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Competencies

In this project, you will demonstrate your mastery of the following competencies:

  • Analyze financial and investment decisions that add value to the organization
  • Analyze financing options to maximize investor value

Scenario

You are a financial analyst for the chosen business that you selected during your Module Two Journal assignment. Your supervisor has discovered last minute that your business’s board of directors is looking for updates on the business’s financial health. Your supervisor has asked you to write a report regarding the business’s current financial health and the available financial options for improving the business. You’ve also been asked to make recommendations as to which options the business should choose to best support its financial health. Your supervisor will then use your report to present to the business’s board of directors, whose members all have varying levels of knowledge in terms of finance.

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Directions

Using the business you chose from the Project Two Business Options List, create a report for your supervisor to share with the board of directors during their presentation. Keep in mind that your report needs to be easy for someone unfamiliar with finance to understand, as not all of the board members for your business fully understand finance.

Using Mergent Online, locate the most recent quarterly financial statements for your chosen company, and use these statements to support your analysis throughout the project. Refer to the Project Two Financial Assumptions document located in the Supporting Materials section for the assumptions you need in order to analyze the three available financial options outlined in the Financial Analysis section of the project directions.

You are encouraged to use the Project Two Financial Analyst Report template located in the What to Submit section to help complete this project.

Specifically, you must address the following:

  1. Financial Analysis: In this section of the report, you will use the most recent quarterly financial statements for your chosen business and the Project Two Financial Formulas spreadsheet (located in the What to Submit section) to calculate appropriate financial formulas for assessing the business’s financial health. You will also analyze all three available financial options for improving the business based on your calculations and the provided Project Two Financial Assumptions document.
    1. Financial Calculations: Calculate accurate financial formulas to assess the business’s current financial health. Specifically, you must calculate the following:
      • Working capital
      • Current ratio
      • Debt ratio
      • Earnings per share
      • Price/earnings ratio
      • Total asset turnover ratio
      • Financial leverage
      • Net profit margin
      • Return on assets
      • Return on equity
    2. Working Capital Management: Explain the impact of working capital management on the business’s operations. Provide examples to support your claims.
    3. Bond Investment: Analyze the risks and benefits of the business choosing to invest in a corporate bond, including the necessary ethical considerations, appropriate calculations, and examples to support your analysis.
    4. Capital Equipment: Analyze the risks and benefits of the business choosing to invest in capital equipment, including the necessary ethical considerations, appropriate calculations, and examples to support your analysis.
    5. Capital Lease: Analyze the risks and benefits of the business choosing to purchase a capital lease, including the necessary ethical considerations, appropriate calculations, and examples to support your analysis.
  2. Financial Evaluation: In this section of the report, you will evaluate the three available financial options for the business and recommend which option(s) are the best for the business to choose.
    1. Financing: Explain how a business finances its operations and expansion.
    2. Bond Investment: Assess the appropriateness of a bond investment as a financing option for the business’s financial health, using your financial analysis and other financial information to your support claims.
    3. Capital Equipment: Assess the appropriateness of a capital equipment investment as a financing option for the business’s financial health, using your financial analysis and other financial information to support your claims.
    4. Capital Lease: Assess the appropriateness of a capital lease purchase as a financing option for the business’s financial health, using your financial analysis and other financial information to support your claims.
    5. Short-Term Financing: Explain how potential short-term financing sources could help the business raise needed funds for improving its financial health. Base your response on the business’s current financial information.
    6. Future Financial Considerations: Describe the business’s likely future financial performance based on its current financial well-being and risk levels. Use financial information to support your claims.
  3. Financial Recommendations: In this section of the report, you will recommend which financing option(s) are the best for the business to choose depending on its financial health.
    1. Financial Recommendation(s): Recommend the most appropriate financing option(s) based on the business’s financial health, including a rationale for why the option(s) are best.

FIN 320 Project Two Financial Assumptions 

Whenever a business needs to make an investment, the financial options associated with that investment must be carefully considered. This is true whether the business seeks to purchase something as simple as a new building or a piece of equipment, or something as complex as acquiring a new business. Business leaders need to be able to estimate cash flows from an investment and use the net present value (NPV) method to figure out if the investment is worthwhile. 

This document includes lists for three financial options and their associated assumptions. For your Project Two assignment, analyze all three financial options provided, then select the option or options that add the most value to the business you have selected based on all the information you’ve gathered. Your recommendation should include careful analysis of NPV calculations, financial ratios, working capital analysis, and supportive documents. 

Remember to evaluate each financial option in the context of the financial ratio analysis and working capital analysis to help you decide which option(s) to recommend to your chosen business in your Project Two assignment. 

Financial Option 1: Purchase a $10 Million Building 

Rationale for investment: The business is considering environmental, social, and corporate governance (ESG) factors as part of its investment into a new building for its headquarters. The building itself will be a Leadership in Energy and Environmental Design (LEED)-certified building, but the new site being considered currently houses a large, inactive gas station that sold both gasoline and diesel fuel. The new site also has a sizable repair facility left over that was used for deliveries and tractor-trailer trucks for more than 50 years. While some restoration was performed on the site prior to the new building’s construction, the previous owner ran out of funds before they were ever able to bring the site up to 

LEED standards. Four large fuel tanks remain on the site, and they will also need to be addressed per LEED standards. 

Assumptions to consider: 

  • $10 million cash purchase
     
  • Building generates additional net profits after tax of $1.25 million per year
     
  • 20 year expected useful life of building
     
  • Salvage value: $1.5 million
     
  • Discount rate is 10%
     

Financial Option 2: Purchase of $25 Million in Equipment 

Rationale for investment: The business’s current equipment is efficient, but it uses a substantial amount of electricity. Operating the production line also creates significant waste material, including waste plastics. The business is looking into purchasing newer, more environmentally friendly equipment that will still allow it to be at least as efficient in production as it is now. 

Assumptions to consider: 

  • Annual cash flows generated with equipment: $4 million
     
  • Discount rate is 12%
     
  • 15-year useful life
     
  • No salvage value
     

Financial Option 3: $30 Million Investment in Bonds 

Rationale for investment: The business that’s offering these bonds for sale contracts with another business in China to assemble computer components. The Chinese business is known to have used child labor in the past, but claims it has stopped this practice. However, the U.S. business selling these bonds has not investigated to verify whether these claims are true or not. 

Assumptions to consider: 

  • 10-year bond
     
  • 8% coupon
     
  • Priced at a discount: $95
     
  • Discount rate is 9%

Monthly

Time Value of Money – Monthly Compounding
Rate of ReturnYear 1
Initial InvestmentMonth123456789101112
Interest$0$0$0$0$0$0$0$0$0$0$0$0
Investment Value$0$0$0$0$0$0$0$0$0$0$0$0
Year 2
Month123456789101112
Interest$0$0$0$0$0$0$0$0$0$0$0$0
Investment Value$0$0$0$0$0$0$0$0$0$0$0$0
Year 3
Month123456789101112
Interest$0$0$0$0$0$0$0$0$0$0$0$0
Investment Value$0$0$0$0$0$0$0$0$0$0$0$0
Year 4
Month123456789101112
Interest$0$0$0$0$0$0$0$0$0$0$0$0
Investment Value$0$0$0$0$0$0$0$0$0$0$0$0
Year 5
Month123456789101112
Interest$0$0$0$0$0$0$0$0$0$0$0$0
Investment Value$0$0$0$0$0$0$0$0$0$0$0$0
Year 6
Month123456789101112
Interest$0$0$0$0$0$0$0$0$0$0$0$0
Investment Value$0$0$0$0$0$0$0$0$0$0$0$0
Year 7
Month123456789101112
Interest$0$0$0$0$0$0$0$0$0$0$0$0
Investment Value$0$0$0$0$0$0$0$0$0$0$0$0
Year 8
Month123456789101112
Interest$0$0$0$0$0$0$0$0$0$0$0$0
Investment Value$0$0$0$0$0$0$0$0$0$0$0$0
Year 9
Month123456789101112
Interest$0$0$0$0$0$0$0$0$0$0$0$0
Investment Value$0$0$0$0$0$0$0$0$0$0$0$0
Year 10
Month123456789101112
Interest$0$0$0$0$0$0$0$0$0$0$0$0
Investment Value$0$0$0$0$0$0$0$0$0$0$0$0

Annual

Time Value of Money – Annual Compounding
Rate of ReturnYear12345678910
Initial InvestmentInterest$0$0$0$0$0$0$0$0$0$0
Investment Value$0$0$0$0$0$0$0$0$0$0

PV

Time Value of Money – Present Value Annuity
Number of Years
Rate of Return$0.00
Payment

FV

Time Value of Money – Future Value Annuity
Number of Years
Rate of Return$0.00
Payment

PV – Lump Sum

Time Value of Money – Present Value of Lump Sum
Rate
Years$0.00
Initial Investment

FV – Lump Sum

Time Value of Money – Future Value of Lump Sum
Rate
Years$0.00
Initial Investment

NPV

Net Present Value (NPV) Calculator
Building
Initial InvestmentYear12345678910
Annual Cash InflowsCash Flows$0$0$0$0$0$0$0$0$0$0
Discount RateNPV =$0Year11121314151617181920
Number of YearsCash Flows$0$0$0$0$0$0$0$0$0$0
Salvage Value
Equipment
Initial InvestmentYear12345678910
Annual Cash InflowsCash Flows$0$0$0$0$0$0$0$0$0$0
Discount RateNPV =$0Year11121314151617181920
Number of YearsCash Flows$0$0$0$0$0$0$0$0$0$0
Salvage Value
Bonds
Initial Investment
Annual Cash Inflows
Discount RateNPV =$0Year12345678910
Number of YearsCash Flows$0$0$0$0$0$0$0$0$0$0
Principal Returned

RATIOS

ACCOUNTING & FINANCIAL RATIOS
CURRENT RATIO (Current Assets / Current Liabilities)TOTAL ASSET TURNOVER RATIO (Total Revenue / Total Assets)
Current Assets51,237,000,000Total Revenue82,584,000,000
Current Liabilities42,493,000,0001.2057750688Total Assets174,894,000,0000.4721945864
WORKING CAPITAL (Current Assets – Current Liabilities)
: *Note to students: Be mindful of the scale being used in Mergent Online when filling this out. If a number is written as 12.53, that does not mean the total for that item is $12.53. There could be numerous zeros written after it, depending on the scale labeled above. In thiscurrent example, 12.53 is actually $12,530,000. (To delete this comment, right-click on the “WORKING CAPITAL” box, then select Delete Comment from the drop-down menu.)
FINANCIAL LEVERAGE (Total Assets / Shareholder’s Equity)
Current Assets51,237,000,000Total Assets174,894,000,000
Current Liabilities42,493,000,0008744000000Shareholder’s Equity63,278,000,0002.7638989854
DEBT RATIO (Total Debt / Total Assets)NET PROFIT MARGIN (Net Income / Total Revenue)
Total Debt34,434,000,000Net Income14,714,000,000
Total Assets174,894,000,0000.1968849703Total Revenue82,584,000,0000.1781701056
EARNINGS PER SHARE (Net Income / Weighted Average Common Shares Outstanding)RETURN ON ASSETS (Net Income / Total Assets)
Net Income14,714,000,000Net Income14,714,000,000
Shares Outstanding2,632,512,000.005.5893382442Total Assets174,894,000,0000.0841309593
PRICE EARNINGS RATIO (Share Price (end of quarter / EPS)RETURN ON EQUITY (Net Income – Preferred Dividends / Shareholder’s Equity)
Stock Price165.01NI – Pref. Div.4,233,000,000
EPS5.5129.9473684211Shareholder’s Equity63,278,000,000
SNHU logo

FIN 320 Project Two Financial Analyst Report

[Note: To complete this template, replace the bracketed text with your own content. Remove this note before you submit your report.]

Financial Analysis, Financial Evaluation, and Financial Recommendation(s)

Financial Analysis

A. Financial Calculations:

Using the most current quarter’s financial statements for your chosen business and the

Financial Formulas spreadsheet, calculate the financial formulas below to assess the

business’s financial health.

· Working capital:

· The working capital for Johnson and Johnson is $8,744,000,000.

· The working capital is a measure of J&J’s liquidity, operational efficiency, and the short-term financial health. Since they have a substantial positive working capital, then they should be able to invest and grow the company.

· Current ratio:

· The current ratio of Johnson and Johnson is about 1.2.

· This ratio is the liquidity ratio, it measures the ability to pay short-term obligations or ones that are due within a year. If the current ratio is below 1.0, this can usually mean that they do not have the capital on hand if they were all due at the same time. J&J’s current ratio means that they most likely have the financial resources in order to stay solvent short-term. However, since this ratio is current it is not typically a complete representation of the businesses short-term liquidity or long-term solvency.

· Debt ratio:

· The debt ratio of Johnson and Johnson is about 0.19.

· The debt ratio measures the extent of J&J’s leverage; it can be taken as the proportion of their assets that are financed by debt (Hayes, 2021). If the ratio is greater than 1 this shows that a considerable portion of their debt is funded by assets, this can also indicate that the company is putting their selves at risk of default on loans if interest rates were to rise. J&J’s assets indicate that they have more assets than they have debt.

· Earnings per share:

· The earnings per shares for Johnson and Johnson is about 5.59.

· The earnings per share indicates the company’s profitability, this will also indicate how much the company makes for each share of its stock (Fernando, 2021). The higher the EPS means there is greater value because investors will pay more if they believe that that company has higher profits.

· Price/earnings ratio:

· The price/earnings ratio of Johnson and Johnson is about 29.95.

· The will relate a company’s share price to its earnings per share. Having a high P/E ratio could indicate that the stock is over-valued or that investors are expecting high growth rates soon (Murphy, 2021). This means that J&J is at about 29 times earnings.

· Total asset turnover ratio:

· The total asset turnover ratio for Johnson and Johnson is about 0.47.

· This ratio measures the value of a company’s sales or revenue, relative to the value of their assets. It can also indicate the efficiency in which a company is using its assets in order to generate value.

· Financial leverage:

· The financial leverage for Johnson and Johnson is about 2.76.

· The higher the of debt a company uses for leverage, will mean that the higher and riskier the financial leverage position. This can be defined as the leveraging of various debt instruments to boost the company’s return on investment. This can also mean that the more leveraged debt a company acquires, the higher interest rates will be, this is also a financial risk for companies and shareholders.

· Net profit margin:

· The net profit margin of Johnson and Johnson is about 0.18.

· The net profit margin will measure how much net income is generated as percentage of value (Murphy, 2021). This ratio can indicate how much of each dollar in revenue collected by a company can be translated into profit. This is one of the most important indicators for the company’s overall financial health. This number can also tell investors if a company’s management is generating enough profit from sales and if the operating costs and overhead costs over being contained.

· Return on assets:

· The return on assets of Johnson and Johnson is about 0.08 or 8%.

· The ratio will tell you how profitable the company is relative to their total assets. This also gives investors, managers, and analysts and idea as to how efficient a company’s management is at using the assets to generate earnings (Hargrave, 2021). ROA will also consider a company’s debt, unlike other similar metrics. Having a higher ROA will indicate that there is more asset efficiency.

· Return on equity:

· The return on equity for Johnson and Johnson is about 0.07 or 7%.

· The ROE is considered to measure the profitability of a corporation in relation to the stockholders’ equity. Anything less that 10% is considered to be poor.

B. Working Capital Management:

Having working capital management is essential for a company’s fundamental financial health and the operational success. This can ensure that the company maintains a solid balance between growth, profitability, and liquidity. Working capital management, if done properly, can help to maintain smooth operations and also improve earnings and profitability. This can include inventory management and the management of accounts receivables and accounts payables. Some of the main objectives of working capital management includes maintaining the working capital operating cycle and ensuring its ordered operation, minimize the cost of capital spent on the working capital, and maximizing return on current asset investments (Hawley, 2020)

C. Bond Investment:

A corporate bond is debt issued by a company for in order to raise capital, they are typically seen as riskier that U.S government bonds, therefor they typically have higher interest rates. The basic features of bonds include what the maturity is, how the interest is determined (and whether it is fixed or floating), and how the principle will be repaid. The highest-rated bonds are typically called “Triple-A” rated bonds and the lowest rated are referred to as “junk” bonds. Bond ratings are vital for alerting investors to the quality and stability of a bond; ratings also greatly influence interest rates, investment appetite and bond pricing. The bond value equals the present value of the Bond’s Coupon Interest Payments plus the Present Value of the Principle Amount (Par Value) of the Bond Issue. Long-term bonds have great interest-rate risk than the short-term bonds, this means that there is greater bond price volatility in response to changing interest rates.

D. Capital Equipment:

When a company decides to purchase a capital lease they are making a long-term agreement to lease equipment over its useful lifespan. In this type of lease contract, the lessor acquires and finances the leased equipment but all other rights of ownership transfer to the lessee, which is the company that used the leased equipment. Often, these are referred to as finance or financial leases. One key thing to note about leasing is that the use of the equipment is transferred to the lessee while the title is not. Similar to leasing a car, if you were to lease a car for four years, once the four-year period expired, you will have to return the car to the lessor. The residual value cannot be known at the time the lease agreement is negotiated, which can cause disagreements between the lessor and lessee which could favor leasing or buying. If a company were to buy a piece of equipment, they could have tax consequences. Since cost of equipment depreciates over its typical life, this reduces the firm’s income tax liability. Also, interest payment on the debt that is used to finance the purchase of equipment are tax-deductible.

E. Capital Lease:

A capital lease agreement is more like a purchase based on the terms of the loan. This is a contract entitling a renter to the temporary use of an asset, which has the economic characteristics of asset ownership for accounting purposes. This type of lease can impact a company’s financial statements, influence interest expense, depreciation expense, assets and liabilities. This type of lease must satisfy any of the four following criteria: the life of the lease must be 75% or greater for the asset’s useful life, the lease must contain a bargain purchase option for a price less than the market value of an asset, the lessee must gain ownership at the end of the lease period, and the present value of lease payments must be great than 90% of the asset’s market value (Hayes, 2021).

Financial Evaluation

In this section of the report, you will evaluate the three available financial options for the business and recommend which option(s) are the best for the business to choose.

A. Financing:

[In one paragraph, explain how a business finances its operations and expansion.]

B. Bond Investment:

Bond investment would be the least likely to recommend for an option of financing. Corporate issued bonds are riskier than government issued bonds as well as having higher interest rates. They are often issued in order to provide immediate cash for a particular project the company wants to undertake. One advantage of this type of financing is that this does not include giving up any ownership stake or control for the company. The company will have to pay back the bonds in interest rather than based solely on profit of the company. For example, if the company were to go bankrupt, we must still pay the bondholders and other creditors first. Since the business that is offering these bonds for sale contracts with a business in China and they are known to have used child labor in the past this could look bad for the business if this were to come out. Considering the U.S business selling these bonds has not investigated further to verify whether the claims are true or not, this does not seem to be a very reliable source.

[In one paragraph, write your assessment on the appropriateness of a bond investment as an option for the business’s financial health, using your financial analysis and other financial information to support your claims.]

C. Capital Equipment:

[In one paragraph, write your assessment on the appropriateness of a capital equipment investment as an option for the business’s financial health, using your financial analysis and other financial information to support your claims.]

D. Capital Lease:

[In one paragraph, write your assessment on the appropriateness of a capital lease purchase as an investment option for the business’s financial health, using your financial analysis and other financial information to support your claims.]

E. Short-Term Financing:

[In one paragraph, explain how potential short-term financing sources could help the business raise needed funds for improving its financial health. Base your response on the business’s current financial information.]

F. Future Financial Considerations:

[In one paragraph, describe the business’s likely future financial performance based on its current financial well-being and risk level. Use financial information to support your claims.]

Financial Recommendation(s)

[In 1 to 2 paragraphs, recommend the most appropriate financing option(s) based on the business’s financial health, and include a rationale for why the option(s) are the best.]\

References:

Fernando, J. (2021, April 09). Earnings per share (eps). Retrieved April 12, 2021, from https://www.investopedia.com/terms/e/eps.asp

Hargrave, M. (2021, April 08). How to use return on assets when analyzing a company. Retrieved April 13, 2021, from https://www.investopedia.com/terms/r/returnonassets.asp

Hayes, A. (2021, March 30). Debt ratio. Retrieved April 1, 2021, from https://www.investopedia.com/terms/d/debtratio.asp

Hawley, J. (2020, September 16). Why working Capital management matters. Retrieved April 01, 2021, from https://www.investopedia.com/ask/answers/100715/why-working-capital-management-important-company.asp#:~:text=Working%20capital%20management%20is%20essentially,but%20also%20boost%20their%20earnings.

Hawley, J. (2020, September 16). Why working Capital management matters. Retrieved April 13, 2021, from https://www.investopedia.com/ask/answers/100715/why-working-capital-management-important-company.asp

Hayes, A. (2021, February 15). What you need to know about capital leases. Retrieved April 14, 2021, from https://www.investopedia.com/terms/c/capitallease.asp#:~:text=The%20capital%20lease%20requires%20a,accepted%20accounting%20principles%20(GAAP).

Mergent. (n.d.-b). Johnson & Johnson [Company profile]. Retrieved April 1, 2021 from https://www.mergentonline.com/login.php

Murphy, C. (2021, January 30). Assessing a stock’s future with the price-to-earnings ratio and peg. Retrieved April 13, 2021, from https://www.investopedia.com/investing/use-pe-ratio-and-peg-to-tell-stocks-future/

Murphy, C. (2021, April 07). How to calculate net profit margin. Retrieved April 13, 2021, from https://www.investopedia.com/terms/n/net_margin.asp

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