Reference no: EM132245923
Assignment
As a senior analyst at Maryland Creative Solutions (MCS), you have continued to prove your value after helping Choice Hotels make strategic decisions by analyzing their financial reports. Frank Marinara and Elisa Izuki, continually happy with your work, have decided to transfer you to the finance team. You're excited to continue working for MCS and you strongly believe you are capable of someday making senior partner.
Dialogue with Frank Marinara
You meet with Frank so he can orient you to your new team. "The finance team has a slightly different focus than the accounting team," he says. "The finance team is more involved with analyzing financing and investment decisions, making corporate asset valuations, evaluating corporate financial performance, and providing corporate valuations. You will be working to complete a project for our Maryland-based client McCormick & Company."
Given your position as a senior analyst, you are anticipating that Frank will have several separate requests for your group. Frank explains that McCormick & Company is considering expanding their operations by purchasing another factory to increase production of their spice products. The client has asked MCS to help them determine if this financial investment is worthwhile.
Frank continues by delineating your responsibilities for the project: "To get started, we will need to look at the variables involved in this purchase and the questions McCormick & Company has provided. Ultimately, MCS will help them determine their corporate valuation, responsibly raise capital, and make the right financing and investing decisions. This information will help you determine which financing and investing options would provide McCormick & Company with the best potential outcomes for sustainability and growth.
"You will also need to host a meeting with the other finance analysts to discuss risk and returns," Frank says. This discussion will help the client decide if they should invest in the new factory.
"The client also mentioned they would like MCS to provide them with guidance on retirement plan options and other employee benefits," Frank elaborates. "Finally, I will need you to complete the project by filing a report that highlights your recommendations."
Frank needs all of these assignments done within two weeks and suggests you begin right away.
When you submit your project, your work will be evaluated using the competencies listed below. You can use the list below to self-check your work before submission.
• 1.3: Provide sufficient, correctly cited support that substantiates the writer's ideas.
• 1.6: Follow conventions of Standard Written English.
• 3.1: Identify numerical or mathematical information that is relevant in a problem or situation.
• 3.2: Employ mathematical or statistical operations and data analysis techniques to arrive at a correct or optimal solution.
• 3.3: Analyze mathematical or statistical information, or the results of quantitative inquiry and manipulation of data.
• 3.4: Employ software applications and analytic tools to analyze, visualize, and present data to inform decision-making.
• 8.1: Evaluate major business/organizational systems and processes and make recommendations for improvement.
• 10.3: Determine optimal financial decisions in pursuit of an organization's goals.
• 10.4: Make strategic managerial decisions for obtaining capital required for achieving organizational goals.
• 12.1: Assess market risk and opportunity.
Step 1: Analyze Financing and Investing Activities
INBOX (1 NEW EMAIL)
From: Frank Marinara, Director of Finance
To: You and Finance Team
I hope you have had a chance to get to know the team and are ready to move forward with the project at hand. I want to give you the background on the McCormick & Company case and instructions for this project.
McCormick & Company approached MCS because they would like to increase the production of their products and are considering purchasing a new factory in Largo, Maryland. This new factory would allow the company to increase its overall production capacity. As McCormick decides whether to purchase the new factory, they are asking our finance team to evaluate options to finance this purchase. McCormick has provided MCS with the purchase price, expected cash flow, and two new product line projects they expect to run in the new factory.
To understand which financing option would be best for the client, you must first understand time value of money, present value, future value, and loan amortization. These topics will help your group make recommendations about the relative benefits and drawbacks of each option.
Working in the attached Excel Workbook, complete the Financing and Investing worksheet. The Financing and Investing worksheet contains information about present value, revenue, expenses, and cash flows, as well as questions that will help Frank guide the client in selecting the best financing option.
When you have completed the Financing and Investing worksheet, submit it to the submission folder located in the final step of this project.
You should aim to complete this step during Week 8. Then, proceed to Step 3, where you will examine the factors affecting McCormick's corporate valuation.
Looking forward to seeing your work,
Frank
ATTACHMENTS
McCormick & Company Workbook.xlsx
Step 2: Determine Corporate Valuation
McCormick & Company is also interested in gaining further insight on the corporate valuation of the company, as they need to know how much capital they'll need to raise to purchase a new factory. To understand valuation, you must review dividends, options, warrants, derivatives, discount rate, and yield.
Dialogue with Frank Marinara
Frank tasks you with recommending a method for raising sufficient capital. "McCormick & Company has been paying dividends to its shareholders for several years now," he says. "The company has given us some data and would like us to recommend ways they can further leverage their financing activities.
The company is interested in potentially issuing more stock or purchasing bonds to raise additional capital for the purchase of the new factory. I will need you to answer a few questions about the company's stock prices and minimum acceptable rate of return. Your answers will help me make a recommendation to McCormick."
Working with the same Project 4 Excel Workbook you worked with in Step 2, complete the Valuation of Performance worksheet. This worksheet contains information on McCormick's dividends, stocks, and risk premiums, as well as questions that will guide the client's decisions.
When you have completed the Valuation of Performance worksheet, submit the Project 4 Excel Workbook to the folder located in the final step of this project. As you enter Week 9, proceed to Step 4, in which you will discuss risk and returns with your colleagues.
Step 3: Discuss Risk and Returns
Dialogue with Frank Marinara
As McCormick decides whether they will invest in an additional factory to keep up with demand, the company remains uncertain if the investment will yield worthwhile returns. "That is where they need us to provide them with a risk and return evaluation," Frank says. "Risk is the financial liability a company takes in a given investment in consideration of a potential return on the investment."
Meet and Discuss
Frank has asked you to meet with your colleagues and discuss how risk and returns will influence McCormick's investment decision. Complete the following tasks:
• Discuss whether McCormick & Company should invest in a new factory in Largo, Maryland. Give credit to any sources you use to support your statements.
• Discuss how understanding risk and returns will impact this decision. Give credit to any sources you use to support your statements.
• Later in the week, after you are back in your office, you have a follow-up discussion with your MCS colleagues in an effort to summarize the key lessons from your discussion on risk and returns at the meeting. Respond to your colleagues' original discussion posts and give credit to any sources you use to support your statements.
During Week 9, submit one original posting of at least 250 words in the Risk and Returns Discussion by Saturday and post two responses of at least 50 words each to other discussion participants by Tuesday. See MBA discussion guidelines.
This discussion will take place during Week 9 of the course.
When you have finished Step 4, proceed to Step 5, where you will advise the client on selecting a retirement plan for its employees.
Questions
1. McCormick & Company is considering purchasing a new factory in Largo, Maryland. The purchase price of the factory is $4,000,000. McCormick & Company believes they can produce a net cash inflow of $780,000 a year for 10 years. If the discount rate is 14 percent, should McCormick & Company purchase the factory at the $4,000,000 asking price?
2. If McCormick & Company decides to purchase the new factory in Largo, they need to consider relevent after-tax cash flow. McCormick & Company estimated their potential first-year sales revenue at $780,000, expenses at $225,000, and depreciation expense at $150,000. McCormick's marginal tax rate is 40 percent (21 percent federal and 19 percent state combined). What is first-year relative cash flow?
3. The estimated relevent annual expected cash flows (C1) associated with the puchase of the new factory in Largo are as follows:
Year C1 PV(C1)
1 ? ?
2 $291,000 $202,083
3 $191,000 $110,532
4 $306,000 $147,569
5 $424,000 $170,396
In Year 3, the estimated relevent annual expected cash flows represents funds used to pay operating expenses for subsequent years. All estimated relevent annual expected cash flows include a risk premium of 13 percent, which has already been applied to the cash flows above. Solve for cash flow for Year 1 based on your answer in Question 2. Then, solve for present value (PV) for Year 1. What is the total of present value for all five years? Should the factory be purchased? Why or why not?
4. McCormick & Company is also considering introducing two new product lines to be made at the new factory (if it is purchased). As a new member of MCS's finance team, you are asked to determine whether McCormick & Company should invest in the two product line expansions. Project A has lower future cash flows than Project B, but because Project A is more closely related to McCormick's existing product line, the company feels it is less risky than Project B. You've done some more analysis and have formulated the following future profits for each project (with the first cash flow occurring one year from now). Each project is expected to have a life of 5 years.
Year 1 Year 2 Year 3 Year 4 Year 5
Project A $5M $10M $10M $15M $15M
Project B $5M $10M $15M $20M $20M
You also believe that each project will require about $40 million in upfront investment. Finally, based on the different risk assumptions, you believe that Project A should use a discount rate of 7 percent, while Project B will have a discount rate of 20 percent. Which project or projects should the company undertake?
Questions
1. McCormick & Company is considering buying a new factory in Largo, Maryland. The company is considering issuing additional common stock to finance the purchase of the factory. McCormick & Company stock has recently paid a dividend payment of $0.52 per share. Dividends are expected to grow by 8.5 percent per year for the next five years. The required return on the stock is 12 percent. Determine the intrinsic value of the stock, also known as today's stock price.
2. The current price of an American call option with exercise price $80, written on McCormick & Company stock is $41.40. The current price of one McCormick & Company stock is $123.13. If you were to sell the stock, how much money would you expect to make?
3. McCormick & Company is considering establishing new products in a new factory in Largo, Maryland. The project is expected to last for eight years. To determine the right financing option, you need to determine the appropriate discount based on the weighted average cost of capital. The cost of equity is estimated using the capital asset pricing model. Cash flows are assumed to be steady, the nominal risk-free rate for the short-term US government treasury bills is 1.5 percent, the 10-year government bonds rate is 2.5 percent, and the inflation rate is 2.54 percent. What is the real risk-free rate? Then, assume a beta of 1.2 and a market return of 5 percent. What is the cost of equity?
4. McCormick & Company is considering purchasing a new factory in Largo, Maryland. After you and your team have conducted an analysis of alternative investments and cost of capital, McCormick has decided that a risk premium of 13 percent is appropriate for the investment into a new factory. Adding the risk premium to the current risk-free rate of 7 percent, what is the minimum acceptable rate of return?
Questions
1. Liz is retiring from the US Postal Service and will turn 70 next year. After 39 years of service, her monthly pension is $7,500. She does not qualify for Social Security. Liz has accumulated $700,000 in her thrift savings plan. The government requires that she convert it to an annuity or move it to a IRA. All of the money is pretax and tax can be avoided if it is moved to the IRA. The annuity will be calculated based on her life expectancy of 17.5 years after age 70. The current US Treasury long-term bond rate is 3 percent. How much will she get as an annuity monthly payment? Should Liz take the annuity or move the money to the IRA? The tax regulations require that she take out 4 percent of the amount each year.
2. Kathy plans to move to Maryland and take a job at McCormick as the assistant director of HR. She and her husband, Stan, plan to buy a house in Garrison, MD, and their budget is $500,000. They have $100,000 for the down payment and McCormick will pay for closing costs. They are considering either a 30-year mortgage at 4.5 percent annual rate or a 15 year mortgage at 4 percent. Calculate the monthly payment for each. Property taxes and insurance will add $1,000 per month to which ever mortgage they choose. What should Kathy and Stan do?