Project 4 Finance for Managers

Project 4: Finance for Managers

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As a senior analyst at Maryland Creative Solutions (MCS), you have continued to prove your value after helping Choice Hotels make strategic decisions by analyzing their financial reports. Frank Marinara and Elisa Izuki, continually happy with your work, have decided to transfer you to the finance team. You’re excited to continue working for MCS and you strongly believe you are capable of someday making senior partner.


Dialogue with Frank Marinara

You meet with Frank so he can orient you to the upcoming task. “The finance operations have a slightly different focus than the accounting operations,” he says. “The financial analysis part of our business is more involved with analyzing financing and investment decisions, making corporate asset valuations, evaluating corporate financial performance, and providing corporate valuations. You will be working to complete a project for our Maryland-based client McCormick & Company.”

Given your position as a senior analyst, you are anticipating that Frank will have several separate requests. Frank explains that McCormick & Company is considering expanding their operations by building another factory to increase the production volumes of their spice products. The client has asked MCS to help them determine if this financial investment is worthwhile.

Frank continues by delineating your responsibilities for the project: “To get started, we will need to look at the variables involved in this purchase and the questions McCormick & Company has provided. Ultimately, MCS will help them determine their corporate valuation, responsibly raise capital, and make the right financing and investing decisions. This information will help you determine which financing and investing options would provide McCormick & Company with the best potential outcomes for sustainability and growth.

“You will also need to participate in a meeting with the other finance analysts to discuss risk and returns,” Frank says. This discussion will help the client decide if they should invest in the new factory.

“The client also mentioned they would like MCS to provide them with guidance on retirement plan options and other employee benefits,” Frank elaborates. “Finally, I will need you to complete the project by preparing an executive summary that highlights your recommendations.”

Frank needs all of these tasks done within two weeks and suggests you begin right away. Click Step 1 to get started!

When you submit your project, your work will be evaluated using the competencies listed below. You can use the list below to self-check your work before submission.

  • 1.3:      Provide sufficient, correctly cited support that substantiates the      writer’s ideas.
  • 1.6:      Follow conventions of Standard Written English.
  • 3.1:      Identify numerical or mathematical information that is relevant in a      problem or situation.
  • 3.2:      Employ mathematical or statistical operations and data analysis techniques      to arrive at a correct or optimal solution.
  • 3.3:      Analyze mathematical or statistical information, or the results of      quantitative inquiry and manipulation of data.
  • 3.4:      Employ software applications and analytic tools to analyze, visualize, and      present data to inform decision-making.
  • 8.1:      Evaluate major business/organizational systems and processes and make      recommendations for improvement.
  • 10.3:      Determine optimal financial decisions in pursuit of an organization’s      goals.
  • 10.4: Make      strategic managerial decisions for obtaining capital required for      achieving organizational goals.
  • 12.1:      Assess market risk and opportunity.

Project 4: Finance for Managers

Step 1: Analyze Financing and Investing Activities

INBOX (1 NEW EMAIL)


From:

Frank Marinara, Director of Finance


To:

You and Finance Team

I hope you are ready to move forward with the project at hand. I want to give you the background on the McCormick & Company case and instructions for this project.

McCormick & Company approached MCS because they would like to increase the production of their spice products and are considering the construction of a new factory in Largo, Maryland. The new factory would allow the company to increase its overall production capacity. As McCormick decides whether to build the factory, they are asking our finance team to evaluate options to finance this construction. McCormick has provided MCS with the purchase price, expected cash flow, and two new product lines projects they expect to run in the newly built factory.

To understand which financing option would be best for the client, you must first understand

time value of money

,

present value

,

future value

, and

loan amortization

. These topics will help you make recommendations about the relative benefits and drawbacks of each option.

Working in the attached Excel Workbook, complete the Financing and Investing worksheet. The Financing and Investing worksheet contains information about present value, revenue, expenses, and cash flows, as well as questions that will help Frank guide the client in selecting the best financing option.

When you have completed the Financing and Investing worksheet, submit it to the submission folder located in the final step of this project. You should aim to complete this step during Week 7. Then, proceed to Step 3, where you will examine the factors affecting McCormick’s corporate valuation.

Looking forward to seeing your work,

Frank

ATTACHMENTS


McCormick & Company Workbook.xlsx

Project 4: Finance for Managers

Step 2: Determine Corporate Valuation

McCormick & Company is also interested in gaining further insight on the

corporate valuation

of the company, as they need to know how much capital they’ll need to raise to construct the factory. To understand valuation, you must review

dividends

,

options

,

warrants

,

derivatives

,

discount rate

, and

yield

.

Dialogue with Frank Marinara

Frank tasks you with recommending a method for raising sufficient capital. “McCormick & Company has been paying dividends to its shareholders for several years now,” he says. “The company has given us some data and would like us to recommend ways they can further leverage their financing activities. The company is interested in potentially issuing more stock or purchasing bonds to raise additional capital for the construction of the new factory. I will need you to answer a few questions about the company’s stock prices and minimum acceptable rate of return. Your answers will help me make a recommendation to McCormick.”

Working with the same Project 4 Excel Workbook you worked with in Step 1, complete the Valuation of Performance worksheet. This worksheet contains information on McCormick’s dividends,

stocks

, and

risk premiums

, as well as questions that will guide the client’s decisions.

When you have completed the Valuation of Performance worksheet, submit the Project 4 Excel Workbook to the folder located in the final step of this project. Next, proceed to Step 3, in which you will advise the client on selecting a retirement plan for its employees.

Project 4: Finance for Managers

Step 3: Evaluate Annuities

As McCormick & Company reviews its capital in preparation for constructing the factory, it has asked MCS to help with the process of selecting the best retirement options for their employees. To help McCormick make the best decision based on our recommendations, you will need to understand several concepts:

You will also apply what you learned about present value and future value.

Working with the same

Project 4 Excel Workbook

you will use in Steps 1 and 2, complete the Annuities worksheet. The worksheet poses questions about the retirement annuities, US treasury bond rates for the employees’ portfolios managed by a retirement fund company, and annuities for employee’s personal investments. This information will clarify the best choice of retirement plan for McCormick employees.

When you have answered the questions provided, submit the Project 4 Excel Workbook to the submission folder in the final step of this project. Then continue to Step 4, where you will discuss risk and returns with your colleagues.

Project 4: Finance for Managers

Step 4: Discuss Risk and Returns


Dialogue with Frank Marinara

As McCormick decides whether they will invest in an additional factory to keep up with demand, the company remains uncertain if the investment will yield worthwhile

returns

. “That is where they need us to provide them with a risk and return evaluation,” Frank says. “

Risk

is the financial liability a company takes in a given investment in consideration of a potential return on the investment.”


Meet and Discuss

Frank has asked you to meet with your colleagues and discuss how risk and returns will influence McCormick’s investment decision. Complete the following tasks:

· Discuss whether McCormick & Company should invest in building a new factory in Largo, Maryland. Give credit to any sources you use to support your statements.

· Discuss how understanding risk and returns will impact this decision. Give credit to any sources you use to support your statements.

· Later in the week, after you are back in your office, you have a follow-up discussion with your MCS colleagues in an effort to summarize the key lessons from your discussion on risk and returns at the meeting. Respond to your colleagues’ original discussion posts and give credit to any sources you use to support your statements.

During Week 8, submit one original posting of at least 250 words in the Risk and Returns Discussion by Saturday and post two responses of at least 50 words each to other discussion participants by Tuesday. Consult the

MBA discussion guidelines

for assistance.

When you have finished Step 4, proceed to Step 5, where you will review your recent findings in a report to management.

Project 4: Finance for Managers

Step 5: Submit Executive Summary

Team Report

At the conclusion of your project, Frank requests an executive summary based on your analysis and recommendations in the previous steps. He is planning on using this executive summary to provide the client, McCormick & Company, with guidance on the potential construction of an additional factory. This executive summary should include facts and figures to support your recommendations. The report should highlight your analysis and recommendations based on the work you completed in the Project 4 Excel Workbook. Be creative and use charts, graphs, or any other tools you feel would be useful to convey your analysis and recommendations. Post your executive summary to management in the submission folder located in the final step of this project.

When you have completed Step 5, proceed to Step 6, where you will submit all work for Project 4.

Attachments

Instructions

Instructions

To complete this workbook, answer the questions on each worksheet.

Financing and Investing

1
2
3 Price Percent Down Amount Financed
4 Loan N I/Y PV PMT
Loan A
Loan B
Loan C
5 Loan N I/Y PV PMT Total Paid
Loan A
Loan B
Loan C
6

McCormick & Company is considering building a new factory in Largo, Maryland. James Francis, a landowner, is selling a 4.35-acre parcel of industrial zoned land with a listed sale price of $3,000,000.00 for the land. McCormick & Company is interested in the land and so is another manufacturing company. The competing manufacturing company has made an offer of $2,300,000.00 in cash and $300,000 each year for 15 years for the land. McCormick & Company knows it can make an offer to outbid the competitor to obtain the land. So, McCormick & Company decided to offer $4,242,000.00 in cash.

Now, the land owner, James Francis, must make a decision between the two competing offers. To make this decision, James should first identify the Present Value (PV) of each offer. James’s bank is offering a 12 percent (12%) interest rate when invested through the bank-managed growth stock portfolios. Let’s help James make his decision by answering the following questions using the template to the right.

1. Without any calculation involving TVM, what offer would James accept ?

2. Using PV and/or FV, which offer should James accept? Does it change your perspective? Elaborate and explain.

McCormick & Company has decided in order for the company to have a minimal impact on current cash flows, the company will need to borrow seventy percent (70%) Loan to Value (LTV) of the $4,242,000.00 offer in the form of a commercial acquisition and development loan to purchase the land. This means McCormick & Company will need to make a thirty percent (30%) down payment to secure the commercial acquisition and development loan. McCormick & Company is considering three different loan options:

Loan A: 20-year loan with a fixed annual interest rate of 6 percent
Loan B: 10-year loan with a fixed annual interest rate of 4.5 percent
Loan C: 15-year loan with a fixed annual interest rate of 5 percent

3. How much of the total $4,242,000.00 offer will be financed?

4. Which loan will have the lowest monthly payment?

5. Which loan will have the lowest total payback amount?

6. Would you recommend McCormick & Company select the loan with lowest monthly payment or lowest total payment and why?

Corporate Valuation

Capital Asset Pricing Model
1
0
Dividend Valuation Model
2
0.00

Now that McCormick & Company has secured the land for the new factory through a loan, now it is time to construct the new factory. Instead of using operating cash flow to fund the construction of the new factory, McCormick & Company has decided to raise capital. To raise additional capital the company is considering issuing additional shares of stock. For McCormick & Company to determine how much it will cost the company to issue stock, the company must determine the required return on the stock in relation to the systematic risk. We can help McCormick & Company with this by answering the following questions using the provided information below:

McCormick & Company uses the 10-Year Treasury Constant Maturity Rate as the risk-free rate. As of 7/1/2019, this was 2.03 according to the U.S. Treasury.
McCormick & Company has disclosed the company’s levered Beta is 0.60 (MarketWatch, 7/1/2019).
McCormick & Company has disclosed the company’s expected return on the market is 8.03%

To answer the following questions, please use the template to the right.

1. What is McCormick & Company’s required return on the issuance of stock using CAPM?

In the CAPM, we examined the expected return on the market as a whole. In an effort to estimate the required return of McCormick & Company’s stock, we will assume market equilibrium and use the Dividend Valuation Model (DVM), which is the expected return of McCormick’ & Company stock. To find the cost of equity using DVM, we take the original equation
and rearrange it solving for Rs:

McCormick & Company’s expected dividend per share next year is $2.28
McCormick & Company’s expected dividend per share constant growth rate is 8.70% (as of May 2019)
McCormick & Company’s stock price per share was $155.70 on 7/1/2019

2. Using the DVM what is the cost of equity?

Annuity

Answer Questions 1 and 2 here. Show your calculations.
1 PV
PMT
1b PMT
2 PMT
Monthly

Questions

1. Marie, an employee at McCormick, has determined that she will need $5500 per month in retirement over a 30-year period. She has forecasted that her money will earn 7.2% compounded monthly. Marie will spend 25-years working toward this goal investing monthly at an annual rate of 7.2%. How much should Marie’s monthly payments be during her working years in order to satisfy her retirement needs?  Hint: Find how much Marie must have at retirement, then find the monthly payments to reach that goal.
What maximum amount could Marie withdraw each month so that her balance never decreases (nearest dollar)?

2. Kathy plans to move to Maryland and take a job at McCormick as the Assistant Director of HR. She and her husband Stan plan to buy a house in Garrison, MD and their budget is $500,000. They have $100,000 for the down payment and McCormick will pay for closing costs. They are considering either a 30 year mortgage at 4.5% annual rate or a 15 year mortgage at 4%. Calculate the monthly payment for each. Property taxes and insurance will add $1,000 per month to which ever mortgage they choose. What should Kathy and Stan do?

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