MBA-FPX5014_RomeroRalph_Assessment3-Attempt2

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ABC Healthcare Corporation Financial Engineering to Enhance Shareholder Value Ralph Romero Capella University MBA-FPX5014 – Applied Managerial Finance 12/28/23 ABC Healthcare Corporation Financial Engineering to Enhance Shareholder Value Ralph Romero Capella University MBA-FPX5014 – Applied Managerial Finance 12/28/23

Current Financial Condition - Value Current Financial Condition - Value • Maria Gomez the founder and President of ABC Healthcare Corporation was able to provide us with some financial information of the business over the last three years. Below is the current condition of the company and its slow increased value. • Maria Gomez the founder and President of ABC Healthcare Corporation was able to provide us with some financial information of the business over the last three years. Below is the current condition of the company and its slow increased value.

Current Financial Condition - Projects Current Financial Condition - Projects • ABC Healthcare’s president and senior leadership are currently working on three different capital project to maximize shareholder value and increase the overall company value. The three projects were evaluated using different financial analysis tools to identify which project is best to move forward with. • The three current projects are: • Project A: Major Equipment Purchase – The life of this project is expected to be 8 years requiring an initial investment of $10 million and return rate of 8%. • Project B: Expansion into Three Additional States – The life of this project is expected to be 5 years requiring a start-up cost is $7 million and a return rate of 12%. • Project C: Marketing/Advertising Campaign – The life of this project is expected to be 6 years, there’s no initial investment requirement but current marketing cost is already $8.7 million. However, there will be an annual cost of $2 million and a required rate of return of 10%. • ABC Healthcare’s president and senior leadership are currently working on three different capital project to maximize shareholder value and increase the overall company value. The three projects were evaluated using different financial analysis tools to identify which project is best to move forward with. • The three current projects are: • Project A: Major Equipment Purchase – The life of this project is expected to be 8 years requiring an initial investment of $10 million and return rate of 8%. • Project B: Expansion into Three Additional States – The life of this project is expected to be 5 years requiring a start-up cost is $7 million and a return rate of 12%. • Project C: Marketing/Advertising Campaign – The life of this project is expected to be 6 years, there’s no initial investment requirement but current marketing cost is already $8.7 million. However, there will be an annual cost of $2 million and a required rate of return of 10%.

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Overview of Financial Analysis Overview of Financial Analysis To properly analyze the financial condition of ABC healthcare Corporation we used several different analysis tools, here are some of the tools we used: 1. Ratio Analysis – We used a financial ratio analysis to see where our business stand for the current year, and the areas of opportunities we can improve in. 2. Trend Analysis – For our trend analysis we looked at our ratios for the last 3 years. Our P/E ratio increased by a yearly average of 1.5 and P/B ratio increased by a yearly average of 0.025. This means the stock is progressively working back to its true value. To properly analyze the financial condition of ABC healthcare Corporation we used several different analysis tools, here are some of the tools we used: 1. Ratio Analysis – We used a financial ratio analysis to see where our business stand for the current year, and the areas of opportunities we can improve in. 2. Trend Analysis – For our trend analysis we looked at our ratios for the last 3 years. Our P/E ratio increased by a yearly average of 1.5 and P/B ratio increased by a yearly average of 0.025. This means the stock is progressively working back to its true value. Price/ Earnings Ratio 2019 201 8 201 7 Market Price 83.6 2 83.6 2 83.6 2 Earnings Per Share 6.91 7.87 9.15 Price to Earnings Ratio 12.1 0 10.6 3 9.14 Price/ Book Ratio 2019 2018 2017 Market Price 83.62 83.62 83.62 Book Value per Share 199.1 209.0 5 226 Price to Book Ratio .42 .40 .37

Overview of Financial Analysis Continued Overview of Financial Analysis Continued To properly analyze the financial condition of ABC healthcare Corporation we used several different analysis tools, here are some of the tools we used: 3. Competitive Analysis – For the competitive analysis, we compared our financial to the leading healthcare organization which is HCA. When comparing to HCA, they seem to be very close to peaking and their tangible assets are worth a lot less than their liabilities making them a risky investment. ABC analysis shows it is strongly undervalued. To properly analyze the financial condition of ABC healthcare Corporation we used several different analysis tools, here are some of the tools we used: 3. Competitive Analysis – For the competitive analysis, we compared our financial to the leading healthcare organization which is HCA. When comparing to HCA, they seem to be very close to peaking and their tangible assets are worth a lot less than their liabilities making them a risky investment. ABC analysis shows it is strongly undervalued. Price/ Earnings Ratio 2019 201 8 201 7 Market Price 83.6 2 83.6 2 83.6 2 Earnings Per Share 6.91 7.87 9.15 Price to Earnings Ratio 12.1 0 10.6 3 9.14

Evidence Based Financial Decision Evidence Based Financial Decision 1. Current financial ratios are positive indicator. All ratios are good indicators of stock being undervalued and a good investment. MPS is 83.62, EPS is 6.91, and P/E is 12.10 2. The current trend analysis shows a slow upward trend for P/E and P/B and a downwards trend for EPS. 3. Competitive analysis with HCA shows that this stock is currently overvalued and risky investment, and ABC has great room growth and maximize investment value. 1. Current financial ratios are positive indicator. All ratios are good indicators of stock being undervalued and a good investment. MPS is 83.62, EPS is 6.91, and P/E is 12.10 2. The current trend analysis shows a slow upward trend for P/E and P/B and a downwards trend for EPS. 3. Competitive analysis with HCA shows that this stock is currently overvalued and risky investment, and ABC has great room growth and maximize investment value. Price/ Earnings Ratio 2019 201 8 201 7 Market Price 83.6 2 83.6 2 83.6 2 Earnings Per Share 6.91 7.87 9.15 Price to Earnings 12.1 0 10.6 3 9.14

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Evidence Based Financial Decision Continued Evidence Based Financial Decision Continued Capital Project Evidence – Project A: Major Equipment Purchase • Projects with the highest NPV are generally the most profitable, and Project A has a NPV of $44,262,268.65 and ranks highest. (Wrinkle, n.d.). • IRR is the next best alternative to NPV, this number summarizes the merits of a project and in this case our IRR is higher than the discount rate which makes our project acceptable. The cost capital is 25% (Ross, 2020). • Profitability Index for this project is 5.43 which is the highest ranked, a PI of 1.0 is needed for a project to be acceptable (Chen, 2023). • The payback period is ranked last at 1.36 but is only 3-month time difference for the return of the initial investment. Capital Project Evidence – Project A: Major Equipment Purchase • Projects with the highest NPV are generally the most profitable, and Project A has a NPV of $44,262,268.65 and ranks highest. (Wrinkle, n.d.). • IRR is the next best alternative to NPV, this number summarizes the merits of a project and in this case our IRR is higher than the discount rate which makes our project acceptable. The cost capital is 25% (Ross, 2020). • Profitability Index for this project is 5.43 which is the highest ranked, a PI of 1.0 is needed for a project to be acceptable (Chen, 2023). • The payback period is ranked last at 1.36 but is only 3-month time difference for the return of the initial investment.

Maximizing Shareholder Value Maximizing Shareholder Value I have three recommendations for ABC Healthcare Corporation to help their stock gain value and improve their financial performance: • My first recommendation is to increase demand by doing a stock buyback, since the stock is currently undervalued this will help increase its price. • My second recommendation is to increase utilization efficiency of our operations. This is done by reviewing all current processes and maximize the use of our assets. We will also set up training to ensure everyone is properly trained and can fully take care of their assigned tasks. • According to the net present value theory investing in something that has a net present value greater than zero should logically increase a company’s earning therefore increasing the stock value and shareholder wealth (Tuovila, 2021). Our analysis shows that Project A: Major Equipment Purchase has the highest net present value, with an internal rate of return higher than the capital cost. The NPV for this project is $44,262,268.65. I have three recommendations for ABC Healthcare Corporation to help their stock gain value and improve their financial performance: • My first recommendation is to increase demand by doing a stock buyback, since the stock is currently undervalued this will help increase its price. • My second recommendation is to increase utilization efficiency of our operations. This is done by reviewing all current processes and maximize the use of our assets. We will also set up training to ensure everyone is properly trained and can fully take care of their assigned tasks. • According to the net present value theory investing in something that has a net present value greater than zero should logically increase a company’s earning therefore increasing the stock value and shareholder wealth (Tuovila, 2021). Our analysis shows that Project A: Major Equipment Purchase has the highest net present value, with an internal rate of return higher than the capital cost. The NPV for this project is $44,262,268.65.

Translate Strategies to Tactical Objectives Translate Strategies to Tactical Objectives The success rate of strategy execution is incredibly low. The failure percentages found in scientific studies range from as low as 7% to as high as 90%, with an average of about 50% (Bizjournals, 2020). For us to have an effective tactical objective we will pay great attention to detail on all the following areas: • Translate the strategy • Setup execution plan • Assign clear responsibilities • Engage and align all goals • Assess progress, monitor and adjust. The success rate of strategy execution is incredibly low. The failure percentages found in scientific studies range from as low as 7% to as high as 90%, with an average of about 50% (Bizjournals, 2020). For us to have an effective tactical objective we will pay great attention to detail on all the following areas: • Translate the strategy • Setup execution plan • Assign clear responsibilities • Engage and align all goals • Assess progress, monitor and adjust.

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Financial Monitoring Tools Financial Monitoring Tools Some of the tools that we will be using to monitor the financial progress are the following: • Ratio Analysis • Comparative Analysis • Benchmarking • Financial Statements: • Cashflow • Balance sheets • Income statements Some of the tools that we will be using to monitor the financial progress are the following: • Ratio Analysis • Comparative Analysis • Benchmarking • Financial Statements: • Cashflow • Balance sheets • Income statements

References References • Chen, J. (2023, January 9). Profitability index (PI): Definition, components, and formula . Investopedia. https://www.investopedia.com/terms/p/profitability.asp#:~:text=Generally%2C%20the%2 0higher%20the%20PI,may%20be%20the%20best%20option . • Ross, S. A. (2020). Corporate Finance: Core Principles and Applications (6th ed.). McGraw- Hill Higher Education (US). https://capella.vitalsource.com/books/9781260726305 • Take these steps to translate strategic concepts into effective business goals . Bizjournals.com. (2020, March 16). https://www.bizjournals.com/newyork/news/2020/03/16/take-these-steps-to-translate-strat egic-concepts.html • Tuovila, A. (2021, April 18). Net present value (NPV) rule: Definition, use, and example . Investopedia. https://www.investopedia.com/terms/n/npv-rule.asp • What is net present value (NPV) in project management?: Wrike . Versatile & Robust Project Management Software. (n.d.). https://www.wrike.com/project-management-guide/faq/what-is-net-present-value-npv-in-p roject-management/ • Chen, J. (2023, January 9). Profitability index (PI): Definition, components, and formula . Investopedia. https://www.investopedia.com/terms/p/profitability.asp#:~:text=Generally%2C%20the%2 0higher%20the%20PI,may%20be%20the%20best%20option . • Ross, S. A. (2020). Corporate Finance: Core Principles and Applications (6th ed.). McGraw- Hill Higher Education (US). https://capella.vitalsource.com/books/9781260726305 • Take these steps to translate strategic concepts into effective business goals . Bizjournals.com. (2020, March 16). https://www.bizjournals.com/newyork/news/2020/03/16/take-these-steps-to-translate-strat egic-concepts.html • Tuovila, A. (2021, April 18). Net present value (NPV) rule: Definition, use, and example . Investopedia. https://www.investopedia.com/terms/n/npv-rule.asp • What is net present value (NPV) in project management?: Wrike . Versatile & Robust Project Management Software. (n.d.). https://www.wrike.com/project-management-guide/faq/what-is-net-present-value-npv-in-p roject-management/