Module 1 – Case
THE ROLE OF THE FINANCIAL MANAGERAssignment OverviewDue to the increasingly complex nature of corporate finance,more and more corporations are tapping their chief financial officer to becometheir chief executive officer. The CFO brings substantial financial expertiseto the position of CEO. However, there may be other reasons why the CFO is notnecessarily the best person to become the CEO.
Please note that the CFO must have an external orientation:After all, the company is owned by its shareholders and if the company is tooperate so as to raise the value of the shares it must consider not only theinternal structure of the organization, its products, competitors etc., but itmust consider the interaction between what the company ‘does’, and the way the‘market’ evaluates its performance. It is the combination of the two that playsa role in affecting the market price of the shares and shareholders value. Theindividuals who must have an eye on this are usually the CEO and the CFO.
Please read the articles below, which are both available inProquest. You need to click âADDIONAL LIBRARY RESOURCESâ under the title ofOnline Library in the TLC Portal in order to access the links.
How a CFO can graduate to CEO
Corporate Finance; London; Jun 1999; Janine Brewis
Abstract: Positions of power within corporates are highlysought after, and today’s chief financial officers and finance directors areincreasingly becoming aware that they now have a realistic opportunity ofbecoming CEO. Part of the reason for the trend towards recruiting CFOs who canbehave as strategic partners is that the investor community looks much morecritically at the business performance and management strengths and weaknessesof corporates. This strategic positioning gives them an opportunity to buff uptheir image, and make themselves seen as a more credible candidate to take overthe CEO role.
Do CFOs Really Make Good CEOs
Institutional Investor; New York; Aug 1989; Picker, Ida
Abstract: With the proliferation of corporate takeovers,leveraged buyouts, and restructuring in the US, it would seem that chieffinancial officers (CFO) hold the keys to executive wisdom. Recruiters report agrowing trend of grooming CFOs for chief executive officer (CEO) positions, withsome estimating that nearly 25% of top corporate leaders are former CFOs.Analysts, academics, and headhunters agree that the ideal CEO communicateswell, is adept at managing managers, understands the company’s product andoperations, and provides a consistent vision. A recent survey by ManagementPractices Quarterly reveals that, of 83 new CEOs appointed in 1988, more than18% came from operations-production backgrounds, some 23% had technicaltraining, while only 14.4% had a financial background. D. Wayne Calloway, whobecame CEO of PepsiCo in May 1986, was formerly the company’s CFO and isprobably the best example of the valuable experience CFOs can bring to the CEOposition.
Assignment ExpectationsRead the two articles above, look for newer articles on thesubject by browsing the web and then write a two-page paper answering thefollowing question:
Do you think finance departments are the best place to trainfuture CEOs? Provide two actual examples of CFOs of publicly-traded companieswho became CEOs of publicly-traded companies within the past 5 years. Do theseindividuals have the CPA and/or CFA designations?
Include a discussion of both the pros and cons of hiring aCFO to be CEO. Try to cite at least three articles in your paper in support ofyour arguments in favor of and against hiring a CFO to be a CEO. Remember toinclude a reference list and to refer to the articles you use in the body ofyour paper.
Module 1 – SLP
THE ROLE OF THE FINANCIAL MANAGERFor this assignment, go to the Yahoo Stock Screener and usethis page to find a publicly traded company that you find interesting and wouldlike to study for this class. The company should not be a bank or a financialinstitution of any kind including insurance companies.
SLP Assignment ExpectationsWrite a two to three page paper discussing what you findinteresting about this company, and whether or not you think this company willhave a successful future. Get to the company’s web site, into the“investors relations” section and provide some financial highlightsof your company for the past year. Indicate which stock exchange the company islisted on and what was the past 12 month rate of return (% gain or loss) toinvestors who bought shares of this company a year ago and sold the sharesyesterday. This rate of return is called the one-year Holding Period Return, orHPR. Also state what is the most recent price of the shares on the company?
In addition discuss briefly some information about the topmanagement team including the CEO and CFO. If there are any issues involvedwith the company that relate to the issues discussed in the case assignment,mention them briefly as well.
Module 2 – Case
PRESENT VALUEAssignment OverviewNOTE: This assignment is in two parts, one is quantitativeproblem, the other a short paper. You need to turn in both Part I and Part IIto receive full credit for this assignment.
Part I: This part of the assignments tests your ability tocalculate present value.
A. Suppose your bank account will be worth $15,000.00 in oneyear. The interest rate (discount rate) that the bank pays is 7%. What is thepresent value of your bank account today? What would the present value of theaccount be if the discount rate is only 4%?
B. Suppose you have two bank accounts, one called Account Aand another Account B. Account A will be worth $6,500.00 in one year. Account Bwill be worth $12,600.00 in two years. Both accounts earn 6% interest. What isthe present value of each of these accounts?
C. Suppose you just inherited an gold mine. This gold mineis believed to have three years worth of gold deposit. Here is how much incomethis gold mine is projected to bring you each year for the next three years:
Year 1: $49,000,000
Year 2: $61,000,000
Year 3: $85,000,000
Compute the present value of this stream of income at adiscount rate of 7%. Remember, you are calculating the present value for awhole stream of income, i.e. the total value of receiving all three payments(how much you would pay right now to receive these three payments in thefuture). Your answer should be one number – the present value for this goldmine at a 7% discount rate but you have to show how you got to this number.
Now compute the present value of the income stream from thegold mine at a discount rate of 5%, and at a discount rate of 3%. Compare thepresent values of the income stream under the three discount rates and write ashort paragraph with conclusions from the computations.
Part II: Read the following three sample business plans:
R J Wagner & Associates Realty
Interstate Travel Center
Which of these three projects do you think should have thehighest risk from the point of view of investors (potential providers of funds)and would therefore be evaluated using the highest discount rate? Which one doyou think should have the lowest? Write a paper explaining your reasoning.
In your assessment of the business plans consider thepossible risk of each plan. Risk is one of the main considerations whendeciding whether a plan should be evaluated and discounted to present valueusing a high or a low discount rate.
Note: you are not expected to fully analyze the numbers andfinancial statements in these business plans. There are only forecasts andprojections. Nobody really believes them anyway. Use your intuition rather thancalculations to assess risk and potential of each of these plans.
Assignment ExpectationsTurn in both Part I and Part II in one Word document whencompleted. Part I should be two pages long and contain your calculations. PartII should be two pages long
Module 2 – SLP
PRESENT VALUEOne specialized type of security is called an equityfutures. This is a contract that guarantees you a share of a particular companyto be delivered to you not today, but sometime in the future, at a price thatis determined by the market right now. This price is usually called the futuresprice of the stock (note – the term is plural – “futures”). If you‘buy’ this futures, you don’t pay for the shares now. You are actually signinga contract whereby you are committed to pay that price in a particular date inthe future, and you are guaranteed to receive one share of the company at thattime, irrespective of its actual market price at that future date. Suppose forexample that the futures price of the XYZ company is $40. Suppose you ‘buy’ a6-months futures contract. If six months later the share price is $45, you gain$5 per share. If the market price in 6 months is only $35, then you lose $5.
Using the Yahoo Finance take a look at the five year chartfor your reference company (the one you chose for SLP1). Using this chart andother information you can find on this company, write a paper answering thefollowing question:
What do you think would the futures price of 100 shares ofyour reference company to be delivered to you in one year be right now?
SLP Assignment ExpectationsThe paper is to be two pages long. You DO NOT need to usecomplex mathematical formulas for this assignment. Instead, think about howmuch do you think the market value of 100 shares of your company will be in oneyear? In considering the possible answer please reflect also on the following:
Do you expect the price of the shares in one year to be muchhigher? Or lower? Or only a little bit higher?
How risky the stock is. Is its price prone to wild swings upand down? Or has the price been relatively stable the last few years?
What alternative investments you have access to. What ratedoes your bank give you on a savings account or certificate of deposit? Thegreater return you can get on other investments, the less you would be willingto pay for an equity future.
Module 3 – Case
THE CAPITAL ASSET PRICING MODELAssignment OverviewFor each of the scenarios below, explain whether or not itrepresents a diversifiable or an undiversifiable risk. Please consider theissues from the viewpoint of investors. Explain your reasoning.There’s a substantial unexpected increase in inflation.There’s a major recession in the U.S.A major lawsuit is filed against one large publicly tradedcorporation.Use the CAPM to answer the following questions:Find the Expected Rate of Return on the Market Portfoliogiven that the Expected Rate of Return on Asset “i” is 12%, theRisk-Free Rate is 4%, and the Beta (b) for Asset “i” is 1.2.Find the Risk-Free Rate given that the Expected Rate ofReturn on Asset “j” is 9%, the Expected Return on the MarketPortfolio is 10%, and the Beta (b) for Asset “j” is 0.8.What do you think the Beta (?) of your portfolio would be ifyou owned half of all the stocks traded on the major exchanges? Explain.In one page explain what you think is the main ‘message’ ofthe Capital Asset Pricing Model to corporations and what is the main message ofthe CAPM to investors?Assignment ExpectationsThe Case report should be a two-page report. Please showyour work for quantitative questions.
Module 3 – SLP
THE CAPITAL ASSET PRICING MODELUsing Yahoo! Finance find the value of beta for yourreference company. Write a two page paper discussing the following items:
What is the estimated beta coefficient of your company? Whatdoes this beta mean in terms of your choice to include this company in youroverall portfolio?Given the beta of your company, the present yield tomaturity on U.S. government bonds maturing in one year (currently about 4.5%annually) and an assessment that the market risk premium (that is – thedifference between the expected rate of return on the ‘market portfolio’ andthe risk-free rate of interest) is 6.5%, use the CAPM equation in order to findout what is the present ‘cost of equity’ of your company? Explain what is themeaning of the ‘cost of equity’.Choose two other companies, look up their “Beta”and report the names of these companies and their betas. Suppose you invest onethird of your money in each of the stocks of these companies. What will the betaof the portfolio be? Given the data in (b), what will the Expected Rate ofReturn on this portfolio be? Do you feel that the three-stock portfolio issufficiently diversified or does it still have risk that can be diversifiedaway? Explain.SLP Assignment ExpectationsIn a two-page report explain your answers thoroughly withreferences to the background materials. Make sure to demonstrate a strongunderstanding of the concept of beta and the risk/return trade off.
Module 4 – Case
CAPITAL BUDGETING WITH FUNDING SOURCESCase AssignmentThis case has two separate parts.
Part I: Capital Budgeting Practice Problems
a. Consider the project with the following expected cashflows:
YearCash flow0-$400,0001$100,0002$120,0003 $850,000If the discount rate is 0%, what is the project’s netpresent value?If the discount rate is 2%, what is the project’s netpresent value?If the discount rate is 6%, what is the project’s netpresent value?If the discount rate is 11%, what is the project’s net presentvalue?With a cost of capital of 5%, what is this project’smodified internal rate of return?Now draw (for yourself) a chart where the discount rate ison the horizontal axis (the “x” axis) and the net present value onthe vertical axis (the Y axis). Plot the net present value of the project as afunction of the discount rate by dots for the four discount rates. Connect thefour points using a free hand ‘smooth’ curve. The curve intersects thehorizontal line at a particular discount rate. What is this discount rate atwhich the graph intersects the horizontal axis?
[ Look at the graph you draw and write a short paragraphstating what the graph ‘showsâ]
b. Consider a project with the expected cash flows:
Year Cash flow0-$815,0001$141,0002$320,0003$440,000What is this project’s internal rate of return?If the discount rate is 1%, what is this project’s netpresent value?If the discount rate is 4%, what is this project’s netpresent value?If the discount rate is 10%, what is this project’s netpresent value?If the discount rate is 18%, what is this project’s netpresent value?Now draw (for yourself) a chart where the discount rate ison the horizontal axis (the “x” axis) and the net present value onthe vertical axis (the Y axis). Plot the net present value of the project as afunction of the discount rate by dots for the four discount rates. Connect thefour points using a free hand ‘smooth’ curve. The curve intersects thehorizontal line at a particular discount rate. What is this discount rate atwhich the graph intersects the horizontal axis?
[ Observe the graph and write a short paragraph stating whatthe graph ‘showsâ]
c. Read the background materials. Then write a one-to-twopage paper answering the following question:
Which method do you think is the better one for makingcapital budgeting decisions – IRR or NPV?
Part 2: Equity and Debt
Read the article below available in ProQuest:
American Superconductor switch ; Westboro company plans toraise 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 thedecision to forgo a secured debt financing and to adopt an equity financingstrategy under current market conditions is in the best interests of ourshareholders,” said Gregory J. Yurek, chief executive officer of AMSC. The265-employee company has operations in Westboro and Devens and in Wisconsin.
Finally, the Northeast blackout “shined a lot of lighton the problems we have been talking about as a company for three to fouryears,” Mr. Yurek said. AMSC products, such as a system installed thisyear in the aging Connecticut grid and high temperature superconductor powercables and other devices bought by China for its grid, are designed to improvethe cost, efficiency and reliability of systems that generate, deliver and useelectric power. “We are a company with products out there solving problemstoday,” he said.
After reading the background materials and doing yourresearch, apply what you learned from the background materials and write a twoto three page paper answering the following questions:
What are the advantages and disadvantages for AMSC to forgotheir debt financing and take on equity financing? Do you agree with theirdecision? How can a company’s cost of equity be determined? Is there a taxdeduction from the use of debt financing? Please explain.
Explain your answers thoroughly. Be sure to support youropinions on these assignment questions with references to the backgroundmaterials or to other articles in your paper.
Assignment ExpectationsThis assignment consists of a quantitative section (Part 1)and an essay section (Part 2) below. Upload both sections as one Word documentby the end of the Module.
Module 4 – SLP
CAPITAL BUDGETING WITH FUNDING SOURCESThis SLP has two parts.
Every company has capital projects. The company you haveselected must need something! Be it a new wing to the building, a new product lineto be funded, a new piece of equipment, find one new acquisition your companyneeds.
Once you have identified the new possible investment item,what problems are you going to have in estimating the cash flow that might beemanating from the initial investment and problems in getting it funded? Issuesmight be:
RiskCostPolitics (getting it through committees)Public Relationsetc.,Identify a potential capital project for your companydescribe such a project and write a short summary of the problems you see ingetting the funding to see it through.
Examine the structure and activities in your organizationand identify two projects or events that required an investment. One should bea ‘current project’ and the other long-term investment project.
For each project or event, identify the preferable source offunding. You may not have access to the actual source of funding so limit yourpaper to the source YOU feel is most appropriate. Then explain why you feelthat source is most appropriate.
This is a SignatureAssignment Expectation for FIN301 Module 4 SLP
There are 2 specific learning outcomes: 1) apply businesstheories, models, and concepts to guide analysis of problems and situations and2) utilize data driven analysis in making business decisions.
In this SLP assignment for Module 4 our emphasis will be onunderstanding the preferable source of funding. You will be summarizing all ofwhat you learned the in the Cases, SLPs and TDs.
The grading rubric below has been developed to measurestudent success in meeting the FIN301 Module 4 SLP expectations related toapplying your knowledge of the source of funding on making business decisions.
Assignment ExpectationWeakMarginalAdequateStrongOrganizationDemonstrates the ability to explain content logically,concisely, and in an appropriate manner to understanding of the source offunding.There is no logical sequence of information. Wording isrambling and unfocused.Paper does not follow a logical sequence.Paper follows a logical sequence. There are some minorproblems with sub-classification and/or results are not clear.Paper follows a logical sequence with a correct computationand results. Each activity relates to others in a carefully organizedframework.Demonstrates the ability to support a central point orviewpoint 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 thepaper.Support through both specific details and elaborationapparent in the paper.ContentDemonstrates the ability to analyze the source of fundingand compare equity with debt.The purpose is not identified, is unclear, or inappropriatein the paper.Purpose is occasionally unclear in the paper.Clear purpose, but not consistently sustained throughout thepaper.Clear purpose sustained throughout the paper.Demonstrates the ability to gather and sort financialinformation 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. Triteideas and/or unclear wording reflect a lack of understanding of topic.Seems uncomfortable with information and data. Topic isevident 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 explanationand elaboration. The topic is well developed, effectively supported, andappropriate for the assignment. Critical thinking is clearly and creativelyexpressed. Data choices are well thought out.DeliveryDemonstrates the ability to use appropriate word choice andgrammar in the paper.There are many sentences with grammatical errors. Somesentences are incomplete/halting, and/or vocabulary is somewhat limited orinappropriate.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 theyflow together easily. With a few exceptions, words are chosen for their precisemeaning.All sentences are complete and grammatical, and they flowtogether easily. Words are chosen for their precise meaning. Word choiceillustrates grasp of content and enhances explanation.Demonstrates the ability to make an effective explanationoutline that is free from bias.Words chosen for an explanation are inappropriate andexhibits bias. Some readers may be confused.Words chosen for the paper are free from bias with one ortwo minor exceptions.Words have no apparent bias. There is some inappropriateexplanation.Words and explanation are completely free from bias.SLP Assignment ExpectationsFor Part I, you must discuss both the estimates of theinitial investments and the annual incremental after-tax cash flow that isexpected to emanate from the investment.
Module 1 discussionCFO to CEOThere has been a trend across corporate America of promotingfinancial officers to CEO. What are some advantages and disadvantages of thispractice? (Based on the article of Financial Managers and other reading you mayhave done)
Do research on the Internet and show the reference for theinformation. Don’t forget to respond to a colleague’s posting also.
Professorâs Note: In addition to searching the Internet fortext related to this threaded discussion, please watch the following videos(click on the following link to access these videos) and post your comments.
http://www.youtube.com/watch?v=E2GxuhDRVYg David Mudrick –CFOs Becoming CEOs
http://www.youtube.com/watch?v=y5HkWah-bfs Ron Gaboury –CFOs Becoming CEOs
Grading Criteria: Try to add information not previouslydiscussed by others. Please, provide factual information (not merely opinions)backed up by details or examples. Your comments should be in your own words andinclude references.
Module 2 discussionPresent ValueWhat is your personal discount rate or rate of preferences?That is, how much would you pay for a promise of $1,000 to be received one yearfrom now? Would you discount it by 10%, 5%, etc?
Professorâs Note: In addition to searching the Internet fortext related to this threaded discussion, please watch the following videos(click on the following link to access these videos) and post yourcomments.
http://www.youtube.com/watch?v=ks33lMoxst0 Introduction to Present Value
http://www.youtube.com/watch?v=4LSktB7Pk_c Present Value 2
http://www.youtube.com/watch?v=nScQsMmohZ0 Time value ofmoney calculations using the TI BAII Plus calculator â part 1
http://www.youtube.com/watch?v=EocymirVokM Lesson TVM-10-060– Clip 06 – PV of an Annuity Due – TI BAII Financial
Module 3 discussionCAPMNow that you have read about the CAPM, would you ever use itto make personal investment decisions? How can an individual investor use orthink about CAPM?Consider the following:
What is the main message of the CAPM? It evolves from thenotion that investors in general arenât stupid: They diversify their investmentfunds into a well-diversified portfolio. More specificallyâthe main message ofthe CAPM is that the rate of return one should expect to earn on a particularinvestment is only related to the systematic risk of the security, not to itstotal risk. When you purchase a stock (because you like it or because you got aâtipâ), youâll be exposed to the total risk of this stock, but the markettheory implies that youâll only be compensated for a small proportion of thatrisk. Hence, if you do like risk you should invest in a well-diversified riskyportfolio with many securities having a high beta, rather in an individualstock. Now go back to the initial question and present your thoughts…
Professorâs Note: In addition to searching the Internet fortext related to this threaded discussion, please watch the following video(click on the following link to access this video and further Part 2) and postyour comments.
http://www.youtube.com/watch?v=LWsEJYPSw0k CAPM CapitalAsset Pricing Model in 4 Easy Steps – What is Capital Asset Pricing ModelExplained
Module 4 discussionNet Present ValueHow accurate do you think a company’s estimates of the netpresent value of a proposed project are? Refer to both the initial investmentand to the components of the cash flow: revenues, operating expenses,depreciation, taxes, and the cost of capital to use for the computation of thepresent value.
Keep in mind that NPV is the value in today’s dollars ofcash flows to be received some time in the future minus what we have to paytoday to get those cash flows.
Which of the following do you think would give you the mostaccurate NPV calculation: (a) a brand new retail startup (b) a pharmaceuticalcompany introducing a new drug (c) a company with a successful product in Chiletrying to introduce it to the USA.
http://www.youtube.com/watch?v=jylJ2r9bklE Episode 99: How to Calculate Net PresentValue
http://www.youtube.com/watch?v=uNcBWALtLHU What is NPV?
Module 4 Reflective DiscussionGiven the readings and assignments in this course, identifyand briefly discuss two important concepts applicable to your professional discipline.In other words, discuss what concepts you have learned that you feel you canpersonally apply to your career.