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Final Project Background information Background Information (applies to Milestones One through Three): Bayer is a life science firm with a more than 150-year history and core competencies in the areas of healthcare and agriculture. With its innovative products, it contributes to finding solutions major challenges, such as a growing and aging world population requiring improved medical care and an adequate supply of food. Bayer addresses these issues by preventing, alleviating and treating diseases, and helping to provide a reliable supply of high-quality food, feed and plant-based raw materials. Bayer Pharmaceutical is Bayer's largest division in terms of total sales. This division focuses on researching, developing and marketing innovative medicines with a positive cost-benefit ratio primarily in the therapeutic areas of cardiology, oncology, gynecology, hematology and ophthalmology. To safeguard long-term growth, Bayer is currently seeking increase its investment in research and development. Besides expanding early research, Bayer is concentrating on the clinical development of active drug substance candidates in the therapeutic areas of cardiology, oncology, hematology and gynecology. In addition, it is selectively expanding and supplementing its development portfolio through licensing agreements and acquisitions. The Crop Science Division of Bayer, on the other hand, focuses on improvement in agricultural sustainability, crop yields and quality, as well as the leveraging of digitization to help make products safer (Bayer, 2016). Bayer's aim is to help shape the future of the agricultural industry with innovative offerings that increase its productivity, thus generating profitable and sustainable growth for Crop Science and its customers and enabling the production of sufficient food, animal feed and renewable raw materials for a growing world population despite the limited amount of available arable land. This strategy is complementary to its Animal Science Division, which produces animal feed products. Bayer Crop Science Division's current strategy is to enhance its Crop Protection and Environmental Science portfolio, expand its Seeds business, and to lead the way in innovation and develop holistic solution (Bayer AG, 2016). For purposes of this discussion, assume that Bayer aims to build on its expertise in the integration of seed technology with chemical and biological crop protection. For purposes of this project, assume that Bayer is seeking to acquire Monsanto Corporation. Monsanto, along with its subsidiaries, is a leading global provider of agricultural products for farmers. Through its seeds, biotechnology-trait products, herbicides and precision agriculture tools, Monsanto (Monsanto, 2016) seeks to provide farmers with solutions that help improve productivity, reduce the costs of farming and produce better foods for consumers and better feed for animals. Monsanto has a worldwide distribution, sales and marketing organization for its agricultural-productivity products. In a growing number of locations throughout the world, it produces directly or contracts with third-party growers for corn seed, soybean, vegetable, cotton, canola and other seeds. The global market for its \"Seeds and Genomics\" segment is increasingly competitive. Both its row crops and its vegetable seed businesses compete with numerous multinational agrichemical and seed marketers globally, and with hundreds of smaller companies regionally. Bayer's proposal would pair Monsanto, the world's largest seed company, with drug-maker Bayer's growing seed and crop protection portfolio. Upon announcement of the possibility of such a bid, shares of St. Louis-based Monsanto (MON) rose by 8.7% (Kirchfield, et. al., 2016). Across 2015, immediately following announcement of a possible merger between the two firms, Bayer's growing agribusiness division saw sales rise 9% to $11.8 billion, while its healthcare sales rose 19% to $26 billion, as market participants reacted to news of the possible merger. Overall, Bayer's 2015 sales rose 12%, to $52.8 billion (Business Wire, 2014). On the other hand, Monsanto, which makes seeds (corn, cotton, fruits and other vegetables) and crop protection chemicals such as RoundUp, reported sales of $15 billion in its 2015 fiscal year. This was a 5% decline from the previous year (Daily Management Review, 2016). See Table 1, below, for an alternative view of these results. Prompt: In this project, you will assume that Bayer is considering a bid for United States seed company Monsanto (Snider, 2016). For purposes of this project, assume that you are Chief Financial Officer of Monsanto Corporation. Bayer's proposal would pair Monsanto, the world's largest seed company, with drug maker Bayer's growing seed and crop protection portfolio. Upon announcement of the possibility of such a bid, shares of St. Louis-based Monsanto (MON) rose by 8.7% (Kirchfield, et. al., 2016). Across 2015, immediately following announcement of a possible merger between the two firms, Bayer's growing agribusiness division saw sales rise 9% to $11.8 billion, while its healthcare sales rose 19% to $26 billion. Overall, Bayer's 2015 sales rose 12%, to $52.8 billion (Business Wire, 2014). On the other hand, Monsanto, which makes seeds (corn, cotton, fruits and other vegetables) and crop protection chemicals such as RoundUp, reported sales of $15 billion in its 2015 fiscal year. This was a 5% decline from the previous year (Daily Management Review, 2016). Assume that Monsanto is taxed (TC) at a rate of 35% and its cost of debt (RD) is 12%. See Table 1, below, for an alternative view of this data. In the context of Bayer's proposal, assume that Bayer's Beta is 1.24. For purposes of valuation of cash flows in the context of Bayer's proposal, consider Monsanto's discounted cash flow for only the upcoming 1 year of sales, and assume that Monsanto is expected to grow at a rate of 3% in the current year. Assume also that Monsanto's current sales are projected to be $15,239,000, while its equity holdings are estimated to be $9,141,333 and its debt is $12,359,333. Assume that Monsanto's Profit Margins and Total Asset Turnover are unchanged from 2015 levels. EBIT, depreciation, capital spending, and the change in net working capital will grow at the same rate as sales, which is expected to grow at a rate of 3% across this year, while capital investment will remain stable As an alternative proposal means of increasing shareholder value, as Chief Financial Officer of Monsanto, you have also been asked to evaluate a management proposal to expand Monsanto's existing operations to pesticide production, yielding an increase in sales of $3,950,000. In the context of this alternative proposal, assume that there is no excess capacity, and the increase in fixed asset needs would be equal to 70% of this increase in sales, while cost of sales would run 20% of sales, using a percentage of sales approach. Also assume that Monsanto issues dividends at a rate of 1.98% of net sales, and thus the firm's retention ratio is 98.2%. Assume that Monsanto's current total level of sales is $15,239,000, while the division involved in this project is expected to yield sales of $2,950,000 in the current year. .Assume that the proposed project has a risk and weighted average cost of capital similar to that of Monsanto, and a firm beta similar to that of Monsanto. Upon receipt of Bayer's proposal, your company's Board of Directors has directed you, as Chief Financial Officer of Monsanto Corporation, to review key statistics and other information and report to the Board on the following: 1. Taking account of background information and other information supplied here, determine whether to accept or reject this proposal for $62B. For purposes of this analysis, consider discounted adjusted cash flow for only the current year, in which the firm is anticipated to grow at a rate of 3%. Evaluate each of the following: a. From given information (Table 7 will aid you in making these calculations, and has been provided for this purpose): (i) Ascertain Monsanto's weighted average cost of capital (WACC) and use this along with the firm's growth rate to determine the discounted value of adjusted cash flows. Employ the discounted value of adjusted cash flows to determine how this offer compares to the present value of the firm's adjusted cash flow (CFA*), using the firm's WACC. (ii) Explain the importance that this has for the firm, and for shareholders, noting that this is an issue which you have not covered in previous Milestones - and thus you will use this additional measure alongside measures prepared in Milestone One, as you complete Milestone Three. Use information from all assigned readings to support your analyses. b. Justify your decision to accept or reject this offer using additional evidence drawn from ratio analysis, financial statement analysis, or time and trend analysis, refining your Milestone One analyses as applicable, given information covered in subsequent modules, and given current sales, equity and debt information included here. 2. With respect to the firm's alternative proposal, determine: a. The extent to which Monsanto will have to take on additional debt, given that it wishes to retain its current dividend ratio and does not wish to sell additional equities. b. Calculate the firm's sustainable growth rate and internal growth rate and use these measures to analyze a decision to accept this alternative proposal. Use these measures and concepts covered in assigned readings including EFN, DuPont Identity and leverage, Modules One through Eight, to explain the importance of these measures to shareholder interests. Use evidence and assigned readings covered to this point to support your determinations. Present your analysis in a 4-6 page double-spaced document using 12 pt. Times New Roman font. Use APA formatting. References Bayer. (2016). Bayer Global Annual Report. Bayer AG (2016). Bayer: Science for a better life. Bloomberg. (2016). United States rates and bonds. Business Wire. (2014). Merck Announces Sale of Consumer Care Business to Bayer AG for $14.2 Billion . Berkshire Hathaway Business Wire. Daily Management Review. (2016). Reports of Takeover Interests Causes Monsanto Shares to Jump. Daily Management Review. Kirchfield, A., David, R. and Nair, D. (2016). Bayer considers the offer of Monsanto. Bloomberg News. Monsanto (2016). Annual Report. Snider, M. (2016). Chemical firm Bayer makes $62B offer for Monsanto. USA Today. ValuePro. (2016). ValuePro. Yahoo Finance. (2016). MON cash flow. Yahoo Finance. (2016). MON balance sheet. Yahoo Finance. (2016). MON income statement annual. Immediate Results from the Bayer Announcement in 2015 Monsanto (MON) Share Price Increased 8.7% Bayer Crop Science Division Sales increased 9% to $11.8 billion Bayer Healthcare Division Sales Increased 19% to $26 billion Bayer Pharmaceutical Sales Increased 12%, to $52.8 billion Monsanto Sales Decreased 5% to $15 billion Table 1 Immediate Results from the Bayer Announcement in 2015 ValuPro Net Online Valuation of MONSANTO CORPORATION - 2015 Return on Assets 8.56 Return on Equity 14.93 Sales ($mil) 14,757 Investment Rate (% of Rev) 4.78 Growth Rate (%) 13.5 Working Capital (% of Rev) 29.19 Net Oper. Profit Margin (%) 21.3 Short-Term Assets ($mil) 11141 Tax Rate (%) 30.584 Short-Term Liab. ($mil) 4055 Stock Price ($) 86.74 Equity Risk Premium (%) 3 Shares Outstanding (mil) 533.8 Company Beta 1.05 10-Yr Treasury Yield (%) 500% Value Debt Out. ($mil) 2.054 Bond Spread Treasury (%) 1.5 Value Pref. Stock Out. ($mil) 0 Preferred Stock Yield (%) 7.5 Company WACC (%) Table 2 ValuePro Net Online Valuation Monsanto Co. 2015 (Bloomberg Market Rates) MON:US Current Price 106.00 (USD) Open 106.80 Day Range 109.69-109.54 8% Volume 18,049,774 Previous Close 106 52 Week Range 81.22-120 1 Year Return -7.06% YTD Return 10.94% Current P/E Ratio (TTM) 23.67 Earnings Per Share (USD) (TTM) 4.62 Market Cap (B USD) 47.747 Shares Outstanding 436.845 Price/Sales (TTM) 3.65 Dividend Indicated Gross Yield 1.98% Sector Materials Industry Chemicals Sub-Industry Agricultural Chemicals Table 3 Monsanto Co. Rates Income Statement - Monsanto Corp. Period Ending 31-Aug-15 31-Aug-14 31-Aug-13 Total Sales 15,001,000 15,855,000 14,861,000 Cost of Sales 6,819,000 7,281,000 7,208,000 Gross Profit 8,182,000 8,574,000 7,653,000 1,580,000 1,725,000 1,533,000 Operating Expenses Research Development Selling General and Administrative 2,686,000 2,774,000 2,550,000 Non Recurring 393,000 - - Others - - - Total Operating Expenses - - - 3,523,000 4,075,000 3,570,000 Operating Income or Loss Income from Continuing Operations Total Other Income/Expenses Net 71,000 - 31,000 Earnings Before Interest and Taxes 3,594,000 4,075,000 3,601,000 Interest Expense 433,000 248,000 172,000 Income Before Tax 3,161,000 3,827,000 3,429,000 Income Tax Expense 864,000 1,078,000 915,000 Minority Interest -11,000 -22,000 -43,000 Net Income from Continuing Ops 2,286,000 2,727,000 2,471,000 Discontinued Operations 28,000 13,000 11,000 Extraordinary Items - - - Effect of Accounting Changes - - - Other Items - - - 2,314,000 2,740,000 2,482,000 - - - 2,314,000 2,740,000 2,482,000 Non-recurring Events Net Income Preferred Stock and Other Adjustments Net Income Applicable to Common Shares Table 4 Monsanto Income Statement Balance Sheet - Monsanto Corp. Period Ending 31-Aug-15 31-Aug-14 31-Aug-13 Cash and Cash Equivalents 3,701,000 2,367,000 3,668,000 Short Term Investments 47,000 40,000 254,000 Net Receivables 3,182,000 3,466,000 3,042,000 Inventory 3,496,000 3,597,000 2,947,000 Other Current Assets 199,000 205,000 166,000 Assets Current Assets Total Current Assets 10,625,000 9,675,000 10,077,000 Long Term Investments 42,000 92,000 237,000 Property Plant and Equipment 4,973,000 5,082,000 4,654,000 Goodwill 4,061,000 4,319,000 3,520,000 Intangible Assets 1,332,000 1,554,000 1,226,000 Accumulated Amortization - - - Other Assets 610,000 746,000 496,000 Deferred Long Term Asset Charges 277,000 450,000 454,000 Total Assets 21,920,000 21,918,000 20,664,000 Liabilities Current Liabilities Accounts Payable Total Liabilities Stockholders' Equity 3,950,000 4,359,000 3,756,000 Short/Current Long Term 687,000 Debt 315,000 63,000 Other Current Liabilities 438,000 517,000 540,000 14,930,000 14,043,000 8,105,000 Misc. Stocks Options Warrants - - - Redeemable Preferred Stock - - - Preferred Stock - - - Common Stock 6,000 6,000 6,000 Retained Earnings 10,374,000 9,012,000 Treasury Stock -4,140,000 12,053,000 10,032,000 Capital Surplus 11,464,000 10,003,000 10,783,000 Other Stockholder Equity -2,801,000 7,188,000 -1,114,000 -1,278,000 Total Stockholder Equity 6,990,000 7,875,000 12,559,000 Net Tangible Assets 1,597,000 2,002,000 7,813,000 Table 5 Monsanto Balance Sheet Cash Flow - Monsanto Corp. Period Ending 31-Aug-15 31-Aug-14 31-Aug-13 Net Income 2,314,000 2,740,000 2,482,000 Operating Activities, Cash Flows Provided By or Used In Depreciation 716,000 691,000 615,000 Adjustments to Net Income 240,000 233,000 113,000 Changes in Accounts Receivables 68,000 -172,000 222,000 Changes in Liabilities 457,000 482,000 -129,000 Changes in Inventories -425,000 -650,000 -192,000 Changes in Other Operating Activities -273,000 -292,000 -414,000 Total Cash Flow from Operating Activities 3,108,000 3,054,000 2,740,000 Investing Activities, Cash Flows Provided By or Used In Capital Expenditures -967,000 -1,005,000 -741,000 Investments 4,000 235,000 Other Cash Flows from Investing Activities -56,000 217,000 -1,235,000 -253,000 Total Cash Flows from Investing Activities -1,019,000 -2,095,000 -777,000 Financing Activities, Cash Flows Provided by or Used in Dividends Paid -966,000 -932,000 -976,000 Sale Purchase of Stock -698,000 -6,834,000 -705,000 Net Borrowings 1,238,000 -5,536,000 127,000 Other Cash Flows from Financing Activities -36,000 -48,000 -10,000 Total Cash Flows from Financing Activities -430,000 -2,259,000 -1,485,000 Effect of Exchange Rate Changes -325,000 -1,000 Change In Cash and Cash Equivalents 1,334,000 -1,301,000 385,000 -93,000 Table 6 Monsanto Statement of Cash Flows Valuation Component Previous 3-Year Average EBIT $ 3,511,347 Depreciation $ 674,000 Taxes* $ 1,228,971 Change in NWC $ 227,911 Capital Spending $ (1,000,000) CFA* $ 3,728,464 Year 1 Firm Value Note that all values are in thousands. This table may be used to present your NPV calculations. Discount factor Discounted CFA* NPV $ 12,359,933 NPV-Debt Debt Table 7 Monsanto Firm Valuation Using Average Expected Sales Based on 3-Year Average of Previous Results BUS 505: Final Project Document Overview & Rubric Your final project for this course is to prepare a financial analysis. This final project takes a close look at two corporations, Bayer and Monsanto. Bayer is considering a bid for United States seed company Monsanto (Snider, 2016). For purposes of this project, you will act as the Chief Financial Officer of Monsanto Corporation, analyzing financial documents and determining whether Monsanto should indeed go forward with acceptance of the purchase. The project is divided into three milestones, which will be submitted at various points throughout the course to scaffold learning and ensure quality final submissions. Preliminary milestones will be submitted in Modules Four and Six. The final submission will occur in Module Eight. Milestone 1: Evaluation of the Proposal Due in Module 4 Milestone 2: Evaluation of an Alternative Opportunity Due in Module 6 Milestone 3: Final Project Submission Due in Module 8 In this assignment you will demonstrate your mastery of the following course outcomes: [CO1] Analyze financial reports to determine a firm's performance. [CO2] Apply the strategic planning processes necessary to manage the long- and short-term financial activities of the firm. [CO3] Perform valuation of financial instruments. [CO4] Evaluate the appropriateness of an investment using applicable economic, industry, and competitive analysis. Milestone 1: Evaluation of the Proposal Before completing this assignment, review the Final Project Document. Background information found in the Final Project Document applies to Milestones One through Three. In the final project, you will assume the role of Chief Financial Officer of Monsanto Corporation. Bayer is considering a bid for United States seed company Monsanto. Assume that relevant tax rate is 35%. EBIT, depreciation, capital spending, and the change in net working capital will grow at the same rate as sales, which is expected to grow at a rate of 3% across the current year, while capital investment will remain stable. Assume that operational results quoted outside of Tables 4, 5 and 6 (income statement, balance sheet, and statement of cash flows, below), are interim measures to be used for purposes of your calculations. Based on the proposal's likely effect on shareholder value, determine whether to accept or reject this proposal for $62B, using evidence provided here in Tables 1 through 6, to support your analyses. Evaluate each of the following: Whether to accept or reject this proposal, using evidence drawn from ratio analysis, and time and trend analysis and other evidence from assigned readings covered in Modules One through Three to support your determinations. Compute and include two ratios per each of the four main areas of ratio analysis, including short-term solvency, asset utilization, long-term solvency, and profitability. B. Evaluate limitations that may exist in using these varieties of analysis to make this determination. Immediate Results from the Bayer Announcement in 2015 Monsanto (MON) Share Price Increased 8.7% Bayer Crop Science Division Sales increased 9% to $11.8 billion Bayer Healthcare Division Sales Increased 19% to $26 billion Bayer Pharmaceutical Sales Increased 12%, to $52.8 billion Monsanto Sales Decreased 5% to $15 billion Table 1 Immediate Results from the Bayer Announcement in 2015 ValuPro Net Online Valuation of MONSANTO CORPORATION - 2015 Return on Assets 8.56 Return on Equity 14.93 Sales ($mil) 14,757 Investment Rate (% of Rev) 4.78 Growth Rate (%) 13.5 Working Capital (% of Rev) 29.19 Net Oper. Profit Margin (%) 21.3 Short-Term Assets ($mil) 11141 Tax Rate (%) 30.584 Short-Term Liab. ($mil) 4055 Stock Price ($) 86.74 Equity Risk Premium (%) 3 Shares Outstanding (mil) 533.8 Company Beta 1.05 10-Yr Treasury Yield (%) 500% Value Debt Out. ($mil) 2.054 Bond Spread Treasury (%) 1.5 Value Pref. Stock Out. ($mil) 0 Preferred Stock Yield (%) 7.5 Company WACC (%) Table 2 ValuePro Net Online Valuation Monsanto Co. 2015 (Bloomberg Market Rates) MON:US Current Price 106.00 (USD) Open 106.80 Day Range 109.69-109.54 Volume 18,049,774 Previous Close 106 52 Week Range 81.22-120 1 Year Return -7.06% YTD Return 10.94% Current P/E Ratio (TTM) 23.67 Earnings Per Share (USD) (TTM) 4.62 Market Cap (B USD) 47.747 Shares Outstanding 436.845 Price/Sales (TTM) 3.65 8% Dividend Indicated Gross Yield 1.98% Sector Materials Industry Chemicals Sub-Industry Agricultural Chemicals Table 3 Monsanto Co. Rates Income Statement - Monsanto Corp. Period Ending 31-Aug-15 31-Aug-14 31-Aug-13 Total Sales 15,001,000 15,855,000 14,861,000 Cost of Sales 6,819,000 7,281,000 7,208,000 Gross Profit 8,182,000 8,574,000 7,653,000 Research Development 1,580,000 1,725,000 1,533,000 Selling General and Administrative 2,686,000 2,774,000 2,550,000 Non Recurring 393,000 - - Others - - - Total Operating Expenses - - - 3,523,000 4,075,000 3,570,000 Operating Expenses Operating Income or Loss Income from Continuing Operations Total Other Income/Expenses Net 71,000 - 31,000 Earnings Before Interest and Taxes 3,594,000 4,075,000 3,601,000 Interest Expense 433,000 248,000 172,000 Income Before Tax 3,161,000 3,827,000 3,429,000 Income Tax Expense 864,000 1,078,000 915,000 Minority Interest -11,000 -22,000 -43,000 Net Income from Continuing Ops 2,286,000 2,727,000 2,471,000 Discontinued Operations 28,000 13,000 11,000 Extraordinary Items - - - Effect of Accounting Changes - - - Other Items - - - 2,314,000 2,740,000 2,482,000 - - - 2,314,000 2,740,000 2,482,000 31-Aug-15 31-Aug-14 31-Aug-13 Cash and Cash Equivalents 3,701,000 2,367,000 3,668,000 Short Term Investments 47,000 40,000 254,000 Net Receivables 3,182,000 3,466,000 3,042,000 Inventory 3,496,000 3,597,000 2,947,000 Other Current Assets 199,000 205,000 166,000 Non-recurring Events Net Income Preferred Stock and Other Adjustments Net Income Applicable to Common Shares Table 4 Monsanto Income Statement Balance Sheet - Monsanto Corp. Period Ending Assets Current Assets Total Current Assets 10,625,000 9,675,000 10,077,000 Long Term Investments 42,000 92,000 237,000 Property Plant and Equipment 4,973,000 5,082,000 4,654,000 Goodwill 4,061,000 4,319,000 3,520,000 Intangible Assets 1,332,000 1,554,000 1,226,000 Accumulated Amortization - - - Other Assets 610,000 746,000 496,000 Deferred Long Term Asset Charges 277,000 450,000 454,000 Total Assets 21,920,000 21,918,000 20,664,000 Liabilities Current Liabilities Accounts Payable 4,359,000 3,756,000 Short/Current Long Term 687,000 Debt 315,000 63,000 Other Current Liabilities 438,000 517,000 Total Liabilities 3,950,000 540,000 14,930,000 14,043,000 8,105,000 Stockholders' Equity Misc. Stocks Options Warrants - - - Redeemable Preferred Stock - - - Preferred Stock - - - Common Stock 6,000 6,000 6,000 Retained Earnings 10,374,000 9,012,000 Treasury Stock -4,140,000 12,053,000 10,032,000 Capital Surplus 11,464,000 10,003,000 10,783,000 Other Stockholder Equity -2,801,000 7,188,000 -1,114,000 -1,278,000 Total Stockholder Equity 6,990,000 7,875,000 12,559,000 Net Tangible Assets 1,597,000 2,002,000 7,813,000 Table 5 Monsanto Balance Sheet Cash Flow - Monsanto Corp. Period Ending 31-Aug-15 31-Aug-14 31-Aug-13 Net Income 2,314,000 2,740,000 2,482,000 Operating Activities, Cash Flows Provided By or Used In Depreciation 716,000 691,000 615,000 Adjustments to Net Income 240,000 233,000 113,000 Changes in Accounts Receivables 68,000 -172,000 222,000 Changes in Liabilities 457,000 482,000 -129,000 Changes in Inventories -425,000 -650,000 -192,000 Changes in Other Operating Activities -273,000 -292,000 -414,000 Total Cash Flow from Operating Activities 3,108,000 3,054,000 2,740,000 Investing Activities, Cash Flows Provided By or Used In Capital Expenditures -967,000 -1,005,000 -741,000 Investments 4,000 235,000 Other Cash Flows from Investing Activities -56,000 Total Cash Flows from Investing Activities 217,000 -1,235,000 -253,000 -1,019,000 -2,095,000 -777,000 Financing Activities, Cash Flows Provided by or Used in Dividends Paid -966,000 -932,000 -976,000 Sale Purchase of Stock -698,000 -6,834,000 -705,000 Net Borrowings 1,238,000 -5,536,000 127,000 Other Cash Flows from Financing Activities -36,000 -48,000 Total Cash Flows from Financing Activities -430,000 -2,259,000 -1,485,000 Effect of Exchange Rate Changes -325,000 -1,000 Change In Cash and Cash Equivalents 1,334,000 -1,301,000 385,000 Table 6 Monsanto Statement of Cash Flows -10,000 -93,000 M6A5 Milestone 2 Milestone 2: Evaluation of an Alternative Opportunity Before completing this assignment, review the Final Project Document. Background information found in the Final Project Document applies to Milestones 1 through 3. As an alternative proposal means of increasing shareholder value, you have also been asked to evaluate Monsanto's intent to expand its operations to pesticide production, which is expected to yield a sales increase of $3,950,000. There is no excess capacity, and the increase in fixed asset needs would be equal to 70% of this increase in sales, while cost of sales would run 20% of sales, using a percentage of sales approach. Assume that Monsanto issues dividends at a rate of 1.98% of net sales, and thus the firm's retention ratio is 98.2%. Current sales are projected to be $15,239,000. Assume that the proposed project has a risk and weighted average cost of capital similar to that of Monsanto, and a firm beta similar to that of Monsanto. a. The extent to which Monsanto will have to take on additional debt, given that it wishes to retain its current dividend ratio and does not wish to sell additional equities. b. Calculate the firm's sustainable growth rate and internal growth rate and use these measures to analyze a decision to accept this alternative proposal. Use these measures and concepts covered in assigned readings including EFN, DuPont Identity and leverage, Modules One through Six, to explain the importance of these measures to shareholder interests. At the end of your draft, include questions and challenges that you experienced with this milestone. Prepare your Evaluation of an Alternative Opportunity in a 2-4 page double-spaced document using 12 pt. Times New Roman font. Use APA formatting. Immediate Results from the Bayer Announcement in 2015 Monsanto (MON) Share Price Increased 8.7% Bayer Crop Science Division Sales increased 9% to $11.8 billion Bayer Healthcare Division Sales Increased 19% to $26 billion Bayer Pharmaceutical Sales Increased 12%, to $52.8 billion Monsanto Sales Decreased 5% to $15 billion Table 1 Immediate Results from the Bayer Announcement in 2015 ValuPro Net Online Valuation of MONSANTO CORPORATION - 2015 Return on Assets 8.56 Return on Equity 14.93 Sales ($mil) 14,757 Investment Rate (% of Rev) 4.78 Growth Rate (%) 13.5 Working Capital (% of Rev) 29.19 Net Oper. Profit Margin (%) 21.3 Short-Term Assets ($mil) 11141 Tax Rate (%) 30.584 Short-Term Liab. ($mil) 4055 Stock Price ($) 86.74 Equity Risk Premium (%) 3 Shares Outstanding (mil) 533.8 Company Beta 1.05 10-Yr Treasury Yield (%) 500% Value Debt Out. ($mil) 2.054 Bond Spread Treasury (%) 1.5 Value Pref. Stock Out. ($mil) 0 Preferred Stock Yield (%) 7.5 Company WACC (%) Table 2 ValuePro Net Online Valuation Monsanto Co. 2015 (Bloomberg Market Rates) MON:US Current Price 106.00 (USD) Open 106.80 Day Range 109.69-109.54 Volume 18,049,774 Previous Close 106 52 Week Range 81.22-120 1 Year Return -7.06% 8% YTD Return 10.94% Current P/E Ratio (TTM) 23.67 Earnings Per Share (USD) (TTM) 4.62 Market Cap (B USD) 47.747 Shares Outstanding 436.845 Price/Sales (TTM) 3.65 Dividend Indicated Gross Yield 1.98% Sector Materials Industry Chemicals Sub-Industry Agricultural Chemicals Table 3 Monsanto Co. Rates Income Statement - Monsanto Corp. Period Ending 31-Aug-15 31-Aug-14 31-Aug-13 Total Sales 15,001,000 15,855,000 14,861,000 Cost of Sales 6,819,000 7,281,000 7,208,000 Gross Profit 8,182,000 8,574,000 7,653,000 Research Development 1,580,000 1,725,000 1,533,000 Selling General and Administrative 2,686,000 2,774,000 2,550,000 Non Recurring 393,000 - - Others - - - Total Operating Expenses - - - 3,523,000 4,075,000 3,570,000 Operating Expenses Operating Income or Loss Income from Continuing Operations Total Other Income/Expenses Net 71,000 - 31,000 Earnings Before Interest and Taxes 3,594,000 4,075,000 3,601,000 Interest Expense 433,000 248,000 172,000 Income Before Tax 3,161,000 3,827,000 3,429,000 Income Tax Expense 864,000 1,078,000 915,000 Minority Interest -11,000 -22,000 -43,000 Net Income from Continuing Ops 2,286,000 2,727,000 2,471,000 Discontinued Operations 28,000 13,000 11,000 Extraordinary Items - - - Effect of Accounting Changes - - - Other Items - - - 2,314,000 2,740,000 2,482,000 - - - 2,314,000 2,740,000 2,482,000 31-Aug-15 31-Aug-14 31-Aug-13 Cash and Cash Equivalents 3,701,000 2,367,000 3,668,000 Short Term Investments 47,000 40,000 254,000 Non-recurring Events Net Income Preferred Stock and Other Adjustments Net Income Applicable to Common Shares Table 4 Monsanto Income Statement Balance Sheet - Monsanto Corp. Period Ending Assets Current Assets Net Receivables 3,182,000 3,466,000 3,042,000 Inventory 3,496,000 3,597,000 2,947,000 Other Current Assets 199,000 205,000 166,000 Total Current Assets 10,625,000 9,675,000 10,077,000 Long Term Investments 42,000 92,000 237,000 Property Plant and Equipment 4,973,000 5,082,000 4,654,000 Goodwill 4,061,000 4,319,000 3,520,000 Intangible Assets 1,332,000 1,554,000 1,226,000 Accumulated Amortization - - - Other Assets 610,000 746,000 496,000 Deferred Long Term Asset Charges 277,000 450,000 454,000 Total Assets 21,920,000 21,918,000 20,664,000 Liabilities Current Liabilities Accounts Payable 4,359,000 3,756,000 Short/Current Long Term 687,000 Debt 315,000 63,000 Other Current Liabilities 438,000 517,000 Total Liabilities 3,950,000 540,000 14,930,000 14,043,000 8,105,000 Stockholders' Equity Misc. Stocks Options Warrants - - - Redeemable Preferred Stock - - - Preferred Stock - - - Common Stock 6,000 6,000 6,000 Retained Earnings 10,374,000 9,012,000 7,188,000 Treasury Stock -4,140,000 12,053,000 10,032,000 Capital Surplus 11,464,000 10,003,000 10,783,000 Other Stockholder Equity -2,801,000 -1,114,000 -1,278,000 Total Stockholder Equity 6,990,000 7,875,000 12,559,000 Net Tangible Assets 1,597,000 2,002,000 7,813,000 Table 5 Monsanto Balance Sheet Cash Flow - Monsanto Corp. Period Ending 31-Aug-15 31-Aug-14 31-Aug-13 Net Income 2,314,000 2,740,000 2,482,000 Operating Activities, Cash Flows Provided By or Used In Depreciation 716,000 691,000 615,000 Adjustments to Net Income 240,000 233,000 113,000 Changes in Accounts Receivables 68,000 -172,000 222,000 Changes in Liabilities 457,000 482,000 -129,000 Changes in Inventories -425,000 -650,000 -192,000 Changes in Other Operating Activities -273,000 -292,000 -414,000 Total Cash Flow from Operating Activities 3,108,000 3,054,000 2,740,000 Investing Activities, Cash Flows Provided By or Used In Capital Expenditures -967,000 -1,005,000 -741,000 Investments 4,000 235,000 Other Cash Flows from Investing Activities -56,000 Total Cash Flows from Investing Activities 217,000 -1,235,000 -253,000 -1,019,000 -2,095,000 -777,000 Financing Activities, Cash Flows Provided by or Used in Dividends Paid -966,000 -932,000 Sale Purchase of Stock -698,000 -6,834,000 -705,000 Net Borrowings 1,238,000 -5,536,000 127,000 Other Cash Flows from Financing Activities -36,000 -48,000 -976,000 -10,000 Total Cash Flows from Financing Activities -430,000 -2,259,000 -1,485,000 Effect of Exchange Rate Changes -325,000 -1,000 Change In Cash and Cash Equivalents 1,334,000 -1,301,000 385,000 -93,000 Table 6 Monsanto Statement of Cash Flows Valuation Component Previous 3-Year Average EBIT $ 3,511,347 Depreciation $ Taxes* $ 1,228,971 Change in NWC $ Capital Spending $ (1,000,000) CFA* 674,000 Year 1 Firm Value Note that all values are in thousands. This table may be used to present your NPV calculations. 227,911 $ 3,728,464 Discount factor Discounted CFA* NPV $ 12,359,933 NPV-Debt Debt Table 7 Monsanto Firm Valuation Using Average Expected Sales Based on 3-Year Average of Previous Results Running head: MILESTONE 3: EVALUATION AND ANALYSIS OF PROPOSALS Milestone 3: Evaluation and Analysis of Proposals Student's name Professor's name Course title Date of submission 2 MILESTONE 3: EVALUATION AND ANALYSIS OF PROPOSALS The main purpose of the existence of a firm is to increase the overall profit of the firm or to maximize shareholder value. A firm can choose to pursue both objectives or to pursue one of the goals. Companies may from time to time merge so as to increase their profit or to increase their shareholder value. \"As farmers increasingly look for one-stop shopping for seeds, pesticides and digital services such as satellite-guided spraying and harvesting Monsanto has long argued it needs to buy or team up with a large crop chemicals maker\" (Daily Management Review 2016). This has made the company to make a $62 billion bid with Bayer Corp, the second biggest player in crop chemicals. The decision to accept or reject the offer is made after evaluating the effects on the firm's financial performance. Following the announcement of the merge, Monsanto's sales have declined by 5% while that of Bayer Corp has increased. National Farmers Union president Roger Johnson argues that approval of the mergers would lead not only to higher prices, but also less innovation and fewer products from which farmers can choose (Business Wire 2014). This is worth considering before acceptance of the merger because the firm's aim is to continuously develop farm products through innovation. This means that the effect on the merge also affects the farmers. However, the firms invest heavily in research and development and this means that the combined efforts will reduce research and development costs. Calculating the WACC E D WACC= ( V *Re + V *Rd) (1-Tc) Where Re=cost of equity Rd=cost of debt=12% E=market value of the firm's equity=$9,141,333 3 MILESTONE 3: EVALUATION AND ANALYSIS OF PROPOSALS D=market value of the firm's debt=$12,359,333 V=E+D=$21,500,666 Tc is the corporate tax rate=35% The current yield on the 10-year Treasury bond is 7.5% which is the risk free rate. Given the market risk premium as 3% Required rate of return on Monsanto which has a beta of 1.24 ks= kRF + B kM Where ks is the required rate of return kRF is the risk free rate kM is the market risk premium B is beta ks =3+1.24(5) ks=9.2% $ 9,141,333 $ 12,359,333 WACC= ( $ 21,500,666 *0.092% + $ 21,500,666 *0.12) (1-0.35) WACC= (3.912+6.898)*0.65 WACC=7.03% 4 MILESTONE 3: EVALUATION AND ANALYSIS OF PROPOSALS Valuation Component Previous 3-Year Average $ 3,511,347 Year 1 Firm Value $3,409,074.7 EBIT 6 Depreciation $ 674,000 $654,363.93 Taxes* $ 1,228,971 $ 1,228,971 Change in NWC $ 227,911 $221,272.82 Capital Spending $ (1,000,000) 970,873.79 CFA* $ 3,728,464 Discount factor 7.03% $3483569.09 NPV Discounted CFA* $3483569.09 $ 12,359,933 NPV-Debt Debt $11,035,654.46 Financial ratios analysis Looking at the financial statements may not give a clear picture of the financial performance of the firm hence the need for calculating financial. 5 MILESTONE 3: EVALUATION AND ANALYSIS OF PROPOSALS Ratio 2015 2014 Current ratio 0.71 0.69 Quick ratio 0.48 0.43 Accounts receivable turnover 4.51 4.8 Inventory turnover 1.92 2.22 Total assets turnover 0.68 0.74 Debt to equity 2.14 1.78 Debt to assets 0.68 0.64 Interest coverage ratio 8.3 16.43 Gross profit margin 0.55 0.54 Return on assets 10.56% 12.87% Return on equity 33.10% 34.79% The financial ratios show that Monsanto's shows that the solvency of the company has increased hence the firm can easily convert its current assets to cash. This increase is good if the company needs to acquire short term loans. Shareholders would prefer if the current ratio was low because it would mean that firm's assets are working to grow the business. Asset utilization ratios have declined meaning that the way in which Monsanto uses its assets to obtain revenue and profit has decline. The decline in sales had led to a reduction in profitability of the firm meaning that the company has been unsuccessful in generating profits. Profitability ratios have declined drastically on the financial year 2015, the year that the firms made the announcement about the merge. The overall usage of long-term debt has declined as shown by the solvency ratios. Monsanto (MON) Share Price increased by 8.7% and this is important as it prevents the company from being undervalued. Acquisitions made by Bayer have always led to a distinction in the name of the company. This could mean that the company may dissociate itself from the image that has been created by Monsanto and this could be the reason for the declining sales. Therefore, the firm should not consider the proposal to merge with Bayer as the company may fall completely. The management should explore the alternative proposal of expanding Monsanto's existing operations. 6 MILESTONE 3: EVALUATION AND ANALYSIS OF PROPOSALS The firm's initiative alternative proposal means of increasing shareholder value to expand Monsanto's existing operations to pesticide production is viable. This project is expected to yield an increase in sales of $3,950,000. The fact that the company would not like to issue more stock means that it will have to finance the project through debt. An increase in sales will increase the company's net income and the net worth. With this project, the sustainable growth of the firm is estimated to be 14.63% compared to the valued market growth rate of 13.5% whereas the internal growth rate is estimated to be 11.57%. The management should also work on strategic decisions that will lead to improving sales. These could include indulging in advertising and other promotional activities such as personal selling and direct marketing. With this, the firm will increase the market share and the overall profit. Decision making will also be easier as the firm will make its own decisions uninfluenced by the merging business. References Bayer. (2016). Bayer Global Annual Report. Bayer AG (2016). Bayer: Science for a better life. Bloomberg. (2016). United States rates and bonds. Business Wire. (2014). Merck Announces Sale of Consumer Care Business to Bayer AG for $14.2 Billion. Berkshire Hathaway Business Wire. Daily Management Review. (2016). Reports of Takeover Interests Causes Monsanto Shares to Jump. Daily Management Review. Kirchfield, A., David, R. and Nair, D. (2016). Bayer considers the offer of Monsanto. Bloomberg News. 7 MILESTONE 3: EVALUATION AND ANALYSIS OF PROPOSALS Monsanto (2016). Annual Report. Snider, M. (2016). Chemical firm Bayer makes $62B offer for Monsanto. USA Today. ValuePro. (2016). ValuePro. Yahoo Finance. (2016). MON cash flow. Yahoo Finance. (2016). MON balance sheet. Yahoo Finance. (2016). MON income statement annual. Running head: MILESTONE 3: EVALUATION AND ANALYSIS OF PROPOSALS Milestone 3: Evaluation and Analysis of Proposals Student's name Professor's name Course title Date of submission 2 MILESTONE 3: EVALUATION AND ANALYSIS OF PROPOSALS The main purpose of the existence of a firm is to increase the overall profit of the firm or to maximize shareholder value. A firm can choose to pursue both objectives or to pursue one of the goals. Companies may from time to time merge so as to increase their profit or to increase their shareholder value. \"As farmers increasingly look for one-stop shopping for seeds, pesticides and digital services such as satellite-guided spraying and harvesting Monsanto has long argued it needs to buy or team up with a large crop chemicals maker\" (Daily Management Review 2016). This has made the company to make a $62 billion bid with Bayer Corp, the second biggest player in crop chemicals. The decision to accept or reject the offer is made after evaluating the effects on the firm's financial performance. Following the announcement of the merge, Monsanto's sales have declined by 5% while that of Bayer Corp has increased. National Farmers Union president Roger Johnson argues that approval of the mergers would lead not only to higher prices, but also less innovation and fewer products from which farmers can choose (Business Wire 2014). This is worth considering before acceptance of the merger because the firm's aim is to continuously develop farm products through innovation. This means that the effect on the merge also affects the farmers. However, the firms invest heavily in research and development and this means that the combined efforts will reduce research and development costs. Calculating the WACC E D WACC= ( V *Re + V *Rd) (1-Tc) Where Re=cost of equity Rd=cost of debt=12% E=market value of the firm's equity=$9,141,333 3 MILESTONE 3: EVALUATION AND ANALYSIS OF PROPOSALS D=market value of the firm's debt=$12,359,333 V=E+D=$21,500,666 Tc is the corporate tax rate=35% The current yield on the 10-year Treasury bond is 7.5% which is the risk free rate. Given the market risk premium as 3% Required rate of return on Monsanto which has a beta of 1.24 ks= kRF + B kM Where ks is the required rate of return kRF is the risk free rate kM is the market risk premium B is beta ks =3+1.24(5) ks=9.2% $ 9,141,333 $ 12,359,333 WACC= ( $ 21,500,666 *0.092% + $ 21,500,666 *0.12) (1-0.35) WACC= (3.912+6.898)*0.65 WACC=7.03% 4 MILESTONE 3: EVALUATION AND ANALYSIS OF PROPOSALS Valuation Component Previous 3-Year Average $ 3,511,347 Year 1 Firm Value $3,409,074.7 EBIT 6 Depreciation $ 674,000 $654,363.93 Taxes* $ 1,228,971 $ 1,228,971 Change in NWC $ 227,911 $221,272.82 Capital Spending $ (1,000,000) 970,873.79 CFA* $ 3,728,464 Discount factor 7.03% $3483569.09 NPV Discounted CFA* $3483569.09 $ 12,359,933 NPV-Debt Debt $11,035,654.46 Financial ratios analysis Looking at the financial statements may not give a clear picture of the financial performance of the firm hence the need for calculating financial. 5 MILESTONE 3: EVALUATION AND ANALYSIS OF PROPOSALS Ratio 2015 2014 Current ratio 0.71 0.69 Quick ratio 0.48 0.43 Accounts receivable turnover 4.51 4.8 Inventory turnover 1.92 2.22 Total assets turnover 0.68 0.74 Debt to equity 2.14 1.78 Debt to assets 0.68 0.64 Interest coverage ratio 8.3 16.43 Gross profit margin 0.55 0.54 Return on assets 10.56% 12.87% Return on equity 33.10% 34.79% The financial ratios show that Monsanto's shows that the solvency of the company has increased hence the firm can easily convert its current assets to cash. This increase is good if the company needs to acquire short term loans. Shareholders would prefer if the current ratio was low because it would mean that firm's assets are working to grow the business. Asset utilization ratios have declined meaning that the way in which Monsanto uses its assets to obtain revenue and profit has decline. The decline in sales had led to a reduction in profitability of the firm meaning that the company has been unsuccessful in generating profits. Profitability ratios have declined drastically on the financial year 2015, the year that the firms made the announcement about the merge. The overall usage of long-term debt has declined as shown by the solvency ratios. Monsanto (MON) Share Price increased by 8.7% and this is important as it prevents the company from being undervalued. Acquisitions made by Bayer have always led to a distinction in the name of the company. This could mean that the company may dissociate itself from the image that has been created by Monsanto and this could be the reason for the declining sales. Therefore, the firm should not consider the proposal to merge with Bayer as the company may fall completely. The management should explore the alternative proposal of expanding Monsanto's existing operations. 6 MILESTONE 3: EVALUATION AND ANALYSIS OF PROPOSALS The firm's initiative alternative proposal means of increasing shareholder value to expand Monsanto's existing operations to pesticide production is viable. This project is expected to yield an increase in sales of $3,950,000. The fact that the company would not like to issue more stock means that it will have to finance the project through debt. An increase in sales will increase the company's net income and the net worth. With this project, the sustainable growth of the firm is estimated to be 14.63% compared to the valued market growth rate of 13.5% whereas the internal growth rate is estimated to be 11.57%. The management should also work on strategic decisions that will lead to improving sales. These could include indulging in advertising and other promotional activities such as personal selling and direct marketing. With this, the firm will increase the market share and the overall profit. Decision making will also be easier as the firm will make its own decisions uninfluenced by the merging business. References Bayer. (2016). Bayer Global Annual Report. Bayer AG (2016). Bayer: Science for a better life. Bloomberg. (2016). United States rates and bonds. Business Wire. (2014). Merck Announces Sale of Consumer Care Business to Bayer AG for $14.2 Billion. Berkshire Hathaway Business Wire. Daily Management Review. (2016). Reports of Takeover Interests Causes Monsanto Shares to Jump. Daily Management Review. Kirchfield, A., David, R. and Nair, D. (2016). Bayer considers the offer of Monsanto. Bloomberg News. 7 MILESTONE 3: EVALUATION AND ANALYSIS OF PROPOSALS Monsanto (2016). Annual Report. Snider, M. (2016). Chemical firm Bayer makes $62B offer for Monsanto. USA Today. ValuePro. (2016). ValuePro. Yahoo Finance. (2016). MON cash flow. Yahoo Finance. (2016). MON balance sheet. Yahoo Finance. (2016). MON income statement annual