# trident FIN 301 MOD 4 CASE and SLP

| February 25, 2017

Question
MOD 4 FIN 301 CA and SLP

Module 4 – Case

Capital Budgeting with Funding Sources

Case Assignment

This case has two separate parts.

Part I: Capital Budgeting Practice Problems

a. Consider the project with the following expected cash flows:

Year

Cash flow

0

-\$400,000

1

\$100,000

2

\$120,000

3 \$850,000

•If the discount rate is 0%, what is the project’s net present value?

•If the discount rate is 2%, what is the project’s net present value?

•If the discount rate is 6%, what is the project’s net present value?

•If the discount rate is 11%, what is the project’s net present value?

•With a cost of capital of 5%, what is this project’s modified internal rate of return?

Now draw (for yourself) a chart where the discount rate is on the horizontal axis (the “x” axis) and the net present value on the vertical axis (the Y axis). Plot the net present value of the project as a function of the discount rate by dots for the four discount rates. Connect the four points using a free hand ‘smooth’ curve. The curve intersects the horizontal line at a particular discount rate. What is this discount rate at which the graph intersects the horizontal axis?

[ Look at the graph you draw and write a short paragraph stating what the graph ‘shows’]

b. Consider a project with the expected cash flows:

Year Cash flow

0

-\$815,000

1

\$141,000

2

\$320,000

3

\$440,000

•What is this project’s internal rate of return?

•If the discount rate is 1%, what is this project’s net present value?

•If the discount rate is 4%, what is this project’s net present value?

•If the discount rate is 10%, what is this project’s net present value?

•If the discount rate is 18%, what is this project’s net present value?

Now draw (for yourself) a chart where the discount rate is on the horizontal axis (the “x” axis) and the net present value on the vertical axis (the Y axis). Plot the net present value of the project as a function of the discount rate by dots for the four discount rates. Connect the four points using a free hand ‘smooth’ curve. The curve intersects the horizontal line at a particular discount rate. What is this discount rate at which the graph intersects the horizontal axis?

[ Observe the graph and write a short paragraph stating what the graph ‘shows’]

c. Read the background materials. Then write a one-to-two page paper answering the following question:

Which method do you think is the better one for making capital budgeting decisions – IRR or NPV?

Part 2: Equity and Debt

Read the article below available in ProQuest:

American Superconductor switch ; Westboro company plans to raise money through a stock offering, Andi Esposito. Telegram & Gazette. Worcester, Mass.: Aug 26, 2003. pg. E.1

Abstract (Article Summary)

“AMSC’s management and board of directors believe the decision to forgo a secured debt financing and to adopt an equity financing strategy under current market conditions is in the best interests of our shareholders,” said Gregory J. Yurek, chief executive officer of AMSC. The 265-employee company has operations in Westboro and Devens and in Wisconsin.

Finally, the Northeast blackout “shined a lot of light on the problems we have been talking about as a company for three to four years,” Mr. Yurek said. AMSC products, such as a system installed this year in the aging Connecticut grid and high temperature superconductor power cables and other devices bought by China for its grid, are designed to improve the cost, efficiency and reliability of systems that generate, deliver and use electric power. “We are a company with products out there solving problems today,” he said.

After reading the background materials and doing your research, apply what you learned from the background materials and write a two to three page paper answering the following questions:

What are the advantages and disadvantages for AMSC to forgo their debt financing and take on equity financing? Do you agree with their decision? How can a company’s cost of equity be determined? Is there a tax deduction from the use of debt financing? Please explain.

Explain your answers thoroughly. Be sure to support your opinions on these assignment questions with references to the background materials or to other articles in your paper.

Assignment Expectations

This assignment consists of a quantitative section (Part 1) and an essay section (Part 2) below. Upload both sections as one Word document by the end of the Module.

Module 4 – SLP

Capital Budgeting with Funding Sources

This SLP has two parts.

Part I

Every company has capital projects. The company you have selected must need something! Be it a new wing to the building, a new product line to be funded, a new piece of equipment, find one new acquisition your company needs.

Once you have identified the new possible investment item, what problems are you going to have in estimating the cash flow that might be emanating from the initial investment and problems in getting it funded? Issues might be:

•Risk

•Cost

•Politics (getting it through committees)

•Public Relations

•etc.,

Identify a potential capital project for your company describe such a project and write a short summary of the problems you see in getting the funding to see it through.

Part II

Examine the structure and activities in your organization and identify two projects or events that required an investment. One should be a ‘current project’ and the other long-term investment project.

For each project or event, identify the preferable source of funding. You may not have access to the actual source of funding so limit your paper to the source YOU feel is most appropriate. Then explain why you feel that source is most appropriate.

This is a Signature Assignment Expectation for FIN301 Module 4 SLP

There are 2 specific learning outcomes: 1) apply business theories, models, and concepts to guide analysis of problems and situations and 2) utilize data driven analysis in making business decisions.

In this SLP assignment for Module 4 our emphasis will be on understanding the preferable source of funding. You will be summarizing all of what you learned the in the Cases, SLPs and TDs.

The grading rubric below has been developed to measure student success in meeting the FIN301 Module 4 SLP expectations related to applying your knowledge of the source of funding on making business decisions.

Assignment Expectation

Weak

Marginal

Strong

Organization

Demonstrates the ability to explain content logically, concisely, and in an appropriate manner to understanding of the source of funding.

There is no logical sequence of information. Wording is rambling and unfocused.

Paper does not follow a logical sequence.

Paper follows a logical sequence. There are some minor problems with sub-classification and/or results are not clear.

Paper follows a logical sequence with a correct computation and results. Each activity relates to others in a carefully organized framework.

Demonstrates the ability to support a central point or viewpoint throughout the paper.

Insufficient elaboration and/or support (e.g., computation, each source) in the paper.

Limited elaboration and/or support in the paper.

Support with some specific details and elaboration in the paper.

Support through both specific details and elaboration apparent in the paper.

Content

Demonstrates the ability to analyze the source of funding and compare equity with debt.

The purpose is not identified, is unclear, or inappropriate in the paper.

Purpose is occasionally unclear in the paper.

Clear purpose, but not consistently sustained throughout the paper.

Clear purpose sustained throughout the paper.

Demonstrates the ability to gather and sort financial information and data on a particular investment activity.

Does not have a grasp of information and appropriate data. Topic is poorly created. Supporting explanations are absent or vague. Trite ideas and/or unclear wording reflect a lack of understanding of topic.

Seems uncomfortable with information and data. Topic is evident but with little or no elaboration.

Seems comfortable with the financial information and data. Topic is evident with some supporting details.

Demonstrates full knowledge of the topic with explanation and elaboration. The topic is well developed, effectively supported, and appropriate for the assignment. Critical thinking is clearly and creatively expressed. Data choices are well thought out.

Delivery

Demonstrates the ability to use appropriate word choice and grammar in the paper.

There are many sentences with grammatical errors. Some sentences are incomplete/halting, and/or vocabulary is somewhat limited or inappropriate.

There are a few sentences that are complete and grammatical. Word choice is not always appropriate for presentation.

Sentences are generally complete and grammatical, and they flow together easily. With a few exceptions, words are chosen for their precise meaning.

All sentences are complete and grammatical, and they flow together easily. Words are chosen for their precise meaning. Word choice illustrates grasp of content and enhances explanation.

Demonstrates the ability to make an effective explanation outline that is free from bias.

Words chosen for an explanation are inappropriate and exhibits bias. Some readers may be confused.

Words chosen for the paper are free from bias with one or two minor exceptions.

Words have no apparent bias. There is some inappropriate explanation.

Words and explanation are completely free from bias.

SLP Assignment Expectations

For Part I, you must discuss both the estimates of the initial investments and the annual incremental after-tax cash flow that is expected to emanate from the investment.