Perez Construction Four years ago, after 11 years in banking, you opened up a management consulting firm serving the Coastal Bend area of Texas. Sofia Perez, CEO of Perez Construction, recently approached your firm with a request to conduct a multi-layered analysis of Perez Construction. Perez Construction is a fullservice general contractor offering "Design \& Build" or remodeling services in the region running from Houston to McAllen. It is a closely held, public firm. Ms. Perez has asked you to conduct an analysis of Perez Construction's financial statements, investment options, and impact of a give decision on its value. Project examination will be from the perspective of making a choice between completing mutually-exclusive options and the impact on firm value arising from accepting a second project that is being championed by some at Perez Construction. Deliverable (Report Layout) Your report is to begin with an Executive summary. Instead of presenting a "conclusion," you follow the typical approach of presenting the "bottom line" up front in an Executive Summary. This "summary" of the report findings should include some kcy numeric values, but no computations. You can earn 6 points for Part 1, 2 points for Part 2, and 3 points for Part 3 on this component of your report. The remainder of your report has three components. In the financial statement analysis, you evaluate Perez Construction's current economic condition. This segment of the report is worth the most points largely because one has to understand the firm's current condition in order to effectively plan for the future. Two separate projects are being considered in the capital budgeting and valuation components of the paper. As important as computation of the values is assessment of them, hence each component has a qualitative component as well as a quantitative component. Your analysis is due at the end of Week 7, which is the last full week of the course. The potential point distribution is exhibited below: Each case component has a different weighting, including the proportion of points arising from crunching numbers and analyzing numbers. Specific grading by major neport component is given in the following matrix, where you can see that 39 points arise from computations and II points from analysis Let's take a closer look at the qualitative and quantitative components in terms of the MBA Learning goals being assessed by this project. Goal 1, Objective 1: Written Communication. Through this project, you will be able to demonstrate your writing skills. The components required are: a. Introduction - Your responsibility vis a vis Perez Construction b. Organization - Current finances - New Project - Impact on firm value c. Content - Presentation of analysis; complete, without excessive repetition d. Conclusion - A one or two sentence summary of current condition and project acceptability e. Grammar - Your consulting agency is respected for your ability to communicate f. Spelling-Run your final report through a grammar and spell check software package Goal 2: Analytic Skills. Through this project, you will demonstrate your analytic skills. The components required are: a. Objective I: Assessment of Business Practices - Part 1 a. Identify applicable data - Which numbers are used in equation? b. Compute solutions - Proper placement of numbers in equation c. Identify symptoms - Values above or below trend and industry benchmarks d. Identify main problems - Note category of values which are above/below benchmarks c. Create solutions - Propose changes that could be made to address problems b. Objective 2: Decision Making - Part 2 and Part 3 a. Evaluate feasibility - Evaluate project in terms of time, yicld, and dollar capital budgeting criteria (i.e., payback, internal rate of retum, net present value) b. Defend solution - Compare computation to capital budgeting decision rule and change in firm value (NOTE: In order to provide unique cases to all students. It is possible that an accepted(rejected) project on the basis of capital budgeting criteria may still negatively (positively) impact firm values when all externalities are considered.) project on the basis of capital budgeting criteria may still negatively (positively) impact firm values when all externalities are considered.) Part I. Financial Statement Analysis In order to bring you up to speed with Perez Construction's current situation, you have been asked to assess Perez Construction's financial performance during 2021 and its financial position at year-end 2021. To complete this assignment, you have gathered the firm's 2021 financial statements (below). In addition, your assistant obtained the firm's ratio values for 2019 and 2020, along with the 2021 industry average ratios. During the year, lease payments were $10,000, while sinking fund payments were $10,000. To Do: 1. Calculate the firm's 2021 financial ratios, and then fill in the table given at the bottom of this section. (10 points; 1 point each) (ASSUME a 365-day year) 2. In Executive Summary evaluate the firm's strength and weaknesses. Break your analysis down into evaluations of the firm's liquidity, asset management, debt, profitability, and market ratios. (6 points - one for each category tied to trends and comparison to industry, plus one for an overall synopsis.) Balance Sheets \begin{tabular}{llc} Assets31 & & December \\ & 2020 & 2021 \\ \hline \end{tabular} Current assets Perez Construstiob Part II. Stock Price Impacts During the immediately preceding 4 years, the annual dividend paid on the Perez Construction's common stock has grown from $3.91 to $4.58 (Do), or by approximately a dollar, which equates to a 4% growth rate. Sophia Perez believes that without a proposed investment, the historical annual dividend growth rate will continue into the future. Currently the required rate of return on the common stock is 13% and the stock price is $52.92. Sophia Perez' research indicates that if a proposed expansion is undertaken, the annual rate of dividend growth will rise. She feels that in the best case, the dividend would continue to grow at this rate each year forever into the future. Or, essentially, that she would replace this expansion project with a similar project repeatedly in the future. In the anticipated case. the higher annual rate of dividend growth would continue for only two years, and then at the beginning of the third year the dividend growth rate would retum fall back to a more normal level. In the worst case, the firm's growth rate would drop over time due to the use of valuable managerial resources managing inventory assignment across Perez Construction and the losses level. In the worst case, the firm's growth rate would drop over time due to the use of valuable managerial resources managing inventory assignment across Perez Construction and the losses incurred if the economy were to deteriorate in a world where it had amassed extra inventory. As a result of the increased risk associated with the proposed risky investment, the required rate of return on the common stock is expected to increase by 1% to an annual rate of 14%. This required rate of return applies regardless of which dividend growth outcome occurs. Armed with the preceding information, Sophia has tasked you with assessing the impact of the proposed risky investment on the market value of Perez Construction's stock. In this scenario analysis, your examination has shown that the best case scenario is likely to happen 20 perecnt of the time, anticipated case 65 percent of the time, and worst case 15 percent of the time. (Note on grading: Correct prices have the correct inputs, so you should report the inputs (D,D,D,r,g ) in computing P. Reporting inputs also allows you to carn partial credit in instances wherein you have not computed the correct share price, ? 1. Best case. Find the value of Perez Construction's common stock in the event that it undertakes the proposed investment and the subsequent dividend growth rate stays at 9% forever. (3 points) 2. Anticipated case. Recalculate the current price assuming that after two years the average annual dividend growth rate returns from 8% to 4%. (5 points) 3. Worst case. Recalculate the current price assuming that project is undertaken and that in addition to the required retum rising, costs exceed revenues after the initial customers are satiated. Hence, the growth rate for the overall company is only 6 pereent for one year, falls back to 5 percent in Year 2 , and then drops to 2 percent from that point onward. (5 points) 4. In the Executive Summary, summarize your findings. Include a weighted average of the expected stock price (i.e., Summation of probability times price in a given outcome). relative to the current stock price. (2 points) Part III. Project Selection Perez Construction has recently experienced a surge in demand. In order to be more productive, Perez. Construction is analyzing two potential expansion projects, Option B is costlier but provides larger cash inflows. Project A and Project B are 2. Anticipated case, Recalculate the current price assuming that after two years the average annual dividend growth rate returns from 8% to 4%. (5 points) 3. Worst case. Recalculate the current price assuming that project is undertaken and that in addition to the required retum rising, costs exceed revenues after the initial customers are satiated. Hence, the growth rate for the overall company is only 6 percent for one year, falls back to 5 percent in Year 2 , and then drops to 2 percent from that point onward. ( 5 points) 4. In the Executive Summary, summarize your findings. Include a weighted average of the expected stock price (i.e., Summation of probability times price in a given outcome). relative to the current stock price. ( 2 points) Part III. Project Selection Perez Construction has recently experienced a surge in demand. In order to be more productive, Perez Construction is analyzing two potential expansion projects, Option B is costliet but provides larger cash inflows. Project A and Project B are mutually-exclusive projects. Sophia Perez believes that the impact of this decision will extend out to three years. Perez Construction's required return on this project is 10 percent Computations for Option A are provided. Complete the analysis for OptionB, which is over $100,000 more costly, and identify the project that should be selected. Show work to get partial credit in situations where vou have incorrect final answer. PART A. Capital Budgeting 1. Payback Method (3 points; Option A=2.04 years); 2. Discounted Payback (4 points; Option A=2.41 years): 3. Net Present Value ( 2 points; Option A=$67,479) : 4. Profitability Index ( 1 point; Option A=1.22) : 5. Intemal Rate of Retum (1 point, Option A=22.0% ): 6. Modified Internal Rate of Retum (5 points; Option A = 17.46%): 7. In the Executive Summary, based on the information given and your computations, identify the project should be chosen by Perez Construction. Why? (Hint: Include discussions of time, yield, and dollars) (3 points) Perez Construction Four years ago, after 11 years in banking, you opened up a management consulting firm serving the Coastal Bend area of Texas. Sofia Perez, CEO of Perez Construction, recently approached your firm with a request to conduct a multi-layered analysis of Perez Construction. Perez Construction is a fullservice general contractor offering "Design \& Build" or remodeling services in the region running from Houston to McAllen. It is a closely held, public firm. Ms. Perez has asked you to conduct an analysis of Perez Construction's financial statements, investment options, and impact of a give decision on its value. Project examination will be from the perspective of making a choice between completing mutually-exclusive options and the impact on firm value arising from accepting a second project that is being championed by some at Perez Construction. Deliverable (Report Layout) Your report is to begin with an Executive summary. Instead of presenting a "conclusion," you follow the typical approach of presenting the "bottom line" up front in an Executive Summary. This "summary" of the report findings should include some kcy numeric values, but no computations. You can earn 6 points for Part 1, 2 points for Part 2, and 3 points for Part 3 on this component of your report. The remainder of your report has three components. In the financial statement analysis, you evaluate Perez Construction's current economic condition. This segment of the report is worth the most points largely because one has to understand the firm's current condition in order to effectively plan for the future. Two separate projects are being considered in the capital budgeting and valuation components of the paper. As important as computation of the values is assessment of them, hence each component has a qualitative component as well as a quantitative component. Your analysis is due at the end of Week 7, which is the last full week of the course. The potential point distribution is exhibited below: Each case component has a different weighting, including the proportion of points arising from crunching numbers and analyzing numbers. Specific grading by major neport component is given in the following matrix, where you can see that 39 points arise from computations and II points from analysis Let's take a closer look at the qualitative and quantitative components in terms of the MBA Learning goals being assessed by this project. Goal 1, Objective 1: Written Communication. Through this project, you will be able to demonstrate your writing skills. The components required are: a. Introduction - Your responsibility vis a vis Perez Construction b. Organization - Current finances - New Project - Impact on firm value c. Content - Presentation of analysis; complete, without excessive repetition d. Conclusion - A one or two sentence summary of current condition and project acceptability e. Grammar - Your consulting agency is respected for your ability to communicate f. Spelling-Run your final report through a grammar and spell check software package Goal 2: Analytic Skills. Through this project, you will demonstrate your analytic skills. The components required are: a. Objective I: Assessment of Business Practices - Part 1 a. Identify applicable data - Which numbers are used in equation? b. Compute solutions - Proper placement of numbers in equation c. Identify symptoms - Values above or below trend and industry benchmarks d. Identify main problems - Note category of values which are above/below benchmarks c. Create solutions - Propose changes that could be made to address problems b. Objective 2: Decision Making - Part 2 and Part 3 a. Evaluate feasibility - Evaluate project in terms of time, yicld, and dollar capital budgeting criteria (i.e., payback, internal rate of retum, net present value) b. Defend solution - Compare computation to capital budgeting decision rule and change in firm value (NOTE: In order to provide unique cases to all students. It is possible that an accepted(rejected) project on the basis of capital budgeting criteria may still negatively (positively) impact firm values when all externalities are considered.) project on the basis of capital budgeting criteria may still negatively (positively) impact firm values when all externalities are considered.) Part I. Financial Statement Analysis In order to bring you up to speed with Perez Construction's current situation, you have been asked to assess Perez Construction's financial performance during 2021 and its financial position at year-end 2021. To complete this assignment, you have gathered the firm's 2021 financial statements (below). In addition, your assistant obtained the firm's ratio values for 2019 and 2020, along with the 2021 industry average ratios. During the year, lease payments were $10,000, while sinking fund payments were $10,000. To Do: 1. Calculate the firm's 2021 financial ratios, and then fill in the table given at the bottom of this section. (10 points; 1 point each) (ASSUME a 365-day year) 2. In Executive Summary evaluate the firm's strength and weaknesses. Break your analysis down into evaluations of the firm's liquidity, asset management, debt, profitability, and market ratios. (6 points - one for each category tied to trends and comparison to industry, plus one for an overall synopsis.) Balance Sheets \begin{tabular}{llc} Assets31 & & December \\ & 2020 & 2021 \\ \hline \end{tabular} Current assets Perez Construstiob Part II. Stock Price Impacts During the immediately preceding 4 years, the annual dividend paid on the Perez Construction's common stock has grown from $3.91 to $4.58 (Do), or by approximately a dollar, which equates to a 4% growth rate. Sophia Perez believes that without a proposed investment, the historical annual dividend growth rate will continue into the future. Currently the required rate of return on the common stock is 13% and the stock price is $52.92. Sophia Perez' research indicates that if a proposed expansion is undertaken, the annual rate of dividend growth will rise. She feels that in the best case, the dividend would continue to grow at this rate each year forever into the future. Or, essentially, that she would replace this expansion project with a similar project repeatedly in the future. In the anticipated case. the higher annual rate of dividend growth would continue for only two years, and then at the beginning of the third year the dividend growth rate would retum fall back to a more normal level. In the worst case, the firm's growth rate would drop over time due to the use of valuable managerial resources managing inventory assignment across Perez Construction and the losses level. In the worst case, the firm's growth rate would drop over time due to the use of valuable managerial resources managing inventory assignment across Perez Construction and the losses incurred if the economy were to deteriorate in a world where it had amassed extra inventory. As a result of the increased risk associated with the proposed risky investment, the required rate of return on the common stock is expected to increase by 1% to an annual rate of 14%. This required rate of return applies regardless of which dividend growth outcome occurs. Armed with the preceding information, Sophia has tasked you with assessing the impact of the proposed risky investment on the market value of Perez Construction's stock. In this scenario analysis, your examination has shown that the best case scenario is likely to happen 20 perecnt of the time, anticipated case 65 percent of the time, and worst case 15 percent of the time. (Note on grading: Correct prices have the correct inputs, so you should report the inputs (D,D,D,r,g ) in computing P. Reporting inputs also allows you to carn partial credit in instances wherein you have not computed the correct share price, ? 1. Best case. Find the value of Perez Construction's common stock in the event that it undertakes the proposed investment and the subsequent dividend growth rate stays at 9% forever. (3 points) 2. Anticipated case. Recalculate the current price assuming that after two years the average annual dividend growth rate returns from 8% to 4%. (5 points) 3. Worst case. Recalculate the current price assuming that project is undertaken and that in addition to the required retum rising, costs exceed revenues after the initial customers are satiated. Hence, the growth rate for the overall company is only 6 pereent for one year, falls back to 5 percent in Year 2 , and then drops to 2 percent from that point onward. (5 points) 4. In the Executive Summary, summarize your findings. Include a weighted average of the expected stock price (i.e., Summation of probability times price in a given outcome). relative to the current stock price. (2 points) Part III. Project Selection Perez Construction has recently experienced a surge in demand. In order to be more productive, Perez. Construction is analyzing two potential expansion projects, Option B is costlier but provides larger cash inflows. Project A and Project B are 2. Anticipated case, Recalculate the current price assuming that after two years the average annual dividend growth rate returns from 8% to 4%. (5 points) 3. Worst case. Recalculate the current price assuming that project is undertaken and that in addition to the required retum rising, costs exceed revenues after the initial customers are satiated. Hence, the growth rate for the overall company is only 6 percent for one year, falls back to 5 percent in Year 2 , and then drops to 2 percent from that point onward. ( 5 points) 4. In the Executive Summary, summarize your findings. Include a weighted average of the expected stock price (i.e., Summation of probability times price in a given outcome). relative to the current stock price. ( 2 points) Part III. Project Selection Perez Construction has recently experienced a surge in demand. In order to be more productive, Perez Construction is analyzing two potential expansion projects, Option B is costliet but provides larger cash inflows. Project A and Project B are mutually-exclusive projects. Sophia Perez believes that the impact of this decision will extend out to three years. Perez Construction's required return on this project is 10 percent Computations for Option A are provided. Complete the analysis for OptionB, which is over $100,000 more costly, and identify the project that should be selected. Show work to get partial credit in situations where vou have incorrect final answer. PART A. Capital Budgeting 1. Payback Method (3 points; Option A=2.04 years); 2. Discounted Payback (4 points; Option A=2.41 years): 3. Net Present Value ( 2 points; Option A=$67,479) : 4. Profitability Index ( 1 point; Option A=1.22) : 5. Intemal Rate of Retum (1 point, Option A=22.0% ): 6. Modified Internal Rate of Retum (5 points; Option A = 17.46%): 7. In the Executive Summary, based on the information given and your computations, identify the project should be chosen by Perez Construction. Why? (Hint: Include discussions of time, yield, and dollars) (3 points)