Financial Management Case Study, Vulcan Materials Paper Instructions:
Topic: Cost of Capital, Capital Structure, and Capital Budgeting Analysis.
In this project, you are supposed to be a financial manager working for a big corporation and you have to apply the knowledge obtained from the financial management (FINC6352) course to determine the cost of debt, cost of preferred stock, cost of common equity, capital structure, and the weighted average cost of capital (WACC) for a publicly-traded company of your choice. You will use the WACC as the discount rate to conduct capital budgeting analysis for a project that the firm is considering and then decide whether it should be accepted or not. Your projects must be typed and well-organized. You will receive a separate set of instructions for this project.
- Apply knowledge from attached Financial Management Textbook-financial management (FINC6352) course to estimate the following:
- the cost of debt, the
- cost of preferred stock, the
- cost of common equity,
- capital structure, and the
- weighted average cost of capital (WACC) for a publicly-traded company – Vulcan Materials. You can use the WACC that you obtained from previous steps as the discount rate to perform capital budgeting analysis for a project that the firm is considering and decide whether the project should be accepted.
(2) Financial data are available in the online library. The detailed information is given in the Financial Data Source file attached.
(3) Your project should be well-organized and typed in a Word File. You need to submit both your Word file AND the Excel file to the instructor. The style and organization part of the project accounts for 10 points. Do not directly copy any contents from other resources. List the references that you have cited in your project. The Final Project Grade Sheet has the grade distribution for each part of the project.
Vulcan Materials Company – NAICS Code # 212313,
SIC # 14230000
Cost of Capital, Capital Structure,
and Capital Budgeting Analysis
1. Purpose of the project:
In this project, you are supposed to be a financial manager to apply the knowledge obtained from the Financial Management (FINC6352) course to estimate the cost of debt, cost of preferred stock, cost of common equity, capital structure, and the weighted average cost of capital (WACC) for a publicly traded corporation of your choice. You will use the estimated WACC as the discount rate to perform capital budgeting analysis for a hypothetical project (the data is given below) that is under consideration by the selected company and decide whether the project should be accepted.
2. Outline for the project:
(1) Executive Summary (10 points)
– Summarize the major findings, results, and the analysis of the report.
(2) Financial Ratio Analysis (40 points)
You are expected to retrieve the most recent 3-5 years historical financial statements the selected company and apply the knowledge obtained in Financial Management and Financial Statement Analysis (ACCT6351) to calculate and analyze the key financial ratios of the firm.
– Perform trend analysis of the key financial ratios (i.e., liquidity ratios, asset management ratios, debt management ratios, profitability ratios, market value ratios) of the company for 3-5 years.
– Perform industry (or benchmark companies) comparison analysis of the key financial ratios of the company during the most recent year.
– Based on the financial ratio analysis results, discuss/evaluate the financial performance of the company.
(3) Estimate Capital Structure (25 points)
– Estimate the firm’s weights of debt, preferred stock, and common stock using the firm’s balance sheet (book value).
– Estimate the firm’s weights of debt, preferred stock, and common stock using the market value of each capital component.
(4) Compute Weighted Average Cost of Capital (WACC) (35 points)
– Estimate the firm’s before-tax and after-tax component cost of debt; (Note: If the information about the current corporate tax rate is not available, you need to estimate the tax rate based on the historical tax payments).
– Estimate the firm’s component cost of preferred stock if the firm has issued preferred stocks.
– Use three approaches (CAPM, DCF, bond-yield-plus-risk-premium) to estimate the component cost of common equity for the firm.
– Calculate the firm’s weighted average cost of capital (WACC) using the market-based capital weights.
(5) Cash Flow Estimation (40 points)
– We assume that the company you selected is considering a new project. The project has 8 years’ life. This project requires initial investment of $550 million to purchase equipment, and $28 million for shipping & installation fee. The fixed assets fall in the 7-year MACRS class. The salvage value of the fixed assets is 10% of the purchase price (including the shipping & installation fee). The number of units of the new product expected to be sold in the first year is 2,560,000 and the expected annual growth rate is 10%. The sales price is $285 per unit and the variable cost is $230 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized inflation rate of 2.0%. The required net operating working capital (NOWC) is 10.8% of sales. Use the corporate tax rate obtained in Step (4) for the project. The project is assumed to have the same risk as the corporation, so you should use the WACC you obtained from prior steps as the discount rate. Note: you may revise the partial model in the file Ch11 P18 Build a Model.xls on the website of the textbook (also posted in this final project learning module in Blackboard) for capital budgeting analysis, but you are NOT required to strictly follow the partial model. Actually, you are encouraged to build a better model by yourself.
– Compute the depreciation basis and annual depreciation of the new project. You can refer to Table 11A-2 MACRS allowances on pp.496 in the textbook.
– Estimate annual cash flows for the 8 years.
– Draw a timeline of the cash flows.
(6) Capital Budgeting Analysis (40 points)
– Using the WACC obtained from in Step (4) as the discount rate for this project, apply capital budgeting analysis techniques (NPV, IRR, MIRR, PI, Payback, Discounted Payback) to analyze the new project.
– Perform a sensitivity analysis for the effects of key variables (e.g., sales growth rate, cost of capital, unit costs, sales price) on the estimated NPV or IRR in order to demonstrate the sensitivity of the model. The Scenario analysis of several variables simultaneously is encouraged (but not required). A document Sensitivity Analysis in Excel is provided in this learning module. It introduces the Data Table function that you can use to conduct sensitivity analysis in Excel.
– Discuss whether the project should be taken and summarize your report.
3 Sample Projects – ATTACHED
The three sample projects posted here were completed by the MBA students in the previous semesters. These projects are far from perfect and they did have some problems/errors (e.g. the estimation of component costs of capital, capital budgeting analysis, sensitivity analysis). We post them here just for your reference. Please do NOT strictly follow the methods used in these projects for your final project but apply the correct models that we learned in our class for the analysis. The solutions in Excel (e.g. ratio analysis, trend analysis, capital structure, WACC, cash flow estimation, and capital budgeting analysis) for these sample projects are not posted here, but you also need to work on that part in Excel and submit it to the instructor with your Word report.