this question 6 from project 5

below this is project 4

please help with questions 1 and 2. thanks

Good morning,

I need help with questions 1 and 2 of project 5. I added project info from project 4. Thanks

McCormick & Company is considering a project that requires an initial investment of $350 million to build a new plant and purchase equipment. The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven- year class asset. The new plant will be built on some of the company's land, which has a current, after-tax market value of $14 million. (note, a $350 million investment for a company with $10 billion in assets is significant but not huge. The $4 million investment in Project 4 is trivial and likely not requiring any high level approvals) You have been asked to refine your work to include the correct tax impact of depreciation, and the cash flow impact of working capital on the capital budget evaluation. (We jump right in to the most difficult tax depreciation. Your accountants can help in the real world) The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The correct depreciation table is included at the right. fund d 17 mill: in $14 million for Inventory are cash outflows. The $15 million for receivables is a cash inflow. Assume that this net working capital is recovered as a cash inflow in year 21. The company still estimates revenues and expenses the same as it did in Project 4. See Table 2 at the right. The company now estimates that it can sell the land in year 21 for $40 million. It will also recover the cash spent on working capital in year 21. Use the WACC that you calculated in the Cost of Capital tab. (Q-6 of the Cost of Capital tab in Project 5) Questions 1. What will be the tax depreciation each year? Note; the total deprecation of tax purposes will still be $350 million if your calculations are correct 2. Create an after-tax cash flow timeline similar to the one you did in Project 4. (Project 4 eliminated the relatively easy cash flow time line so this will be your first) 6. Recognize that Finance Theory tells us to use the WACC for the discount rate for capital budgeting. The past discount rate was 7%. Do you recommend that McCormick change its discount rate. If so what rate do you recommend? If not, why not? Yes I recommend McCormick shauld change its discount rate from 7% to 9% as market situation changed too much and low discount rate shows higher enterprise value of company which is good for the company but not for investors and stakeholders. Capital Budgeting Instructions Cost of Capital 26 O Type here to search 1. McCormick & Company is considering building a new factory in Largo, Maryland. James Francis, a landowner, is selling a 4.35-acre parcel of industrial zoned land with a listed sale price of $3,000,000.00 for the land. McCormick & Company is interested in the land and so is another manufacturing company. The competing manufacturing company has made a full offer of $3,000,000.00 for the land. McCormick & Company knows it can make an offer to outbid the competitor to obtain the land. So, McCormick & Company decided to offer $4,424,000.00. 6. Now, the landowner must make a decision between the two competing offers. To make this decision, James should first identify the 8. Future Value (FV) of each offer. James's bank is offering a 12 percent interest rate when invested through the bank-managed growth stock portfolios. Let's help James make his decision by answering the following questions using the template to the right. 10 1. What is the Future Value (FV) of each offer? FV=13,740,272 What is the two competing offers? Unknown manufaduring 12 company makes an for $3,000,000.00 and McCormick & Company makes an offer $4,424,000.00. 13 11 2. Based on your Future Value calculations, which offer should James accept? James should accept the offer from McCormick and 15 Company. 14 16 17 McCormick & Company has decided in order for the company to have a minimal impact on current cash flows, the company will need to borrow 70 percent Loan to Value (LTV) of the $4,424,000.00 offer in the form of a commercial acquisition and development loan to 18 purchase the land. This means McCormick & Company will need to make a 30 percent down payment to secure the commercial 19 acquisition and development loan. McCormick & Company is considering three different loan options: Lo LC 20 Lc 21 Loan A: 20-year loan with a fixed annual interest rate of 6 percent 22 Loan B: 10-year loan with a fixed annual interest rate of 4.5 percent 5. Loan C: 15-year loan with a fixed annual interest rate of 5 percent 23 Lo 24 3. How much of the total $4,424,000.00 offer will be financed? Financing and Investing 3.096.800 25 Annuities Corporate Valuation Instructions 24 3. How much of the total $4,424,000.00 offer will be financed? 25 3,096,800 26 4. Which loan will have the lowest monthly payment? Loan A 27 28 5. Which loan will have the lowest total payback amount? Loan B $3,913,699.35 29 30 6. Would you recommend McCormick & Company select the loan with lowest monthly payment or lowest total payment and why? 31 32 Trecommend McCormick select the loan with the lowest total payback amount should be accepted as overall, it will have the lowest 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 Corporate Valuation Annuities Instructions Financing and Investing 7. IN 12% PV PMT FV ($13,740,272.47) $4,424,000 10 9. 10 1 I/Y 12% $ 4,424,000.00 PMT FV PV 12 ($13,740,272.47) 10 13 14 Amount Financed Principal Percent Down 15 30% $ 3,096,800.00 16 #### $4424,000.00 17 I/Y PMT PV Loan 18 6% $ 3,096,800.00 4.5% $ 3,096,800.00 5% $ 3,096,800.00 (S269,993.14) (S391,369.94) (S298,352.80) 20 Loan A 19 10 Loan B 20 15 Loan C 21 22 Total Paid PMT PV 5. Loan 23 $5,400,000.00 $3,913,699.35 $4,475,291.94 $3,096,800 $3,096,800 $269,993.14 6% 20 Loan A 24 $391,369.94 $298,352.80 4.5% 10 Loan B 25 $3,096,800 5% 15 Loan C 26 27 6 Loan B 28 29 30 31 Annuities Corporate Valuation Financing and Investing Instructions 26 O Type here to search 3. Now that McCormick & Company has secured the land for the new factory through a loan, it is time to construct the new factory. Instead of using operating cash flow to fund the construction of the new factory, McCormick & Company has decided to raise capital. To raise additional capital, the company is considering issuing additional shares of stock. For McCormick & Company to determine how much it will cost the company to issue stock, the company must determine the expected return on the stock in relation to the systematic risk. We can help McCormick & Company with this by answering the following questions using the provided information below: McCormick & Company uses the 10-Year Treasury Constant Maturity Rate as the risk-free rate. As of 7/1/2019, this was 2.03 according to the US Treasury. McCormick & Company has disclosed the company's levered Beta is 0.60 (MarketWatch, 7/1/2019). McCormick & Company has disclosed the company's expected return on the market is 8.03% To answer the following questions, use the template to the right. 1. What is McCormick & Company's expected return on the issuance of stock using CAPM? In the CAPM, we examined the expected return on the market as a whole. In an effort to estimate the expected return of McCormick & Company's stock, we will use the Dividend Discount Model (DDM). We can help McCormick & Company with this by answering the following questions using the provided information below: McCormick & Company's expected dividend per share next year is $2.28 McCormick & Company's expected dividend per share constant growth rate is 8.70% (as of May 2019) McCormick & Company's stock price ner share was S155 70 on 7/1/2019 Instructions 2. Annuities Corporate Valuation Financing and Investing O Type here to search 26 McCormick & Company's expected dividend per share next year is $2.28 McCormick & Company's expected dividend per share constant growth rate is 8.70% (as of May 2019) McCormick & Company's stock price per share was $155.70 on 7/1/2019 22 23 24 25 26 27 2. Using the Dividend Discount Model (DDM), what is the cost of equity? To find the cost of equity using DDM, we take the original equation and rearrange the equation: Div P = Rs Div R5 %3D 28 29 30 31 32 33 Annuities Corporate Valuation Financing and Investing Instructions 26 Type here to search RE B x (RM RF) risk free rate= 2.03 Expected return = 5.63 Beta 0.6 expected market return risk free rate 8.03 2.03 Div 2 Rs expected dividend%D current stock price= 2.28 0.101644 cost of equity= 155.7 or 10.16% 0.087 constant growth rate= Annuities Corporate Valuation Financing and Investing Instructions w/ P. 0O 1. McCormick & Company is considering a project that requires an initial investment of $350 million to build a new plant and purchase equipment. The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven- year class asset. The new plant will be built on some of the company's land, which has a current, after-tax market value of $14 million. (note, a $350 million investment for a company with $10 billion in assets is significant but not huge. The $4 million investment in Project 4 is trivial and likely not requiring any high level approvals) You have been asked to refine your work to include the correct tax impact of depreciation, and the cash flow impact of working capital on the capital budget evaluation. (We jump right in to the most difficult tax depreciation. Your accountants can help in the real world) The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The correct depreciation table is included at the right. fund d 17 mill: in $14 million for Inventory are cash outflows. The $15 million for receivables is a cash inflow. Assume that this net working capital is recovered as a cash inflow in year 21. The company still estimates revenues and expenses the same as it did in Project 4. See Table 2 at the right. The company now estimates that it can sell the land in year 21 for $40 million. It will also recover the cash spent on working capital in year 21. Use the WACC that you calculated in the Cost of Capital tab. (Q-6 of the Cost of Capital tab in Project 5) Questions 1. What will be the tax depreciation each year? Note; the total deprecation of tax purposes will still be $350 million if your calculations are correct 2. Create an after-tax cash flow timeline similar to the one you did in Project 4. (Project 4 eliminated the relatively easy cash flow time line so this will be your first) 6. Recognize that Finance Theory tells us to use the WACC for the discount rate for capital budgeting. The past discount rate was 7%. Do you recommend that McCormick change its discount rate. If so what rate do you recommend? If not, why not? Yes I recommend McCormick shauld change its discount rate from 7% to 9% as market situation changed too much and low discount rate shows higher enterprise value of company which is good for the company but not for investors and stakeholders. Capital Budgeting Instructions Cost of Capital 26 O Type here to search 1. McCormick & Company is considering building a new factory in Largo, Maryland. James Francis, a landowner, is selling a 4.35-acre parcel of industrial zoned land with a listed sale price of $3,000,000.00 for the land. McCormick & Company is interested in the land and so is another manufacturing company. The competing manufacturing company has made a full offer of $3,000,000.00 for the land. McCormick & Company knows it can make an offer to outbid the competitor to obtain the land. So, McCormick & Company decided to offer $4,424,000.00. 6. Now, the landowner must make a decision between the two competing offers. To make this decision, James should first identify the 8. Future Value (FV) of each offer. James's bank is offering a 12 percent interest rate when invested through the bank-managed growth stock portfolios. Let's help James make his decision by answering the following questions using the template to the right. 10 1. What is the Future Value (FV) of each offer? FV=13,740,272 What is the two competing offers? Unknown manufaduring 12 company makes an for $3,000,000.00 and McCormick & Company makes an offer $4,424,000.00. 13 11 2. Based on your Future Value calculations, which offer should James accept? James should accept the offer from McCormick and 15 Company. 14 16 17 McCormick & Company has decided in order for the company to have a minimal impact on current cash flows, the company will need to borrow 70 percent Loan to Value (LTV) of the $4,424,000.00 offer in the form of a commercial acquisition and development loan to 18 purchase the land. This means McCormick & Company will need to make a 30 percent down payment to secure the commercial 19 acquisition and development loan. McCormick & Company is considering three different loan options: Lo LC 20 Lc 21 Loan A: 20-year loan with a fixed annual interest rate of 6 percent 22 Loan B: 10-year loan with a fixed annual interest rate of 4.5 percent 5. Loan C: 15-year loan with a fixed annual interest rate of 5 percent 23 Lo 24 3. How much of the total $4,424,000.00 offer will be financed? Financing and Investing 3.096.800 25 Annuities Corporate Valuation Instructions 24 3. How much of the total $4,424,000.00 offer will be financed? 25 3,096,800 26 4. Which loan will have the lowest monthly payment? Loan A 27 28 5. Which loan will have the lowest total payback amount? Loan B $3,913,699.35 29 30 6. Would you recommend McCormick & Company select the loan with lowest monthly payment or lowest total payment and why? 31 32 Trecommend McCormick select the loan with the lowest total payback amount should be accepted as overall, it will have the lowest 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 Corporate Valuation Annuities Instructions Financing and Investing 7. IN 12% PV PMT FV ($13,740,272.47) $4,424,000 10 9. 10 1 I/Y 12% $ 4,424,000.00 PMT FV PV 12 ($13,740,272.47) 10 13 14 Amount Financed Principal Percent Down 15 30% $ 3,096,800.00 16 #### $4424,000.00 17 I/Y PMT PV Loan 18 6% $ 3,096,800.00 4.5% $ 3,096,800.00 5% $ 3,096,800.00 (S269,993.14) (S391,369.94) (S298,352.80) 20 Loan A 19 10 Loan B 20 15 Loan C 21 22 Total Paid PMT PV 5. Loan 23 $5,400,000.00 $3,913,699.35 $4,475,291.94 $3,096,800 $3,096,800 $269,993.14 6% 20 Loan A 24 $391,369.94 $298,352.80 4.5% 10 Loan B 25 $3,096,800 5% 15 Loan C 26 27 6 Loan B 28 29 30 31 Annuities Corporate Valuation Financing and Investing Instructions 26 O Type here to search 3. Now that McCormick & Company has secured the land for the new factory through a loan, it is time to construct the new factory. Instead of using operating cash flow to fund the construction of the new factory, McCormick & Company has decided to raise capital. To raise additional capital, the company is considering issuing additional shares of stock. For McCormick & Company to determine how much it will cost the company to issue stock, the company must determine the expected return on the stock in relation to the systematic risk. We can help McCormick & Company with this by answering the following questions using the provided information below: McCormick & Company uses the 10-Year Treasury Constant Maturity Rate as the risk-free rate. As of 7/1/2019, this was 2.03 according to the US Treasury. McCormick & Company has disclosed the company's levered Beta is 0.60 (MarketWatch, 7/1/2019). McCormick & Company has disclosed the company's expected return on the market is 8.03% To answer the following questions, use the template to the right. 1. What is McCormick & Company's expected return on the issuance of stock using CAPM? In the CAPM, we examined the expected return on the market as a whole. In an effort to estimate the expected return of McCormick & Company's stock, we will use the Dividend Discount Model (DDM). We can help McCormick & Company with this by answering the following questions using the provided information below: McCormick & Company's expected dividend per share next year is $2.28 McCormick & Company's expected dividend per share constant growth rate is 8.70% (as of May 2019) McCormick & Company's stock price ner share was S155 70 on 7/1/2019 Instructions 2. Annuities Corporate Valuation Financing and Investing O Type here to search 26 McCormick & Company's expected dividend per share next year is $2.28 McCormick & Company's expected dividend per share constant growth rate is 8.70% (as of May 2019) McCormick & Company's stock price per share was $155.70 on 7/1/2019 22 23 24 25 26 27 2. Using the Dividend Discount Model (DDM), what is the cost of equity? To find the cost of equity using DDM, we take the original equation and rearrange the equation: Div P = Rs Div R5 %3D 28 29 30 31 32 33 Annuities Corporate Valuation Financing and Investing Instructions 26 Type here to search RE B x (RM RF) risk free rate= 2.03 Expected return = 5.63 Beta 0.6 expected market return risk free rate 8.03 2.03 Div 2 Rs expected dividend%D current stock price= 2.28 0.101644 cost of equity= 155.7 or 10.16% 0.087 constant growth rate= Annuities Corporate Valuation Financing and Investing Instructions w/ P. 0O 1