Prince Mohammad Bin Fahd University
Summer 2019-20
Case Study/Project
Managerial Finance (MBA 5103)
Today: June 30, 2020
Submission deadline: July 17, 2020, 11.59 pm
Points: 25 (15+10) percent of the final grade
No Plagiarism
Instructions
According to the syllabus of the course, this is a group project. You already mentioned about your group. Have the same group for this case study. However, one group cannot consult with another group. Next class You will submit by email attachment. It must be typed. You must show your work completely. Finally, make everything clear in your answer and do not assume that I will be able to read your mind. I will grade what I will see. Deadline will be not extended. Submission after the deadline will be subject to penalty.
I have chosen a particular company for each group. The list is given below. You will use the data of that company for this case analysis.
Part I
- For the first part, you need to find the weighted average cost of capital (WACC) of your company.
- You have already found the beta of your company (available also in finance.yahoo.com). Find the average risk-free rate and market return for the same period. For the risk-free rate use the treasury bond or bill rate. For the market, use S&P 500 return. Convert monthly return into annual return. From all the information above, find the expected return of your stock. You can also call it cost of capital for equity. (hint: you can use CAPM).
- Now, you need to find cost of debt of your company. Do some research to find the YTM of your company. It should be available in the internet.
- Next you need to know the weight of debt and equity in the capital structure. Go to finance and open the annual balance sheet of your company. It will give you information regarding the value of debt (use only long-term liability for simplicity) of your company. Total value of equity of your firm is the market capitalization (no. of shares outstanding times stock price). Total value of your firm is the summation of the value of equity and the value of debt.
- Average tax rate in the U.S. is about 25%.
- Once you have all the information, use the formula for WACC to find the cost of capital of your firm. This is the minimum rate of return your firm must make if any new project is accepted.
- Tell me what could happen to WACC if interest rates go down in the U.S. goes up. Discuss.
- The U.S. and China are now engaged in heated trade negotiations. What will happen to WACC if the trade negotiation fails? (Assume your firm has significant business with China).
Part II
- It is a capital budgeting problem. Assume that XYZ company wants to invest in a new project that needs $2.65 billion (time 0). It is expected that it will give cash flows as given below.
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5-10 | Year 11 | Year 12-14 | Year 15 |
| 2,650 million | 0 million | 0 million | 100 million | 200 million | 550 million | 400 million | 200 million | 50 million |
Find the NPV and IRR of the project. Should you accept the project? Discuss in details why you accept or reject the project. Assume WACC is 10%.
- If the firm wants to reduce its WACC (from 10% to 8%), how should the company do it? (think about it, I am not helping in this question).
Group List (any group missing? – let me know quickly)
| Last 4 digits of student ID | Company name |
| 0739, 1224, 0522 | |
| 0930, 0619, 0506 | |
| 0412, 2209, 0073 | Microsoft |
| 1147, 0088 | Wal-Mart |
| 1799, 1600, 1303 | British Petroleum |
| 2902, 2092 | Intel |
| 1607, 3394 | Pfizer |
| 0056, 1584, 0855 | Exxon-Mobil |
