Determine the capital structure of the firm: Determine the market value of the firm’s debt and equity. Explain the approach and procedure you used and use these values to determine the weights for the WACC.
This is a copy of the full assignment. At this time I am only requesting parts I,II,III
Will request the rest in the future
The firm it Marriott
Must use textbook as a reference
Text book: Vitalsource.com (corporate finance)
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Book: Corporate Finance found under the “my bookshelf” tab
Part I: Firm History and Overview (due Week 4)
Develop an overview/history of the firm that you have chosen, as well as the industry your firm operates in. You should include information that describes the market structure and competition in the industry, along with the position of your firm within this industry – i.e., is the firm one of the leaders or is it a niche player? Is the firm one of the medium-size firms in the industry? Part I will be worth 30 points.
Part II: End-Point Financial Analysis (due Week 4)
Using historical financial statements (income statements and balance sheets) for the firm, analyze the financial performance and changes to the firm over a ten-year time period using an end-point analysis framework similar to that used in the analysis of Coca-Cola (Week 1 dropbox assignment). You should calculate the same ratios and financial measures as were provided for the Coca-Cola case.
Next, you will identify the major changes in the firm’s financial performance over this time period. Include an analysis of: 1) overall changes/growth in the firm’s revenues, assets, and liabilities; 2) common-size statements; 3) ratio analysis; and 4) analysis using the DuPont model.
You will be required to provide the conclusions regarding which way the major ratio categories are trending. An acceptable conclusion might be, for example: “profitability has increased over the last five years as evidenced by increasing net margin and gross margin ratios. This is the result of a decrease in cost of goods sold, higher margins because of increased market share, etc.” You should also research the notes to your company’s 10K to determine the probable causes of these changes (“Leverage increased because the company issued $50M in bonds to pay for a plant expansion.”). Part II will be worth 70 points.
Part III: Working Capital Analysis (due Week 4)
Using the same financial statements from your Financial Analysis (Part II), provide an analysis of the firm’s working capital policy and changes to this policy over a ten-year period. Your working capital analysis should include the following: 1) overall level and change in WC over the time period and the factors that caused these changes; 2) calculation of the Cash Conversion Cycle for the beginning and ending period and a discussion of causal factors and implication of these changes; 3) overall assessment of the firm’s working capital policy (i.e., is it conservative, moderate, or aggressive?). Compare your results to the firm’s industry averages. Part III will be worth 40 points.
Part IV: Determination of WACC (due Week 7)
Using the principles and tools outlined in the textbook, form an estimate of the Weighted Average Cost of Capital (WACC) for the firm. In order to complete this task, you will need to do the following:
- Determine the cost of debt: Using information from the firm’s website, annual report, the website Investing in Bonds (link available in the Content area), and the library database sources, determine the ‘average’ rating of your firm’s bonds and the current YTM on a composite of these bonds. Based on this information, estimate the current cost of debt for the firm. Explain the approach and procedure you used to make your determination and what this number means.
- Determine the cost of equity: Determine the required rate of return for your firm using the CAPM. Explain the approach and procedure you used (and justification for the sources of inputs used for your model) to make your determination and the meaning of this required rate of return.
- Determine the capital structure of the firm: Determine the market value of the firm’s debt and equity. Explain the approach and procedure you used and use these values to determine the weights for the WACC.
Finally, provide an overall explanation for your results and how the firm will use this WACC. There are resources available in the Content area that will help guide your determination of WACC. Part IV will be worth 80 points.
Part V: Stock Valuation (due Week 7)
In chapter 9, we learned how the dividend-discount model can be used to determine the value of a firm’s equity, or the current price of a share of stock. Use this model to estimate the value of a share of your firm’s stock and compare this estimate to the current market value. To do this, you will need to do the following:
- Estimate the firm’s stock price using the dividend-discount model: Use an investment source (some have been provided in the Content area) and find: 1) the current dividend; 2) analyst’s estimate growth rate for the next five to ten years; 3) an alternative growth estimate using the firm’s historical growth rate or the formula “g=ROE x b”.
- Use your estimate of the cost of equity in the WACC for the rE part of your formula: Combine the above information into the dividend-discount model (DDM).
- Compare your result to the current market price of your firm’s stock. Provide analysis and an explanation of how they compare and explain any differences you observe.
Part V will be worth 50 points.
Part VI: Capital Budgeting Analysis, Capital Structure Analysis and Funding Growth Strategies, and Bibliography and Data (due Week 8)
Capital Budgeting Analysis (30 points): You have been asked to evaluate a potential acquisition of a smaller privately owned competitor. The acquisition candidate produces an EBITDA of 10% of your current EBITDA and is offered to your firm at a price of multiple of 8 times EBITDA. Assume the following:
- Current debt costs you 8% and you can raise additional debt at this rate today. The loan is to be amortized over 7 years.
- Current return on equity is 15%
- Current WACC is 10%
- Tax rate is 30% (constant)
- 80% of the purchase price is considered depreciable assets – to be depreciated over ten years on a straight-line basis with no residual values.
- Residual value for this operation is to be 2x current EBITDA in year ten.
Create an after-tax cash flow analysis to answer the following:
- Economic analysis: is this a fundamentally sound investment?
- Using the tax cash flows and no debt (pure equity), is the prospect a positive NPV using ROE as the hurdle rate?
- Using the after tax cash flows and the firm’s WACC, is this project desirable? Explain how you came to this conclusion.
Capital Structure Analysis and Funding Growth Strategies (80 points): Imagine your firm has some attractive investment opportunities that it is considering. The capital budgeting process has been completed and found that these projects have a positive NPV and are desirable. The firm must raise financing for the projects in the amount equal to 5% of the current level of its total assets. As you know, these funds can come from a number of sources: operations, short-term debt, long-term debt (new bond issues), or equity (new stock issues).
Your task is to decide where funds for these projects should come from based on your knowledge of the firm and your knowledge of the current state of the economy (i.e., level of interest rates, state of the stock market, future prospects for the economy/firm). This section is worth 80 points. Your analysis should answer the following questions:
- How much must your firm raise for the investments to be undertaken?
- How will you determine where the funds should come from? Provide analysis for the following areas:
- Current capital structure of the firm, specifically, you must cite how some of the ratios you calculated in Part II will influence your decision.
- Federal Reserve policy and interest rates, meaning what are current borrowing interest rates and what direction do you believe these will trend in the near future?
- Stock price and state of the stock market, meaning are current stock prices high? Low? How could a firm’s financing choice(s) be impacted?
- Working capital policy
- Profit/loss situation and operating cash flows
Sources and Formatting: (20 points) – Due Week 8, along with your Completed Project
- Remember to include a properly formatted APA bibliography page. All direct and paraphrased quotations within your paper are to be properly notated. All sources of information are to be properly identified. (5 points)
- As an appendix to your paper, copy and paste the financial statements from which you derived all your ratios, percentages, and any other quantitative data. Do not just provide a link. (5 points)
- The paper will be prepared in APA format and is to be double-spaced. Composition is an important part of your paper. Multiple grammar, spelling and/or punctuation errors will decrease your ability to communicate clearly your ideas to your audience. (10 points)
- Your final project should be formatted as a MS Word (.doc/.docx) file that has been edited carefully for grammar and style, and include a cover page and a complete bibliography and index of data.
Coca-Cola case assignment as referred to in Section II
Coca-Cola Analysis
Below you will find financial data for Coca-Cola for the years 2006 and 2016. This data includes the following:
- Raw numbers for the balance sheet and income statements
- Common-size balance sheets (all entries expressed as a percent of Total Assets)
- Common-size income statement (all entries expressed as a percent of Total Sales)
- Ratios—including liquidity, profitability, leverage, asset management, and market ratios
- DuPont equations
- Working Capital
- Cash Conversion Cycle
Your assignment is to analyze this data. Your analysis should include the following:
- An ‘eye-ball’ assessment of the changes in Coke’s financial statements between 2006 and 2016—e.g., overall growth in assets, revenues, equity, debt, etc.
- Analysis of the Common-size statements—i.e., what changed and why. That is, describe the changes in these statements and analyze the cause of the changes. Include: a) mix of assets, b) split between current assets and fixed assets, c) mix of debt, d) split between current liabilities and LT liabilities, capital structure (i.e., debt and equity), e) profitability at all levels, f) changes in expenses, etc. This section must include evidence of research indicating what events had substantive effects on Coke’s financial profile during the 10 year In other words, profitability may have increased due to introduction of new product lines, leverage may have increased due to the issuance of bonds, and assets may have increased due to acquisitions. These are offered as examples, and your research should indicate what occurred and how it affected Coke from a financial perspective.
- Analysis of the ratios by category—include in this an explanation of the cause of the change—e.g., liquidity increased due to the increase in CAs and decrease in CLs. In addition to discussing each of the individual ratios, this section must include an overall conclusion regarding the direction of the four major categories of ratios. In other words, you must draw conclusions regarding the overall trends in 1)liquidity, 2) efficiency, profitability, and 4) leverage over the 10 year period. You must also provide industry averages where available so that you can compare Coke’s ratios to those of its industry
- Analysis of the DuPont equation and discussion of the underlying reasons for the changes in ROI (ROA) and ROE.
- Analysis of working capital and discussion of the implication of a positive or negative WC level. Is Coke’s WC policy conservative, moderate, aggressive? Why?
- Analysis of the Cash Conversion Cycle and discussion of its implications.
- Summary and conclusion concerning the major changes in Coke’s financial situation.
Coca-Cola Common-Size Statements of Income and Retained Earnings for December 2006 and 2016
All Amounts in Millions
2006 | % | 2016 | ||
Revenue | 24,088 | 100% | $ 41,863 | 100% |
Cost and Expenses | ||||
Cost of Sales | $8,164 | 34% | $16,465 | 39% |
Gross Profit | $15,924 | 66% | $ 25,398 | 61% |
S, G, and A |
$9,616 | 40% | $16,772 | 40% |
Interest Charges | $220 | 1% | $ 733 | 2% |
Other Income/Expenses (net) | ($490) | -2% | ($243) | -.5% |
Total Cost and Expenses | $17,510 | 73% | $ 33,727 | 81% |
Income before Income Taxes | $6,578 | 27% | $ 8,136 | 19.4% |
Provision of Income Taxes |
$1,498 | 6% | $ 1,586 | 4% |
Other Income | ($23) | -0.4% | ||
Net Income | 5,080 | 21% | $ 6,527 | 15.6% |
Dividends (% of NI) | 57% | 83.6% | ||
Adjustments to Retained Earnings | $0 | $0 | ||
Retained Earnings, Beginning Balance | $28,388 | $ | 65,018 | |
Retained Earnings, Ending Balance | $33,468 | $ | 65,502 |
Coca-Cola Common Size Balance Sheets for December 2006 and 2016
All amounts in Millions
2006 | % | 2016 | % | |
Assets | ||||
Current Assets | ||||
Cash and Equivalents | $2,440 | 8% | $22,201 | 25.4% |
Receivables | $2,704 | 9% | $3,856 | 4.4% |
Inventory | $1,641 | 5.5% | $2,675 | 3.1% |
Other | $1,656 | 5.5% | $5,278 | 6.1% |
Total Current Assets | $8,441 | 28% | $34,010 | 39.0% |
Productive Assets | ||||
Property, Plant, and Equipment (net) | $6,903 | $10,635 | ||
Net Productive Assets | $6,903 | 23% | $10,635 | 12.2% |
Other Assets | $14,619 | 49% | $42,625 | 48.8% |
Total non-current assets | $21,522 | 71.8% | $53,260 | 61.0% |
Total Assets | $29,963 | 100% | $87,270 | 100% |
Liabilities And Shareholders’ Equity | ||||
Liabilities | ||||
Current Liabilities | ||||
Accounts Payable | $5,622 | 19% | $2,682 | 3.1% |
Current Debt Due | $3,268 | 11% | $16,025 | 18.4% |
Other | $0 | 0% | $7,825 | 9.0% |
Total Current Liabilities | $8,890 | 30% | $26,532 | 30.5% |
Long-Term Liabilities | ||||
LT Debt | $1,314 | 4% | $29,684 | 34.0% |
Other LT Liabilities | $2,231 | 7% | $3,753 | 4.3% |
Deferred Income Taxes | $ 608 | 2% | $4,239 | 4.9% |
Total LT Liabilities | $4,153 | 13% | $37,676 | 43.2% |
Total Liabilities | $13,043 | 43% | $64,208 | 73.6 % |
Shareholders’ Equity | ||||
Common Stock | $878 | 3% | $1,760 | 2.0% |
Treasury Stock | ($22,118) | -74% | ($47,988) | -55.0% |
Retained Earnings | $33,468 | 112% | $65,502 | 75.1% |
Equity Adjustments | ($1,291) | -5% | ($11,205) | -12.8% |
Capital Surplus | $ 5,983 | 20% | $14,993 | 17.2% |
Total Shareholders’ Equity | $16,920 | 57% | $23,062 | 26.5% |
Total Equity + Liabilities $29,963 100% $87,270 100%
Ratio Analysis for Coco-Cola: 2006 and 2016
Ratio | Definition | 2006 | 2016 |
Liquidity | |||
1. Current ratio | current assets
current liabilities |
.9 | 1.28 |
2. Quick ratio (acid test) | current assets – inventories
current liabilities |
.76 | 1.18 |
Asset Management | |||
3. Average collection period | accounts receivables
credits sales/ 365 |
41 | 33.6 |
Total Rev. = Cr. Sales | |||
4. Inventory turnover |
cost of sales
average inventory |
5 | 5.64 |
INO = AVE INV | |||
5. Fixed asset turnover |
sales
fixed assets |
3.5 | 3.94 |
FIXED ASSETS = NET | |||
6. Total asset turnover | sales
total assets |
.8 | 0.48 |
Financial Leverage Management | |||
7. Debt Ratio | total debt
total assets |
.44 | 0.735 |
ST+LT= Total Debt | |||
8, Debt-to-equity | total debt
total equity |
.77 | 2.78 |
ST+LT | |||
Profitability | |||
9. Gross profit margin | sales – cost of sales
sales |
66.1 | 60.7 |
10. Net profit margin | earnings after taxes (EAT)
sales |
21.1 | 15.6 |
11. Return on investment | earnings after taxes (EAT)
total assets |
17.0 | 7.5 |
12. Return on Stockholders’ equity | earnings after taxes (EAT)
stockholders’ equity |
30.0 | 28.3 |
Dividend Payout 57% 83.6%
Du Pont Model
ROI or ROA:
ROI | = | Profit Margin | x | Asset Turnover | = | Net Profit | x | Net Sales | ||||||||
Net Sales | Total Assets | |||||||||||||||
ROI (2006) | = | $5,080 | x | $24,088 | = | 21.1% | x | ,80 | = | 17% | ||||||
$24,088 | $29,963 | |||||||||||||||
ROI (2016) | = | $6,527 | x | $41,863 | = | 15.6% | x | 0.48 | = | 7.5% | ||||||
$41,863 | $87,270 | |||||||||||||||
ROE:
|
||||||||||||||||
ROE | = | Profit Margin | x | Asset Turnover | x | Leverage | ||||||||||
Where Leverage = Total Assets/Equity
|
||||||||||||||||
ROE (2006) = 21.1% X .8 X 1.77 = 29.9%
ROE (2016) = 15.6% X 0.48 X 3.78 = 28.3%
Working Capital
Working Capital = Current Assets – Current Liabilities
2006 Working Capital: 8441 – 8890 = -449
2016 Working Capital: 34,010 – 26,532 = +7478
Cash Conversion Cycle
2006 2016
Accounts Receivable Days: 41 33.6
Inventory Days: 73 59.4
Accounts Payable Days: 251 59.5
CCC -137 33.6