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 a 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 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.