FIN 620 Long-Term Financial Management QUESTION 1 with Financials

Introduction: You are part of an analysis group set up by the Controller of the firm XYZ. Your group has 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 the firm.

Over 10 weeks, you are to work on several projects, detail your work as you proceed on these projects, and assemble the report for the CFO to present to the board on the items listed below, while working 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

· The capital structure of the company

· Dividend policy

· Stock repurchase and option pricing strategy

· Bankruptcy risk analysis

· Decision Tree Creation

· Real options 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:

BEB		Balance Sheet
Assets
Current assets:	2020	2021	change
Cash	1,500,000	1,800,000	300,000
Investments	1,000,000	1,025,000	25,000
Inventories	112,000,000	127,000,000	15,000,000
Accounts receivable	11,950,000	12,500,000	550,000
Pre-paid expenses	2,500,000	2,650,000	150,000
Other	0	0
Total current assets	128,950,000	144,975,000	16,025,000
Fixed assets:	2020	2021	change
Property and equipment	155,000,000	172,500,000	17,500,000
Leasehold improvements	0	0	0
Equity and other investments	48,000,000	57,000,000	9,000,000
Total fixed assets	203,000,000	229,500,000	26,500,000
Other assets:	2020	2021	change
Goodwill	85,000,000	70,000,000	-15,000,000
Total other assets	85,000,000	70,000,000	-15,000,000
Total assets	416,950,000	444,475,000	27,525,000
Liabilities and owner’s equity
Current liabilities:	2020	2021	change
Accounts payable	38,500,000	43,200,000	4,700,000
Accrued wages	75,000,000	80,500,000	5,500,000
Accrued compensation	10,000,000	10,255,000	255,000

Income taxes payable	4,024,000	4,697,000	673,000
current portion of LT debt	5,000,000	5,350,000	350,000
Other	0	0	0
Total current liabilities	132,524,000	144,002,000	11,478,000
Long-term liabilities:	2020	2021	change
Long term debt	115,000,000	130,000,000	15,000,000
Total long-term liabilities	115,000,000	130,000,000	15,000,000
Owner’s equity:	2020	2021	change
Common stock	122,000,000	122,000,000	0
Preferred stock	16,725,000	16,725,000	0
Accumulated retained earnings	30,701,000	31,748,000	1,047,000
Total owner’s equity	169,426,000	170,473,000	1,047,000
Total liabilities and owner’s equity	416,950,000	444,475,000	27,525,000

Income Statement

BEB

December 2021

Financial Statements in ‘000s of U.S. Dollars

Revenue

282,000

2,500

279,500

Gross Sales

Less: Sales Returns and Allowances

Net Sales

Cost of Goods Sold

7,500

4,500

–

75,000

15,000

102,000

102,000

Beginning Inventory

Add: Purchases

Freight-in Direct Labor

Indirect Expenses

Inventory Available Less: Ending Inventory

Cost of Goods Sold Gross Profit (Loss)