Group Problem Set 2_Managerial Finance_Group_V

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Campbellsville University *

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60298 H1

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Finance

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Jan 9, 2024

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Running head: Problem Set 2 1 Managerial Finance Problem Set 2 Campbellsville University Group V Maheswari Mandha, Student ID: 559064 Anuhya Dasari, Student ID: 558337 Sai Dinesh Sura, Student ID: 551862 Harsheth Uma Shankar, Student ID: 564340 Dharshan Challa, Student ID: 542483

2 Problem Set 2 Capital Budgeting Analysis Part 1 Machines cost - $200,000 Shipping cost - $10,000 Installation cost - $30,000 Salvage value - $25,000 Years of life – 4 Tax rate – 40% Capital cost – 10% Units sold – 1,250 Sales price per unit - $200 Incremental cost per unit - $100 Rate of inflation – 3% Net working capital rise – 12% Depreciable Basis = Machines + Shipping + Installation costs = $200, 000 + $30,000 + $10,000 = $240,000 Depreciation expenses = % * Basis

3 Problem Set 2 Year % Basis Annual Depreciation Expenses 1 0.33 $240,000 $79,000 2 0.45 $240,000 $108,000 3 0.15 $240,000 $36,000 4 0.07 $240,000 $16,800 Annual sales revenues and costs Year 1 Year 2 Year 3 Year 4 Units 1250 1250 1250 1250 Cost per unit $100 $103 $106.09 $109.27 Sales price per unit $200 $206 $212.18 $218.55 Revenue (3% increase) $250,000 $257,500 $265,225 $273,182 Net working capital (12% increase) $30,000 $30,900 $31,827 $32,781.81 Annual Incremental operating cash flow statements (Investment revenue $240,000) Year 1 Year 2 Year 3 Year 4 Revenue $250,000 $257,500 $265,225 $273,181.75 Costs $125,000 $128,750 $132,612.50 $136,590.88 Depreciation $79,200 $108,000 $36,000 $16,800 (Operating income before tax)EBIT $45,800 $20,750 $96,612.50 $119,790.88 Taxes (40%) $18,320 $8,300 $38,645 $47,916.35 Net Income $27,480 $12,450 $57,967.50 $71,874.53 Net operating CF (net income +depreciation) $106,680 $120,450 $93,967.50 $88,674.53 FCF $76,680 $89,550 $62,140.50 $55,892.72 Discounting factor 0.909090 9 0.82644628 1 0.751314801 0.683013455 DCF (240,000) $69709.0 9 $74008.26 $46687.08 $38175.48 NPV = -11420.09 Payback method CF = $284,263.22 Payback method does not put into consideration the time value of money and therefore considering that this investment should not be considered

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4 Problem Set 2 NPV is the distinction among the present approximation of cash influxes and the present approximation of cash expenditure over some time. IRR is the internal pace of profit. It is the rate at which NPV is zero. PI is measure by the utilization of the result accumulated of the investment. Since we got a negative NPV, we should not consider this project. Part 2. Working Capital Management Expected Sales 150000 Net profit 150000/0.06 = 2500000 Net profit 0.06 Return on assets 2500000/2.27 = 1101321.586 Inventory turnover 7.5 DSO 36.5 Cost of goods sold 121667 Fixed assets 35000 Payable deferral period 40 A). C). Inventory days 365/7.5 = 48.67 Inventory turnover 9 Cash conversion cycle (36.5+48.67)-40 = 45.17 Inventory 121667/9 = 13518.56 B) Inventory days 365/9 = 40.56 Accounts receivable turnover 365/36.5 = 10 Cash conversion cycle 40.56+36.5-40 = 37.06 Accounts receivable 150,000/10 = 15,000 Total assets 13518.56+15000+35000 = 63518.56 Inventory 121,667/7.5 = 16222.27 Asset turnover 150000/63518.56 = 2.36 Total assets 15000+16222.27+3500 0 = 66222.27 Return on assets 2500000/2.36 = 1059322.034 Asset turnover 150000/66222.27 = 2.27 Part 3: Dividend Policy El Ansary and El-Azab (2017), asserts that dividend policy is established within the framework of the general financial plans of the firm. Dividend irrelevance is a hypothesis that sets that financial specialists are indifferent among profits and capital increases, leaving the profit strategy irrelevant dependent on its effect

5 Problem Set 2 on the firm worth. Flying creature in-the-hand alludes to a hypothesis that a dollar of profits in the hand is favored by speculators contrasted with a dollar left in the business, where the profit strategy would influence the estimation of the firm (Priya and Mohanasundari, 2016). MM proposed the dividend irrelevance theory. The hypothesis depends on the supposition that there are zero charges, zero buoyancy, and zero expense of the exchange. MM stated that paying out a dollar for each portion of profits brings down the pace of development in profits and income since new stock should be offered to sub for the capital delivered out as profits. Under his suppositions, a dollar of profits will cut the cost of the stock by just $1. In this way, as indicated by him, investors should be aloof among profits and capital additions. According to Priya and Mohanasundari (2016), the bird-in-the-hand was planned by Myron Gordon and John Lintner, who affirmed that speculators see a dollar of profits in the hand to be superior to a dollar of expected possibilities in the breeze, in this way investors will incline toward a dollar of genuine profits than a dollar of held income. The tax preference hypothesis built up that two expense related issues exist for accepting that financial specialists may go for a low profit payout to a high payout. The primary explanation is that assessments are not transmitted on capital increases until the stock is sold and besides when a stock is held by somebody until they bite the dust, there will be no capital additions charge. This is on the grounds that the recipients accepting the stock can use the estimation of the stock upon the arrival of death as their cost premise and accordingly avoid capital increases charge (Priya and Mohanasundari, 2016). B).

6 Problem Set 2 Assuming that the dividend irrelevance theory is true, then the payout of dividends will not have any consequences, and the business may follow any bonus expenditure. Assuming the bird-in-the-hand theory holds, the business is supposed to set a bigger payout if it seeks to increase the price of its stock. Assuming the tax preference theory holds, the business is supposed to formulate a low payout if it intends to increase the price of the stock. Thus, these theories conflict with each other. C). According to Farrell, Unlu, and Yu (2014), stock repurchase is a case where a firm decides to distribute its cash among its stakeholders by purchasing again its assets rather than reimbursing money bonuses. Advantages of Repurchases Repurchases permit investors to pick in the event that they need money, they can delicate their offer, get money, and make good on charges, or they can hold their offers and avoid charges. Repurchased stock can likewise be utilized during mergers, during investment opportunity practice by workers, during the transformation of convertible bonds, and when warrants are worked out. Repurchased stock can likewise be sold in the open market if the firm requires money. Repurchases are equipped for taking out a greater square of stock that overhangs the market and limit the cost per share (Farrell, Unlu, and Yu, 2014). Disadvantages of Repurchases The cost of the company's stock could diminish if a repurchase is taken as a possibility for a couple of wise venture chances by the firm. Generally, a repurchase could intend to investors that the directors are not engaged with the structure of the domain, where assets are put

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7 Problem Set 2 resources into low-bring ventures back. The firm may likewise raise the stock cost and wind up giving a more significant expense for the offers. For this situation, the selling investors may pick up to the detriment of the rest of the investors (Farrell, Unlu, and Yu, 2014). D). A stock dividend means issuing new shares in place of remitting cash dividend. Stock split means that the amount of shares remaining is increased in an act that is not related to the payment of dividends (El Ansary and El-Azab, 2017). According to El Ansary and El-Azab (2017), the main advantage of stock splits and stock dividends is that they surge the amount of stocks exceptional and, thus reduce the shares into more, and reduced parts. If the bonus or split does not take place at the same time as some other events which would change views concerning the future cash flows, such as news about greater revenues, then someone would expect the value of the stock to change in a way that the wealth of each investor remains the same. Stock splits and dividends might be influenced by the belief that they are indicators of management believes that the future is better. If the management of the firm chooses to split it's stock or remit stock dividends based on anticipated gains in the revenues and dividends, then the split/dividend action could give a positive signal thus boosting the price of the stock. Nevertheless, in a case where cash dividends and earnings fail to rise subsequently, the stock price would reduce back to its range, or get lower, since managers may lose their integrity (El Ansary and El-Azab, 2017).

8 Problem Set 2 Part 4: International Financial Management A). Young and Ghoshal(2016), asserts that multinational Corporation is a firm that operates in an integrated fashion in different countries. Firms chose to expand into other countries due to many reasons.  To search for new markets. Multinational companies venture into different countries to seek markets for their products. Companies such as Coca-Cola have expanded and created new niches around the world in search of new markets.  To seek raw material – Multinational companies such as Oil companies have pushed across borders and around the world to look for new sources of oil. Raw materials are an essential part of any companies and many companies would go long distances in search of it.  To search for new technology. No country has the lead in all aspects of technology, thus many companies are venturing into different countries to seek new and emerging technologies.  To avert political and regulatory problems – Most companies choose to operate in countries where there are no restrictions and import problems.  Diversification – Firms seek to establish international production facilities and markets to cushion the effects of unfavorable economic trends in a single country.

9 Problem Set 2 B).  Diverse money values. Money inflows in different fragments of multinational business constructions are denominated in diverse coinages. Therefore, an examination of the rates of exchange, and the impacts of reducing values of money, is supposed to be involved in every monetary analysis.  Language disparities. Communication ability is important in every aspect of the business. Multinational firms need a better understanding and knowledge of other languages for their success.  Financial and legal penalties – Each nation has its individual political and monetary institutions, and differences in these institutions can lead to significant hurdles when a firm is coordinating and controlling its international operations. Different legal systems can also cause complicated legal issues.  Different cultures. Every country or region has a unique cultural heritage that determines its values and influence how a business survives in society. These differences have profound effects on the consumption habits, attitudes towards risks, how the firm deals with employees, and much more.  Political risks. Every nation has a sovereign right over the property and people. Therefore, a government can hold the assets of a multinational company, or limit the return of incomes from the nation and the corporation will not have a way of recovering its resources.  Role of the government. Most governments do not create a favorable environment that can enable free and fair enterprise competition. Some governments assume an active role

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10 Problem Set 2 in business issues, requiring a multinational company to consult with the government directly to carry out its business. C). Exchange rate risk is a case where the instability intrinsic in a fluctuating frequency of exchange systems for a multinational corporation surges the ambiguity of money inflows that must be converted from one coinage to another. The exchange rate risk is determined by this increase. D). According to Valdecantos and Zezza (2015), before 1971, the rate of exchange was fixed. The U.S dollar was related to gold at a fixed price of $35 while other values of currency were based on the US dollar. The current monetary system is based on a floating rate system. The rate of exchange for any currency is fluctuating based on the fluctuation in the market. The intervention of the government is less. Currently, some countries still work with a fixed rate of exchange. E). According to Hassan and Mano (2019), spot rates will be rates given to purchasing cash for sure conveyance, for the most part two days after the date of the exchange. Forward rates are the rates given to purchasing cash for conveyance at some date that is settled upon later on. In a circumstance where the forward money isn't as important as the spot cash, the forward rate is esteemed to be at a markdown to the spot rate. Similarly, when a forward cash

11 Problem Set 2 bears more an incentive than the spot money, the forward money is said to sell including some hidden costs. F). As Citrus Inc. plans to expand overseas, it should first consider its reasons for venturing it the international arena. This will guide it to the right countries for its intended purpose. Additionally, the company should examine how different countries carry out its financial management and its effects. Knowing financial management in different countries will help the company plan what country to expand to. Generally, my responses will help the company plan for the right venture before its intended expansion.

12 Problem Set 2 References El Ansary, O. A. E., & El-Azab, M. H. (2017). The impact of stock dividends and stock splits on shares’ prices: Evidence from Egypt. Accounting and Finance Research , 6 (4), 84-96. Farrell, K., Unlu, E., & Yu, J. (2014). Stock repurchases as an earnings management mechanism: The impact of financing constraints. Journal of Corporate Finance , 25 , 1-15. Hassan, T. A., & Mano, R. C. (2019). Forward and spot exchange rates in a multi-currency world. The Quarterly Journal of Economics , 134 (1), 397-450. Priya, P. V., & Mohanasundari, M. (2016). Dividend policy and its impact on firm value: A review of theories and empirical evidence. Journal of Management Sciences and Technology , 3 (3), 59-69. Valdecantos, S., & Zezza, G. (2015). Reforming the international monetary system: a stock-flow- consistent approach. Journal of Post Keynesian Economics , 38 (2), 167-191. Young, C., & Ghoshal, S. (2016). Organization theory and the multinational corporation . Springer.

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