Category: Investment

Long-term Investment Decision Paper

Long-term Investment Decision
Long-term Investment Decision

Long-term Investment Decision

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The assignment due in 10 days please.
This assignment is part of order #114630 and #114659. please go through the above orders before doing this assignment please.

SAMPLE ANSWER

Assignment 3:

Long-term Investment Decision

A low calorie or healthy option microwavable food is a fresh concept which has gained a lot of interest among consumers. A majority of consumers are evaluating the food products provided in the market and consideration is given to the healthiest diet. Thus, introduction of microwavable products made up of low calorie has gain a high market due to consumer’s health concerns. To cater for the needs of the market, managers must formulate methods that will increase the product’s market share and profitability while increasing value to consumers. As such, the intention of this paper is to outline a plan for managers in anticipation of rising prices, examine the major effects the government have on production and employment, determine whether government regulations are fair in the food industry, examine the major complexities under expansion via capital projects, and lastly suggest how a company could create convergence between the interests of stock holders and managers. The Company aims to keep the prices of its products as inelastic as possible.

Low calorie dietary is the new form of healthy foods and it has gained a lot of popularity among the consumers. In schools, homes, and restaurants, the concept of healthy feeding is not new. With the emergence of many chronic diseases, people desire to live healthy lives and lifestyles, thus the need for low calorie diets as will be produced and sold by Lean. The purpose of this paper is to assess the main impacts the government has on production and employment, if government policies and laws facilitate fairness, determine the complications of expansion, and finally, offer recommendation on the merger of a company’s stakeholders and the management. For sustainable growth and profitability, the firm seeks to have the prices of its products as inelastic as it possibly can (Sullivan and Sheffiran 2013).

It therefore means that the strategy used for pricing should have no effect on the way consumers recognize and purchase the commodities. In general, the type of demand occurs only for products that are essential for the normal living of consumers. However, the situation is not the same for food products that are microwavable. Elasticity of demand for low calorie products highly depends on the offered price, availability of substitutes, expenditure on promotions, income level of consumers, and prevailing economic conditions. Considering the demand function and elasticity, low calorie products are favorable in a monopolistically dominated market. In a monopolistic competitive market, buyers and sellers are usually few. Therefore, if one company raises its prices, consumers shifts to another brand. As thus, firms in this market increase demand for their products through differentiation.

ThProfit (NP) = Total revenue (TR) Total Cost (TC)

According to the FOC of profit maximization,

=Marginal Revenue  =Marginal Cost = 0

So Marginal Revenue = Marginal Cost

By applying the elasticity of 1.9, it was stipulated that demand for low calorie microwavable processed products is low. Since the company purposes to keep the prices of the products inelastic, it will strategize on differentiation to obtain a competitive advantage in the market. Differentiation is important since consumers will be able to pick the product from other substitutes hence increasing the sales. More so, it is proved that when product differentiation is noticeable to competitors, a firm’s market power and leadership increases. As such, it is advisable for the firm to strategize on product differentiation to increase the rate of returns.

Globally, the government usually has the mandate of regulating the market to protect consumers and the firms. However, whether markets are regulated or unregulated they are always influenced by the forces of demand and supply. As such, government regulation is critical for stability. For instance, the government handles externalities through provision of public utilities such as roads, contracts enforcements, and supply of currency (Wall and Griffin 2013). All theses aspects are better done by the government compared to private firms whose main aim is profit making.

A lot of discussion has been made on determination of the activities that the government is limited. Though regulations are important, extreme policies and laws are adverse to the growth of an economy. An ideal economic climate is only possible when government regulations are in accordance with the prevailing market conditions. The main reasons that the government involves itself in a market are enactment of policies and rules to facilitate exchange between buyers and sellers, and enforcement of the policies.

In the area of employment government sets rules for employers to follow when selecting, recruiting, and compensation. No employee should be paid below the set minimum wage rate, they are to be treated humanely and allowed to interact and work freely without fear of intimidation. Labor unions and other industrial agencies set regulations for firms follow failure to which employees have the right of suing the firm. The government also limits production through the taxation rates, production costs, and prices for raw materials (Frank 2013). When terms are favorable, firms are able to produce to full capacity but when there is over production, the government sets higher terms to stabilize the market. As such, the effects the government will have on the company are limitation of production capacity and selling prices, employment, and eventually profitability since regulations are costly to the firm.

It is the mandate of the government to ensure the market is stable and at equilibrium for benefit of all stakeholders (MIT 2012). For instance, without intervention, big mergers and monopolistic conditions would be possible leading to excessive exploitation of the consumers. Thus, the government gets involved by limiting mergers and monopoly situations. It is fair for the government to get involved in the low calorie microwavable commodities to control prices, limit entrants and exit for fair market competition, and avoid emergence of monopolistic powers that would made the firm irrelevant. When many unregulated firms are in the market, price wars would lead to consistent low prices causing the prices to be unstable. More so, unregulated market causes poor quality goods to be introduced as firms seek to minimize production costs for profits.

Thus, the major reasons for government involved are to control prices, ensure that the market is stable for protection of local firms, and protect consumers from exploitation. For microwavable foods, firms have to correctly label the contents of the products and they should be processed in certain measures to avoid provision of unhealthy contents.  Moreover, regulations also assist in protection of the environment where firms are supposed to observe efficient waste management practices, as well as reduce usage of production methods that release poisonous gasses in the environment.

An example of government involvement is the control of industries in China which have the tendency of producing smog that forcing people to wear masks to avoid getting contaminated. These goods are exported to US and other countries and the government has set measures to control the packaging of the products, their distribution and usage. Additionally, the government enforces policies to regulate the banking and finance industry by setting minimum interest rates so that consumers are not exploited and for banks to remain in business.

Some capital projects that the firm could undertake are mergers or acquisitions for expansion purposes. The reason for the projects is to increase market share, share operational risks, and increase market leadership and profitability (Harris et al. 2014). However, these projects bring complexities such as collusion between the shareholders and management. Managers tend to get additional capital from the reserves or by requesting shareholders to top up using their savings. Shareholders may not be willing to use their reserves or contribute extra capital due to uncertainty of the venture. To avoid the complexity, managers should undertake projects that have high chances of generating returns in the short run by carrying out comprehensive evaluation of the project. For instance, managers should acquire a brand that is already dominating in the market to avoid experiencing losses.

Convergence between managers and shareholders is created through a firm’s strategic decision making process and through the use of financial statements. Whereas the shareholders own the company, they have limited control over the decision making process and the actions of management. On the other hand, managers are responsible for controlling the affairs of the firm. Managers seek for higher income and allowances irrespective of a firm’s performance while shareholders are usually interested in higher profits for increased dividends. As such, shareholders seek for firm’s growth through mergers. However, mergers may compromise manager’s job security and control leading to divergence between the interests of shareholders and managers. Therefore, strategic decision making should be done such that managers get allowances and salaries depending on the generate profits. If profits are high, their salaries are high and vice versa. As a result, managers will become productive so as to get high profits and allowances and in the process, the interests of shareholders will be met and both parties will be satisfied. Therefore, convergence of shareholders and managers lead to higher profits since managers become preoccupied in generating high revenues so that they pay is high and when the revenues are high, dividends are also high.

Instances that bring convergence of the interests of managers and shareholders include: managers being employed on contractual terms such that their contracts are renewable if they perform as required, and application of commission terms whereby managers are paid depending on the income generated at a certain period.

It therefore shows that the government should get involved in microwavable food market to ensure products are of high quality, control monopoly activities, and stabilize the market. For better returns, managers and shareholders should have a common vision and the needs of each party considered. The firm is likely to excel and attain market leadership through product differentiation since demand is inelastic, ensure all the needs of stakeholders are met, and follow government conditions as they relate to production and employment.

References

Frank, R. (2013). Microeconomics and Behavior, (7th ed.). New York, NY: McGraw-Hill. 

McGuigan, B. P., Moyer, R. C., &Harris, F. H. (2014).Managerial economics: Applications, strategies and tactics, (13th ed.). Stamford, CT: CengageLearning.

Mit. (2012). Government Regulations in the Market. University of Cambridge.

Sullivan, A. &Sheffrin, S. M. (2013). Economics: Principles in Action. Upper Saddle River, NJ: Pearson Prentice Hall.

Wall, S. & Griffiths, A. (2012). Economics for Business and Management.New York, NY: Financial Times Prentice Hall.

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Capital Purchase Justification Paper

Capital Purchase Justification
Capital Purchase Justification

Capital Purchase Justification

Order Instructions:

Write a justification for capital purchase (800-1000 words) to your vice president as to why the purchase would be a good investment for the hospital. Include a one-page executive summary for your proposal. The paper should include the operating costs you took into consideration, what facility considerations are involved regarding this new piece of equipment, and future benefits to the organization of this piece of equipment.

Prepare this assignment according to the guidelines found in the GCU Style Guide, located in the Student Success Center.

This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.

You are required to submit this assignment to Turnitin. Please refer to the directions in the Student Success Center

  1. Unsatisfactory    0.00%
  2. Less than Satisfactory   65.00%
  3. Satisfactory     75.00%
  4. Good   85.00%
  5. Excellent     100.00%  80.0 %Content

55.0 % Justification For Capital Purchase

Does not provide justification for capital purchase. No explanation as to why the purchase would be a good investment for the hospital. Does not address the operating costs you took into consideration, what facility considerations are involved regarding this new piece of equipment, and future benefits to the organization of this piece of equipment. Subject knowledge is not demonstrated.

Provides only minimal justification for capital purchase with little explanation as to why the purchase would be a good investment for the hospital. Only a few of the following are addressed with minimal detail; the operating costs you took into consideration, what facility considerations are involved regarding this new piece of equipment, and future benefits to the organization of this piece of equipment. Subject knowledge is unclear, inconsistent.

Provides basic justification for capital purchase with little explanation as to why the purchase would be a good investment for the hospital. Several of the following are addresses with basic detail; the operating costs you took into consideration, what facility considerations are involved regarding this new piece of equipment, and future benefits to the organization of this piece of equipment. Some subject knowledge is evident.

Provides thorough justification for capital purchase with thoughtful explanation as to why the purchase would be a good investment for the hospital. Several of the following are addressed in detail; the operating costs you took into consideration, what facility considerations are involved regarding this new piece of equipment, and future benefits to the organization of this piece of equipment. Subject knowledge is evident.

Provides thorough knowledge justification for capital purchase with elaborate explanation as to why the purchase would be a good investment for the hospital. Clearly addresses the operating costs you took into consideration, what facility considerations are involved regarding this new piece of equipment, and future benefits to the organization of this piece of equipment. Introduces appropriate examples.

25.0 % Integrates Information From Outside Resources Into the Body of Paper

Does not use appropriate references as required by the assignment, examples, or explanations.

Provides some supporting examples, but minimal explanations and no appropriate published references as required by the assignment.

Supports main points with examples and explanations, but fails to include published references, as required by the assignment, to support claims and ideas.

Supports main points with references, explanations, and examples. Application and description is direct, competent, and appropriate of the criteria. Includes appropriate references as required by the assignment.

Supports main points with references as required by the assignment, examples, and full explanations of how they apply.

17.0 %Organization and Effectiveness

6.0 % Thesis Development and Purpose

Paper lacks any discernible overall purpose or organizing claim.

Thesis and/or main claim are insufficiently developed and/or vague; purpose is not clear.

Thesis and/or main claim are apparent and appropriate to purpose.

Thesis and/or main claim are clear and forecast the development of the paper. It is descriptive and reflective of the arguments and appropriate to the purpose.

Thesis and/or main claim are comprehensive; contained within the thesis is the essence of the paper. Thesis statement makes the purpose of the paper clear.

6.0 % Paragraph Development and Transitions

Paragraphs and transitions consistently lack unity and coherence. No apparent connections between paragraphs are established. Transitions are inappropriate to purpose and scope. Organization is disjointed.

Some paragraphs and transitions may lack logical progression of ideas, unity, coherence, and/or cohesiveness. Some degree of organization is evident.

Paragraphs are generally competent, but ideas may show some inconsistency in organization and/or in their relationships to each other.

A logical progression of ideas between paragraphs is apparent. Paragraphs exhibit a unity, coherence, and cohesiveness. Topic sentences and concluding remarks are appropriate to purpose.

There is a sophisticated construction of paragraphs and transitions. Ideas progress and relate to each other. Paragraph and transition construction guide the reader. Paragraph structure is seamless.

5.0 % Mechanics of Writing (Includes spelling, punctuation, grammar, language use.)

Surface errors are pervasive enough that they impede communication of meaning. Inappropriate word choice and/or sentence construction are used.

Frequent and repetitive mechanical errors distract the reader. Inconsistencies in language choice (register), sentence structure, and/or word choice are present.

Some mechanical errors or typos are present, but are not overly distracting to the reader. Correct sentence structure and audience-appropriate language are used.

Prose is largely free of mechanical errors, although a few may be present. A variety of sentence structures and effective figures of speech are used.

Writer is clearly in command of standard, written, academic English.

3.0 %Format

1.0 % Paper Format (1- inch margins; 12-point-font; double-spaced; Times New Roman, Arial, or Courier)

GCU template is not used appropriately or documentation format is rarely followed correctly.

GCU template is used, but some elements are missing or mistaken; lack of control with formatting is apparent.

GCU template is used, and formatting is correct, although some minor errors may be present.

GCU template is fully used; There are virtually no errors in formatting style.

All format elements are correct.

2.0 % Research Citations (In-text citations for paraphrasing and direct quotes, and reference page listing and formatting, as appropriate to assignment.)

No reference page is included. No citations are used.

Reference page is present. Citations are inconsistently used.

Reference page is included and lists sources used in the paper. Sources are appropriately documented, although some errors may be present.

Reference page is present and fully inclusive of all cited sources. Documentation is appropriate and GCU style is usually correct.

In-text citations and a reference page are complete. The documentation of cited sources is free of error.

100 % Total Weightage

SAMPLE ANSWER

Capital Purchase Justification

Executive summary

Reducing profit margins in health care makes it complex to choose a good investment for a hospital. While buying medical equipment is an investment majority of physicians may take into account, sales executives can make it sound enticing. Nonetheless, physicians should purchase medical equipment that is beneficial to the hospital.  Mr. Vice President, I understand that the facility is attempting to improve its services by investing in a quality tool for the radiology unit. I would suggest that the hospital buys a General Electric Healthcare’s Magnetic Resonance Imaging (MRI) scanner. Moreover, I fully understand that making this investment calls for careful consideration of several factors including cost of the equipment and expected profit or benefit to the hospital. The hospital, particularly the radiology unit will greatly benefit from the purchase of MRI scanners. For example, the scanners will increase the physicians’ capacity to choose the effective treatment for each patient. This piece of equipment will also permit physicians to collect relevant information regarding a patient’s internal organs. Again, physicians would be able to complete many exams in a short period because of the homogenous magnet and Optima MR450w, which will be essential in saving time. Nonetheless, the price of the General Electric Healthcare installed with Optima MR450w 1.5T and Geometry Embracing Method (GEM) Suite, is roughly $49,181.00. Much as the hospital may choose to lease the MRI scanners, it not a suitable investment because of the huge cost in the long run. Basically, this piece of equipment is a good investment for the hospital as well as the patients.

Introduction

Buying medical equipment can be an intricate investment. Therefore, the hospital should ensure that factors like cost and benefits are taken into consideration.  While these scanners require substantial investment, they have a great potential on the return on investment (ROI).  This essay presents a justification as to why MRI offered by General Electric Healthcare is a good investment for the hospital. Mr. Vice President, MRI scanners are critical equipment for the hospital when it comes to quality improvement and a good investment for the institution.

Future Benefits to the Organization

MRI scanners are simple diagnostic practices, which enable physicians to see detailed images of internal organs of the patient without the use of x-rays (Ohsfeldt, Li, & Schneider, 2015). Additionally, this equipment is instrumental since it undoubtedly demonstrates the difference between healthy and abnormal tissues. Besides, it would help physicians to collect relevant data on the patient’s brain, spine and other internal organs. Preliminary treatment and identifying the illness and with no negative effects, therefore, the MRI scanners would increase physicians’ capacity to choose the effective treatment for each patient.                                           The hospital will be able complete more examinations in less time. This is because of the homogenous magnet and the design of the Optima MR450w, which will enable physicians to save time during examinations and patients’ setup (Ohsfeldt, Li & Schneider, 2015). Mr. Vice President, the General Electric Healthcare‘s Optima and MR450w is a good investment for this hospital. It has more than two decades of proven record in providing further capabilities to patients as technology advances without necessarily replacing the magnet.  MRI scanners expand considerably compared to radiology, since it validates the use of radiation therapy. Again, it enhances uptime with skilled and service forces across the world allowing the department of radiation to forecast and tackle service requirements with no unplanned interruption (Ohsfeldt, Li, & Schneider, 2015).

Facility Consideration

MRI scanners are not only future-based but also patient-centered as it presents extraordinary outcomes besides a wide-ranging assortment of products to meet the imaging requirements of this institution’s radiology unit. Subsequently, without compromising the quality or ability, General Electric Healthcare installed with Optima MR450w 1.5T as well as GEM Suite would be ideal for patients visiting the hospital (General Electric Company, 2014). Additionally, the Optima MR450w is appropriate for all patients irrespective of their size while decreasing audio sound for spine and brain examinations. This equipment also presents extraordinary reliability that controls the gradient to generate outstanding presentation in demanding uses including cardiac, fMRI, and transmission to improve signal-to-noise ratio (SNR).  On the other hand, GEM suite and Optima MR450w would allow the institution to adhere to the requirements of patients, quality signal, efficiency, lesser stations, faster examinations and fewer failures. Due to the wider diameter of the MRI scanners, acoustic applications, comfort and aesthetic elements of the GEM suite is important when it comes to addressing common causes of anxiety among patients and nonconformity during assessments (General Electric Company, 2014).

Operating Costs

Being able to understand the cost of this investment in terms of operational outlays remains vital. The cost of this piece of equipment is about USD 49,181, as such, if the institution would get financial support that span 60 months at an interest rate of 7%, then the hospital would be making a monthly payment of USD 862.54. The monthly charges would be inclusive of operational costs such as maintenance expenses, which will be completed within the specified time-frame. However, the radiology unit can lease MRI scanners. But this alternative is not a good investment for the hospital since it will be too costly in the long run. Moreover, there will be less or no return on investment (Wu et al., 2014). Mr. Vice president based on all benefits of General Electric Healthcare’s MRI that comes with GEM suite and the Optima MR450w 1.5T will be beneficial not only for the  institution’s radiology unit but also patients.

Conclusion

Healthcare organisations can only guarantee the quality of care when physicians have access to the best equipment. This is why the installation of General Electric Healthcare with Optima MR450w 1.5T and GEM Suite is strategic in terms meeting enhanced quality care and also when it comes to ROI. Ultimately, it is critical to ensure that factors to do with facility consideration, operating costs and future benefits of the MRI equipment are determined before undertaking on such an expensive venture.

References

General Electric Company. Retrieved October 19, 2016, from http://www3.gehealthcare.com/

Ohsfeldt, R., Li, P., & Schneider, J. (2015). Patterns of Onsite Magnetic Resonance Imaging Equipment among Orthopedic Practices. International Journal of Technology Assessment in Health Care, 31(5), 339-346. doi:http://dx.doi.org/10.1017/S0266462315000550

Wu, S., Sylwestrzak, G., Shah, C., & DeVries, A. (2014). Price transparency for MRIs increased use of less costly providers and triggered provider competition. Health Affairs, 33(8), 1391-8. Retrieved from http://search.proquest.com/docview/1553396971?accountid=45049

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The Evaluation of Equity Research Report

The Evaluation of Equity Research Report
The Evaluation of Equity Research Report

The Evaluation of Equity Research Report

Order Instructions:

I’ll email you the description for my order

SAMPLE ANSWER

The evaluation of equity research report involves three main stages;

  1. Inquire what the analyst depends on to make a recommendation. What a strategy the analyst is using. Whether it is an effective basis for evaluating the value of the stock or not.
  2. Inquire if the recommendations adhere to the analysis; in particular based on the formulated forecast
  3. Inquire if the analysis is reasonably consistent. In addition, assess whether ‘good analysis” have been violated or not.

The task of the analysts is developing forecasts so as to make inferences regarding the valuation based on the forecasts. Some analysts are excellent when it comes to forecasting; however they are not competent to convert the forecast to a given valuation as well as a recommendation. On the other hand, other analysts are excellent at collecting data about an organization, but not good at converting such data for forecasting purposes.  Moreover, other analysts feel strong regarding a recommendation. However, they do not support such a recommendation with detailed data forecasting or collection (Ohlson, 2005).

In most cases, it always appropriate to inquire about the strategy based on the analyst’s perspective in obtaining a valuation. A bad equity research report will not provide a comprehensible answer to this issue. With respect to Kmart scenario,

  1. What is the analyst using to make a recommendation?

The forecast of the price-earnings ratio (P/E) is imperative to a recommendation. However, there is no clear strategy behind it. The analyst submits average price earnings ratio like she views other discount, retailers. One wonders whether such average multiple is acceptable. The analysts have simply initiated the technique of comparable, something that is not encouraged in stock valuation as it is risky. In addition, the analyst fails to demonstrate how one gets the right profit earnings ratio or if she comprehends what P/E is all about. In the analyst’s estimates, it is clear that profit earnings ratio is inconsistent with other forecasts (Easton, 2003).

  1. Does the recommendation adhere to the analysis?

The present cost is USD 17 per share. According to the analyst’s 2001, Eps forecast of USD 1.41 with a projected profit earnings ratio of 20 gives a projected 2001 cost of USD 28.20. Therefore, the stock return projected for two years based on the current costs of $17 is;

Estimated stock return= (28.20-17.0)/17.0

= 65.9%

As such, the return for two years at 12% p.a is 25.4 percent. Thus, this forecast does undeniably mean a BUY. However, is this analysis logic?

  1. Is the analysis reasonably consistent?
  2. a) The analyst estimates 2001 profit earnings ratio of 20, which generates an estimated cost of $28.20 while estimating a Price-to-book (P/B) ratio that yields an estimated cost of $21.30. These costs are different. The $21.30 cost indicates an estimated return of 25.3% that is needed for the 2 year return. A HOLD is implied.

Estimated return = (21.30-17.0)/17.0

25.3%

  1. b) The Bps estimates are not correct if compared with Eps projections (Ohlson, & Juettner-Nauroth, 2005). It should be that; Bps (2000) = Bps (1999) + Eps (2000) – DPS (2000). Because there are no dividends and shares outstanding demonstrates an estimated stock concerns or even re-acquirements;

Bps (2000) = 12.12 + 1.23 = 13.35 while

Bps (2001) = 13.35 + 1.41 = 14.76

In the event that the estimated Price-to-book ratio in 2001 is used, the cost in 2001 is about $20.37. This cost demonstrates a SELL.

  1. c) The analyst estimates earnings to increase at 6 percent annually after 2001. As a matter of fact when earning are estimated to increase at a lower rate compared to the required return, the earnings yield is higher than required return, and the price-earnings ratio is below the required return. The perception is that, if an organization is to increase its earnings below the required return on cost, the cost will be less per every dollar of earnings compared to if it was to increase at the required return. In that view, the required return is roughly 12 percent; the E/P ought to be higher than the required return while price earnings ratio must be below 9.33. As a result, the analyst estimate of price-earnings ratio at 20 is inconsistent with earnings estimates.
  2. d) The recommendation is inconsistent based on the projection of free cash flow increasing at 6 percent;

VE1999 = (2000 free cash flow/ {required return-growth in FCF})-Debit

= ({632×1.06})/12%-6%)-2,706

= $8,459    or     $17.14 /share (for 493.4 million shares)

With the present costs of $17, this analysis demonstrates a HOLD. The cost capital of 12 percent is assumed here for purposes of simplicity. As such, cost capital for operations out to be forecasted.

  1. e) The analysis of estimated earnings indicated a SELL.

2- Year yield= (1.23+1.141)/17.00

=15.53%

There are no dividends for reinvestment; this is because this is below the required 2-year return of about 25.4 percent. Therefore, implying a SELL. Increasing more years of earning at 6 percent cannot change this justification. However, the justification can only change in the event that forecasted change in premium is integrated with the costs in 2001 from the estimated price-earnings ratio of 20, although not with the estimated 2001 price-to-book ratio.

By and large, Kmart share is selling at $17, however, based on the valuation the stock price is lower. In that case, analyst’s recommendation to BUY is not correct since one pays more compared to actual cost. Regardless of the analyst’s suggestion to BUY the shares, the valuation indicated a SELL for Kmart shares (Penman, 2005).

References

Easton, P (2003). “Does the PEG Ratio Rank Stocks According to the Market’s Expected   Rate of Return on Equity Capital?” Notre-Dame University,

Ohlson, J& Juettner-Nauroth, B. (2005). “Expected EPS and EPS Growth as  Determinants of  Value,” Review of Accounting Studies 10.

Ohlson, J. (2005).  “On Accounting-Based Valuation Formulae” Review of Accounting  Studies 10.

Penman, S. (2005). Discussion of ‘On Accounting-Based Valuation Formulae’ and  ‘Expected  EPS and EPS Growth as Determinants of Value’,” Review of Accounting Studies 10.

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The Need for Careful Investment Appraisal of Projects

The Need for Careful Investment Appraisal of Projects
The Need for Careful Investment Appraisal of Projects

The Need for Careful Investment Appraisal of Projects

Order Instructions:

Dear Admin,

•Consider the main ideas relating to the need for careful investment appraisal of projects.

•Consider how sensitivity and scenario analysis can be used in capital budgeting decisions.

•Discussing an example related to different capital investment appraisal techniques

•Offering examples of sensitivity analysis within the context of capital budgeting decisions

•Extending the discussion into new but relevant areas regarding financial management.

Also,

1) The answer must raise appropriate critical questions.

2) Do include all your references, as per the Harvard Referencing System,

3) Please don’t use Wikipedia web site.

4) I need examples from peer reviewed articles or researches.

5) Turnitin.com copy percentage must be 10% or less.

Appreciate each single moment you spend in writing my paper

Best regards

 

 

 

SAMPLE ANSWER

Introduction

A principled decision-making process includes the collection of all information that is accurate for any organization seeking for avenues for investment. Investment appraisal, therefore, remains an integral part that requires appropriate decisions. An assessment determines the allocation of the organizations financial resource among the varying market opportunities.

Organizations, therefore, need to employ the functions of project appraisal to disclose an analysis of a project and to determine whether particular projects should be implemented or not (Adler, P. 15, 2000). An appraisal therefore derives avenues through which an organization can determine the alternative approaches geared towards selecting an optimum solution with respect to the size of a project, its location, technology, engineering, organizational set-up, the size of a market, economic and social aspects, and financial cost-benefit. This paper therefore seeks to focus on the elements of a projects appraisal.

The Need for Careful Investment Appraisal of Projects

It is significant to acknowledge that business enterprises make their investments over their long-term assets. In the event that such an entity has limited capital, there is a need for great care while considering the development of a program, a factor that necessitates the incorporation of an investment appraisal.

Investment appraisal therefore requires an organization to make significant decisions on their capital investments through an analysis that is carried out to decide whether such an entity should channel its funds to a particular investment process whose returns are more likely to be realized within a short period of time (Adler, P. 15, 2000). An appraisal drives an organization’s stakeholder into generating, evaluating, and following up on an investment alternative that would suit an organization’s state.

There is consequently a need for a careful investment appraisal on organizations projects to determine decisions that would prove beneficial for the organization before undertaking any project. Such decisions would include evaluations on organizations expenditures and the benefits of returns from such expenditures over a period (Damgaard, & Elkjaer, Pp. 245-260, 2014). These decisions have an impact on the long-term profitability and flexibility of an organization. It is also crucial to mention that the success and failure of an organization would be determined by the quality of an investment appraisal developed for an organization.
Capital Budgeting

Capital budgeting mainly concerns an organization’s analysis it’s potential projects and remains one of the most significant decisions that managers need to critically make. The capital budgeting therefore involves a systematic evaluation of the amount of capital an organizations should invest in a project including the specific assets that this organizations can employ to meet an investments goal (Damgaard, & Elkjaer, Pp. 245-260, 2014). According to sources from the financial literature, this process is described as an organization’s long-term investment. The success of a capital budgeting process lies in the evaluation through a forecast and monitoring procedure. The success of a company, therefore, depends on the appropriate choice of a capital budgeting system for investment decisions of an organization.

In the event that an organization faces challenges with limited sources of capital, managers go through a sensitive and scenario analysis to carefully decide whether a particular project can viably meet the organizations economic situation. In a case where the organization has more than one project, the management is required to identify the primary project that will bring returns to the value of the organization (Dragotă, & Dragotă, Pp. 1-7, 2009). Through this, the process of capital budgeting is brought on board. The commonly used technique in evaluating the capital budgeting process of a project includes the payback method that determines the time limits of an organization in recovering its cash outlay.

The different capital investment appraisal techniques

There are four types of investment appraisals that companies can undertake in determining the rewarding projects within its objectives. The four typologies can be classified into two main categories; the ARR and payback period which includes a non-discounting approach while on the other hand the NVP and IRR include the discounting methods. The ARR approach of appraisal mainly measures the accounting profit rate by dividing an organization’s average income with the average investment.

The payback method calculates the time length that an organization can employ in recovering its initial investment from its operating cash flow in a project (Dragotă, & Dragotă, Pp. 1-7, 2009). A shorter payback period may be a preferred method for an organization since it capacitates an organization to generate equal levels of cash for an initial investment over a short duration of time, also viewed as a proxy of risks. It is significant to mention that the payback approach primarily ignored the element of time value of organizations returns.

The NVP approach also calculates the bet value of an organization’s project by discounting its cash flow in a manner that reflects the risks that would be associated with the cash flows. This, therefore, offers an organization the advantage of the NVP method over a discounting approach. The NVP method, on the other hand, assumes the maintenance of the capital a factor that less happens since cash flows change with time (Sangster, Pp. 307-332, 2003).
Sensitivity Analysis within the Context of Capital Budgeting Decisions

Sensitivity analysis within an organization determines how critical an output is to change inputs while also keeping the other inputs constant.  The sensitivity analysis is important since it enables a user to determine how dependant an output value is on each and every input. A sample example of this can be determined below;

A construction company decides to build a road that is 20 kilometers long within a city. The company bids for a $1 from vehicles that pass through the road for a period of 100 years. The chief engineer resorted to and NPV of $ 1,218 million over the project with an assumption of cash flows at the end of the year (Sangster, Pp. 307-332, 2003). He made an estimate of an average cost of capital at 12.1% of the daily vehicles passing through the road approximated at 1,000,000. His daily operating expanse stood at 3% of the total revenues and a cost of $ 2 billion. In determining the sensitivity in the net value of this project input, the approach below will be essential.

Solution

Net present value of the WACC is assumed to be 12.1%

Daily traffic of vehicles= 1,000,000

Daily operating expenses 3% of an initial cost of $2,000 million

Present value of the project=$925 million

Determining the percentage output would require;

-24.01% ($ 926million× $1,218 million) ÷ $1,218 million) over corresponding input of 10% (12.1%-11%) with an output of 1%.

This calculation therefore shows the relationship between the negative sensitivity and the output and inputs in the project.

Financial Management

The investment appraisal method has some ties with the financial management approaches within an organization. Financial management involves the processes of planning, organizing, directing and controlling organizations financial activities (Tegarden, Pp. 5-14, 2013). It involves the aspects of applying the general managerial principles into the financial resources of an organization.

Conclusion

Out of this, it is therefore relative to summarize that an appraisal derives avenues through which an organization can determine the alternative approaches geared towards selecting an optimum solution with respect to the size of a project, its location, technology, engineering, organizational set-up, the size of a market, economic and social aspects, and financial cost-benefit.

References

Adler, Rw 2000, ‘Strategic Investment Decision Appraisal Techniques: The Old And The New’, Business Horizons, 43, 6, P. 15.

Damgaard, J, & Elkjaer, T 2014, ‘Foreign Direct Investment And The External Wealth Of Nations: How Important Is Valuation?’, Review Of Income & Wealth, 60, 2, Pp. 245-260,

Dragotă, V, & Dragotă, M 2009, ‘Models and Indicators For Risk Valuation Of Direct Investments’, Economic Computation & Economic Cybernetics Studies & Research, 43, 3, Pp. 1-7,

Sangster, A 2003, ‘Capital Investment Appraisal Techniques: A Survey Of Current Usage’, Journal Of Business Finance & Accounting, 20, 3, Pp. 307-332

Tegarden, Tk 2013, ‘Income Approach Techniques In Central Assessment Appraisals’, Journal Of Property Tax Assessment & Administration, 10, 3, Pp. 5-14

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Capital investment appraisal Assignment Paper

Capital investment appraisal
Capital investment appraisal

Capital investment appraisal

Order Instructions:

Please find the attached file or by email

SAMPLE ANSWER

Capital investment appraisal is an important tool of planning process that help to make decisions on what to invest in based on their returns and initial capital of investment (Harris et al., 2011). For example, capital budgeting in SME’s helps a company to decide future investments such as entry into new markets, expansion of business activities and also the inclusion of new activities. Examples include; Accounting Rate of Return (ARR), Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period (Davies & Crawford, 2011).

Calculate the Missing answers

Project 1 Project 2
ARR 33% 18.7%
NPV (£’ 000) 15 210
IRR 25% 53%
Payback Period (yrs) 0.556 3.2

 

Workings

ARR for project two

Annual Depreciation = (Initial Investment – Scrap Value) / Useful Life in Years

Annual Depreciation = (£1616000 – £301,000) /15% =£197,250

Average Accounting Income = £500,000 – £197,250 = £302,750

Accounting Rate of Return =302,750/1,616,000 = 0.187 =18.7%

Where

Co = -Initial Investment =556,000

C = Cash Flow = 200,000

r = Depreciation rate = 15%

T = Time = 5yrs

= -556000+570994

=14,994

Therefore, NPV is 14, 994

14,994 = -556,000 + (500,000)/(1+IRR) + (500000)/ (1+IRR2)+(5200000)/(1+IRR3)+ (200000)/(1+IRR4)+ (200000)/(1+IRR5)

14994 = -1616000 + (500000)( 1+IRR+1+IRR2 +1+IRR3 +1+IRR4 1+IRR5)

14994= -1616000 + (500000) + (5/1+IRR)

14994+1616000 = (500000) + (5/1+IRR)

1630994= 2500000/1+IRR

1630994(1+IRR) = 2500000

1630994+1630994IRR =2500000

16309941IRR = 2500000-1630994

1630994IRR = 869006=869006/16309941

IRR= 0.532= 53%

Payback Period for project One

Payback Period = Initial Investment/ Cash Inflow per Period

= 0.556

References

Harris, E. P., & El-Massri, M. (2011). Capital Investment Appraisal. Review of Management Accounting Research, 343.

Davies, T., & Crawford, I. (2011). Business accounting and finance. Pearson.

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Investments Research Term Paper Available

Investments
                        Investments

Investments

Order Instructions:

Dear Admin,

Note: To prepare for this essay please read the required articles that is attached then answer the following questions:

Part A…………………………..

Answer the following questions:

1.An organisation owes £300,000 tax at 1.7.X4 and £450,000 at 30.6.X5. Its income statement for the year to 30.6.X5 includes a tax charge of £400,000. How much tax was actually paid in the year to 30.6.X5?

2.An organisation buys a tangible non-current asset for £200,000. It has an estimated scrap value of £20,000 and an expected useful economic life of 10 years.

o What depreciation will be shown in the income statement for year 3?

o How would the non-current asset be shown in the statement of financial position at the end of year 3?

o If the asset is sold for £120,000 in year 4, how will this affect:
a) the income statement for year 4?
b) the statement of financial position at the end of year 4?

o How will the sale of the tangible non-current asset affect the firm’s statement of cash flows?
Be sure to demonstrate your numerical workings.

Part B…………………………..

The income statement and the statement of cash flows, in addition to the statement of financial position, are the three financial statements that organisations cannot do without. The statement of cash flows was the last one to be instituted but is now regarded as a necessity in the accounting field. The following exercise takes a closer look at the statement of cash flows and allows time for your thoughts and consideration of its role.
In formulating your Key Concept Exercise, consider the following questions:

•What type of information does the statement of cash flows provide investors?

•How do changes in liquidity affect an organisation?
Cash is the lifeblood of any business, and without it survival is very unlikely.

Do you agree or disagree? Explain what information a statement of cash flows provides to supplement a statement of financial position and an income statement. Why is there still some controversy surrounding published statements of cash flows? How important are such statements in terms of the financial reporting requirements within YOUR country?
Base your answer upon your reading, further research and your own experiences.

Also,
1) The answer must raise appropriate critical questions.
2) Do include all your references, as per the Harvard Referencing System,
3) Please don’t use Wikipedia web site.
4) I need examples from peer reviewed articles or researches.
5) Turnitin.com copy percentage must be 10% or less.

Note: To prepare for this essay please read the required articles that is attached

Appreciate each single moment you spend in writing my paper

Best regards

SAMPLE ANSWER

Investments

Part A

Question 1

Taxation Tax due £
1.7.X 4 300,000
30.06. X 5 450,000
Tax due 750,000
Tax paid 400,000 For 30.06.X5
Tax Paid 300,000 For 1.7.X4
Total paid 700,000
Please note taxes are paid as per the total
that’s being owed. The entries in the income
statement reflect the income for expenses
for the period only. Owings for taxes  for that period
would amount to £ 50 (part of Owings)

 

The total tax paid in 30.06.X5 is £700,000

Question 2

Depreciation £
Cost of the Asset 200,000
Less Scrap value 20,000
Useful life 180,000
Years 10 yrs (depreciation/year) 18,000
 a) Third yr depreciation 18,000
Cost Dep NBV
 b)  Non-current Assets 200,000 54,000 146,000
     Income Statement yr 4
Total depreciation – 4yrs 72,000
NBV (200,000-72,000) 128,000
Disposal 120,000
Loss 8,000
c) The income statement would report a loss of 8,000
 d) The financial statement would not have a report
of the asset if it’s sold. It would be removed
from the financial statement.

 

(Kieso, Weygandt & Warfield, 2007)

Part B

Introduction

Cash flows reflect the changes in the balance sheet and also the income statement. It calculates and arrives at cash and cash equivalents through an analysis that breaks down all the business operations into three processes; financing, operating and investing activities. The cash flow statement includes all the current financial operations as per the balance sheet as well as all the changes that took place during the financial year. The cash flow is utilized to determine a company’s short term financial viability especially its liquidity. The investors would be interested in knowing the cash generated from operations, the taxes and interest paid together with the dividends that were paid to the owners of the company (Bodie, Z., Kane, A., & Marcus, A. J. 2008).

The cash flow reveals all the net cash flows from the investing, financing and operating activities. It also indicates the net increase in the company’s cash & cash equivalents. The investors are mostly interested in profitability of the company but the company has to be liquid. The company must be able to maintain its financial obligations by having a reasonable working capital. Investors are mostly interested in cash flow statements because they shade some light on the company’s liquidity. The income statement is based on the accrual system; transactions are recognized when they have occurred and not when cash is paid or received by the company. Because of these systems, it’s possible for a company to register some profits but actually collapse after a few days due to liquidity problems. The amounts recorded and expected from debtors may not arrive on time or may turn out to be bad debts.

Yes i agree with the statement as without liquid cash for operations a business unit cannot function. Large businesses collapse because of investing huge amounts of money in stock. Operating cash flow is crucial to the survival of a business as most operations like payment of salaries, sales allowances and maintenance of vehicles must be paid for business operations and processes to function effectively.

The statement of cash flow reveals the company’s liquidity position. The total cash paid and the remaining cash and cash equivalent (Vance, 2003).

The controversies surrounding the cash flow suggest that the financial statement is difficult to understand for average citizens and it becomes even more complex for large corporations that have complex business operations like acquisitions, mergers or disposals of subsidiaries. Most companies rank liquidity in companies as more important and critical than actual profitability of the company. The income statement and the balance sheet reveal only the profitability of the company but the cash flow reveals even the liquidity status of the company.

However, the major limitation of the cash flow statement is that it only indicates the amounts spent on acquisition of fixed or non-current assets in a particular financial period but it does not reveal whether the transaction were profitable or not and if it was necessary in the first place.

The cash flow may also reveal if the company registered some increment in stock since the last financial period but it does not reveal if the increment was a result of poor work by salesmen, error in stock taking or a strategy to make extra income on anticipation of price increment or fear of shortages (Garrison, R., Noreen, W. & Brewer, 2009).

The cash flow also does not reveal why debtors may have increased and the reasons behind the increment. It could be possible that the debtors may be having financial challenges or the company has extended its credit period or the credit controller is inefficient in collecting the debts due. These questions makes it necessary to have other financial statements that have more details on financial issues and which may  be needed to clear certain reports. Hence the cash flow cannot be of much use if it’s presented on its own and without the income statement and the balance sheet or the statement of financial position of a company. All the three financial documents have their own contribution in providing complete financial accounting information.

References

Bodie, Z., Kane, A., & Marcus, A. J., 2008, Investments (7th International Ed.) Boston: McGraw-Hill. 303

Garrison, R., Noreen, W. & Brewer, P., 2009, Managerial Accounting, New York, NY: McGraw-Hill Irwin. 65 -70

Kieso, D. E., Weygandt, J. J., & Warfield, T. D., 2007, Intermediate Accounting (12th Ed.). Hoboken, NJ: John Wiley & Sons,

Vance, D., 2003, Financial analysis and decision making: tools and techniques to solve financial problems and make effective business decisions. New York, NY: McGraw-Hill.

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Diversification of Portfolios Term Paper

Diversification of Portfolios
   Diversification of Portfolios

Diversification of Portfolios

Order Instructions:

For this paper, the writer will have to read the two post and react to them in one paragraph each. The writer will expand and constructively challenge each of this postings using a minimum of one scholarly article to support his point. each posting respond must have a minimum of 250 words and APA must be use . The writer will respond directly on the uploaded paper with the respond coming directly under each posting as indicated. the references must be in APA format.

SAMPLE ANSWER

Diversification of Portfolios

Response to post 1

It is heart breaking for the many employees that have invested their stocks in Enron to lose such substantial investments because of poor management. For this reason, I  hold the view that the company has to stick to the various laws and regulations such as Employee Income Security Act of 1974 (ERISA) to meet the interests of employees (Purcell, 2002).  Employees should not always believe that fiduciary has their interest at stake. It is their obligation to scrutinize hard information and data on the risks and returns to have a clear picture on the company financial position before making the decision to invest. There is an option to diversify their investments as opposed to investing in one entity. The good thing about diversifying ones investments is that, it acts as a caution in case of such incidences that happened in Enron. Therefore, this posting is telling all investors to be very attentive and take precautionary measures when making investment decisions.  Intense research on the company data is critical before investing in any portfolio. The safe thing to do is to consider diversifying ones investments.

Response to post 2

The company option of offering their employees and option of 401k supported by section 404 (c) Employee Retirement Income Security Act of 1974 (ERISA) to enable them self-direct their investment was a noble idea. The problem is that the managers already knew the intention behind this. It is evident that employees saw prospectus and an opportunity in investing in the company stock.  One thing they did not know is that the company books of accounts did not represent the real market growth. The blame goes to the employer for misrepresenting the financial books of accounts to woo employees to invest in the company. The repercussions on the management of the company were therefore appropriate to help discourage such unethical practices by other managers (Ross, Westerfield & Jaffe, 2013). To some extent, employees as well are to blame for what begot them.  It is important for any investor to scrutinize the books of accounts and  do due  diligence by exploring financial statements of the company, calculate ratio analysis, carry out risk analysis, compare the dividends/ share versus earnings per share and calculate the time value of money to ascertain the performance of the company. Whether the company gave them this information or not, they have the obligation to request for the same.

References

Purcell, P.  (2002). The Enron bankruptcy and employer stock in retirement plans. Journal of         Pension Planning & Compliance, 28(2), 36-44.

Ross, S.A., Westerfield, R.W., & Jaffe, J. (2013). Corporate finance (10thed.). New York, NY:    McGraw-Hill/Irwin

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Managing investments Research Assignment

Managing investments
              Managing investments

Managing investments

Order Instructions:

For this paper, the writer will have to read the two post and react to them in one paragraph each. The writer will expand and constructively challenge each of this postings using a minimum of one scholarly article to support his point. each posting respond must have a minimum of 250 words and APA must be use . The writer will respond directly on the uploaded paper with the respond coming directly under each posting as indicated. the references must be in APA format.

SAMPLE ANSWER

It is true that the effectiveness of any investment decision depends on the cash flows, project life, and the discounting factor (Preda, 2009). Before the commencement of the project, an immense understanding of the overall project is critical as this will help provide an economic view whether the project is feasible or not. The time value of money will help assess the feasibility of the overall project by comparing the inflows and the outflows of the overall life cycle of the project (Cornett, Adair, & Nofsinger, 2013). The cash flows consideration needs to be done in combination with the overall life of the project in determining whether the benefits of the project are sufficient to justify the current outlays. The combination of the payback period, the net present value, and the internal rate of returns are significant in determining the feasibility of the project.

The project with a positive net present value is feasible and has positive outcomes of the investment. However, the shortcoming of the net present value is that is does not take care of environmental factors that may also affect the outcome of the project (Cullen & Broadbent, 2012). In this regard, evaluating the capital project requires multiple analyses that also take care of other factors such as environmental influences. In this regard, the optional situation evaluations are good in assessing capital project feasibility as it will provide a clear understanding of the potential of the project, in addition to providing an overview of how much the organization is likely to lose in case the project fails. According to Hightower (2009), the use of decision trees in analyzing the feasibility of the project is also useful as it gives provides the management with the option of abandoning the project during implementation when the net present value turns out to be negative.

References

Preda, A. (2009). Framing Finance: The Boundaries of Markets and Modern Capitalism. University of Chicago Press

Cornett, M., Adair, T., & Nofsinger, J. (2013). M:Finance. McGraw-Hill/Irwin; 2 edition

Cullen, J., & Broadbent, M. (2012). Managing Financial Resources (CMI Diploma in Management Series). Routledge; 3 edition

Hightower, R. (2008). Internal Controls Procedures and Procedures. Wiley   https://www.wiley.com/en-us/Internal+Controls+Policies+and+Procedures-p-9780470287170

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Dividend Growth Model Assignment Paper

Dividend Growth Model
             Dividend Growth Model

Dividend Growth Model

Order Instructions:

I will insite that the writer read the instructions about completing this papers with tables and appendix and strictly follow what APA requirements are when using tables and appendix. The prof is very particular about that as I mentioned in the last paper. The writer must number it and then reference it in the discussion. the writer must also strictly follow the template and complete the paper base on the template as I mentioned in the previous paper. Also remember that the template has all the subheadings and the writer just have to use them and fill in the information and the calculations and tables where necessary should be place in the appendix and reference in the summary. The writer must also include a reference page in APA that means they must all be in alphabetical order. the writer will adding this paper to 112912. Remember that I had send the template in the previous orders mentioned in this order hear, so the writer should refer to that.

Part three
Investment Analysis and Recommendation
• This part of the Investment Analysis and Recommendation Paper requires you to establish an estimated growth rate in earnings and dividends for your company. Note, in the dividend growth model, “g” is the growth rate for earnings AND dividends. You might want to check historical growth rates for the company (in terms of earnings and dividends). Also, many people rely on analyst forecasts. Be sure to justify your growth rate selection and explain how you arrived at the number. Assume your company is a constant growth stock. Use your estimated growth rate to solve for the required rate of return using the dividend discount model. After completing your calculations, respond to the following:

• Does the number you arrived at seem logical or feasible?

• Did you face any problems or issues using the dividend growth model? Does your company pay a dividend?

• Is it reasonable to assume constant growth for your company?

Write up a 2-page summary of your findings, including any calculations you made, and how you gathered your information.

SAMPLE ANSWER

Dividend Growth Model

The dividend growth model helps in the in-depth understanding of equity by forecasting business performance and selecting the appropriate valuation model. Return on investment is a method that determines the efficiency of a company by dividing the returns and the cost of the investment (Isiklar, 2005). Just as its name suggests, retention ratio refers to the percentage of the net income that remains to grow the business after dividends have been paid. The price of stock is the cost at which an investor needs to undergo in purchasing securities in the exchange market.  Earnings per share are the portion that indicates the company’s profitability as it indicates the monetary value of earnings per outstanding share of the company’s stocks.

The financial information used in these calculations was drawn from the income statement shown in Appendix A. Appendix B shows the dividend in stock for Chesapeake Energy Corporation of the year 2014. After calculating the net income of the company of 2014, the income is found to be $586,000 with an equity of 3. The total dividend of the company was $207.80 in the year 2014 with an outstanding share of $665.14. The total earnings of the company were $0.1952 in total. The dividends per shares that were offered by the company in 2014 were $2.32%, which is a good return to the company shareholders. The price of the company’s stock in 2014 was recorded as $15.06, which is also good news for the company shareholders. The calculations of the stock prices in relation to the ROE and retention ratio are shown in Appendix C. The following are formulas that have been used in the analysis that was carried out below:

The Rate of Return (ROE)                 =          Net income/ Equity

Retention ratio                                    =          1 – (cash dividends/ net income)

Growth rate in earnings (g)                 =          Retention ratio x ROE

Dividend Discount Model (DDM)     =          Return rate (R)

=          Dividend/ (Price of Stock) +g

Price of Stock                                     =          Dividend/ (Return Rate (R)-Growth Rate (g))

Issues with Using the Growth Model

Growth model by Chesapeake Energy Corporation brings issues as it relies much of the company growth rate model that assumes stable growth (Coe, 2002). This model demands that the Chesapeake Energy Corporation company stock is hypersensitive to the entire growth dividend rate that is provided that cannot exceed the cost of equity.  The growth model brings along the issue of not taking into account non dividend factors that are inclusive of brand loyalty and customer retention in Chesapeake Energy Corporation.

Growth

The Reasonability of Constant Growth is tested through the use of discounted cash flow that resides in the very heart of any valuation that the company is geared to use in its operations (Gomes, 2010). The use of reasonability of constant growth ensures that understanding about any given value of the most important perception is given in the right way ever for the benefit of the company success. Therefore, it is necessary to assume a constant growth in the company.

Conclusion

The numbers arrived at using dividend growth model seen logical and feasible as can be evidenced in the appendix. However, the use of dividend growth model seems complex and cumbersome due to several calculations and steps involved. It is reasonable to assume a constant growth in a company provided all the necessary requirements are taken into consideration.

The Bullock Gold Mining Assignment

The estimates provided by Danto can be used by Alma to determine the revenue that is expected from the gold mine. The expense of opening the mine and the annual operating expenses is determined. Opening the mine will cost an initial capital of $750 million with a cash outflow of $75 million for 9 years. The expected cash flows from the mine for the 9 year period is represented by the table shown below.

Table 1. Summary Table

Year Cash flow $ (million)
0 -$750
1 130
2 180
3 190
4 245
5 205
6 155
7 135
8 95
9 -75

Discussion

Payback Period

The payback period is the time taken by the investment to recoup the initial cash injected into the project. Lucrative projects have shorter payback period than the non-lucrative project that tends to have a long payback period. The calculation of the payback period of this case is summarized in the appendix E.

Net Present Value

The Net Present Value (NPV) involves the calculations of the percentage return rate, less the initial cash outlay. The NPV bigger than 1, implies that the project is lucrative and economically viable and is worth the risk (Griffin, 2009). On the other hand, the NPV value which is less than one implies that the investment is less lucrative since the returns will be less than the costs involved in the project (Cornett, Adair, & Nofsinger, 2013). In this case, the calculations of NPV are shown in appendix F.

Internal Rate of Returns (IRR)

In this case, a rate of 12% provides an IRR of $1,594,792,833. Since it can be discounted on both the higher and the lower rate, the project IRR higher than the discounting rate of returns is acceptable as shown in the Appendix G.

Modified Internal Rate of Return

The modified IRR operates on the principle that the positive cash flows are reinvented at the firm’s cost of capital and the firms’ financial cost are done with the initial capital outlay (Bragg, 2009). In this regard, the modified IRR stands out as the most precise way of determining the cost and profitability of an investment as can be seen in the appendix H (Cullen, & Broadbent, 2012).

Conclusion

The Bullock Gold Mining case can be analyzed by the use of Payback Period, NPV, IRR, and modified IRR. From the calculations in the appendix, all the above calculations show positive results to imply that the project is worth investing in. Therefore, the Ballock Gold mine is a viable project.

 References

Bragg, S. (2009). Accounting Control Best Practices. Wiley

Cheasapeake Corp. (2015). Company Profile: Chesapeake Energy Corporation. MarketLine

Coe, P. J. (2002). Power issues when testing the Markov switching model with the sup likelihood ratio test using U.S. output. Empirical Economics, 27(2), 395-401 Financial Service Professionals. Journal of Financial Service Professionals. 74-82.

Cornett, M., Adair, T., & Nofsinger, J. (2013). M:Finance.McGraw-Hill/Irwin; 2 edition

Cullen, J., & Broadbent, M. (2012). Managing Financial Resources (CMI Diploma in Management Series). Routledge; 3 edition

Gomes, O. (2010). Consumer confidence, endogenous growth and endogenous cycles. Journal of Economic Studies, 37(4), 377-404

Griffin, M. (2009). MBA Fundamentals Accounting and Finance. Kaplan Publishing

Isiklar, G. (2005). Essays on macroeconomic forecasting (Order No. 3177045). Available from ABI/INFORM Complete. (305363178)

Appendix A

Income Statement for Chesapeake Energy Corporation (CHK)

Appendix B

Chesapeake Energy Corporation Year 2014
Net income $ 586,000
Equity $ 3
Total dividends paid $ 207.80
Outstanding shares $ 665.14M
Earnings per share (EPS) $ 0.1952
Dividends paid per share $ 2.32%
Stock price as of _ Chesapeake Energy Corporation (CHK) $ 15.06

 

Appendix C

Analysis Formula Year 2014
ROE Net income/ Equity $ 195333.3
Retention ratio 1 – (cash dividends/ net income)                 $ 0.9996
Growth rate in earnings (g) Retention ratio x ROE                 $ 195255.17

Appendix D

Dividend Discount Model (DDM) =

(2.32%/ 15.06) +195255.17

= 195255.32

2.32% / (195255.32-195255.17)

= $ 15.47

Appendix E

Payback Period represents the number of years before the project pays off

Year 0= -750

Year 1=-750 130= -620

Year 2=-750 130 180= – 440

Year 3= -750 130 180 190= -250

Year 4= -750 130 180 190 245= -5

Year 4= -750 130 180 190 245 205= 200

This gold mine project will pay off between the 4th and the 5th year

5/205= 0.0244

Appendix F and 12% rate

Initial investment ($750,000,000)
1st year’s return $130,000,000
2nd year’s return $180,000,000
3rd year’s return $190,000,000
4th year’s return $245,000,000
5th year’s return $205,000,000
6th year’s return $155,000,000
7th year’s return $135,000,000
8th year’s return $95,000,000
$1,594,792,883

Appendix G

IRR can be calculated as follows

Description Data Data
initial investment ($750,000,000) ($750,000,000)
1st years returns $130,000,000 $130,000,000
2nd years returns $180,000,000 $180,000,000
3rd year returns $190,000,000 $190,000,000
4th year returns $245,000,000 $245,000,000
5th year returns $205,000,000 $205,000,000
6th year returns $155,000,000 $155,000,000
7th year returns $135,000,000 $135,000,000
8th year returns $95,000,000 $95,000,000
16% 14%

Appendix H

Modified IRR can be calculated as follows

Description data MIRR after 3 year
initial investment ($750,000,000) 220%
1st years returns $130,000,000 MIRR After 7 years
2nd years returns $180,000,000 613%
3rd year returns $190,000,000
4th year returns $245,000,000
5th year returns $205,000,000
6th year returns $155,000,000
7th year returns $135,000,000
8th year returns $95,000,000

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