Managerial Finance

Managerial Finance

Note: Need 1000 words and In-text citations, references

Connect with a professional writer in 5 simple steps

Please provide as many details about your writing struggle as possible

Academic level of your paper

Type of Paper

When is it due?

How many pages is this assigment?

Cost of Capital

In the links below, you will explore how companies compute their cost of capital by computing a weighted average of the three major components of capital: debt, preferred stock, and common equity. The firm’s cost of capital is a key element in capital budgeting decisions and must be understood in order to justify capital projects.

Cost of Capital

For this Discussion, imagine the following scenario:

You are the director of operations for your company, and your vice president wants to expand production by adding new and more expensive fabrication machines. You are directed to build a business case for implementing this program of capacity expansion. Assume the company’s weighted average cost of capital is 13%, the after-tax cost of debt is 7%, preferred stock is 10.5%, and common equity is 15%. As you work with your staff on the first cut of the business case, you surmise that this is a fairly risky project due to a recent slowing in product sales. As a matter of fact, when using the 13% weighted average cost of capital, you discover that the project is estimated to return about 10%, which is quite a bit less than the company’s weighted average cost of capital. An enterprising young analyst in your department, Harriet, suggests that the project is financed from retained earnings (50%) and bonds (50%). She reasons that using retained earnings does not cost the firm anything since it is cash you already have in the bank and the after-tax cost of debt is only 7%. That would lower your weighted average cost of capital to 3.5% and make your 10% projected return look great.

Based on the scenario above, post your reactions to the following questions and concerns:

What is your reaction to Harriet’s suggestion of using the cost of debt only? Is it a good idea or a bad idea? Why? Do you think capital projects should have their own unique cost of capital rates for budgeting purposes, as opposed to using the weighted average cost of capital (WACC) or the cost of equity capital as computed by CAPM? What about the relatively high risk inherent in this project? How can you factor into the analysis of the notion of risk so that all competing projects that have relatively lower or higher risks can be evaluated on a level playing field?

 

Use the links below to review stock valuation and interest rate. 

Stock valuation

https://www.youtube.com/watch?v=DSn1HThfb5w

https://www.youtube.com/watch?v=jfcRUzKZZE8

https://notendur.hi.is/ajonsson/kennsla2008/stock_valuation.pdf

Risk and Returns

https://www.youtube.com/watch?v=3BIIiUyr3-w

MICROSOFT CORPORATION
 
FinancialStatementFY20Q1
BALANCE SHEETS
(In millions) (Unaudited)
  June 30,   June 30,
  2019   2018
Assets      
Current assets:      
Cash and cash equivalents $11,356,000   $11,946,000
Short-term investments $122,463,000   $ 121,822,000
Total cash, cash equivalents, and short-term investments $133,819,000   $ 133,768,000
Accounts receivable, net of allowance for doubtful accounts of $411 and $377 $ 29,524,000   $ 26,481,000
Inventories $ 2,063,000   $ 2,662,000
Other current assets $ 10,146,000   $ 6,751,000
Total current assets $175,552,000   $ 169,662,000
       
Long-term assets:      
Property and equipment, net of accumulated depreciation of $35,330 and $29,223 $ 36,477,000   $ 29,460,000
Operating lease right-of-use assets $ 7,379,000   $ 6,686,000
Equity investments $ 2,649,000   $ 1,862,000
Goodwill $ 42,026,000   $ 35,683,000
Intangible assets, net $ 7,750,000   $ 8,053,000
Other long-term assets $ 14,723,000   $ 7,442,000
Deferred asset charges $ –   $ –
Total assets $286,556,000   $258,848,000
       
Liabilities and stockholders’ equity    
Current liabilities:    
Accounts payable $9,382,000   $8,617,000
Short-term Debt/Current portion of long-term debt $ 5,516,000   $ 3,998,000
Accrued compensation $ 6,830,000   $ 6,103,000
Short-term income taxes $ 5,665,000   $ 2,121,000
Short-term unearned revenue $ 32,676,000   $ 28,905,000
Other current liabilities $ 9,351,000   $ 8,744,000
Total current liabilities $ 69,420,000   $ 58,488,000
Long-term debt $ 66,662,000   $ 72,242,000
Long-term income taxes $ 29,612,000   $ 30,265,000
Long-term unearned revenue $ 4,530,000   $ 3,815,000
Deferred income taxes $ 233,000   $ 541,000
Operating lease liabilities $ 6,188,000   $ 5,568,000
Other long-term liabilities $ 7,581,000   $ 5,211,000
Misc. Stocks $ –   $ –
Minority interest $ –   $ –
Total liabilities $184,226,000   $176,130,000
     
Stockholders’ equity:    
Common stock and paid-in capital – shares authorized 24,000; outstanding 7,643 and 7,677 $ 78,520,000   $ 71,223,000
Retained earnings $ 24,150,000   $ 13,682,000
Accumulated other comprehensive loss/Other equity $ (340,000)   $ (2,187,000)
Total stockholders’ equity $102,330,000   $ 82,718,000
Total liabilities and stockholders’ equity $286,556,000   $258,848,000

 

 

 

 

 

 

 

 

 

 

 

 

 
MICROSOFT CORPORATION
 
INCOME STATEMENTS
(In millions, except per share amounts) (Unaudited)
  Twelve Months Ended June 30,
  2019   2018
Sales:    
Product $66,069,000   $64,497,000
Service and other $ 59,774,000   $ 45,863,000
Net sales $125,843,000   $110,360,000
Cost of goods sold:      
Product $ 16,273,000   $ 15,420,000
Service and other $ 26,637,000   $ 22,933,000
Total cost of goods sold $ 42,910,000   $ 38,353,000
Gross profit $ 82,933,000   $ 72,007,000
Research and development $ 16,876,000   $ 14,726,000
Sales and marketing $ 18,213,000   $ 17,469,000
General and administrative $ 4,885,000   $ 4,754,000
Total operating expenses $ 42,959,000   $ 35,058,000
less: Interest expense $ 2,686,000   $ 2,733,000
Other income, net $ 3,415,000   $ 4,149,000
Earnings before income and taxes $ 43,688,000   $ 36,474,000
less: Provision for income taxes $ 4,448,000   $ 19,903,000
Net income $ 39,240,000   $ 16,571,000
Net income available to common shareholders $ 39,240,000   $16,571,000
Earnings per share:      
Basic $5.11   $2.15
Diluted $5.06   $2.13
Weighted average shares outstanding:      
Basic $ 7,673,000   $ 7,700,000
Diluted $ 7,753,000   $ 7,794,000

 

 

 

 

 

 

MICROSOFT CORPORATION
 
CASH FLOWS STATEMENTS
(In millions) (Unaudited)
  Twelve Months Ended June 30,
  2019
Operating Activities  
Net income $39,240,000
   
Non-cash adjustments  
Depreciation, amortization, and other $ 11,682,000
Stock-based compensation expense $ 4,652,000
Net recognized gains on investments and derivatives $ (792,000)
Deferred income taxes $ (6,463,000)
   
Changes in working capital  
Accounts receivable $ (2,812,000)
Inventories $ 597,000
Other current assets $ (1,718,000)
Other long-term assets $ (1,834,000)
Accounts payable $ 232,000
Unearned revenue $ 4,462,000
Income taxes $ 2,929,000
Other current liabilities $ 1,419,000
Other long-term liabilities $ 591,000
Net cash from operations $ 52,185,000
Financing Activities  
Repayments of short-term debt, maturities of 90 days or less, net $ –
Proceeds from issuance of debt $ –
Repayments of debt $ (4,000,000)
Common stock issued $ 1,142,000
Common stock repurchased $ (19,543,000)
Common stock cash dividends paid $ (13,811,000)
Other, net $ (675,000)
Net cash used in financing $ (36,887,000)
Investing Activities  
Additions to property and equipment $ (13,925,000)
Acquisition of companies, net of cash acquired, and purchases of intangible and other assets $ (2,388,000)
Purchases of investments $ (57,697,000)
Maturities of investments $ 20,043,000
Sales of investments $ 38,194,000
Securities lending payable $ –
Net cash used in investing $ (15,773,000)
Effect of foreign exchange rates on cash and cash equivalents $ (115,000)
Net change in cash and cash equivalents $ (590,000)
Cash and cash equivalents, beginning of period $ 11,946,000
Cash and cash equivalents, end of period $11,356,000

 

 

 

 

 

 

 

 

 

 

 

 

Based on the company you selected in Part I, complete the following:

1. Based on formulas in your textbook, compute the following ratios for two years. You may use Excel to compute your ratios.

1. Debt ratio (for the year 2019)

= Total Liabilities / Total Assets

= $286,556,000 / $286,556,000

1

Debt Ratio (for the year 2018)

= Total Liabilities / Total Assets

= $258,848,000 / $258,848,000

1

2. Gross profit margin (for the year 2019)

= [Net Sales – Cost of Goods Sold (COGS)]/Net Sales

= [$125,843,000 – $42,910,000] / $125,843,000

0.66 = 66%

 

Gross profit margin (for the year 2018)

= [Net Sales – Cost of Goods Sold (COGS)]/Net Sales

= [$110,360,000 – $38,353,000] / $110,360,000

0.65 = 65%

3. Free cash flow (for the year 2019)

= Net Cash flow from Operations – Capital Expenditures

= $52,185,000 – $13,925,000

$38,260,000

4. Times interest earned (for the year 2019)

= Earnings before Interest & Taxes (EBIT) / Interest Expense

= $43,688,000 / $2,686,000

16.27 times the annual interest expense

Times interest earned (for the year 2018)

= Earnings before Interest & Taxes (EBIT) / Interest Expense

= $36,474,000 / $2,733,000

13.35 times the annual interest expense

5. Accounts receivable turnover (for the year 2019)

= Net Credit Sales / Accounts Receivables

= $125,843,000 / $29,524,000

4.26 times

Accounts receivable turnover (for the year 2018)

= Net Credit Sales / Accounts Receivables

= $110,360,000 / $26,481,000

4.17 times

6. Inventory turnover (for the year 2019)

= Cost of Goods Sold (COGS) / Inventory

= $42,910,000/ 2,063,000

20.8

Inventory turnover (for the year 2018)

= Cost of Goods Sold (COS) / Inventory

= $38,353,000 / $2,662,000

14.41

2. Prepare a DuPont Analysis of ROE for two years, including computations of

1. Return on Sales

2. Asset Turnover

3. Return on Assets

4. Financial Leverage

5. Return on Equity

 

1. Return on sales (for the year 2019)

= Operating Profit before Tax / Net Sales

= $42,959,000 / $125,843,000

0.34136 = 34.14%

Return on sales (for the year 2018)

= Operating Profit before Tax / Net Sales

= $35,058,00 / $110,360,000

0.31766 = 32%

2. Asset turnover (for the year 2019)

= Net Sales / Total Assets

= $125,843,000 / $286,556,000

0.44 times

Asset turnover (for the year 2018)

= Net Sales / Total Assets

= $110,360,000 / $169,662,000

0.65 times

3. Return on assets (for the year 2019)

= Net Profit Margin X Total Asset Turnover

= 31.18% / 0.44

13.69%

Calculation:

Net Profit Margin = Earnings Available for Common Stockholders / Net Sales

= $39,240,000 / $125,843,000

0.3118 = 31.18%

 

Return on asset (for the year 2018)

= Net Profit Margin X Total Asset Turnover

= 15.02% / 0.65

0.0977 = 10%

Calculation:

Net Profit Margin = Earnings Available for Common Stockholders / Net Sales

= $16,571,000 / $110,360,000

= 15.02%

4. Financial leverage (for the year 2019)

= Total Assets / Common Stock Equity

= $286,556,000 / $102,330,000

= 2.8

Financial leverage (for the year 2018)

= Total Assets / Common Stock Equity

= $258,848,000 / $82,718,000

3.13

5. Return on equity (for the year 2019)

= Return on assets / Financial leverage

= 13.69% / 2.8

38.35%

Return on equity (for the year 2018)

= Return on assets / Financial leverage

= 10% / 3.13

= 30.56%