A1 “I gave an introduction discussing what capital structure is and how it relates to debt vs. equity financing and what maximizes shareholder return and what the goal of the company is in choosing a capital structure approach. I then made my recommendation discussing all approaches for all years using a table with earnings per share in each year for each approach and totaling them up to make my recommendation. (This was discussed and told to us in the webinar as the method so I am just repeating what was said). I then made my recommendation referencing the table, explaining why it maximizes shareholder return *****always refer to actual numbers.”
A1a“I justified my recommendation by talking about how the other approaches were not maximizing shareholder return and why, referencing the outcomes and what was causing their earnings per share to be lower …Talk about all of the other approaches and reference the actual numbers. I repeated my recommendation at the end to sum it up.”
A2 “I gave an introduction describing capital budgeting, net present value, and internal rate of return, and referenced things from the Storyline that were applicable to this section in a paragraph describing the “background of the scenario (what was going on with company).” I then discussed NPV and IRR in individual sections where I referenced all of the numbers and told what they meant about whether or not the company should pursue the project. I gave brief explanation of how the numbers were calculated. At the end of each section for both IRR and NPV I made a recommendation about whether or not to pursue the project based on the NPV and IRR results in the spreadsheet.”
A3 “I began by discussing the background from the storyline (why they need working capital, how much they need) I then gave 3 ways the firm can obtain working capital. I then discussed 3 ways to properly manage working capital….I was told in the webinar to think about the accounts that make up working capital. I then discussed Lease vs. Buy. I started by giving the background from the storyline.
It is supposed to be approached from the standpoint of which one BEST preserves working capital (on the task directions) I explained how they arrived at the numbers on the spreadsheet (A good resource to understand where all the numbers came from and how they were calculated is “Buy or Lease? Commercial Property Decisions” from recenter.tamu.edu website. I then told which one they should do based on which one better preserves working capital (from task directions). If you are confused just think about how WC is calculated.. I referenced numbers, years, etc all steps of the way.”
A4 “I told what a merger is what earnings per share means and what the merger was saying about EPS and how it would affect shareholder returns. I told what an acquisition is what the NPV of the acquisition is and what that means. Always referencing the numbers. I then made a recommendation based on EPS in the merger before and after and NPV of the acquisition. This information comes from the webinar I am just repeating it.”
“I hope my explanation of my method and tips from the webinar help, Timothy.” Timothy Minyard, Student, July 2014.
A1 and A2 – Low and Moderate Sales and Calculations
“Hello, when completing the first two task prompts, is it necessary to analyze both the low and the moderate outcomes? For example, on the “Capital Structure” tab it gives you the moderate EBIT to use, are we expected to enter the low as well? Also, on the “Capital Budgeting” tab, do we discuss both scenarios of low and moderate planning?”
“Task 3 – A1, use only the moderate demand. A2, Capital Budget – analyze both low and moderate demands.”
Dr. Cherry, CM, July 2014 A2 – Internal Rate of Return as listed on Spreadsheet
“On the spreadsheet (Task 3 Capital Budgeting Tab) the Internal Rate of Return projections are listed for both low and moderate sales and then below is a IRR percentage. Yours could be different but my percentages are 8.7% and 10.1%. Are these percentages directly tied to the numbers above them or are they thresholds? If they are NOT thresholds, where do I find good suggestions for an appropriate threshold for IRR?” “10%. It is listed in the storyline.” Dr. Cherry, CM, August 2014 A3
“I am unable to find information or chapters on Lease vs. Buy. Any assistance would be appreciated.”
“There is a SkillSoft titled “Managerial Decisions and Capital Budgeting” that has a section on Lease or Buy Decisions and Make or Buy Decisions. You can find it under the Financial Analysis Course Materials for “The Best Structure and Use of Capital” section.” Adrian Thompson, Student, June 2014. A3Question
I find this part of Task 3 to be misleading. The task states: “Discuss how working capital can be properly obtained and managed for the Canadian expansion. The discussion should consider the lease-versus-buy analysis (Spreadsheet tab: Task 3_Lease vs Buy).”
This, to me, is asking “how can we obtain working capital for the Canadian expansion?”
Then when I look at the Task 3 Lease vs Buy spreadsheet, it says “The $200,000 in working capital and $50,000 down payment would have to be internally funded.” This I feel is telling me that the working capital has to be internally funded. Therefore, for the question A3, I answered how the company can internally fund working capital in order to expand into Canada. I got it returned to me for “However, other ways to obtain working capital, besides internal generation, should also be discussed.” Sorry, I just needed to vent. This is the 2nd time I’ve had this task returned and this one frustrated me.
I am really struggling with understanding the lease vs buy option. I submitted my task and received the following response from the Grader “The submission provides a good discussion of how to properly obtain and mange working capital for the Canadian Expansion. The recommendation to lease is presented; however, to fully support the decision an evaluation of the PV of outflows should be considered”. What am I missing and what should I focus on. Should I be discussing that one yielding the higher NPV should be selected? Any thoughts and comments would be greatly appreciated.” “In the lease vs buy scenario, we discussing cash outflows, so you would want to select the option that will cost the company the least amount of working capital.” Dr. Cherry, CM, august 2014
A3 – Lease vs Buy
“I have a question on the financial information tab for Lease vs. Buy. The after tax cash flows for the lease option are $58,500 each year and I’m wondering how we would arrive at this number? The storyline states that the five-year lease would entail payments of $90,000 each year for 5 years. It seems a stretch that the after tax cash flows would go all the way down to $58,500 from $90,000. Can anyone shed some light on this for me? Thanks!”
“$90,000 * (1 – tax rate) = $90,000 * .65” Dr. Cherry, CM, August 2014
A4Allocation of Overhead
As we consider the merit of opening or acquiring a Canadian operation, should we be concerned with the allocation of overhead and shared services, such as Executive Comp and some aspects of shared services such as A/P and A/R salary costs? Without these allocations, the US operations will carry the whole burden. James Crowe, July 2014 “When considering the merger vs acquisition, first analyze the two projects to determine if both are financial viable. If so, then continue on with qualitative pros and cons.” Dr. Cherry, CM, July 2014