BCO222 – Business Finance II – Case Study I – by Miguel Corte-Real – Academic Year 2020-2021
Task: Case 1 Assignment (50% of course grade) You are asked to answer all the questions in the proposed four mini-cases. This task assesses the following learning outcomes:
Submission file format: Word document with all the answers, clearly identifying each case separately.
CASE 1 (25 points)
From the video shared in the class “How The Economic Machine Works” by Ray Dalio – what have you learned (please do not describe the video since I watched it – I would like to know what you have learned – as discussed in the video by Ray Dalio the macroeconomic cycle has direct implications on the cost of capital and the capital budgeting decision criteria) – please elaborate in a detailed manner.
CASE 2 (25 points)
You just graduated from European University and in your first job as an analyst at Babolat Sports Goods is to evaluate two new capital budgeting proposals. Since this is your first assignment after University you have been asked to provide a detailed financial analysis by providing a recommendation and the reasons for that decision.
The mini-project states the following: Provide an evaluation of 2 proposed projects, both with a 5 year expected lives and identical initial outlays of $10,000. Both of these projects involve additions to Babolat Sports Goods highly successful Rafael Nadal tennis racquet product line, and as a result, the required rate of return on both projects has been established at 12%. The expected FCF (free cash flows) for each of the projects are as follow:
Project A Project B Initial Outlay -$110,000 -$110,000 Inflow year 1 20,000 40,000 Inflow year 2 30,000 40,000 Inflow year 3 40,000 40,000 Inflow year 4 50,000 40,000 Inflow year 5 70,000 40,000
In the process of evaluation these projects, please respond to the following questions:
1) Why is the capital-budgeting process important?
2) Why is it difficult to find exceptional profitable projects?
3) What is the payback period on each project? If Babolat imposes a 3-year maximum acceptable period, which of these projects should be accepted?
4) What are the potential criticisms of the payback period?
5) Determine the NPV for each of the projects. Should these projects be accepted?
6) What would happen to the NPV and PI for each project if the required rate of return increased? And if the required rate of return decreased?
Also read: Business Finance Assignment
CASE 3 (15 points)
Yonex Sport Industries is considering a new project with a 4-year life with the following cost of revenue data. This project will require an investment of $140,000 in new equipment. This new equipment will be depreciated down to zero over 4 years using the simplified straight-line method and has no salvage value. This new project will generate additional sales revenue of $112,000 while additional operating costs, excluding depreciation, will be $68,000. Yonex marginal tax rate is 35%. What is the project’s free cash flow in year 1?
CASE 4 (35 points)
1. On the back of the current COVID-19 and macroeconomic situation the European Central Bank asked the European Banks to refrain from or limited the dividends distribution – describe on your own views and considering the material we covered during classes the trade-off between paying dividends and retaining (reinvesting) firm profits.
2. Suppose I own 10% of the Yonex Sports Industries. An equivalent to 30,000 shares of common stock, which most recently traded for a price of $98 a share. The company has since declared its plans to engage in a two-for-one stock split.
1) What will my financial position be after the stock split, compared to my current position? (Assume the stock price falls proportionally)
2) The executive vice-president is charge of finance believes the price will not fall in proportion to the size of the split and will only fall 45% because she thinks the pre-split price is above the optimal price range. If she is correct, what will be my net gain from the split?
Rubrics
Descriptor 9-10 The student demonstrates an excellent understanding of the
concepts. 8-8.9 The student demonstrates a good understanding of the concepts. 7-7.9 The student demonstrates a fair understanding of the concepts. 6-6.9 The student demonstrates some, but insufficient understanding of the
concepts. 3-5.9 The student demonstrates insufficient understanding of the concepts.
They may mention some relevant ideas or concepts, although it is clear that the relationship between them is not understood by the student. 1-2.9 The student demonstrates insufficient understanding of the concepts
and does not mention any relevant ideas or concepts. The student leaves the question blank or cheats.
Points are stated at the end of each question.