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The document discusses various checks that should be performed to ensure financial statements are accurate. It also asks questions about building financial models and calculators. Specifically: 1) Key checks for a balance sheet include assets equaling liabilities and cash balances matching between the balance sheet and cash flow statement. Retained earnings should also equal the net income appropriation account balance. 2) The second question asks about utilizing functions in a current financial model and identifying auto-color functions. 3) The third question asks to build a small calculator demonstrating the differences between project and equity valuation methods and why they sometimes produce different results. 4) The fourth question asks to include investor parameters for payback period and current yield in
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ContentsBackgroundPurpose__________________________________.docx
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Background/Purpose_____________________________________________________________________________________1
Analysis__________________________________________________________________________________________________2-4
Conclusions/Recommendations_________________________________________________________________________5
Tables/Exhibits _______________________________________________________________________________________6-19
Background/Purpose
background
Collectibles Inc. is a producer of consumer goods that current makes products such as dolls and jewelry. Their products are produced in China and sold in numerous small shops as well as on the Television Shopping Network (TSN). Although Collectibles is currently operating at a profit, they have recently become interested in acquiring the assets of Starlight Jewelry Manufacturing Inc. (thus resulting in a merger of the two companies).
Starlight is a company that currently manufactures and sells low-end jewelry in the United States. Through this merger, both companies would achieve numerous operating efficiencies including reductions in cost of goods sold of 1% and $600,000 in salary savings. In addition to these synergies, Collectibles also expects the acquisition to complement the higher-priced custom jewelry it currently sells (thus appealing to the buying habits of its existing customers) and to eliminate capital expenditures in the foreseeable future.
If the merger is approved, the acquisition will be paid for through a loan (accounting for 60% of the acquisition price) and additional equity from venture capitalists (accounting for the remaining 40%). In addition to this, the accounts payable of the target would be assumed. However, in order for the purchase to be viable, Collectibles Inc. (which would now include Starlight Inc.) would have to maintain a Quick Ratio of at least 1.25 and a Debt Service Coverage Ratio of at least 1.75 to satisfy Eastern Seaboard Bank’s loan requirements.
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The nature of this report is to communicate what the value of the company is calculated to be, whether or not this purchase is feasible, and if it is, what the financing structure would look like. In the analysis section, the assumptions made are presented as well as what financial statements are expected to look like post-acquisition. The report then concludes with a recommendation on whether or not merging with Starlight (i.e. the target) is in Collectibles’ (i.e. the buyer) best financial interest. Analysis
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Background/Purpose_____________________________________________________________________________________1
Analysis__________________________________________________________________________________________________2-4
Conclusions/Recommendations_________________________________________________________________________5
Tables/Exhibits _______________________________________________________________________________________6-19
Background/Purpose
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Collectibles Inc. is a producer of consumer goods that current makes products such as dolls and jewelry. Their products are produced in China and sold in numerous small shops as well as on the Television Shopping Network (TSN). Although Collectibles is currently operating at a profit, they have recently become interested in acquiring the assets of Starlight Jewelry Manufacturing Inc. (thus resulting in a merger of the two companies).
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Build a ModelBuild a Model11/26/18Chapter:10Problem:23Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows:Expected Net Cash FlowsTimeProject AProject B0($375)($575)1($300)$1902($200)$1903($100)$1904$600$1905$600$1906$926$1907($200)$0a. If each project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what project is the proper choice? @ 12% cost of capital @ 18% cost of capitalUse Excel's NPV function as explained in this chapter's Tool Kit. Note that the range does not include the costs, which are added separately.WACC =12%WACC =18%NPV A =NPV A =NPV B =NPV B =At a cost of capital of 12%, Project A should be selected. However, if the cost of capital rises to 18%, then the choice is reversed, and Project B should be accepted.b. Construct NPV profiles for Projects A and B.Before we can graph the NPV profiles for these projects, we must create a data table of project NPVs relative to differing costs of capital.Project AProject B0%2%4%6%8%10%12%14%16%18%20%22%24%26%28%30%c. What is each project's IRR?We find the internal rate of return with Excel's IRR function:IRR A =Note in the graph above that the X-axis intercepts are equal to the two projects' IRRs.IRR B =d. What is the crossover rate, and what is its significance?Cash flowTimedifferential012Crossover rate =34The crossover rate represents the cost of capital at which the two projects value, at a cost of capital of 13.14% is:
have the same net present value. In this scenario, that common net present567e. What is each project's MIRR at a cost of capital of 12%? At r = 18%? Hint: note that B is a 6-year project. @ 12% cost of capital @ 18% cost of capitalMIRR A =
DII Labs: Use Excel's MIRR function
DII Labs: The difference in cash flows between Project "A" and Project "B".
DII Labs: Net Present Value of "A" discounted at a WACC of 12%
DII Labs: The IRR for the Cash Flow Differential
DII Labs: Net Present Value of "A" discounted at a WACC of 18%
MIRR A =MIRR B =MIRR B =f. What is the regular payback period for these two projects?Project ATime period01234567Cash flow(375)(300)(200)(100)600$600$926($200)Cumulative cash flowIntermediate calculation for paybackPayback using intermediate calculationsProject BTime period01234567Cash flow-$575$190$190$190$190$190$190$0Cumulative cash flowIntermediate calculation for paybackPayback using intermediate calculationsPayback using PERCENTRANKOk because cash flows follow normal pattern.g. At a cost of capital of 12%, what is the discounted payback period for these two projects?WACC =12%Project ATime period01234567Cash flow-$375-$300-$200-$100$600$600$926-$200Disc. cash flowDisc. cum. cash flowIntermediate calculation for paybackPayback using intermediate calculationsProject BTime period0123456.
Ch14sol cash flow estimation
This document provides answers and solutions to end-of-chapter questions and problems from a textbook on cash flow estimation and risk analysis. It defines key terms like incremental cash flows, sunk costs, and opportunity costs. It also provides examples of calculating operating cash flows, salvage value, and net present value. The document aims to help students understand the concepts and calculations involved in capital budgeting and project valuation.
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Home work sheet
- 1. Q1 .5 checkitemsto ensure the financial statementsare tallying. A1 . AssetsandLiabilitiesshouldbe equal .There shouldbe nodifference inthe assetand liabilitysidesof the balance sheet The cash flowfinal CASHBALANCEshouldbe equal toCASH BALANCEinBalance Sheet. Difference betweenopeningandclosingbalance of retainedearningshouldbe equal tothe balance of P&L Appropriationa/cbalance. Cash balance shouldnotbe negative.Bankbalance canbe negative andappearasBOD but not cash balance onassetside. DSRA checkthat isDebt Service ReservewhichisanAssetSide Line itemshouldnotbe negative .The amounttrf to DSRA shouldnotbe more thanthe CFADS(cashflow availablefor Debtservice) Q2. 10 utilitiestobe pointedoutfromthe currentmodel andauto-colorfunctiontobe found(utility isa setof calculationsfunctionisone formula). Q3. Builda small calculator(independentsheet) demonstratingdifference betweenprojectand equityvaluationmethod.Showwhytheygivedifferentresultsandsometimessame result. Q4. Buildinvestorparametersinthe valuationsheetforpaybackperiod,currentyield Q5. Difference betweenirr,mirrandxirrmathematicallyandfromuserperspective - whenisit appropriate touse whichone? IRR XIRR MIRR Difference It isa simple methodusedto compare two differentprojects. Thismethoddoes not workwhenCIF occur at different intervals It can be takenas advance version of simple IRR calculation. XIRR isusedwhen the cash flowsare occurringat differentintervals , there isspecific trendof cash inflows. It isa the most complicatedand advancedmethod of calculatingIRR. Thismethodis usedwhenthere are interim returnsfromthe investmentmade . Thisinterim returns occur at same intervals. For different periodinterval XMIRR is used. Thismethod unlike IRRand XIRR use one discountingrate, insteadit considerstwo rates. The two ratesare Finance Rate and the otheris
- 2. Reinvestment Rate. Finance Rate is usedto Discount the COF and Reinvestment Rate isusedto discountthe CIF that occur in intervalsof time. Note : there isno right, wrong, efficientmethodof IRR. Dependingonthe parameterssuchas: trendof COFand CIF , Existence of interimCIF,IntervalsatwhichCIFoccurs etc , the investors shouldchoose amongIRR,XIRR ,MIRR . UsuallyIRRmethodisconsidered.