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.