more than one IRR. How would you choose and which one?

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Chapter 11 on Capital Budgeting

For each of the following assignment questions, in approximately 300 words, submit your analytical response.

Reference chapter 11 in attachment.

Q.1
From a corporate capital budgeting perspective, there are four major evaluation criteria , as follows:
1) Net Present Value
2) Internal Rate of Return
3) Modified Internal Rate of Return
4) Payback period
Discuss the advantages and limitations of each of the above. If there is one you prefer, state the reasons for your choice.

Q.2
One disadvantage of IRR is that for a project, there may be more than one IRR. How would you choose and which one?

Q.3
What are the limitations of using NPV for non-corporate investment projects. Why does the World Bank prefer IRR over NPV for its funded projects?

Q.4
For some multiple capital budgeting projects there is a cross-over rate.
What are its limitations and can they be overcome by using more than one investment criteria.

In order to calculate debt, first, calculate the total interest expense for the year. If your business produces financial statements, you can usually find this figure on your income statement.

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Peer post reply

Weighted average cost of capital (WACC) represents a firm’s average after-tax cost of capital from all sources, including common stock, preferred stock, bonds, and other forms of debt. WACC is the average rate that a company expects to pay to finance its assets.WACC is a common way to determine the required rate of return because it expresses, in a single number, the return that both bondholders and shareholders demand to provide the company with capital. A firm’s WACC is likely to be higher if its stock is relatively volatile or if its debt is seen as risky because investors will require greater returns. The company can control weather it decides to take on more projects or choose not to.

When valuing common stock equity, there are two common models or techniques that can be used. The first is the constant-growth valuation model, also known as the Gordon Model. This model assumes that dividends will grow at a constant rate in perpetuity. In order to calculate the value using this model, we need to know the current dividend per share, the expected dividend growth rate, and the required rate of return.  The second common model for valuing common stock equity is the capital asset pricing model (CAPM). This model takes into account the risk of the investment and requires estimates of both the expected return and the risk-free rate.

In order to calculate debt, first, calculate the total interest expense for the year. If your business produces financial statements, you can usually find this figure on your income statement. (If you compile these quarterly, add up total interest payments for all four quarters. Total up all of your debts. You can usually find these under the liabilities section of your company’s balance sheet. Then, divide the first figure (total interest) by the second (total debt) to get your cost of debt.

Hargrave, M. (2022, November 3). Weighted average cost of capital (WACC) explained with formula and example. Investopedia. Retrieved December 1, 2022, from https://www.investopedia.com/terms/w/wacc.asp

Kk. (2022, August 2). Cost of common stock: Formula. Accountinguide. Retrieved December 1, 2022, from https://accountinguide.com/cost-of-common-stock/

Hayes, A. (2022, September 26). Cost of debt: What it means, with formulas to calculate it. Investopedia. Retrieved December 1, 2022, from https://www.investopedia.com/terms/c/costofdebt.asp

 

Tell us about a time you were challenged by a perspective that differed from your own. How did you respond?

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Rewrite essay

Tell us about a time you were challenged by a perspective that differed from your own. How did you respond? (200-250 words)*

Provide an overview of your firm, including its age, industry, key competitors, and any relevant trends impacting the industry. Find and document an online source that provides a current P/E multiple for your firm’s industry.

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Cash conversion cycle benchmarking

https://www.macrotrends.net/stocks/charts/PEP/pepsico/pe-ratio

Deliverables: In a presentation-style format, provide a cash conversion cycle benchmarking and valuation analysis for a publicly-traded firm. You can work in a team (3 students maximum per team) and you can pick the firm. Grades will depend on presentation and discussion.

Specifics:

  • Provide an overview of your firm, including its age, industry, key competitors, and any relevant trends impacting the industry. Find and document an online source that provides a current P/E multiple for your firm’s industry.

 

Develop an understanding of the Discounted Cash Flow (DCF) techniques in making capital investment and other financial decisions.

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Module 12: Capital Budgeting

Skill Building

  • HAP395: Healthcare Finance
  • Time Value of Money Concepts – Part 2
  • Discounted Cash Flow Analysis in 8 Steps

Objectives:

  1. Develop an understanding of the Discounted Cash Flow (DCF) techniques in making capital investment and other financial decisions.
  1. Practicing the DCF technique using a prepared Excel spreadsheet.
  2. Practicing changing assumptions in an analysis in preparing “what it” analyses.
  3. Gain experience using the Quantitative Literacy Checklist in understanding these concepts.
  1. The Eight Step Process for Preparing a DCF Analysis
  2. Preparing a discounted cash flow analysis takes eight steps. As shown here, both the Net Present Value and Internal Rate of Return are computed, although some organizations compute only one or the other.

Step 1: Choose the time period involved in the investment alternative.

  1. When choosing the time period you will typically consider two variables. The first variable is the length of time of the investment. For a piece of equipment, it is usually the life of the equipment. After a period of years, the equipment may be sold at which time the project is complete and the final year will include the cash flow from the sale.
  1. The second variable is to determine the number of periods in which to divide the time. It is most common to use the number of years, especially in analyzing projects that will last many years. One could use months or quarters in analyzing investments, and this might be appropriate with a financial security such as a bond. Using months or quarters for equipment or project analysis, however, becomes unwieldy. It is common to use timing of annual cash flows with the additional assumption that the flow will occur at the end of the year. Flows in reality will occur throughout the year; however the year end convention is common and yields reasonably good results.

Step 2: Determine the cash flows involved.

  1. Cash flows come in two general types: Inflows, or cash being received; and outflows, or cash being expended or invested. Note that a project that is expected to save expenses treats those savings as a cash inflow.
  1. Flows over time might be either as a single sum or as a series. Thus, there are four typical patterns of cash flow for any investment.
  1. a) Out In
  2. b) Out Out Out Out . . . In
  3. c) Out In In In . . .
  4. d) Out Out Out Out . . . In In In . . .
  5. The first out flow, if done today, in the present, is made in period “0″. Subsequent flows will be noted in the subsequent periods.

Step 3: Determine the Net Cash Flow

  1. This is determined by summing all of the net inflows and subtracting the net outflows from these. To keep these amounts organized it is common to treat all inflows as a positive number, and all outflows as a negative number.
  1. The end result is a series of net cash flow by period, starting with period 0 and ending with the final period of the project; not one number, but a series of numbers; one for each period.

Step 4: Select a discount rate in which to discount the future cash flows to the present.

  1. The discount rate is the “hurdle rate”, that is, the rate at which the organization will place on this project so that if it “clears” this rate (as a runner in track might clear a hurdle) the project will be deemed financially attractive. If the project does not clear the parameters established by the hurdle rate, the net present value of the project will be a negative number. This will mean that the present value of all future inflows does not equal at least the present value of the initial outflow, deeming the project financially unattractive.
  1. While a “hurdle rate” might vary by project depending on the amount of risk involved, a common practice is to use an organization’s “cost of capital” as the discount rate. This cost of capital rate is the hypothetical rate that must be earned on the investment such that the overall value of the firm will not be changed. In for-profit companies it is a blend of the amount of money it costs, net of taxes, to borrow cash (interest expense), blended with the amount of money it costs associated with common stock.

(In this case it is a function of the dividends and stock appreciation expected by the owners). In not-for-profits, because there is no stock, the cost of capital is at least the cost of the organization’s debt, or the interest rate on the debt it has.

Step 4c is not to worry about the rate selected in step 4a.

  1. There are enough estimates involved in discounted cash flow analysis that the selection of the rate is unlikely to make a significant impact on the deciding the attractiveness of the investment as long as a reasonable rate is used. Reasonable means no lower than the cost of the next dollar of debt which would be paid.

Step 5: using the discount rate, compute the net present value of the investment. This can be done in one of several ways.

  1. Using a financial calculator, the net cash flows can be entered by year. This method is long and tedious and is not particularly desirable. Still it can be done, and somewhere in the instruction manual of the calculator is a long explanation on how to accomplish this. Try it if you want to, however, this is not recommended.
  1. Using a financial present value table, the net present value of $1 can be determined for each year. (You can also determine this using the appropriate mathematical formula found in the text). Simply multiply this factor by the net cash flow to get the discounted cash flow or that year. Sum all of the years, including year 0 and the total will be the Net Present Value.
  1. Using a financial spreadsheet, both methods one and two can easily be done. This is likely the most efficient way to do this task.
  1. a) A spreadsheet such as Excel has NPV formulas which will automatically compute the present value of a stream of cash flows at a given discount rate.
  1. b) The spreadsheet can also compute the appropriate discount factors by year, multiply them by each year’s net cash flow, and sum them to arrive at the net present value. If the spreadsheet is done appropriately, both methods can be done with the longer manual calculations being done as a check.

Step 6: Determine if the sum of each year’s discounted present value.

  1. If the Net Present Value is greater or less than 0, then the project adds value to the organization. If less than 0, the project reduces the value of the organization.

Step 7: Using the cash flows identified, determine what discount rate would be appropriate in order to make the net present value equal to zero.

  1. This value by definition is the Internal Rate of Return (IRR) of the project or investment. “Internal” because it typically will be a project that an organization might undertake by purchasing equipment and doing something inside of the organization to produce a product for sale, or to save costs; “Rate of Return” because it is an expression of an interest rate which can equate the flows of the investment with that of an external investment such a bond or bank account.
  1. a) If the internal rate of return of the project is greater than the hurdle rate, then you have a “winner”. If less, the project is a “loser”. The spread between the IRR and the hurdle rate is the “Computational Risk” associated with the selection of the discount rate. The larger the spread, the less the discount rate selected has to do with the generation of a positive NPV.

A great advantage of using spreadsheets, in addition to their accuracy, speed, and ease of use once you know the basics, is the ability to perform “what if” analysis. If one changes assumptions, what will be the new results? This type of exercise is termed “sensitivity analysis” and is valuable in gaining insight as to the level of impact of changes made.

Step 8: Reflect on your answers, assumptions, and process.

  1. Using concepts introduced in the Quantitative Literacy Rubric/Checklist used in this course, think about the various results you have calculated. Do they appear reasonable? What assumptions went into this analysis that may give you some concern? What conclusions can you make from this analysis? How will you communicate these results to others?
  1. Other analytical values determined by DCF analysis
  2. The DCF analysis yields two are values that are sometimes uses in analyzing investments.
  1. The first is the “Profitability Index”. This is an index used to compare one investment alternative with others. Values above one are desirable, with the higher the value, the financially better the alternative.
  1. a) The computation for the Profitability Index is to take the NPV for all future cash flows and divide that by the value of the initial investment.
  1. b) The second is the “Payback Period”. This value measures the time it takes to recoup the investment inflows to a level to equal the initial investment. This time is normally measured in years, with shorter payback period being better than longer ones. For this analysis, traditional payback calculations use undiscounted cash flows, which is a drawback as it does not take into account the time value of money. An alternative is to use discounted cash flows to determine a discounted payback period.

III. Discounted cash flow analysis is often used in two types of analysis.

  1. The analysis of a capital investment. An investment might be a financial investment, such as a bond, or it might be a piece of equipment, project, or new service line which includes a combination of equipment and operating expenses.
  1. The analysis of financing options, particularly when confronted with the decision of purchasing a piece of equipment or leasing it.
  1. In both cases, the fundamental seven-step process can be used.
  2. An example of using the DCF Eight Step Process
  3. Using the accompanying spreadsheet as a template, compute the net present value (NPV), the internal rate of return (IRR), the Profitability Index, and the Payback Period using discounted cash flows, for a project with these assumptions:
  1. The initial price of a piece of equipment we’ll call “Project A” will be for $100,000.
  1. Gross revenues associated with the program using this equipment will be $60,000 each year for 5 years.
  1. Net revenues associated with a program using this equipment will be $40,000 each year for 5 years, thus the deductions from revenue year will be $20,000.
  1. Expenses will be $10,000 each year for 5 years.
  2. The equipment will be sold for $10,000 after the end of the five years.
  3. The discount rate to be used will be 10%.
  4. Change these variables and note the new results:
  5. Changing the purchase price from $100,000 to $110,000 yields these values.
  1. Keeping the $100,000 purchase price, and decreasing the discount rate from 10% to 8% yields these values.

The answers are noted below as well as on separate tabs of the accompanying Excel Spreadsheet.

Answers to Project A Base Problem:

Net Present Value (NPV) = $19,933

Internal Rate of Return (IRR) = 17.23%

Profitability Index = 1.20

Payback Period using discounted cash flows = 4.20 years

Answers to change 1 — Increasing purchase price by $10,000:

Net Present Value (NPV) = $9,933

Internal Rate of Return (IRR) = 13.34%

Profitability Index = 1.09

Payback Period using discounted cash flows = 4.60 years

Observation: Increasing the purchase price lowers the NPV; lowers the IRR; decreases the Profitability Index; and lengthens the Payback Period.

Answers to change 2 — keeping original purchase price and decreasing discount rate from 10% to 8%:

Net Present Value (NPV) = $26,587

Internal Rate of Return (IRR) = 17.23%

Profitability Index = 1.27

Payback Period using discounted cash flows = 4.02 years

Assumptions:

For your analysis assume that the Center uses a 7% discount rate for projects of this risk level, and that they will initially use a five-year time horizon. This is a tax-exempt not-for-profit organization so there will not be any income tax effects to consider in the calculations.

The business after buying the equipment is expected to generate gross revenues of $140,000 each year in the first two years and is expected to be $190,000 each year in the next two years, followed by $240,000 in the fifth year. The services will be paid for by third parties and there is a demand for this new service. Since the third-party payers will pay less than the full charge, assume that deductions from revenue to average 20% of gross revenues in each of the five years. The equipment cost is $425,000 and will cost $45,000 to install. After five years the equipment will be retired, and it is expected that it could be sold for $60,000.

The costs for the service include part-time staffing costs of $13,000 and supply costs of $10,000 in each of the first two years. For the following two years, salaries are expected to be $15,000 and supplies are estimated to be $13,000; and in the last year five, salaries are expected to be $22,000 and supplies are expected to be $18,000. The equipment is under warranty in the first year so there is no extra fee paid. A maintenance contract costing $6,500 per year will be paid in years 2 through 5.

  1. Use the template spreadsheet and 8-step process to enter the above assumptions in the appropriate cells.
  1. Compute the Net Present Value of Future Cash Flows, and the Internal Rate of Return. Highlight in yellow those two answers on your spreadsheet. Note those answers in the table below so that they are in both places.
  1. Note at the bottom of the schedule whether this is an attractive project from a purely financial point of view based upon the numbers that you calculated on the spreadsheet. Why did you make that decision? Note your answers in the table below so that they are in both places.

Optional Additional Point Opportunity:

Copy your spreadsheet tab with your answer and label the new tab “Six Years”. Add a Year 6 column and assume that year six cash inflows and outflows will be the same as year 5, with the exception that the equipment will be sold for $40,000 at the end of year 6 instead of $60,000 at the end of year 5. Adjust any formulas in the cells as appropriate caused by the addition of a year 6. Compute the new Net Present value and Internal Rate of Return for this six-year project. Highlight those answers in yellow on your spreadsheet. Note those answers in the table below so that they are in both places

What were the bond prices on trade date and settlement date? Which one would you use to calculate the REPO and why? What is the accrued interest in dollar amount on settlement date?

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Financial Services and Information Technology Lab

What were the bond prices on trade date and settlement date?

Which one would you use to calculate the REPO and why?

What is the accrued interest in dollar amount on settlement date?

What is the duration of the REPO?

What is the market value of your collateral on settlement date?

How much money would the REPO buyer expect to receive on settlement date?

How much interest would the REPO seller expect to receive on termination the date?