Task 1 with Financials

Introduction: As a special analytical group set up by ACME Iron by the firms Controller, you have been tasked to respond to the following issues raised in a meeting with the CFO. You and your team must look over several prospective financial strategies to aid in the successful growth of ACME Iron.

You are to work over an 10 week period on several projects, detail your work as you proceed on these projects, and assemble the report for the CFO to make to the board on the items listed while you work in a team environment. Management will be looking at the team over this period on how well they self-organize and analyze the research areas which will include:

< >Capital investment analysisCAPM Capital Asset Pricing Model determination for the companyWACC Weighted Average Cost of Capital computationsEVA Economic Value AnalysisMVA Market Value AddedCapital structure of the companyDividend policyStock repurchase and option pricing strategyBankruptcy risk analysisDecision Tree Creation Real option analysis of projects

The CFO wants to test your team out on a simple project in the first task before you get into preparing items for his board presentation in subsequent tasks and projects. He wants to see how well you perform tasks as a team as well as how accurate and thoughtful you are in your work. Details are important to him as well as good organization/presentation and communication.

Financial Statements for use on Tasks

Here are the financial statements you are to use in this exercise:

ACME Iron		Balance Sheet
Assets
Current assets:	2014	2015	change
Cash	500,000	600,000	100,000
Investments	1,000,000	1,025,000	25,000
Inventories	110,000,000	117,000,000	7,000,000
Accounts receivable	11,750,000	12,500,000	750,000
Pre-paid expenses	2,500,000	2,600,000	100,000
Other	0	0	-
Total current assets	125,750,000	133,725,000	7,975,000
Fixed assets:	2014	2015	change
Property and equipment	165,000,000	175,000,000	10,000,000
Leasehold improvements	0	0	-
Equity and other investments	55,000,000	65,000,000	10,000,000
Less accumulated depreciation	15,000,000	15,500,000	500,000
Total fixed assets	235,000,000	255,500,000	20,500,000
Other assets:	2014	2015	change
Goodwill	75,000,000	70,000,000	(5,000,000)
Total other assets	75,000,000	70,000,000	(5,000,000)
Total assets	435,750,000	459,225,000	23,475,000
Liabilities and owner's equity
Current liabilities:	2014	2015	change
Accounts payable	40,500,000	42,400,000	1,900,000
Accrued wages	85,000,000	90,500,000	5,500,000
Accrued compensation	10,000,000	10,855,000	855,000
Income taxes payable	4,024,000	4,697,000	673,000
current portion of LT debt	5,500,000	10,350,000	4,850,000
Other	0	0	-
Total current liabilities	145,024,000	158,802,000	13,778,000
Long-term liabilities:	2014	2015	change
Long term debt	125,000,000	130,000,000	5,000,000
Total long-term liabilities	125,000,000	130,000,000	5,000,000
Owner's equity:	2014	2015	change
Common stock	122,000,000	122,000,000	-
Preferred stock	16,725,000	16,725,000	-
Accumulated retained earnings	27,001,000	31,698,000	4,697,000
Total owner's equity	165,726,000	170,423,000	4,697,000
Total liabilities and owner's equity	435,750,000	459,225,000	23,475,000

Task 1

Reach out to team members and assign roles. You all need to contribute. Rotating responsibilities is a suggested strategy in this team environment.

Capital Asset Pricing Model (CAPM):

Your team needs to investigate certain items to compute the required rate of return of your company. The expected market return for the coming year is 6%, you need to find the current rates for the 10 year Treasury bond to establish a risk-free rate. Please remember to cite your source of this data and justify your reasoning for using this source or data.

Your team will also need to find a rationale for estimating beta since you do not have a long history on the stock market since you are recently listed. You realize that ACME Iron is capital intensive so the beta for the company will be influenced by this point. Since ACME Iron is an iron producer its beta should be in line with similar companies. Your team will need to analyze other companies or this industry to come up with a beta calculation for ACME Iron. Please document your investigation, sources and justify your choice of beta for Acme.

Concept Check: The Capital Asset Pricing Model is a model that separates market risk from individual asset risk. We look at Market risk through the lens of inflationary impact on asset returns and the opportunity cost of the risk free rate. Market risk effects all assets so we utilize Beta as a measure of the volatility of price changes in the particular asset we are analyzing versus the market of that particular asset class.

Helpful Hint: Discuss strategy of finding financial resources with your team. Sources should be current and dependable. Government resources are usually the best since they are free of charges and free of bias.