Description
In this Performance Task Assessment, you will analyze the shortterm and longterm capital position and needs of a company and will prepare an internal memo to the CFO, along with accompanying calculations to support your recommendations.
Assessment Submission Length: 3 to 5page report (excluding title page and references) and calculations in Excel
Instructions
To complete this Assessment, do the following:
 In the MF003_Assessment_Template_
Part1 and MF003_Assessment_Template_ Part2 files, complete your work on the Assessment, using your PreAssessment submission as a starting point and incorporating any feedback, as appropriate.  Be sure to adhere to the indicated assessment length.
Before submitting your Assessment, carefully review the rubric. This is the same rubric the assessor will use to evaluate your submission.
Capital Budget Decision Making for an Organization
For this Performance Task Assessment, you will play the role of a consultant who has been hired by a midsized company that recently went public to provide some recommendations related to their shortterm and longterm financial needs. Your first project is to analyze the short and longterm capital budget needs of the company. You will prepare and submit a 3 to 5page report, including an executive summary in which you synthesize your recommendations for the following fiscal year, along with the provided Excel spreadsheet with your calculations. Explain your findings and your recommendations.
For each of the following items in your report, you will complete the calculations in the provided Excel template (MF003_Assessment_Template_
Part 1: ShortTerm Working Capital Considerations (1–2 pages, plus calculations in Excel)
Part 1: ShortTerm Working Capital Considerations (1–2 pages, plus calculations in Excel)
 Analyze the differences between gross working capital, net working capital, and net operating working capital and their relationship to the cash conversion cycle.
 The company owner is considering a new venture that would require an additional $50,000 every month in inventory from a supplier over the next year. (Note: Use your creativity to come up with such a venture that can serve as a basis for your recommendations.) Explain the various shortterm financing options available, including the advantages and disadvantages of each source. What do you recommend and why?
 Assume that the company has an inventory conversion period of 64 days, an average collection period of 28 days, and a payables deferral period of 41 days.
 What is the length of the cash conversion cycle?
 If annual sales are $2,578,235 and all sales are on credit, what is the investment in accounts receivable?
 How many times per year does the company turn over its inventory? Assume that the cost of goods sold is 75% of sales. Use sales in the numerator to calculate the turnover ratio.
 Compare the cash conversion cycles of two competitors of your company using the following facts:
Competitor A
Inventory conversion period = 88 days
Average collection period (ACP) = 54 days
Payables deferral period = 30 days
Competitor B
Inventory conversion period = 90 days
ACP = 44 days
Payables deferral period = 30 days
 Assume that the company’s sales are expected to increase from $5 million in 2020 to $6 million in 2021, or by 20%. Its assets totaled $3 million at the end of the prior fiscal year. The company is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2020, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 3%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast the additional funds needed for the coming year.
 The company’s leadership team is very concerned about funding growth with new debt, given the existing liabilities. Propose strategies the company might consider to reduce its AFN.
 In your financial analysis, you have identified possible opportunities in Israel to expand operations. The company owner wants to know if it may be more advantageous to exchange U.S. dollars for Japanese yen first and then obtain Israeli shekels to invest. You observed that in the spot exchange market, 1 U.S. dollar can be exchanged for 3.58 Israeli shekels or for 109 Japanese yen. What is the crossexchange rate between the yen and the shekel; that is, how many yen would you receive for every shekel exchanged?
 Based on your calculations, what are the options available to the company and potential financial benefits of each? What strategy do you recommend?
Part 2: LongTerm Working Capital Considerations (1–2 pages, plus calculations in Excel)
Part 2: LongTerm Working Capital Considerations (1–2 pages, plus calculations in Excel)

 Future Value: If the company deposits $2 million in a bank account that pays 6% interest annually, how much will be in the account after 5 years?
 Present Value: What is the present value of a security that will pay $29,000 in 20 years if securities of equal risk pay 5% annually?
 Required Interest Rates: The company owner has said she will retire in 19 years. She currently has $350,000 saved and thinks she will need $800,000 at retirement. What annual interest rate must she earn to reach that goal, assuming she does not save any additional funds?
 Future Value of an Annuity: Find the future values of these ordinary annuities. Compounding occurs once a year.
 $500 per year for 8 years at 14%
 $250 per year for 4 years at 7%
 $700 per year for 4 years at 0%
 Present Value of an Annuity: Find the present values of these ordinary annuities. Discounting occurs once a year.
 $600 per year for 12 years at 8%
 $300 per year for 6 years at 4%
 $500 per year for 6 years at 0%
 Bond Valuation: The company has two bonds in their investment portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 8.2%. Bond C pays an 11.5% annual coupon, while Bond Z is a zerocoupon bond.
Assuming that the yield to maturity of each bond remains at 8.2% over the next 4 years, calculate the price of the bonds at each of the following years to maturity. Explain any observed differences from the pricing calculations of the two bonds.
Years to Maturity 
Price of Bond C 
Price of Bond Z 
4 
_________________ 
___________________________ 
3 
_________________ 
___________________________ 
2 
_________________ 
___________________________ 
1 
_________________ 
___________________________ 
0 
_________________ 
___________________________ 

 Yield to Maturity and Yield to Call: The owner is interested in investing some retained earnings in corporate bonds. She is considering the following:
 Bond A has a 7% annual coupon, matures in 12 years, and has a $1,000 face value.
 Bond B has a 9% annual coupon, matures in 12 years, and has a $1,000 face value.
 Bond C has an 11% annual coupon, matures in 12 years, and has a $1,000 face value.
 Yield to Maturity and Yield to Call: The owner is interested in investing some retained earnings in corporate bonds. She is considering the following:
Each bond has a yield to maturity of 9%.


 Before calculating the prices of the bonds, indicate whether each bond is trading at a premium, at a discount, or at par.
 Calculate the price of each of the three bonds.
 Calculate the current yield for each of the three bonds.
 CAPM and Required Return: The company has a beta of 1.1, and the closest competitor has a beta of 0.30. The required return on an index fund that holds the entire stock market is 11%. The riskfree rate of interest is 4.5%. By how much does your company’s required return exceed your competitor’s required return?
 Constant Growth Valuation: The company is expected to pay a $1.80 per share dividend at the end of the year (i.e., D1 = $1.80). The dividend is expected to grow at a constant rate of 4% a year. The required rate of return on the stock, rs, is 10%. What is the stock’s current value per share?
 Nonconstant Growth Valuation: The company recently paid a dividend, D0, of $2.75. It expects to have nonconstant growth of 18% for 2 years followed by a constant rate of 6% thereafter. The firm’s required return is 12%.
 How far away is the horizon date?
 What is the firm’s horizon, or continuing, value?
 What is the firm’s intrinsic value today, P0?
 Weighted Average Cost of Capital: The company has a target capital structure of 35% debt and 65% common equity, with no preferred stock. Its beforetax cost of debt is 8%, and its marginal tax rate is 40%. The current stock price is P0 = $22.00. The last dividend was D0 = $2.25, and it is expected to grow at a 5% constant rate. What is its cost of common equity and its WACC?
 Capital Budgeting Criteria: The company has an 11% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows:


 What is each project’s NPV?
 What is each project’s IRR?
 What is each project’s MIRR? (Hint: Consider Period 7 as the end of Project B’s life.)
 From your answers to parts a, b, and c, which project would be selected? If the WACC was 18%, which project would be selected?
 Construct NPV profiles for Projects A and B.
 Calculate the crossover rate where the two projects’ NPVs are equal.
 What is each project’s MIRR at a WACC of 18%?
Part 3: Executive Summary (page 1 of your report)
Part3: Provide the company owner with a 1page executive summary of your findings and recommendations. Address the following in your executive summary:
 Briefly identify the purpose of your report.
 Concisely summarize the results of your financial analysis of the company’s short and longterm capital budget needs.
 Synthesize your recommendations for how the company can raise money in the shortterm and longterm to continue to add value to the organization.
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