Assignment Capital Budget Decision Making for an Organization—Par.docx

Assignment: Capital Budget Decision Making for an
Organization—Part 2
Note: In Week 6, you submitted Part 1 of the Module 3
Assignment.
You will complete and submit Part 2 this week. Next
week, you will complete and submit Part 3 and the executive
summary.
As a reminder, you will continue to play the role of a consultant
who has been hired by a mid-sized company that recently went
public to provide some recommendations related to their short-
term and long-term financial needs. Your first project is to
analyze the short- and long-term capital budget needs of the
company. You will prepare and submit a 3- to 5-page report,
including an executive summary in which you synthesize your
recommendations for the following fiscal year, along with the
provided Excel spreadsheet with your calculations. Explain your
findings and your recommendations.
For each of the items in your report, you will complete the
calculations in the Module 3 Assignment Part 1 Template and
will then use that financial information to develop your report
to the owner using the Module 3 Assignment Part 2 Template.
In your report, be sure to include relevant citations from the
Learning Resources, the Walden Library, and/or other
appropriate academic sources to support your work.
To prepare for this Assignment:
· Return to the Module 3 Assignment Part 1 Template to
continue completing the calculations.
· Return to your Module 3 Assignment Part 2 Template to
complete Part 2 of your report.
Note: Be sure to keep a copy of your completed
Assignment this week, as you will be adding to the same file for
your Week 8 Assignment.

By Day 7
Submit your synthesis of financial data related to long-term
financing needs for an organization, to include the following:
Part 2: Long-Term Working Capital Considerations: Time Value
of Money and Bonds (1–2 pages, plus calculations in Excel)
·
Future Value: If the company deposits $2 million in a
bank account that pays 6% interest annually, how much will be
in the account after 5 years?
·
Present Value: What is the present value of a security
that will pay $29,000 in 20 years if securities of equal risk pay
5% annually?
·
Required Interest Rates: The company owner has said
she will retire in 19 years. She currently has $350,000 saved
and thinks she will need $800,000 at retirement. What annual
interest rate must she earn to reach that goal, assuming she does
not save any additional funds?
·
Future Value of an Annuity: Find the future values of
these ordinary annuities. Compounding occurs once a year.
· $500 per year for 8 years at 14%
·
Present Value of an Annuity: Find the present values of
these ordinary annuities. Discounting occurs once a year.

·
Bond Valuation: The company has two bonds in their
investment portfolio, Bond C and Bond Z. Each bond matures in
4 years, has a face value of $1,000, and has a yield to maturity
of 8.2%. Bond C pays an 11.5% annual coupon, while Bond Z is
a zero-coupon bond.
Assuming that the yield to maturity of each bond remains at
8.2% over the next 4 years, calculate the price of the bonds at
each of the following years to maturity. Explain any observed
differences from the pricing calculations of the two bonds.
Years to Maturity
Price of Bond C
Price of Bond Z
4
3
2
1
0
·
Yield to Maturity and Yield to Call: The owner is
interested in investing some retained earnings in corporate
bonds. She is considering the following:

· Bond A has a 7% annual coupon, matures in 12 years, and has
a $1,000 face value.
· Bond B has a 9% annual coupon, matures in 12 years, and has
a $1,000 face value.
· Bond C has an 11% annual coupon, matures in 12 years, and
has a $1,000 face value.
Each bond has a yield to maturity of 9%.
a. Before calculating the prices of the bonds, identify whether
each bond is trading at a premium, at a discount, or at par.
b. Calculate the price of each of the three bonds.
c. Calculate the current yield for each of the three bonds.
Module 3 Assignment: Part 1
Capital Budget Decision Making for an Organization
Report prepared by:
Date: December 11, 2022
Walden University
WMBA 6070:
Managerial Finance

· Gross working capital refer to the total current assets of the
firm. Net working capital of a firm is computed by taking the
current asset less the current liabilities of the firm.
Additionally, Net operating working capital is calculated by
taking the current assets less current non-interest bearing
liabilities of the firm. These three are essential in determining
the amount and timing of the cash collections in the company.
·
· If annual sales is $2, 578, 235 and all on credit, then the
investment in accounts receivables is the same as sales = $2 578
235
·
· In comparing the cash conversion cycle
My company is way better in cash conversion than the
Competitors. My company taker less time during the year to
make cash available.
· Strategies that the company can use
1. Reduce the amount of operating expenses in order to expand

the profit margin.
2. Increase the amounts of retention of profits to have more
funds available.
3. Reduce the amounts of liabilities every year.
·
· The options available to the company is to convert the dollar
into Japanese Yen, the convert the yen into the Shekels. It
would be profitable. The strategy I would recommend is to use
future contract on foreign exchange. A good calculation would
result in to profits. Also, another strategy would be use options
derivatives contract.
Module 3 Assignment:
Report prepared by: Replace this text with your name.

Date: Replace this text with the submission date.
Walden University
WMBA 6070:
Managerial Finance
1
Executive Summary
Replace this text with your executive summary.
Part 1: Short-Term Working Capital Considerations
Replace this text with introductory information. Add or remove
headings as necessary.
[Heading]
Replace or remove this text. Add or remove headings as
necessary.
[Sub-Heading]
necessary.

of Money and Bonds
[Heading]
necessary.
[Sub-Heading]
necessary.
Part 3: Long-Term Working Capital Considerations: CAPM,
Stock Valuation, and Project Evaluation Tools
[Heading]
necessary.
[Sub-Heading]
necessary.
References
[Please delete this note before submitting your Assignment. For

more information about formatting your reference list, please
visit the following site:
https://academicguides.waldenu.edu/writingcenter/apa/reference
s.]
Include appropriately formatted references to support your
Assignment. Refer to the Assignment guidelines for further
information on the requirements.
2
Cash Conversion CycleCash Conversion Cycle(a)Enter figures
belowInventory Conversion Period64daysAverage Collection
Period28daysPayables Deferral Period41daysCash Conversion
Cycle51days(b)Annual Sales$ 2,578,235.00divided into 365
days365daysAverage Sales per Day$ 7,063.6575Average
Collection Period28daysInvestment in Receivables$
197,782.41(c) Step 1: Inventory BalanceAnnual Sales$
2,578,235.00Cost of Goods Sold75%percent of salesdivided into
365 days365daysInventory Conversion Period64days$
5,297.74Inventory$ 339,055.56Step 2: Inventory Turnover
RatioAnnual Sales$ 2,578,235.00Inventory$
339,055.56Turnover Ratio7.60times a year(d)Competitor
A88days54days30days112daysCompetitor
B90days44days30days104days
Additional Funds NeededAdditional Funds NeededLast year's
Sales$ 5,000,000Sales to Increase (in percent)20%Total
Liabilities and Equity = Assets$ 3,000,000Accounts Payable$
300,000Notes Payable$ 600,000Accrued Liability$
300,000Profit Margin3%Retained30%Required increase in
Assets$ 600,000Spontaneous increase in Payables and
Accruals$ 120,000Increase in Retained Earnings$

54,000Assets/Sales60%Next year's Sales (forecasted) $
6,000,000Change in Sales$ 1,000,000Additional Funds
Needed$ 426,000
Cross-Exchange RateCross-Exchange Rate$1 to Israeli
shekels3.58$1 to Japanese Yen109Cross-Exchange
Rate30.45Yen/Shekel
FV & PV Lump SumFuture ValuePresent ValueInterest
Rate6.0%Interest Rate5.0%# of Periods5# of Periods20Starting
Value$ 2,000,000Lump Sum in the Future$ 29,000Future
Lump Sum$ 2,676,451Present Value$10,930
Required Interest RatesRequired Interest RatesPresent
Value$350,000in savingsFuture Value$800,000needed at
retirementAdditional fundsNumber of Periods19yearsRequired
Interest Rate4.45%
FV & PV Annuitya)Future Value of an Annuitya)Present Value
of an AnnuityInterest Rate14.0%Interest Rate8.0%# of
Periods8# of Periods12Payments (per period)$ 500.00Payment
per period$ 600Future Value$ 6,616Present
Value$4,521.65b)Future Value of an Annuityb)Present Value of
an AnnuityInterest Rate7.0%Interest Rate4.0%# of Periods4# of
Periods6Payments (per period)$ 250.00Payment per period$
300Future Value$ 1,110Present Value$1,572.64c)Future Value
of an Annuityc)Present Value of an AnnuityInterest
Rate0.0%Interest Rate0.0%# of Periods4# of Periods6Payments
(per period)$ 700.00Payment per period$ 500Future Value$
2,800Present Value$3,000.00
Bond ValuationBond ValuationFace Value$1,000Yield to
Maturity8.2%Coupon Bond C11.50%Coupon Bond Z0%Years to
MaturityPrice of Bond CPrice of Bond
Z4$1,108.82$729.613$1,084.74$789.442$1,058.69$854.171$1,0
30.50$924.210$1,000.00$1,000.00
YTM & YTCPrice of each of the three bondsBasic Input
DataBond ABond BBond CType of the BondFace ValuePrice of
the bondYears to maturity121212Bond
A$1,000$856.79DiscountCoupon rate7%9%11%Bond
B$1,000$1,000.00At parPar value$1,000$1,000$1,000Bond

C$1,000$1,143.21At a premiumPeriodic
payment$70$90$110Yield to
maturity9%9%9%Price$856.79$1,000.00$1,143.21Current Yield
Bond ABond BBond CCurrent yield 8.17%9.00%9.62%
CAPM and Required ReturnCAPM and Required ReturnMarket
Beta1.0Required ReturnRisk-Free RateMarket
Premium0.00%Your CompanyRisk-Free Rate0.00%Market
Premium0.00%Company BetaRequired Return0.00%Closet
CompetitorRisk-Free Rate0.00%Market
Premium0.00%Competitor's BetaRequired
Return0.00%Difference in Required Return0.00%
Constant Growth ValueConstant Growth ValuationExpected
DividendConstant GrowthRequired Rate of ReturnCurrent Value
per ShareERROR:#DIV/0!
Non-Constant Growth ValNon-Constant Growth ValuationPaid
DividendNon-Constant Growth x 2 yearsConstant Growth
thereafterRequired Rate of ReturnCash Flow at Horizon or
Continuing DateERROR:#DIV/0!Horizon Timeline
Years0123Dividends$0.0000$0.0000$0.0000$0.0000ERROR:#D
IV/0!Cash FlowERROR:#DIV/0!Present
Value$0.0000ERROR:#DIV/0!$0.0000Intrinsic Stock
ValueERROR:#DIV/0!
WACCWeighted Average Cost of CapitalDebtCommon
EquityCost of DebtTax RateCurrent Stock PriceLast Dividend
PaidExpected Constant GrowthNext Dividend$ - 0Internal
EquityERROR:#DIV/0!WACCERROR:#DIV/0!
Capital BudgetingCapital Budgeting
CriteriaYear01234567Project AProject
BDifference$0$0$0$0$0$0$0$0WACC11%WACC18%NPV @
11%NPV @ 18%Project A$0.00Project A$0.00Project
B$0.00Project B$0.00IRR @ 11%Project
AERROR:#NUM!Project BERROR:#NUM!MIRR @ 11%MIRR
@ 18%Project AERROR:#DIV/0!Project
AERROR:#DIV/0!Project BERROR:#DIV/0!Project
BERROR:#DIV/0!Discount RateNPV-ANPV-
B0.0%$0$010.0%$0$011.0%$0$018.1%$0$020.0%$0$024.0%$

0$030.0%$0$0Crossover RateERROR:#NUM!
Comparison Project A vs Project B
0 0 0 0 0 0 0 0 0 0 0 0 0
0
image1.png
Needed$ 426,000

Rate30.45Yen/Shekel
RateInterest Rate# of Periods# of PeriodsStarting ValueLump
Sum in the FutureFuture Lump Sum$ - 0Present Value$0
Required Interest RatesRequired Interest RatesPresent Valuein
savingsFuture Valueneeded at retirementAdditional
fundsNumber of PeriodsyearsRequired Interest
RateERROR:#NUM!
of an AnnuityInterest RateInterest Rate# of Periods# of
PeriodsPayments (per period)Payment per periodFuture Value$
- 0Present Value$0.00b)Future Value of an Annuityb)Present
Value of an AnnuityInterest RateInterest Rate# of Periods# of
- 0Present Value$0.00c)Future Value of an Annuityc)Present
- 0Present Value$0.00
Bond ValuationBond ValuationFace ValueYield to
MaturityCoupon Bond CCoupon Bond ZYears to MaturityPrice
of Bond CPrice of Bond
Z4$0.00$0.003$0.00$0.002$0.00$0.001$0.00$0.000$0.00$0.00
DataBond ABond BBond CYears to maturityCoupon ratePar
valuePeriodic payment$0$0$0Yield to
maturity9%9%9%Price$0.00$0.00$0.00Current Yield Bond
ABond BBond CCurrent yield
ERROR:#DIV/0!ERROR:#DIV/0!ERROR:#DIV/0!

ValueERROR:#DIV/0!
B0.0%$0$010.0%$0$011.0%$0$018.1%$0$020.0%$0$024.0%$
0 0 0 0 0 0 0 0 0 0 0 0 0
0

image1.png
Needed$ 426,000
Rate30.45Yen/Shekel
RateInterest Rate# of Periods# of PeriodsStarting ValueLump
Sum in the FutureFuture Lump Sum$ - 0Present Value$0
Required Interest RatesRequired Interest RatesPresent Valuein
savingsFuture Valueneeded at retirementAdditional
fundsNumber of PeriodsyearsRequired Interest
RateERROR:#NUM!

of an AnnuityInterest RateInterest Rate# of Periods# of
- 0Present Value$0.00b)Future Value of an Annuityb)Present
- 0Present Value$0.00c)Future Value of an Annuityc)Present
- 0Present Value$0.00
Bond ValuationBond ValuationFace ValueYield to
MaturityCoupon Bond CCoupon Bond ZYears to MaturityPrice
of Bond CPrice of Bond
Z4$0.00$0.003$0.00$0.002$0.00$0.001$0.00$0.000$0.00$0.00
DataBond ABond BBond CYears to maturityCoupon ratePar
valuePeriodic payment$0$0$0Yield to
maturity9%9%9%Price$0.00$0.00$0.00Current Yield Bond
ABond BBond CCurrent yield
ERROR:#DIV/0!ERROR:#DIV/0!ERROR:#DIV/0!

ValueERROR:#DIV/0!
B0.0%$0$010.0%$0$011.0%$0$018.1%$0$020.0%$0$024.0%$
0 0 0 0 0 0 0 0 0 0 0 0 0
0
image1.png

Module 3 Assignment: Part 2
Report prepared by:
Date: December 18, 2022
Walden University
WMBA 6070:
Managerial Finance
1
of Money and Bonds
Introduction
Long-term working capital requirements is the lifeblood of a
company’s success. It is therefore important for business to
critically evaluate its current capital decisions on its
sustainability. It is against this backdrop that this paper

evaluates the long-term working capital consideration of a mid-
sized company that has been listed recently.
Future Value and Present Value
Future Value
Interest Rate
6.0%
# Of Periods
5
Starting Value
$ 2,000,000
Future Lump Sum
$ 2,676,451
If our company deposits $ 2,000,000 in an account paying an
interest rate of 6 % for 5 years, there will be increase in its
long-term working capital since the future value will be $
676,451 more than the original amount deposited.
Present Value
Interest Rate
5.0%
# Of Periods
20
Lump Sum in the Future
$ 29,000

Present Value
$10,930
The present value of a security that promises $ 29,000 in 20
years is $ 10,930. This value is lower that the future value
because of inflation effect which affects the value of money. As
such the money to be received in future should be higher than
the amount today to compensate the investors for decrease in
value of money because of inflation.
Bonds
Bond Valuation
Face Value
$1,000
Yield to Maturity
8.2%
Coupon Bond C
11.50%
Coupon Bond Z
0%
Years to Maturity
Price of Bond C
Price of Bond Z
4
$1,108.82
$729.61
3
$1,084.74

$789.44
2
$1,058.69
$854.17
1
$1,030.50
$924.21
0
$1,000.00
$1,000.00
As part of the long-term working capital our company has
options of issuing bonds to finance its operations. Both bonds
have same face value but different coupon rates and maturity
period. The price of bond C is higher than the price of bond Z
because bond C has coupon rate of 11.5% against the zero-
coupon bond Z. The price of a bond decreases with a decrease
in years of maturity because the risk of default on a bond
increase as the maturity date gets closer. As the risk of default
increases, the price of the bond decreases in order to
compensate for the higher risk. Since the bond's maturity is a
measure of the time until it must be redeemed and repaid, a
decrease in the bond's maturity implies an increase in the risk of
default. Therefore, the price of both bonds Cand Z decreases
as the maturity decreases in order to account for the increased
risk.
Basic Input Data
Bond A
Bond B

Bond C
Years to maturity
12
12
12
Coupon rate
7%
9%
11%
Par value
$1,000
$1,000
$1,000
Periodic payment
$70
$90
$110
Yield to maturity
9%
9%
9%
Price
$856.79
$1,000.00
$1,143.21

Current Yield
Bond A
Bond B
Bond C
Current yield
8.17%
9.00%
9.62%
The current yield of a bond is an important metric for
determining its potential as an investment. It is the annual
amount of income received from the bond as a percentage of its
market price. Knowing the current yield of a bond is important
for our firm’s long-term working capital considerations because
it helps us assess the risk of the investment, as well as the
potential return. By knowing the current yield, our company can
better evaluate whether or not it is a good investment based on
our risk profile and the expected return (Fabozzi &
Fabozzi,2021). It also allows us to compare different bonds and
decide which one offers the best value. In addition, the current
yield can help a firm adjust its working capital strategy
accordingly in order to maximize our return on investment. A
bond with a low current yield is generally better for our firm's
long-term working capital considerations. Low current yields
may indicate that the bond has a longer-term maturity, which
means that the firm will be able to have access to the funds for
a longer period of time. Additionally, a low current yield means
that our firm will have a lower interest rate to pay, which will
have a positive effect on their long- term working capital. In
this regard our firms should issue bond A.
Type of the Bond
Face Value
Price of the bond

Bond A
$1,000
$856.79
Discount
Bond B
$1,000
$1,000.00
At par
Bond C
$1,000
$1,143.21
At a premium
Conclusion
The time value of money is critical in long-term working capital
planning. The information about the future and present value
calculation provides insight to our company on the best course
of actions (Cho et al.2021). For instance, the result has shown
that by depositing $ 2million at 6% for 5 years our company
will have over 2.6million after 5 years. Besides the current
yield of various bond options has shown that our company
should invest in a bond with low current yield since it indicates
longer payment period hence long-term access to funds.
References
Cho, T., Grotteria, M., Kremens, L., & Kung, H. (2021). The
Present Value of Future Market Power.

Available at SSRN.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3921171
Fabozzi, F. J., & Fabozzi, F. A. (2021).
Bond markets, analysis, and strategies. MIT Press.
https://books.google.com/books?hl=en&lr=&id=bQpNEAAAQB
AJ&oi=fnd&pg=PR9&dq=bond+valuation&ots=5RPKrSAXAJ&
sig=TsKXRuRlZIiBQPI_umDKnjH9MbU
2
Note: In Weeks 7 and 8, you submitted Part 1 and Part 2 of the
Module 3 Assignment.
You will complete and submit Part 3 and the executive
summary this week.
As a reminder, you will continue to play the role of a consultant
who has been hired by a mid-sized company that recently went
public to provide some recommendations related to their short-
term and long-term financial needs. Your first project is to
analyze the short- and long-term capital budget needs of the
company. You will prepare and submit a 3- to 5-page report,
including an executive summary in which you synthesize your
recommendations for the following fiscal year, along with the
provided Excel spreadsheet with your calculations. Explain your
findings and your recommendations.
For each of the items in your report, you will complete the
calculations in the Module 3 Assignment Part 1 Template and
will then use that financial information to develop your report
to the owner using the Module 3 Assignment Part 2 Template.
In your report, be sure to include relevant citations from the
Learning Resources, the Walden Library, and/or other
appropriate academic sources to support your work.
To prepare for this Assignment:

· Return to the Module 3 Assignment Part 1 Template to
continue completing the calculations.
·
Return to your Module 3 Assignment Part 2 Template to
complete Part 3 of your report, as well as the executive
summary.
By Day 7
Submit your synthesis of financial data related to long-term
financing needs for an organization, to include the following:
Part 3: Long-Term Working Capital Considerations: CAPM,
Stock Valuation, and Project Evaluation Tools (1–2 pages, plus
calculations in Excel)
·
CAPM and Required Return: The company has a beta of
1.1, and the closest competitor has a beta of 0.30. The required
return on an index fund that holds the entire stock market is
11%. The risk-free rate of interest is 4.5%. By how much does
your company’s required return exceed your competitor’s
required return?
·
Constant Growth Valuation: The company is expected
to pay a $1.80 per share dividend at the end of the year (i.e., D1
= $1.80). The dividend is expected to grow at a constant rate of
4% a year. The required rate of return on the stock, rs, is 10%.
What is the stock’s current value per share?
·
Nonconstant Growth Valuation: The company recently
paid a dividend, D0, of $2.75. It expects to have nonconstant
growth of 18% for 2 years followed by a constant rate of 6%
thereafter. The firm’s required return is 12%.
· How far away is the horizon date?

· What is the firm’s horizon, or continuing, value?
· What is the firm’s intrinsic value today, P0?
·
Weighted Average Cost of Capital: The company has a
target capital structure of 35% debt and 65% common equity,
with no preferred stock. Its before-tax cost of debt is 8%, and
its marginal tax rate is 40%. The current stock price is P0 =
$22.00. The last dividend was D0 = $2.25, and it is expected to
grow at a 5% constant rate. What is its cost of common equity
and its WACC?
·
Capital Budgeting Criteria: The company has an 11%
WACC and is considering two mutually exclusive investments
(that cannot be repeated) with the following cash flows:
· What is each project’s NPV?
· What is each project’s IRR?
· What is each project’s MIRR? (Hint: Consider Period 7 as the
end of Project B’s life.)
· From your answers to parts a, b, and c, which project would be
selected? If the WACC was 18%, which project would be
selected?
· Construct NPV profiles for Projects A and B.
· Calculate the crossover rate where the two projects’ NPVs are
equal.
· What is each project’s MIRR at a WACC of 18%?
Executive Summary (page 1 of your report)
Provide the company owner with a 1-page executive summary of
your findings and recommendations. Address the following in
your executive summary:
· Briefly identify the purpose of your report.
· Concisely summarize the results of your financial analysis of
the company’s short- and long-term capital budget needs.
· Synthesize your recommendations for how the company can

raise money in the short-term and long-term to continue to add
value to the organization.

Assignment Capital Budget Decision Making for an Organization—Par.docx

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