I attached information regarding this project, i also attached the financials and also a sample of what i need. the chosen industry isSunCoke Energy Partners LP (NYS: SXCP). This is a 15 to 20 pages project

SunCoke Energy Partners LP (NYS: SXCP) Exchange rate used is that of the Year End reported date As Reported Annual Balance Sheet Report Date Currency Audit Status Consolidated Cash Cash & cash equivalents Receivables Receivables from affiliates, net Coal Coke Material, supplies & other inventories Inventories Other current assets Total current assets Restricted cash Coke & energy plant, machinery & equipment Coal logistics plant, machinery & equipment Land & land improvements Construction-in-progress Other property, plant & equipment Gross investment, at cost Less: accumulated depreciation Property, plant & equipment, net Goodwill Other intangible assets Goodwill & other intanigble assets, net Deferred charges & other assets Total assets Accounts payable Accrued benefits Other accrued liabilities Accrued liabilities Short-term debt Current portion of long-term debt Interest payable Total current liabilities Senior notes Revolving credit facility Promissory note payable Partnership's term loan Total borrowings 12/31/2015 USD Not Qualified Yes 48600000 40000000 1400000 42500000 5600000 29000000 77100000 2000000 169100000 17700000 1265800000 159200000 94900000 93700000 4000000 1617600000 291100000 1326500000 67700000 187400000 500000 1768900000 45300000 12900000 1100000 17500000 76800000 552500000 182000000 114300000 50000000 898800000 Original issue premium Debt issuance costs Total debt Less: current portion of long-term debt Long-term debt Deferred income taxes Asset retirement obligation Other deferred credits & liabilities Total liabilities Common units held by public Common units held by parent Subordinated units General partner interest Limited partner's equity Retained earnings (accumulated deficit) Partners' capital attributable to SunCoke Energy Partners, L.P. Noncontrolling interest Total equity 12100000 -15300000 895600000 1100000 894500000 38000000 5600000 9000000 1023900000 300000000 211000000 203300000 15100000 729400000 15600000 745000000 As Reported Annual Income Statement Report Date 12/31/2015 Currency USD Audit Status Not Qualified Consolidated Yes Sales & other operating revenue 838500000 Total revenues 838500000 Cost of products sold & operating expenses 599600000 Selling, general & administrative expenses 34300000 Depreciation & amortization expense 67400000 Bank fees Total costs & operating expenses 701300000 Operating income 137200000 Interest expense, net 47500000 Income before income tax expense 89700000 Partnership - U.S. federal 1300000 Partnership - U.S. state & local -4200000 Total partnership income tax expense (benefit) -2900000 Previous owner - U.S. federal 300000 Previous owner - U.S. state & local 100000 Total previous owner income tax 400000 Income tax expense (benefit) -2500000 Net income (loss) 92200000 Less: net income attributable to noncontrolling interests -6200000 Net income attributable to SunCoke Energy Partners, L.P. or p 86000000 Less: net income attributable to previous owner -600000 Net income attributable to SunCoke Energy Partners, L.P. 85400000 Net income attributable to Suncoke Energy Partners, L.P. subsequ - General partner's interest in net income Limited partners' interest in net income Common unitholders' interest in net income Subordinated unitholders' interest in net income Weighted average common units outstanding - basic Weighted average subordinated units outstanding - basic Weighted average common units outstanding - diluted Weighted average subordinated units outstanding - diluted Year end units outstanding Net income per common unit - basic Net income per subordinated unit - basic Net income per common unit - diluted Net income per subordinated unit - diluted Total number of employees Number of common stockholders 8600000 77400000 26200000 15700000 26200000 15700000 46203440 1.92 1.71 1.92 1.71 606 3 As Reported Annual Retained Earnings not available for this company at present. As Reported Annual Cash Flow Report Date 12/31/2015 Currency USD Audit Status Not Qualified Consolidated Yes Net income (loss) 92200000 Depreciation & amortization expense 67400000 Deferred income tax expense (benefit) -2500000 Loss on extinguishment of debt -700000 Receivables -8600000 Receivables from affiliate, net 3300000 Inventories 15000000 Accounts payable -12100000 Accrued liabilities -5400000 Interest payable 500000 Other operating activities 300000 Net cash flows from operating activities 149400000 Capital expenditures -42300000 Acquisition of business, net of cash acquired -191700000 Restricted cash -17700000 Net cash flows from investing activities -251700000 Proceeds from issuance of common units, net of offering costs 30000000 Proceeds from issuance of long-term debt 260800000 Repayment of long-term debt -231300000 Debt issuance costs -5300000 Proceeds from revolving credit facility 232000000 Repayment of revolving credit facility -50000000 Distributions to unitholders (public & parent) -104500000 Distributions to noncontrolling interest (SunCoke Energy, Inc.) Common public unit repurchases Capital contribution from SunCoke Energy Partners GP LLC Net transfers from partners Net cash flows from financing activities Net increase (decrease) in cash & cash equivalents Cash & cash equivalents at beginning of year Cash & cash equivalents at end of year Interest paid Income taxes paid -3600000 -12800000 2300000 117600000 15300000 33300000 48600000 49800000 800000 12/31/2014 USD Not Qualified Yes 33300000 30800000 3100000 42500000 1300000 22200000 66000000 1600000 134800000 889700000 83600000 45300000 41000000 2400000 1062000000 168700000 893300000 15100000 14800000 1058000000 44600000 7500000 12300000 64400000 - 12/31/2013 USD Not Qualified Yes 46300000 20200000 6400000 33100000 4100000 22100000 59300000 1700000 133900000 836800000 82600000 44300000 36300000 1600000 1001600000 130500000 871100000 16000000 6500000 1027500000 58700000 4200000 2200000 6400000 40000000 4600000 109700000 - 12/31/2012 USD Not Qualified Yes 435 435 - 411500000 4000000 1200000 481100000 239100000 113800000 203700000 9200000 565800000 11100000 576900000 149700000 2800000 600000 262800000 240800000 41000000 290400000 8300000 580500000 184200000 764700000 20 980 -565 435 12/31/2014 USD Not Qualified Yes 648400000 648400000 476400000 21400000 40600000 538400000 110000000 37100000 72900000 1200000 71700000 -15700000 56000000 56000000 12/31/2013 USD Not Qualified Yes 687300000 687300000 510100000 21400000 33000000 564500000 122800000 15400000 107400000 4500000 102900000 -40800000 62100000 -3500000 58600000 12/31/2012 USD Not Qualified Yes 565 565 -565 - 2400000 53600000 19700000 15700000 19700000 15700000 37403613 1.58 1.43 1.57 1.43 2 1600000 28500000 28500000 15700000 15700000 15700000 15700000 31422850 1.81 1.81 1.81 1.81 2 1 12/31/2014 USD Not Qualified Yes 71700000 40600000 1200000 15400000 -10600000 3300000 -6700000 -14100000 1100000 7700000 -1400000 108200000 -62400000 -62400000 90500000 268100000 -276300000 -5800000 40000000 -80000000 -74700000 12/31/2013 USD Not Qualified Yes 102900000 33000000 4500000 -24500000 -6400000 8300000 16700000 -13800000 4600000 5000000 130300000 -41500000 -113300000 -154800000 231800000 150000000 -225000000 -6800000 40000000 -37200000 12/31/2012 USD Not Qualified Yes -565 -565 - -20900000 300000 -58800000 -13000000 46300000 33300000 15700000 - -82900000 900000 70800000 46300000 46300000 - 1000 1000 435 435 - In this project, your team (1 to 2 students per team) is supposed to apply the knowledge obtained from the financial management (FINC6352) course to estimate 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 of your choice. You are expected to 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 it should be accepted. (1) Read the Instruction to the Final Project carefully. Your team is expected to inform the instructor of the publicly-traded company that you choose for your final project before you start the project. Different groups are expected to analyze different firms. If several groups happen to select the same company, the first group that informed the instructor has the priority, and the other group has to change their selection and choose another company. (2) Financial data are available in the UHV online library. The detailed information is given in theFinancial Data Sources file. (3) Your project should be well-organized and typed in a Word File. You need to submit a copy of your Word file AND the Excel file to the instructor. ONE submission per group is OK. 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. 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 information 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 apply the knowledge obtained in Financial Management and Financial Statement Analysis (ACCT6351) to the key financial ratios of the selected company. - 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. - Perform industry (or benchmark companies) comparison analysis of the key financial ratios of the company. - 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; - 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 $380 million to purchase equipment, and $25 million for shipping & installation fee. The fixed assets fall in the 7-year MACRS class. The salvage value of the fixed assets is 15% 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 1,660,000 and the expected annual growth rate is 8.5%. The sales price is $250 per unit and the variable cost is $185 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized inflation rate of 2.8%. The required net operating working capital (NOWC) is 12% of sales. Please 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. (Please refer to Table 11A-2 MACRS allowances on P.469 in the textbook) - Estimate annual cash flows for the 8 years. - Draw a time line 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. TheScenario analysis of several variables simultaneously is encouraged (but not required). A PDF document named Sensitivity Analysis in Excel is provided in this learning module. The article introduces the Data Table method that you can use for performing sensitivity analysis in Excel. - Discuss whether the project should be taken and summarize your report. 3. Other information regarding the project: (1) Avoid the firms in the financial sector. The financial statements in the financial industry are not compatible with the type of models that we learned in this class. Generally, financial firms have 4-digit SIC codes from 6000 to 6999. (2) Your team needs to inform the instructor of the publicly-traded company that you intend to analyze. Different team should use different companies for their projects. If two teams happen to select the same company, the group that informed the instructor at first will have the priority, and the other group need to pick another company. (3) Your project should be well-organized and typed in a Word document and attach the important tables with your report. The style and organization of the project is also very important. It accounts for 10 points.Do not directly copy any contents from any other resources. Do not analyze the companies that were recently used in MBA Case Conferences, or other projects/courses that are highly related to this project. List the cited references in your project. (5) This is a team-based project, it accounts for 200 points for each member in the team. Teamwork is very critical for this project because everyone in a team will receive the same ORIGINAL grade for this project. Based on previous experiences, many students complained that some of their team partners didn't work actively on the project. To solve the incentive problem, the instructor will adjust the ORIGINAL score based on the performance of each group member. So every student is required to fill out the Peer Review Formand submit it online individually. SELECTED INDUSTRY IS SUNCOKE ENERGY PARTNERS SunCoke Energy Partners LP (NYS: SXCP) to Company Analysis List Address: 1011 Warrenville Road,Suite 600,Lisle, IL 60532 United States | Phone: 630 8241000 | Company Website: www.suncoke.com Incorporated: July 2012 , DE, United States CUSIP: 86722Y10 Auditor: KPMG LLP Legal Counsel: Vinson & Elkins L.L.P. Transfer Agent: Computershare, Providence, R.I. Country: United States Sector: Metal Products Industry: Blast furnaces and steel mills (SIC 3312) Industry: Iron and Steel Mills (NAICS 331111) Number of Employees: 606 (Approximate Full-Time as of 12/31/2015) Number of Shareholders: 3 (record) (as of 02/12/2016) Market Cap: 698,172,660 Revenue: 829,700,000 Net Income: 112,600,000 Dividend: 2.3645 Dividend Yield: 15.6486 EPS Basic: 2.23 EPS Diluted: 2.23 PE Ratio: 6.7758 Sample Project 1 J.B. Hunt Transport Services, Inc. Page 2 of 26 Executive Summary J.B. Hunt Transport Services, Inc. is a holding company that, together with its wholly-owned subsidiaries and associated companies, provides a range of transportation services to customers throughout the continental U.S., Canada and Mexico. The company was incorporated in Arkansas on August 10, 1961 and enjoyed niche market share since then. JB Hunt's major competitors are Landstar System, Inc., Ryder System, Inc., and Knight Transportation, Inc. On an average JB Hunt has favorable financial numbers than the industry average or some of its competitors. This paper will focus on analyzing JB Hunt's financial positioning and its ability to take on the new project to add value to shareholders and the company itself. The new project in review will require initial investment of $192 million and is expected to generate cash flow for 8 years. After performing capital budgeting analysis by discounting future cash flow with company's weighted average cost of capital at 10.05%, it was determined that net present value (NPV) of the new project will be $173.69 million and is expected to pay for itself in 5.19 years according to discounted payback calculations. Internal rate of return (IRR) of 24.7% is way more than its WACC. Therefore it is suggested that JB Hunt should take on the project which have high probability of adding values to the stakeholders. Page 3 of 26 Table of Contents Executive Summary....................................................................................................................................... 2 1.0 Financial Ratio Analysis ........................................................................................................................... 4 2.0 Capital Structure Estimation ................................................................................................................. 13 3.0 Weighted Average Cost of Capital (WACC)........................................................................................... 14 4.0 Cash Flow Estimation ............................................................................................................................ 16 5.0 Sensitivity Analysis ................................................................................................................................ 19 6.0 Appendix ............................................................................................................................................... 22 References .................................................................................................................................................. 26 Page 4 of 26 1.0 Financial Ratio Analysis JB Hunt is a public limited company with various stakeholders. Before taking on any project the management must conduct a complete financial analysis of the company. It also needs compare its financial health as compared to others in the industry and industry as a whole. The management needs to look at primary ratios such as liquidity ratio, asset management ratio, debt management ratios, profitability ratios and market value ratio. Also to remove the unusual activity effect they need to perform trend analysis for last five years. Table 1.1, below depicts JB hunt's all relevant ratios for past five years and also compare those ratios with competitors Ryders and Landstar. In addition it also shows peer average ratios from the companies in the same industry. Table 1.1 - Key Financial Ratios Ratios Liquidity Ratios Quick Ratio Current Ratio Peer Avg. 12/31/2008 12/31/2007 12/31/2006 12/31/2005 12/31/2004 Ryders LandStar 0.69 0.97 0.66 0.93 0.74 0.98 1.27 1.72 1.02 1.51 0.68 0.86 1.79 2.01 0.99 1.27 221.14 27.45 2.69 2.04 237.68 34.54 2.57 1.92 265.61 37.98 2.59 2.01 300.33 40.08 2.97 2.06 303.14 37.88 2.75 1.96 115.5 32.94 1.21 0.91 43.51 21.28 4.11 185.17 Debt Management Debt Ratio Times-Interest-Earned (TIE) Ratio LT Debt to Equity Total Debt to Equity 71% 10.14 0.97 1.2 82% 8.47 1.98 2.66 57% 23.09 0.24 0.52 47% 52.66 0.15 0.15 42% 42.14 80% 2.23 1.84 2.13 62% 25.42 0.44 0.54 Profitability Ratios Profit Margin on Sales Basic Earning Power (BEP) Ratio 5.38% 19.98% 6.11% 19.80% 6.61% 21.05% 6.63% 22.20% 3.22% 5.23% 4.20% 28.16% Asset Management Ratios Inventory Turnover Days Sales Outstanding (DSO) Fixed Asset Turnover Ratio Total Asset Turnover - 5.25% 20.80% 1.75 1.83 1.81 Page 5 of 26 Return on Total Asset (ROA, net) Return on Common Equity (ROE) Return on Investment (ROI, Operating) EBITDA Margin % 10.94 45.87 29.55 14.98 11.73 38.65 30.57 16.41 13.25 27.9 35.54 16.62 13.64 24.71 38.17 16.06 10.28 18.65 35.65 16.42 2.94 12.33 7.87 21.77 17.21 51.27 50.97 7.85 4.65 17.89 14.95 12.46 Market Value Ratio Price/Earnings (P/E) Ratio Price/Cash Flow Ratio Market/Book Ratio 16.51 8.22 6.26 16.05 8.18 9.97 15.52 8.46 4.49 17.68 9.90 4.49 6.14 3.03 1.04 10.84 2.08 1.61 17.78 14.96 7.79 2.50 4.02 4.2 3.41 2.76 2.85 5.26 2.11 5.31 2.43 5.29 22.28 24.17 2.29 4.9 Per Share Cash Flow per Share Book Value per Share JBHT has favorable ratio JBHT has unfavorable ratio JBHT is at par with others Page 6 of 26 1.1 Liquidity Ratios Liquidity ratios describe how quickly and asset may be turned into cash or how much quick asset is available to support current liabilities. There are two ratios that are used to measure liquidity; the current ratio and the quick ratio. The greater the current and quick ratio, the more liquid assets a firm has to satisfy its short term debt obligations. Ideally, creditors would like to see higher current and quick ratios. Higher liquidity ratios indicate that there are more assets available to settle creditors' claims in the event the company is unable to fulfill its short term obligations. For JB Hunt (JBHT henceforth), these ratios are below the industry average ratios. In 2008 their quick ratio is only 0.69 as compared to Landstar's 1.79 and industry 0.99. Its current asset ratio of 0.97 is also lower than industry 1.27 and Landstar's 2.01. However, JBHT still have favorable ratios as compared to Ryders. JBHT's cash management strategy is to keep low cash in hand and they also enjoy higher trade credit terms. JB Hunt may want to revise their expensive trade credit discounts and compare with other source of loans. Also they may want to increase the cash availability to take bargain opportunities in future. The trend, as shown in figure 1.1, shows that JB Hunt's ratios started deteriorating since 2005, this is when the company's cash balanced dropped from 23 million to 7 million (see Appendix for detailed financial statements). Page 7 of 26 Figure 1.1 Liquidity Ratios 1.2 Asset management Ratios Asset management ratios measures efficiency of a firm by calculating inventory turnover, days sales outstanding, fixed asset turnover and total asset turnover ratios. JBHT has outperformed in asset management ratios as compared to peers and competitors. As depicted in table 1.1 and figure 1.2 its inventory turnover is 221.14, DSO 27.45, fixed asset turnover 2.69 and total asset turnover was 2.04. The five year trend shows that JBHT has been doing excellent job in reducing its inventory turnover and DSO ratios without affecting their sales. Page 8 of 26 Figure 1.2 Asset Management Ratios 1.3 Debt Management Ratios The debt management ratios measure the extent to which a firm is financed by debt. It shows the level of leverage a firm uses in their capital structure. JBHT's debt ratio of 71% in 2008 is much better than Ryder's 80% but lower than Landstar's 62%. The trend analysis as per figure 1.3 shows that JBHT has been adding debt in recent years, especially in 2007 to finance its investments. It has favorable long-term debt to equity ratio of 0.97 as compared to industry ratio of 1.83 and also has favorable total debt to equity ratio of 1.2 as compared to 1.81 industry average. JBHT's long term debt spike in 2007 led to lower TIE ratio on 2007. However, the TIE ratio of 10.14 is still favorable than its competitor Ryder but lower than Landstar. Page 9 of 26 Figure 1.3 Debt Management: TIE Ratio Figure 1.4 Debt Management: TIE Ratio Page 10 of 26 Figure 1.5 Debt Management: Debt to Equity 1.4 Profitability Ratios Profitability ratios show how much profit is earned per dollar of sales or invested. JBHT's profit margin on sales was 5.38% in 2008 as compared to Ryder's 3.22% and Landstar's 4.20%. Company has favorable ratio due to its niche position in market. The trend analysis shows a constant ratio since 2004. Basic earnings power ratio in 2008 was 19.98%. JBHT also have a favorable ROA 10.94, ROE 45.87 and ROI 29.55 as compared to industry average of 4.65, 17.89, &14.95 respectively. As depicted in figure 1.7, company's Return on equity has increased since 2007 due to shift in capital structure from equity to debt. Earlier we saw that debt ratio was increased in 2007 this was reflected in higher ROE. Page 11 of 26 Figure 1.6 Profitability Ratios: Profit Margin and BEP Figure 1.7 Profitability Ratios: ROA, ROE and ROI Page 12 of 26 1.5 Market Value Ratios As shows in figure 1.8, JBHT's stock price to earnings ratio has been constant since 2005 after gaining 300% in 2004. The constant P/E ratio is also reflected in constant price to cash flow ratio. In 2008 company has favorable P/E ratio of 16.51 as compared to Ryders but unfavorable as compared to Landstar. Figure 1.8 Market Value Ratios Overall JBHT has favorable ratios as compared to industry average and some if it's primary competitor. However, it may be lagging in few areas as compared to leader in the group Landstar, Inc. Company's higher efficiency ratios led them to make higher profits on dollar invested however, they need to revisit the working capital ratios to increase cash balances. Page 13 of 26 2.0 Capital Structure Estimation The capital structure of a firm is the balance of debt and equity used to finance the firm's operating activities. Most importantly, capital structure affects the firm's cost of capital. If the firm seeks funding for its operations and does not have enough cash on hand to finance the activity, the firm must seek external financing. The cost of this financing is determined by how risky lenders and investors perceive the loan/investment to be. The capital structure of the firm influences this perceived risk. JBHT's market value capital structure composed of 13% debt and 87% equity. They did not issue preferred stock. As depicted in table 2.1 the total market cap of debt and equity composed of 515 million and 3,311 million respectively. Table 2.1 Capital Structure Estimation Capital Structure Estimation Estimation of Weight of Capital Structure (in thousands) Debt Preferred Stock Common Stock Total a Book Value $ 515,000 - Weights 49% 0% $ 529,011 $ 1,044,011 51% 100% Market Value of Common Stock is obtained by multiplying common stock outstanding with closing price at Dec 31st 2008 Market Value $ 515,000 $ $ 3,311,649 3,826,649 Weights 13% 0% 87% 100% a Page 14 of 26 3.0 Weighted Average Cost of Capital (WACC) The decision to accept or reject the proposed project will largely be dependent on the firm's ability to obtain financing at a cost that will allow the project to generate positive future cash flows and add value to JBHT. We will now determine each component cost of capital so that we may apply the weights determined in the previous section to their respective costs and arrive at our firm's weighted average cost of capital. Weighted Average of Cost of capital shows firm's average cost of capital. For JBHT as depicted in below tables their after tax cost of debt is 3.42%. Their cost of equity is 11.08%. To calculate the cost of equity three methods were used capital asset pricing model (CAPM), discounted cash flow (DCF), and bond-yield-plus-risk-premium approach. All three methods shows variations in the cost of equity hence, the average of all three has been taken to derive cost of equity. As shown in table 3.1 JBHT's WACC is 10.05%, this is higher due to lower debt weights in company's capital structure. Page 15 of 26 Table 3.1 Cost of Debt Component Cost of Debt 3.42% For JBHT, future interest rate (rd) will be based on 20 year AAA Corporate Bond. As per Annual Report 10-K, effective income tax rate was 37.8% in 2008 and 34.4% in 2007. As per Yahoo Finance: http://finance.yahoo.com/bonds/composite_bond_rates 20 Year AAA Corporate Bond (rd) Income Tax (T) Component Cost of Debt 5.50% 37.80% rd(1-T) 3.42% Table 3.1 Cost of Equity 9.58% CAPM Approach (rs) : Risk-free Rate (rRF) 10 Year US Treasury Bond http://finance.yahoo.com/bonds/composite_bond_rates 3.16% Beta (b) Source : http://www.google.com/finance?q=JBHT 1.07 Market Risk Premium (RPM) 6% Cost of Equity rs = rRF + (RPM)(b) rs = 0.316 + (0.06)(1.07) 9.58% DCF Approach (rs) : 15.25% Current Stock Price (P0) (as of 5/6/09) = http://finance.yahoo.com/q?s=JBHT Dividend Paid (D0) Source 10K Estimated Growth based on zacks.com (g) $ 29.28 $ 0.40 13.70% Page 16 of 26 http://www.zacks.com/rank/commentary.php?id=2197&type_id=1& Dividend Expected* at end of year 1 (D1) = D0(1+g) $ 0.45 rs = (D1/P0) + Expected g 15.25% Bond-Yield-Plus-Risk-Premium Approach (rs) : 8.42% Cost of Debt Estimated bond Risk Premium rs=cost of debt + estimated bond risk premium 3.42% 5% 8.42% CAPM Approach DCF Approach 9.58% 15.25% Bond Yield Plus Risk Premium Approach (rs) : 8.42% 11.08% Average (rs) Component Cost of preferred stock JBHT has not issued any preferred stock, hence there is no cost for preferred stock. Table 3.1 Weighted Average Cost of Capital Weighted Average Cost of Capital (WACC) WACC = wdrd(1-T) + wpsrps + wcers rd weighted cost rs weighted cost rp weighted cost WACC 10.05% 0.46% 9.59% 0.00% 10.05% 4.0 Cash Flow Estimation JBHT is considering new project. The capital outlay of 192 million was compared with future discounted cash flows. As shown in below calculations, the NPV of JBHT is positive to 176.69 million. The project has high probability of increasing shareholders value and based on the below calculation it is recommended that JBHT should pursue the new project. As shown Page 17 of 26 internal rate of return on the project will be 24.7%, a much higher number than company's WACC. Also the new project would be able to pay back in 4 years. Input Data: Cost of Fixed Assets for Project (FA) = Shipping and Installation = $ 180,000,000 $ 12,000,000 $ Depreciation Basis = Unit Sold in Year 1 = Required NOWC as % of Sales = Annual Growth Rate of Sales = Unit Sales Price in Year 1 = Variable Costs (VC) per Unit in Year 1 = Annual Inflation: Growth in Sales Price = Annual Inflation: Growth in VC per unit = Company Tax Rate = WACC = Market Value of FA at Salvage = Fixed Asset MACRS Class = Duration of the project = Depreciation Schedule: Ownership Year 192,000,000 870,000 18% 10% $ 250 $ 175 2.50% 2.50% 33% 10.05% $ 25,000,000 7 years 8 Years http://www.real-estate-owner.com/depreciationchart.html Recovery Percentage or Depreciation Rate Depreciation Expense 14% 25% 17% 13% 9% 9% 9% 4% $ 26,880,000 $ 48,000,000 $ 32,640,000 $ 24,960,000 $ 17,280,000 $ 17,280,000 $ 17,280,000 $ 7,680,000 1 2 3 4 5 6 7 8 Totals Depreciation Basis (DB) = Cumulative Depreciation Expense (CDE) = Ending Book Value of FA = (DB - CDE) = $ $ 192,000,000 192,000,000 $0 Ending Book Value $ 165,120,000 $ 117,120,000 $ 84,480,000 $ 59,520,000 $ 42,240,000 $ 24,960,000 $ 7,680,000 $ Page 18 of 26 Net Salvage Values at End of Project: Fixed Assets $ 25,000,000 $ 0 Market Value when salvaged = Book Value when salvaged = Expected Gain = Taxes paid = Net Cash Flow from salvage = $ 25,000,000 $ 8,250,000 $ 16,750,000 Projected Net Cash Flows from Project: Years 0 1 2 3 4 5 6 7 8 870,000 $ 250.00 $ 217,500,000 152,250,000 26,880,000 38,370,000 12,662,100 957,000 $ 256.25 $ 245,231,250 171,661,875 48,000,000 25,569,375 8,437,894 1,052,700 $ 262.66 $ 276,498,234 193,548,764 32,640,000 50,309,470 16,602,125 1,157,970 $ 269.22 $ 311,751,759 218,226,231 24,960,000 68,565,528 22,626,624 1,273,767 $ 275.95 $ 351,500,109 246,050,076 17,280,000 88,170,033 29,096,111 1,401,144 $ 282.85 $ 396,316,372 277,421,461 17,280,000 101,614,912 33,532,921 1,541,258 $ 289.92 $ 446,846,710 312,792,697 17,280,000 116,774,013 38,535,424 1,695,384 $ 297.17 $ 503,819,665 352,673,766 7,680,000 143,465,900 47,343,747 25,707,900 17,131,481 33,707,345 45,938,904 59,073,922 68,081,991 78,238,589 96,122,153 26,880,000 48,000,000 $ $ 52,587,900 65,131,481 32,640,000 $ 66,347,345 24,960,000 $ 70,898,904 17,280,000 $ 76,353,922 17,280,000 $ 85,361,991 17,280,000 $ 95,518,589 7,680,000 $ 103,802,153 $ 44,141,625 $ (4,991,625) $ 56,115,317 $ (6,345,634) $ 63,270,020 $ (7,154,703) $ 71,336,947 $ (8,066,927) $ 80,432,408 $ (9,095,461) $ 90,687,540 $ (10,255,132) $ $ 90,687,540 Investment Outlays: Long-Term Assets: $ (192,000,000) Fixed Assets for Project Operating Cash Flows over Project Life: Units Sold Sales Price per unit Sales Revenue Variable Costs Depreciation (Fixed Assets for Project) Operating Income Before Taxes (EBIT) Taxes on Operating Income Net Operating Profit After taxes (NOPAT) Add Back Depreciation Operating Cash Flow Cash Flows Due to Net Operating Working Capital: Net Operating Working Capital (NOWC) $ 39,150,000 $ (39,150,000) Cash Flow Due to Investment in NOWC $ 49,769,682 $ (5,628,057) Salvage Cash Flows: Long-Term Assets: Total Salvage Cash Flow: Fixed Assets for Project $ 16,750,000 $ $ $ (231,150,000) 47,596,275 59,503,424 Net Cash Flow (Time line of cash flows) Capital Budgeting Analysis: Net Present Value (NPV) Internal Rate of Return (IRR) $ 176,693,069 24.7% $ 60,001,711 $ 63,744,201 $ 68,286,994 $ 76,266,530 $ 85,263,457 $ 211,239,693 Page 19 of 26 Modified Internal Rate of Return (MIRR) Profitability Index (PI) Payback Period (in years) Discounted Payback Period (in years) Calculations for Payback Period Net Cash Flow (Time line of cash flows) Cumulative Cash Flow Percent of Year Required for Payback Calculations for Discounted Payback Period Net Cash Flow (Time line of cash flows) Discounted Cash Flow Cumulative Cash Flow Percent of Year Required for Payback 18.1% 1.76 4.0045 5.1865 0 $ (231,150,000) $ (231,150,000) 1 $ 47,596,275 $ (183,553,725) 2 $ 59,503,424 $ (124,050,301) 1 0 $ (231,150,000) $ (231,150,000) $ (231,150,000) 1 $ 47,596,275 $ 43,248,478 $ (187,901,522) 3 $ 60,001,711 $ (64,048,590) 1 2 $ 59,503,424 $ 49,128,973 $ (138,772,549) 1 1 3 $ 60,001,711 $ 45,014,997 $ (93,757,551) 1 1 4 $ 63,744,201 $ (304,390) 5 $ 68,286,994 $ 67,982,605 1 4 $ 63,744,201 $ 43,454,238 $ (50,303,313) 1 6 $ 76,266,530 $ 144,249,135 7 $ 85,263,457 $ 229,512,592 8 $ 211,239,693 $ 440,752,284 6 $ 76,266,530 $ 42,926,075 $ 34,921,492 7 $ 85,263,457 $ 43,606,175 $ 78,527,667 8 $ 211,239,693 $ 98,165,402 $ 176,693,069 0.004458 5 $ 68,286,994 $ 42,298,730 $ (8,004,583) 1 0.19 5.0 Sensitivity Analysis A sensitivity analysis is a risk assessment tool that allows managers to establish how sensitive a project may be to changes in the project's key variables. The sensitivity analysis calculates the change in NPV of the project given a change in a particular variable. For this project we have assumed variances up to 30% for several of the project's input variables: sales growth rate, variable cost per unit, sales price, units sold in year 1 of the project, WACC, and fixed costs. One way to quantify the sensitivity of a project is to chart the change in NPV based on the deviation of certain key drivers. NPV analysis is very helpful for management to see the outcome in various dynamic environments. Listed below are six tables illustrating the sensitivity of the project's NPV to changes in the aforementioned variables: Page 20 of 26 Table 5.1 Sensitivity Analysis % Deviation from SALES GROWTH RATE Sales Growth Base Case Rate $ 176,693,069 7.0% -30% % Deviation NPV 1st YEAR UNIT SALES from Units Base Case Sold -$39,265 NPV $ 176,693,069 -30% 609 $79,112 -15% 740 $125,846 0% 870 $172,579 -15% 8.5% $6,431 0% 10.0% $172,579 15% 11.5% $228,804 15% 1,001 $219,312 30% 13.0% $473,303 30% 1,131 $266,045 % Deviation Base Case VARIABLE COSTS from Variable Cost Base Case per Unit % Deviation NPV WACC from $176,693,069 NPV Base Case WACC $ 176,693,069 -30% $122.50 $412,780 -30% 7.00% $238,463 -15% $148.75 $292,679 -15% 8.50% $206,550 0% $175.00 $172,579 0% 10.00% $177,664 15% $201.25 $52,478 15% 11.50% $151,463 30% $227.50 -$67,622 30% 13.00% $127,648 % Deviation Base Case SALES PRICE from Sales Price Base Case per Unit % Deviation NPV $176,693,069 -30% $175.00 -$161,089 -15% $212.50 $5,745 FIXED COSTS from Initial Base Case Investment $176,693,069 NPV -30% $7,000 $145,870 -15% $8,500 $140,147 0% $250.00 $172,579 0% $10,000 $134,424 15% $287.50 $339,412 15% $11,500 $128,701 30% $325.00 $506,246 30% $13,000 $122,978 Base Case Table 5.2 NPV deviations Deviation NPV at Different Deviations from Base from Sales Variable Sales Growth Year 1 Base Case Price Cost/Unit Rate Units Sold -30% -$161,088,829 $412,779,852 -$39,265,482 $79,112,306 Fixed Cost $145,870,483 WACC $238,463,022 $5,744,944 $292,679,285 $6,430,781 $125,845,512 $140,147,290 $206,549,810 0% $172,578,717 $172,578,717 $172,578,717 $172,578,717 $134,424,098 $177,663,874 15% $339,412,490 $52,478,149 $228,803,950 $219,311,922 $128,700,905 $151,462,779 30% $506,246,263 -$67,622,419 $473,303,384 $266,045,127 $122,977,712 $127,647,919 Range $667,335,092 $480,402,271 $512,568,866 $186,932,821 $22,892,771 $110,815,103 -15% Page 21 of 26 Figure 5.1 Sensitivity Analysis graph Table 5.3 NPV Breakeven Analysis NPV Breakeven Analysis: Input Sales Price Variable Cost / Unit Sales Growth Rate Year 1 Units Sold Fixed Costs WACC Input Value that Produces Zero NPV $211.00 $213.00 -17.0% 388,077 $ 417,979,779.83 24.68% Page 22 of 26 6.0 Appendix Table 6.1 Balance Sheet As Reported Annual Balance Sheet 12/31/2008 12/31/2007 12/31/2006 12/31/2005 12/31/2004 2,373 14,957 7,371 7,412 23,838 Trade accounts receivables, gross Less: allowance for uncollectible accounts & revenue adjustments 285,814 335,102 - - - (5,200) (4,900) - - - Trade accounts receivable, net 280,614 330,202 Currency: USD Scale: Thousands Cash & cash equivalents Income tax receivable Inventories - 346,251 18,214 11,824 15,445 343,501 - 13,921 19,418 11,138 17,843 39,747 Prepaid licenses & permits 17,612 20,477 21,410 21,780 21,696 Prepaid insurance 50,449 49,129 62,537 76,426 83,972 9,182 18,937 7,929 14,433 16,280 Total current assets - 9,692 Assets held for sale Other current assets - 289,146 - 396,287 488,894 471,243 474,690 464,042 1,881,320 1,804,876 1,618,155 1,332,333 1,214,833 25,413 24,280 23,857 22,854 22,014 Structures & improvements 122,753 114,358 108,296 105,414 95,156 Furniture & office equipment 140,407 137,379 134,010 130,960 118,020 2,169,893 2,080,893 1,884,318 1,591,561 1,450,023 (783,363) (722,170) (600,767) (537,502) (438,644) 1,386,530 1,358,723 1,283,551 1,054,059 1,011,379 Other assets 10,636 15,129 15,263 20,125 16,285 Total assets 1,793,453 1,862,746 1,770,057 1,548,874 1,491,706 Current portion of long-term debt 118,500 234,000 214,000 Trade accounts payable 196,059 189,987 170,672 162,749 180,018 18,095 19,402 20,042 15,651 18,535 Revenue & service equipment Land Total property & equipment Less: accumulated depreciation Net property & equipment Claims accruals - - Accrued payroll 33,156 34,310 42,352 61,001 73,750 Other accrued expenses 31,995 26,663 7,961 9,198 10,504 Deferred income taxes 10,083 20,070 23,703 27,487 25,414 407,888 524,432 478,730 276,086 308,221 Total current liabilities Revolving lines of credit 165,000 430,600 Senior notes 400,000 400,000 68,500 82,500 Term loan 299,900 96,500 124,000 - - - - - Page 23 of 26 Less: current maturities Long-term debt Other long-term liabilities Deferred income taxes Total liabilities (118,500) (234,000) (214,000) - - 515,000 679,100 182,400 124,000 30,490 34,453 54,656 45,834 40,294 311,064 281,564 294,534 285,929 282,241 1,264,442 1,519,549 1,010,320 731,849 630,756 - Stockholder's equity: Preferred stock, $100 par value. 10 million shares authorized; none outstanding Common stock, $.01 par value. 1 billion shares authorized; (167,099,432 shares issued at December 31, 2008, and 2007 of which 126,062,115 shares and 124,572,121 shares were outstanding at December 31, 2008, and 2007, respectively) - Additional paid-in capital Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Total equity before treasury stock Treasury stock, at cost - - - - 1,671 1,671 1,671 1,671 418 170,931 170,536 177,065 182,680 197,870 1,343,077 1,192,628 1,035,804 863,586 694,230 (1,186) - (993) - (148) - - 1,047,937 892,518 (985,482) (1,020,645) (454,655) (230,912) (31,568) Total stockholders' equity 529,011 343,197 759,737 817,025 860,950 Total Liabilities & Equity 1,793,453 1,862,746 1,770,057 1,548,874 1,491,706,000 126,062 124,572 167,100 167,100 41,800 12/31/2008 12/31/2007 12/31/2006 12/31/2005 12/31/2004 3,001,531 730,412 3,731,943 1,479,234 859,588 520,647 202,288 158,202 60,772 41,363 32,162 19,269 3,373,525 358,418 890 35,337 -1,735 322,236 93,699 8,985 3,009,819 480,080 3,489,899 1,235,390 888,594 463,538 205,133 155,893 69,655 48,211 33,540 21,156 3,121,110 368,789 1,011 43,523 -1,230 325,047 114,499 13,462 2,897,816 430,171 3,327,987 1,124,734 892,066 447,309 183,604 145,794 71,582 33,232 34,447 22,566 2,955,334 372,653 978 16,137 -3,181 354,313 121,855 7,781 2,791,926 335,973 3,127,899 1,058,406 855,272 388,962 163,034 132,895 55,266 45,939 35,827 22,597 25,801 2,783,999 343,900 966 6,531 -4,709 333,626 114,745 5,809 2,786,154 932,133 830,005 288,562 149,776 124,172 54,757 38,460 35,020 23,046 2,475,931 310,223 1,888 7,362 -2,470 302,279 83,428 2,433 Common Stock Outstanding Table 6.2 Income Statement As Reported Annual Income Statement Currency: USD Scale: Thousands Operating revenues, excluding fuel surcharge revenues Fuel surcharge revenues Total operating revenues Rents & purchased transportation Salaries, wages & employee benefits Fuel & fuel taxes Depreciation & amortization Operating supplies & expenses Insurance & claims expenses General & administrative expenses, net of asset dispositions Operating taxes & licenses expenses Communication & utilities expenses Arbitration settlement Total operating expenses Operating income (loss) Interest income Interest expense Equity in earnings (loss) of affiliated company Earnings (loss) before income taxes Current federal income tax expense (benefit) Current state & local income tax expense (benefit) Page 24 of 26 Total current income tax expense (benefit) Deferred federal income tax expense (benefit) Deferred state & local income tax expense (benefit) Total deferred income tax expense (benefit) Income taxes 102,684 19,776 -817 18,959 121,643 127,961 -16,209 161 -16,048 111,913 129,636 5,891 -1,166 4,725 134,361 120,554 5,131 630 5,761 126,315 85,861 61,375 8,787 70,162 156,023 Net earnings (loss) 200,593 213,134 219,952 207,311 146,256 125,416 128,533 126,062.12 1.6 1.56 0.4 14,667 1,345 134,334 137,639 124,572.12 1.59 1.55 0.36 15,795 1,383 148,581 152,317 144,555.44 1.48 1.44 0.32 17,150 1,354 157,583 162,559 153,813.09 1.32 1.28 0.24 16,370 1,338 161,542 166,936 162,786.73 0.905 0.875 0.045 15,850 1,324 Weighted average shares outstanding - basic Weighted average shares outstanding - diluted Year end shares outstanding Net earnings (loss) per share - basic Net earnings (loss) per share - diluted Dividends declared per common share Total number of employees Total number of common stockholders 1 Adjusted for 2-for-1 stock split, May 24, 2005 As is 3 Approximately 4 As of February 20, 2009 5 As of February 26, 2008 6 As of February 23, 2007 7 As of January 31, 2006 8 As of January 31, 2005 2 Table 6.3 Statement of Cash Flow As Reported Annual Cash Flow 12/31/2008 12/31/2007 12/31/2006 12/31/2005 12/31/2004 Net earnings (loss) 200,593 213,134 219,952 207,311 146,256 Depreciation 202,288 205,133 - - - - - 183,604 163,034 149,776 13,773 9,389 7,171 - - - - -2,891 -1,808 -402 -659 456 - - - 3,934 8,374 - - - Currency: USD Scale: Thousands Depreciation & amortization Share-based compensation Loss (gain) on sale of revenue equipment Loss (gain) on sale of revenue equipment & other Impairment on assets held for sale Provision for deferred income taxes 19,513 3,499 4,915 5,761 70,162 Equity in loss of affiliated company 1,735 1,230 3,181 4,709 2,470 Tax benefit (expense) of stock options exercised - - - 19,276 17,829 Amortization of discount - - - - 67 Trade accounts receivable Income tax receivable Other assets Trade accounts payable 50,043 16,049 -2,750 -54,355 -33,114 4,790 21,784 -11,824 19,418 -19,418 31,672 12,317 20,218 8,052 -19,224 -16,460 14,993 7,923 -28,147 21,132 Claims accruals -1,307 -640 4,391 -2,884 1,659 Accrued payroll & other accrued expenses -4,769 -47,913 -10,827 -8,515 56,544 Net cash flows from operating activities 505,146 457,805 423,063 331,852 393,737 Page 25 of 26 Additions to property & equipment Proceeds from sale of equipment -303,241 -363,552 -483,188 -285,364 -451,083 92,360 32,917 72,985 81,458 175,295 Net proceeds (purchases) of available for sale investments 6,275 -8,756 - - - Change in other assets 2,302 -1,096 -558 -8,738 25,892 -202,304 -340,487 -410,761 -212,644 -249,896 Net cash flows from investing activities Proceeds from issuances of long-term debt - 400,000 100,000 - - -14,000 -14,000 -3,500 - -105,000 Borrowings (repayments) of long-term debt - - - 124,000 - Net proceeds (repayments) from revolving lines of credit Net proceeds (payments) from revolving lines of credit & other debt - - 175,900 - - Payments on long-term debt -273,068 135,022 - - - Principal payments under capital lease obligations - - - - -66,844 Purchase of treasury stock - -603,371 -257,395 - - 8,956 10,312 9,223 10,883 8,045 Stock option exercises Stock repurchased for payroll taxes -2,023 -2,733 -1,204 -4,206 -7,028 Tax benefit of stock options exercised 14,853 13,885 12,367 - - -50,144 -48,847 -47,734 -37,955 -7,288 - - - -239,234 - -315,426 -109,732 -12,343 -146,512 -178,115 -12,584 7,586 -41 -27,304 -34,274 14,957 7,371 7,412 34,716 58,112 2,373 14,957 7,371 7,412 23,838 Dividends paid Proceeds from sale of treasury stock Net cash flows from financing activities Net increase (decrease) in cash & cash equivalents Cash & cash equivalents at beginning of year Cash & cash equivalents at end of year Cash paid during the year for interest 35,495 52,897 14,013 5,506 7,559 Cash paid during the year for income taxes 81,934 107,349 124,307 77,209 55,578 Page 26 of 26 References J.B. Hunt Transport Services, Inc. (2007, Dec. 31). 10-K. Market Watch (2009). S&P 500 Index. http://www.marketwatch.com/quotes/spx Yahoo Finance! (2009). Bonds Center. http://finance.yahoo.com/bonds/composite_bond_rates Yahoo Finance! (2009). JB Hunt Transportation Services, Inc. http://finance.yahoo.com/q?s=jbht Google Finance!(2009). JB Hunt Transportation Services, Inc. http://www.google.com/finance?q=JBHT Yahoo Finance! (2009). Landstar System, Inc. http://finance.yahoo.com/q?s=lstr Merchant Online. http://www.mergentonline.com.ruby2.uhv.edu/compdetail.asp?company=38042 Zacks.com (2009). JB Hunt Transportation Services, Inc. http://www.zacks.com/rank/commentary.php?id=2197&type_id=1& Real Estate Owner.com. MACR Depreciation Schedule. http://www.real-estateowner.com/depreciation-chart.html