The CEO of Midwest Manufacturing Company has asked for your analysis

QUESTION

Topic 5 (20 points)The CEO of Midwest Manufacturing Company has asked for youranalysis of and recommendation related to the proposedacquisition of an additional stamping machine for its principalmanufacturing plant. Demand for the companys products hasrisen to a level that exceeds its present productive capacity. Anadditional stamping machine will make it possible for the companyto increase its production and sales by 15 percent, resulting inprojected incremental relevant cash flows (after income taxes andthe tax benefits of the œdepreciation tax shield) in each of the nextfive years, as indicated at right:YearProjected incremental cash flows1$40,000230,000340,000450,000520,000Total$180,000The equipment will cost $150,000 to purchase and install. Management estimates that its economic life will befive years, after which it will have no residual value. The companys required rate of return on new investments(cost of capital) is 14.0 percent (or, 0.14).a. Complete the NPV analysis of the stamping machine proposal, below. Regard all incremental relevantcash flows as œrisky and assume they occur at the end of years indicated, as listed above.b. State your recommendation to the CEO, including the basis for it. Limit the length of your response to50 words.a. Complete the NPV analysis of the stamping machine proposal:Year (n)Relevant cash flowDiscount factorDiscounted cash flowsœTime zero12345b. State your recommendation to the CEO, including the basis for it. Limit the length of your response to50 words.Replace this text with your response1Topic 6 (20 points)The VP“Operations of Midwest Manufacturing Company has asked for your review of her capital budgetinganalysis, comparing two alternative machines the company is considering acquiring for one of its plants. Usingthe information provided in the table below, complete her analysis by computing the companys cost of equitycapital, rE, weighted average cost of capital, rWACC, and the equivalent annual cost (EAC) for each machineunder consideration. State your recommendation to the VP with regard to selecting one of these machines.Functionally similar alternativesMachine XAcquisition cost (initial investment)Economic life (years)Annual costs of maintenance, insurance, and property taxesProjected end-of-life salvage valueNet present valueEquivalent annual cost (EAC)$$$$262,000 $106000 $45,000$281,400 $?Machine Y187,500711,00015,000230,300?Company’s cost of equity capital, r E?Company’s weighted average cost of capital, r WACC?Beta of the company’s stock (common equity capital), ?1.5Current market rate of interest on company’s debt, r D0.105 (10.5 percent)Company’s combined effective tax rate, t0.400 (40.0 percent)Management’s estimate of expected return .13tœmarket portfolio,rM0. = on (or, 0.1406666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666130(13.0 percent)Management’s estimate of "risk-free" rate, r F0.045(4.5 percent)Proportion of company’s targeted total capital that is debt, D0.500 (50.0 percent)Proportion of company’s targeted total capital that is debt, E0.500 (50.0 percent)Continued2a. Compute the companys cost of equity capital, rE. Show computations in good form and label properlyall amounts presented.b. Compute the companys weighted average cost of capital, rWACC. Show computations in good formand label properly all amounts presented.c. Compute the equivalent annual cost (EAC) for each machine under consideration, ignoring œcostrecovery income tax deductions, the tax deductibility of ownership costs, and capital gains taxes uponthe machines disposal). Show computations in good form and label properly all amounts presented.Machine XMachine Yd. State your recommendation to the VP“Operations, including the basis for it. Limit the length of yourresponse to 50 words.Replace this text with your response3Topic 7 (20 points)The VP“Sales and Marketing of Midwest Manufacturing Company has asked for your analysis of her proposalto modify the companys current terms of sale, œ2/10, net/30. She has proposed more generous terms “ œ3/10,net/30 “ in order to promote increased sales and market share. She has acknowledged that more generousterms may also lead to increased bad debts. The business operating budget for the forthcoming fiscal yearincludes the following relevant information:Budgeted unit sales, Q18,000,000 unitsBudgeted unit selling, SP$15 per unitBudgeted bad debts, BD1, as percent of sales0.01 (or, 1.0 percent)Budgeted unit variable cost, VC (excluding BD1)$8 per unitCombined effective income tax rate, t0.40(or, 40.0 percent)Current interest rate on business debt, rD0.12 (or, 12.0 percent)In addition, based on the existing terms of sales:Discount percentage, CD1Discount period, DP10.02(or, 2.0 percent)10 daysUnder the proposed terms of sales:Discount percentage, CD2Discount period, DP2Estimated bad debts, BD2, as percent of sales0.03(or, 3.0 percent)10 days0.015 (or, 1.5 percent)Continued4a. Compute the NPV of the companys existing terms of sales based on its operating budget and otherinformation provided, above. Show computations in good form and label properly all amountspresented.b. Compute the required sales volume, Q2, under the proposed terms of sale necessary to achieve theNPV of the existing credit policy “ i.e., the œbreak even unit sales volume. Show computations in goodform and label properly all amounts presented.5Topic 8 (20 points)Demonstrate your ability to apply financial ratio analysis to common-sized financial statements. Analyze thecommon-sized balance sheet and income statement of FirstRate Company, included in the Topic 8background paper, Financial Ratio Analysis. Identify the most significant:Trends in the 20X0 “ 20X4 common-sized financial information, andDifferences between the common-sized financial information of the company and its industrys normsYour analysis should indicate the basis on which you indentified trends or differences as significant, includingthe potential implications for FirstRates business or financial condition.Limit your response to a maximum of 200 words. Spell-check and-grammar-and-style-check your completedresponse using MS Words tool for this purpose, being sure to correct any matters identified by thesechecking tools.Students responsePlease provide your word count hereYour response here (please do not modify the formatting, fonts, colors, and so forth in this document template)6Topic 9 (20 points)The CEO of Southwest Manufacturing Company has asked you to (a) complete the projected incomestatement and projected balance sheet for the coming fiscal year (FY) of the company using the informationset forth below. She has also asked you to (b) determine the amount of any additional external financing thecompany will require during the coming fiscal year and (c) assess the reasonableness of the projections inrelation to the companys estimated cost of equity capital, rE, and its sustainable sales growth rate.1. Use the average gross margin during the preceding two-year period to project the amount of gross profit.2. Use the average ratio of "all other S&A-to-sales revenue" during the preceding two-year period to projectthe amount of all other S&A expense.3. Use the average amount of R&D expense during the two preceding FYs to project the amount of thisexpense.4. The estimated combined effective income tax rate during the projected FY is 0.40 (40.0 percent).5. Project the balances of cash and cash equivalents, total current assets, and total liabilities asœresidual amounts using the general methodology examined in Topic 9 of the course. Project total assetsusing the projected balance of total liabilities and shareholders’ equity. Project the balance of totalliabilities and stockholders’ equity based on projected total stockholders’ equity and a targeted totaldebt ratio (ratio of total liabilities-to-total stockholders’ equity) of 0.70 (70 percent).6. Project the balance of accounts receivable (AR) using a projected average AR collection period ratio of45 days.7. Project the balance of inventory using a projected average days to sell inventory ratio of 90 days.8. Project the balance of other assets using the average balance of this item during the two preceding FYs.9. Project the balance of accounts payable (AP) using projected "cash costs" and a projected average APpayment period of 45 days. "Cash costs" include projected COGS and operating expenses, excludingdepreciation.10. Project the balance of dividends payable as the dividends that the company expects to declare during thefinal week of the projected FY (based on net income for that year) and pay early in the next FY. Thecompany’s payout ratio (dividend policy) is 0.40 (40 percent).11. The company plans no issuances (or repurchases) of common stock during the projected FY.12. Project retained earnings (RE) using projected net income and projected dividends to be declared nearthe end of the projected FY.13. The companys estimated cost of equity capital, rE, is 0.185 (18.5 percent), computed using CAPM as:rF + β x (rM “ rF) = 0.04 + 1.7 x (0.125 “ 0.04)Continued7Continueda. Projected income statementActual (historical)20X0(A)Sales revenueProjectedComputational Notes20X2(Formulas or equations used)20X1$52,900,00055,550,000$ 60,000,000Given7,200,0007,500,0008,000,000Given500,000Given240,000GivenCost of goods sold (COGS):(B)Deprec. of manufacturing PP&E(C)All other COGS29,300,00029,720,000(D)Total COGS36,500,00037,220,000(E)Gross profit$ 16,400,00018,330,000(F)Gross margin31.0%33.0%274,000391,0006,348,0006,666,0001,500,0001,700,000178,000173,0008,300,0008,930,000Operating expenses:Selling and admin. (S&A) exp.:(G)Deprec. of non-mfg PP&E(H)All other S&A expense(I)Research and devel. (R&D) exp.(J)Other operating expenses(K)Total operating expenses$$(L)Operating income8,100,0009,400,000(M)Interest on debt(620,000)(760,000)(846,666)Given(N)Income from investments20,00020,00020,000Given(O)Gain (loss) on PP&E disposals-(160,000)-Given(P)Income before taxes7,500,0008,500,000(Q)Provision for income taxes3,000,0003,400,000(R)Net income$ 4,500,0005,100,000Continued8Continueda. (continued) Projected balance sheetAssets:Actual (historical)Current assets:(A)Cash and cash equivalents(B)Investment securities(C)20X0400,000Accounts receivable6,610,0006,940,000(D)Inventory9,130,0009,310,000(E)Total current assets16,580,00017,085,0001.0(Formulas or equations used)435,000400,000Computational Notes20X220X1440,0001.0Current ratio (working capital) ratio$Projected400,000Given(F)PP&E, at cost42,920,00050,485,00058,900,000Given(G)Accumulated depreciation of PP&E16,470,00022,710,00028,900,000Given(H)PP&E, net26,450,00027,775,000(I)Other assets900,0001,100,000(J)Total assets$ 43,930,00045,960,000$ 4,670,0004,780,000750,000850,000880,000GivenLiabilities:Current liabilities:(K)Accounts payable(L)Accrued income taxes payable(M)Dividends payable1,800,0002,040,000(N)Bank notes payable “ current9,200,0009,230,0009,860,000Given(O)Accrued interest payable160,000190,000210,000Given(P)Total current liabilities16,580,00017,090,000(Q)Bank notes payable “ noncurrent4,590,0003,050,000(R)Total liabilities21,170,00020,140,000Total debt ratio0.930.7814,220,00014,220,000Stockholders’ equity:(S)Common stock, at par(T)Additional paid-in capital3,180,0003,180,000(U)Retained earnings5,360,0008,420,000(V)Total stockholders’ equity22,760,00025,820,000$ 43,930,00045,960,000(W) Total liab. and stockhldrs’ equityContinued9Continuedb. Determine the amount of any additional external financing the company will require during the coming FY.Show computations in good form and label properly all amounts presented.c. Assess the reasonableness of the projected financial statements in relation to the companys estimated costof equity capital, rE, and its sustainable sales growth rate.Actual (historical)20X0Return on average common equity (ROCE) ratioProjected20X120X221.0%21.0%%$ 4,500,0005,100,000$Total stockholders’ equity, beginning of FY20,060,00022,760,000$Total stockholders’ equity, end of FY22,760,00025,820,000$$ 21,410,00024,290,000$Net income (available to common stockholders)Average total stockholders’ equitySustainable rate of sales growth%Net income (available to common stockholders)$Beginning-of-year shareholders equity$Payout ratio%Assessment of projected ROCE and sustainable growth rate in sales ratios (limit your response to amaximum of 100 words):Replace this text with your analysis.10

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