Task 1 with Financials Introduction: As a special analytical group set up by ACME Iron by the
Question:
Task 1 with Financials
Introduction: As a special analytical group set up by ACME Iron by the firm's 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 analysis
CAPM - Capital Asset Pricing Model determination for the company
WACC - Weighted Average Cost of Capital computations
EVA - Economic Value Analysis
MVA - Market Value Added
Capital structure of the company
Dividend policy
Stock repurchase and option pricing strategy
Bankruptcy risk analysis
Decision 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
180,000,000
190,500,000
10,000,000
Leasehold improvements
0
0
-
Equity and other investments
55,000,000
65,000,000
10,000,000
Total fixed assets
235,000,000
255,500,000
20,000,000
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.
Expert Answer:
