Milestone Four: Macroeconomic Items (Section V)

For this milestone, submit a draft of the Macroeconomic Items section of the final project, along with your supporting explanations. Base your calculations on the data provided in this case study. Be sure to substantiate your claims. Submit your calculations on the designated tab of the Final Project Student Workbook and your supporting explanations as a Microsoft Word document. This milestone will be used in your final project. For additional details, please refer to the Final Project Guidelines and Rubric document and the Milestone Four Guidelines and Rubric document in the Assignment Guidelines and Rubrics section of the course.The case study address: https://www.sec.gov/Archives/edgar/data/354950/000…
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Milestone One: Time Value of Money (please fill in YELLOW cells)
Interest Rate
8%
FCF1
Amounts*
FCF2
FCF3
-113
Pv*
104.63
Total Pv*
*In millions
425.78
FV
-111
FCF4
-108
$95.16
-101
$85.73
$74.24
$625.61
Pv=FVN/(1)^N
PV(I,N,0,FV)
Milestone One: Time Value of Money (please fill in YELLOW cells)
Interest Rate
10%
FCF1
Amounts*
FCF2
-113
Pv*
102.73
Total Pv*
*In millions
404.82
FV
$651.96
FCF3
-111
$91.74
FCF4
-108
$81.14
$26.35
-101
$68.98
Explanations:
FCF5
-97
$66.02
FCF (Free Cash Flow) is the net change in cash generated by the o
business during a reporting period, minus cash outlays for working
expenditures, and dividends during the same period. This is a stro
the ability of an entity to remain in business.
Note: For this part of the Milestone, please capital lease payment
property. Usually Free Cash Flows (FCFs) are used to calculate NPV
Flow calculations will be covered later in the course and thus canâ??t
the initial Milestone #1 analysis.
Interest Rate (given) – in our scenario we will use 8% interest rate
implicit rate, the average rate that lease consumer face on the cu
FCF5
-97
$60.23
net change in cash generated by the operations of a
eriod, minus cash outlays for working capital, capital
during the same period. This is a strong indicator of
ain in business.
estone, please capital lease payments under
ows (FCFs) are used to calculate NPV. Free Cash
red later in the course and thus canâ??t be used for
sis.
scenario we will use 8% interest rate. This rate is an
e that lease consumer face on the current market.
Milestone Two: Stock Valuation and Bond Issuance (please fill in the YELLOW cells)
PART I: STOCK VALUATION
Dividend from Financial Statements:
Year (fill in
Cash
what year you Div/share ($)
are using)
2012
2013
2014
Dividend Yield
1.16
1.56
1.88
2.30%
2.20%
2.30%
1. Stock Valuation – The new dividend yield if the company increased its dividend per share by 1.75
Year (fill in
Cash
Dividend Yield
what year you Div/Share ($)
are using)
.75
2012
2.91
2013
3.31
2014
3.63
5.77%
4.67%
4.44%
2. The dividend yield if the firm doubled it’s outstanding shares
Year (fill in
Cash
Dividend Yield
what year you Div/Share ($)
are using)
2012
0.58
2013
0.78
2014
0.94
1.15%
1.10%
1.15%
3. The rate of return on equity (i.e., the cost of stock) based on the new dividend yield you calculated above
Year (fill in
Cash
Stock Price
what year you Div/Share ($)
are using)
.75
2012
2.91
2013
3.31
2014
3.63
50.43478261
70.90909091
81.73913043
PART II: BOND ISSUANCE
Current Bonds from Financial Statements
Present Value
Periods
Interest
Payments
Future Value
PV
N
I
PMT
FV
($2,963)
40
2.9375
0
$9,433.58
1. The new value of the bond if overall rates in the market increased by 5%
Present Value
Periods
Interest
Payments
Future Value
PV
N
I
PMT
FV
($2,963)
40
5.4375
0
$24,634.04
2. The new value of the bond if overall rates in the market decreased by 5%
Present Value
Periods
Interest
Payments
Future Value
PV
N
I
PMT
FV
3. The value of the bond if overall rates in the market stayed exactly the same
– identical to CURRENT BOND VALUE from Financial Statements
($2,963)
40
0.4375
0
$3,528.32
ells)
Explanations:
Cash Dividend – distribution
appear on Income Statemen
Stockholder’s
Stock Price
Equity (in millions)
17,777 50.4347826
12,522 70.9090909
9,322 81.7391304
Note: Part of Statement of C
Dividend Yield – annual cash
of a share of the common sto
Note: Current Stock Price is n
for Dividend Yield
d per share by 1.75
Stockholder’s
Stock Price
Equity (in millions)
Stockholder’s Equity = Asset
Owners are called stockholde
goal of every corporate man
17,777 50.4347826
12,522 70.9090909
9,322 81.7391304
Return on Equity – for this pa
Stockholder’s
Equity (in millions) doubled
35,554
25,044
18,644
Stock Price
Using the formula: Dividend
Note – for this part, you will n
50.4347826
70.9090909
81.7391304
d yield you calculated above
Return on
Investment
CALCULATE ROI
3.72% (Dividends Capital gain)/ Divided by the original Price
3.78% (D1 (P1-P0)) / PO
Bonds are a long-term debt f
to the corporation. The borro
lifetime and at the maturity,
have priority over stockholde
Bonds = Debt……………Bondh
Stock=Equity…………….Stockh
Calculation: Please note that
that February 1st, 2015 is the
considered PV (Present value
payment schedule would be
available in 8-k 2006)
Semi-annual payment: 2036-2016 = 20 years *2 = 40 periods
Interest paid semi-annually: 5.875%/2 = 2.9375%
This bond does not make regular PMTs, assume zero coupon bonds
0.029375
0.054375
The following Senior-Note w
5.875% Senior Notes; due De
December 16
PV (Present Value) = 2,963 m
Our scenario: 5.875% Senior
February 1 and August 1
PV (Present Value) = 2,963 m
5.875%% = 10.875%/2 = 5.4375%
0.004375
5.875%-5% = 0.875%/2 = 0.4375%
FV (Future Value Calculation
Step 1) Select Formulas
Step 2) Click on Financial
Step 3) Select FV – you will se
Step 4) Enter the following:
Rate – enter as decimal, no %
Nper – number of period. Ent
Pmt – payment. Our example
Pv – Present value. Enter as n
Type – leave blank
Updated: 01/22/2018 by ZB
xplanations:
ash Dividend – distribution of the corporate income. They are not expenses and do not
ppear on Income Statement.
ote: Part of Statement of Cash Flows. Please be aware that corporation list 5 years worth of
vidend Yield – annual cash dividend per share of common stock divided by the market price
a share of the common stock. (Dividend yield = Annual Dividend/Current Stock Price)
ote: Current Stock Price is not part of the Financial Statements – calculated suing the formula
r Dividend Yield
ockholder’s Equity = Assets – Liabilities. This represents the ownership of a corporations.
wners are called stockholder because they hold stocks or share of the company. The main
oal of every corporate manager is to generate shareholder value.
eturn on Equity – for this part we will modify and use return on investment instead.
sing the formula: Dividend (.75)/[(new price-old price)/old price]
ote – for this part, you will need extra price from 2011
onds are a long-term debt for corporations. By buying a bond, the bond-owner lends money
the corporation. The borrower promises to pay specified interest rate during the loans
etime and at the maturity, payback the entire principle. In case of bankruptcy, bondholders
ave priority over stockholders for any payment distributions.
onds = Debt……………Bondholders = Lenders
ock=Equity…………….Stockholders = Owners
alculation: Please note that for bond calculations, only one bond was used and we assume
at February 1st, 2015 is the origination date. The value on financial statements will be
onsidered PV (Present value). Maturity date would be also assumed for February 2036 and
ayment schedule would be adjusted to February 1 and August 1. (issued in 2006 and details
vailable in 8-k 2006)
he following Senior-Note was used from page 44:
875% Senior Notes; due December 16, 2036; interest payable semi-annually on June 16 and
ecember 16
V (Present Value) = 2,963 million
ur scenario: 5.875% Senior Notes; due February 1, 2036; interest payable semi-annually on
ebruary 1 and August 1
V (Present Value) = 2,963 million
V (Future Value Calculation) – using Excel Formula
ep 1) Select Formulas
ep 2) Click on Financial
ep 3) Select FV – you will see the formula below
ep 4) Enter the following:
ate – enter as decimal, no % sign. Example: 4% as 0.04
per – number of period. Enter a whole number. Example 50
mt – payment. Our example does not assume regular payments. Assume zero coupon bond for our example.
v – Present value. Enter as negative. Example $1,000 should be -1000
ype – leave blank
pdated: 01/22/2018 by ZB
ur example.
Milestone Three: Capital Budgeting Data (please fill in YELLOW cells)
Cash Flows (Sales)
– Operating Costs (excluding Depreciation)
– Depreciation Rate of 20%
Operating Income (EBIT)
– Income Tax (Rate 35%)
After-Tax EBIT
Depreciation
Cash Flows
Initial Outlay
CF1
($65,000,000)
$50,000,000
$25,500,000
(13,000,000)
11,500,000
4,025,000
7,475,000
13,000,000
($65,000,000)
20,475,000
NPV
IRR
CF2
$45,000,000
$25,500,000
(13,000,000)
6,500,000
2,275,000
4,225,000
13,000,000
17,225,000
13,291,616.74 ACCEPT
16.10% ACCEPT
WACC
8%
CF3
CF4
$65,500,000 $55,000,000
$25,500,000 $25,500,000
(13,000,000) (13,000,000)
27,000,000 16,500,000
9,450,000
5,775,000
17,550,000 10,725,000
13,000,000 13,000,000
30,550,000 23,725,000
CF5
$25,000,000
$25,500,000
(13,000,000)
(13,500,000)
(4,725,000)
(8,775,000)
13,000,000
4,225,000
Capital Budgeting Example Set-up
Initial investment $65,000,000
Straight-line Depreciation of 20%
Income Tax @35%
WACC of 8% approximately. (HD WACC was about 8.
Cash Flow (which in this case are Sales Revenues) are
CF1: $50,000,000
CF2: $45,000,000
CF3: $65,500,000
CF4: $55,000,00
CF5: $25,000,000
Operating Costs
CF1: $25,500,000
CF2: $25,500,000
CF3: $25,500,000
CF4: $25,500,000
CF5: $25,500,000
WACC- why do we use WACC rate for new projects?
the project doesnâ??t earn more percent than WACC, t
corporation should abandon the project and invest
Initial Investment – always negative. Corporation has
to invest money (“lose” it till they recover it via sales
in order to gain future benefit.
mple Set-up
ACCEPT
REJECT
mately. (HD WACC was about 8.83%)
his case are Sales Revenues) are as follows:
e WACC rate for new projects? If
rn more percent than WACC, the
andon the project and invest
ways negative. Corporation has
e” it till they recover it via sales)
e benefit.
Milestone Four: Interest Rate Implication (please fill in YELLOW cells)
1. Original Scenario from Milestone 1 – Time Value of Money using 8%
Interest Rate
8.00%
FCF1
FCF2
FCF3
FCF4
Amounts*
Pv*
0.00
Total Pv*
*In millions
0.00
0.00
0.00
0.00
2. Change in interest rate and its implications – Lower Interest Rate (5%)
Interest Rate
FCF1
FCF2
FCF3
FCF4
Amounts*
Pv*
0.00
Total Pv*
*In millions
0.00
0.00
0.00
0.00
3. Change in interest rate and its implications – Higher Interest Rate (15%)
Interest Rate
FCF1
FCF2
FCF3
FCF4
Amounts*
Pv*
0.00
Total Pv*
*In millions
0.00
0.00
0.00
0.00
Explanation:
We will use Milestone 1 and Time Value of Money for Milestone 4 a
Two cases will be analyzed:
Lower Interest Rate at 5%
Higher Interest Rate at 15%
FCF5
0.00
FCF5
0.00
FCF5
0.00
Money for Milestone 4 analysis
FIN 550 Milestone Four Guidelines and Rubric
Overview: For the final project, you will use this case study to prepare a financial analysis report for Home Depot Inc. You will include in your analysis the
background calculations and managerial analysis for each of the following topics: time value of money, stock and bond valuation, and capital budgeting. You will
also discuss macroeconomic variables that might impact the companyâ??s financial decision making and strategic objectives. These topics will be covered over four
milestones to be submitted throughout the course before you submit the final project. Note that while these elements may seem separate and unrelated,
together they will present a well-rounded view of the companyâ??s finances with regard to the topics.
In Milestone Four, you will submit a draft of the Macroeconomic Items section of the final project, along with your supporting explanations.
Prompt: Provide an explanation of the impact of external factors on the financial position of Home Depot. Use the designated tab in the Final Project Student
Workbook to demonstrate the implications of interest rate changes on at least one of the calculations you performed in one of the earlier milestones.
Specifically, the following critical elements must be addressed:
V.
Macroeconomic Items: The CEO of the company is convinced that financial analysis should hinge only on what is happening internally within the
company. Convince him otherwise based on the following:
A. Analyze the implications of interest rate changes on any of the calculations you performed. Be sure to substantiate your claims.
B. How might an issue (negative or positive) within the overall stock market impact the companyâ??s stock valuation numbers, other financial
variables, or its overall portfolio management? Be sure your response is supported by evidence.
C. Analyze the impact of any external factor (i.e., external to the company) discussed throughout the course on the companyâ??s financial position. Be
sure to justify your reasoning.
Guidelines for Submission: Your paper must be submitted as a 2- to 3-page Microsoft Word document, not including your calculations, which should be
completed in the Final Project Student Workbook. Use double spacing, 12-point Times New Roman font, and one-inch margins. Sources should be cited according
to APA style.
Rubric
Critical Elements
Macroeconomic Items:
Implications of Changes
Proficient (100%)
Analyzes implications of interest rate
changes, substantiating claims
Needs Improvement (80%)
Analyzes implications of interest rate
changes, but response or substantiation
is cursory or illogical
Macroeconomic Items: Stock Assesses the impact of an issue within
Assesses the impact of an issue within
Market
the overall stock market on the
the overall stock market on the
companyâ??s stock valuation numbers or
companyâ??s stock valuation numbers or
any other financial variable, supporting
any other financial variable, but response
response with evidence
is cursory, illogical, or weakly supported
Macroeconomic Items:
Analyzes the impact of a factor external Analyzes the impact of a factor external
External Factor
to the company on the companyâ??s
to the company on the companyâ??s
financial position, justifying reasoning
financial position, but response is
cursory, illogical, or weakly supported
Articulation of Response
Submission has no major errors related
Submission has major errors related to
to citations, grammar, spelling, syntax, or citations, grammar, spelling, syntax, or
organization
organization that negatively impact
readability and articulation of main ideas
Not Evident (0%)
Does not analyze implications of interest
rate changes
Value
30
Does not assess the impact of an issue
within the overall stock market on the
companyâ??s stock valuation numbers or any
other financial variable
30
Does not analyze the impact of a factor
external to the company on the companyâ??s
financial position
30
Submission has critical errors related to
citations, grammar, spelling, syntax, or
organization that prevent understanding of
ideas
Earned Total
10
100%

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