Corporate Finance: Capital Structure and Capital Investment Analysis

Corporate finance, is about raising capital, making investment decisions, having appropriate capital structure, accounting, taxation. It involves financial planning and implementing various strategies to maximizing shareholder value. Corporate finance looks at ways to fund operations to maximize profits and minimize costs. It deals with preparing financial statements and taxation, and more.

Capital Structure

Firms typically utilize a mix of equity finance, debt finance, and retained earnings to access funds for their operations and growth. Each of these sources have their own advantages and disadvantages.

Equity Finance does not require repayment like debt, but dilutes ownership.

Debt finance involves borrowing money that must be repaid over time, usually with interest. While higher debt can be a burden during downturns, Debt financing can be attractive as interest payments are tax-deductible which reduces overall cost of capital.

Retained Earnings is the portion of a company’s profits that is reinvested in the business; this is a cost-effective source of funding since they do not incur interest or dilute ownership.

Assignments and Projects on CORPORATE FINANCE

Academic projects, Management (MBA) questions, assignments on Corporate Finance.

Question: These quantitative questions incorporate private equity business model concepts and the balance sheet equation where Assets = Liabilities + Equity.

a) Impact of Held-to-Maturity Debt Securities on Balance Sheet. Based on balance sheet, calculate (as a percentage of total investments) the value of held-to-maturity debt securities. Assuming these securities are accounted for at amortized cost, and the company recognizes an unrealized gain of $100 million, explain the impact on balance sheet equation. Would the gain be recognized directly in equity or through another account? Also mention how the $100 million gain would flow into the balance sheet, and how the Assets and Equity will be adjusted while maintaining the balance sheet equation.

b) Impact of Available-for-Sale Securities on Comprehensive Income. Calculate the unrealized losses on available-for-sale (AFS) securities. If the company records a $1,000 million loss in other comprehensive income (OCI) for these AFS securities, how would it impact Assets and Equity. If the company’s Liabilities remain constant, how would this impact the balance sheet? Explain how unrealized losses affect Equity without impacting Net Income (Assets = Liabilities+(Equity−OCI Loss)).

c) How does Leveraged Loans and Default affect on Liabilities and Equity. The company invests in leveraged loans totaling $10,000 million with a 5% annual yield. How much would be the annual interest income from these loans. Now assume 5% of the loans default, due to which there is no recovery and no interest payments. How would this default affect the company’s Equity and Liabilities? Hint: Assume the company finances half of these loans with debt. Trace how the default would affect both Assets and Liabilities.

d) How does CLO investments impact Asset-Liability Balancing. Assume that CLO investments represent 20% of the company’s total investments of $200,000 million. Calculate the value of CLOs. Assume these CLOs generate 5% yield, so how much would be the annual income. Assume the company funds 30% of the CLOs through debt. How would this affect both Liabilities and Equity in the balance sheet? Trace how the income flows into Equity while the debt affects the Liabilities.

e) Now assume that the company has issued $3,000 million in CLO-backed debt at 5% interest. How much would be the annual interest expense.

Question: Utilize the cash flow statement from company’s recent 10-Q filing to understand and analyze the company’s financial activities, operational efficiency, and financial strategies during the first nine months of the year.

Operating Activities Analysis:

Task: Calculate the net cash used in operating activities and explain the major components contributing to this outcome. Compare this with the previous year to identify significant changes.

Data Points: Use the figures from the Consolidated Statements of Cash Flows for 2024 and 2023.

Investing Activities Exploration:

Task: Determine the total cash used in investing activities and identify the largest cash outflows and inflows under this category. Discuss their implications on the company’s strategic objectives.

Data Points: Focus on the net changes in securities, loans, and other significant investment transactions.

Financing Activities Assessment:

Task: Analyze the net cash provided by financing activities, highlighting major financing sources such as debt and equity. Evaluate how these activities reflect the company’s capital management strategy.

Data Points: Include discussions on repayments, issuances, and dividend payments.

Net Change in Cash Position:

Task: Calculate the net decrease in cash and cash equivalents over the period and discuss the potential reasons for this decrease based on the cash flow activities reported.

Data Points: Summarize the overall cash flow effects from operating, investing, and financing activities.

Cash Flow Ratios:

Task: Compute the cash flow coverage ratios and discuss their significance in assessing the financial health of JPMorgan Chase & Co.

Data Points: Utilize net income and cash flows from operations to calculate and interpret the cash flow coverage ratios.

Effect of Exchange Rate Changes on Cash:

Task: Examine the effect of exchange rate changes on the company’s cash and cash equivalents. Provide insights into how currency fluctuations can impact multinational corporations like JPMorgan Chase.

Data Points: Use the specific adjustments provided in the cash flow statement related to exchange rate changes.

Question: This case study aims to test your understanding of income statements, focusing on accrual basis accounting, revenue recognition, expense recognition principles, and the transaction analysis model.

Using the data from the company’s Q3 2024 Form 10-Q, answer the following six questions. Apply principles of accrual accounting and transaction analysis in your responses, providing calculations where necessary. This exercise will help deepen your understanding of the differences between revenue and cash receipts, and how expenses are recognized.

1. Revenue vs. Cash Receipts:

The company reported total net sales of $85,777 million for the quarter ended June 29, 2024. Discuss the difference between revenue recognition and cash receipts in the context of Apple’s net sales. How much of this revenue may have been collected in cash, and how much might still be outstanding? Refer to Apple’s accounts receivable data to support your answer. Hint: Consider how revenue is recorded under the accrual basis and the implications for accounts receivable.

2. Expense Recognition Principle:

The company reports cost of sales for both products and services for the quarter ended June 29, 2024. Using the expense recognition principle, explain how the company might match these costs with their associated revenues. What portion of these costs could be considered prepaid or accrued expenses, and why? Hint: Consider the timing of the recognition of costs compared to when they are paid.

3. Deferred Revenue: Apple’s financial statements report deferred revenue of $8,053 million as of June 29, 2024. Explain what deferred revenue is and why it might be significant for Apple. How would this balance impact the income statement in future periods?

4. Transaction Analysis Model:

Consider the following transaction: On June 1, 2024, Apple sold $200 million worth of iPhones, but customers were given 60 days to pay. Using the transaction analysis model, break down how this transaction would affect Apple’s financial statements (balance sheet and income statement) as of June 29, 2024. What accounts would be impacted?

5. Accrual Accounting vs. Cash Accounting:

If Apple were using cash basis accounting, how would its net income for Q3 2024 differ from the accrual basis reported net income of $21,448 million? Discuss the impact of accrued revenues and expenses on Apple’s financial performance in Q3.

6. Revenue and Expense Timing:

Apple recognized $24,213 million in services revenue for Q3 2024. Given the nature of service contracts, describe how the timing of revenue recognition for services might differ from that of product sales. What challenges could this create for matching service revenue with related expenses?

Question: For an organisation evaluate what would be the most appropriate investment appraisal techniques to use in reaching a decision as to whether to invest in a significant 30-year life project. Critically discuss how the financing of this project will affect your decision.

Question:

In this assignment, you will describe and appraise capital structure policy and undertake a capital investment analysis.

Task 1: a) Describe the company’s capital structure. b) Evaluate the company’s capital structure using factors to be considered in setting such policy as they apply to the company’s context.

Task 2: Based on the hypothetical scenario information, provide the Investment Review Committee with your evaluation and recommendations on the proposed project.

Guidance points: Analyse base case (expected) cash flows and their potential uncertainty. For your base case analysis, calculate the five investment decision criteria focused upon in the Module 4 PERCI content. Recommendations should address the decision suggested by your base case, along with further follow up or other matters that the company should consider prior to making a final decision. These additional recommendations should be based on an aspect of your analysis and/or the case information. The main body of your evaluation should provide summary metrics only, with detailed cash flows shown in an Appendix (a readable screenshot from your spreadsheet down to and including the net cash flows line). Within the main body, you are advised to use tables and/or figures to assist decision makers in quickly seeing main points and to visualise your analysis results. However, ensure the key point of each table or figure is self-evident or discussed/explained in the text.

Question: For an organisation evaluate what would be the most appropriate investment appraisal techniques to use in reaching a decision as to whether to invest in a significant 30-year life project. Critically discuss how the financing of this project will affect your decision.

Question: The following three companies have recently been the subject of events that will have an impact on their share price over the short-to-medium term; Amazon Inc, Ford Motor Company and Walmart Inc. The task of this assignment is to write a brief research report on one of the three companies, with a recommendation to BUY or SELL the share of the chosen company.

• I) Students should write a brief description of the chosen company’s key activities, target market and strategy. (150 words)
• 2) Each student will identify the key drivers of the company’s future sales and profits, these should be company specific and where relevant include potential impacts from the global economy, such as economic conditions and market trends. Students should give reasons for their forecasts and quantify the impact. (1,000 words)
• 3) Each student should produce an individual 5 year share price performance chart including the share price of a competitor and the market performance with comments on their future expectations.
• 4) Each student will value the company using a two-stage discounted cash flow formula to arrive at their conclusion on whether to buy or sell the chosen company’s shares. (350 words)
• Word count —Total 2,000 words.

The Annual Report is the authoritative document for any numerical data. Any analysis tool such as Porter’s 5-Forces or a SWOT Analysis (NOT PESTLE) can be used as a basis for analysis and determining the future sales and cash-flow forecasts, but should only be applied where the criteria is expected to have a significant impact on the company’s share price or industry performance.

Charts and tables should be used as often as possible for numerical data, with test supporting the data.

Q. The risk free Rate of return is 6 %, Return on market is 11% and the Beta of Michelllo Private limited is 1.1. Estimate the cost of Equity and also mention the steps to calculate the opportunity cost of capital as per the CAPM Model.

Q. Mehta & Mehta constructing company wants to make an investment worth 500 crores in certain real estate projects. As a financial advisor to the company discuss the capital budgeting process with them, covering suitable points. (10 Marks)

Q. Anna dude Enterprises has Rs 5lacs in assets that are financed with 100% equity. Fixed cost are Rs1.2lacs. The EBIT of Anna dude Enterprises for the year is Rs80000. The applicable tax rate is 40%. In case its EBIT increases by 10%and reduces by 10% Define, calculate & interpret the
a. Net income (5 Marks)
b. Return on equity (5 Marks)

Q. Select a company for Corporate Finance assignment and do ratio analysis of that company. The company which you are selecting can be same with others but the years shouldn’t match. So for the same you have to post the company and the year on the official group so that there’s no repetition. There are around 24 ratios, first write the profit and loss ratios, then balance sheet ratios, and then mixed/combined ratios. In the end write about ‘Findings’.

Question: Finance for Strategic Managers: Sample Assignment

Pietro Yon, a local businessman, owns and manages a number of retail stores that sell a range of homewares.

Pietro is a member of the local business Chamber of Commerce and has been asked to chair a committee to research and study the success of Samsung PLC. The Chamber believes that there may be some useful learning from this study which members of the Chamber could use. You have been asked to provide specialist support to the committee and you are required to produce a range of materials for members of the committee to use.

You have been provided with the following link to view Samsung PLC’s annual reports and investor information.
https://www.samsung.com/global/ir/financial-information/audited-financial-statements/

Task 1 – Financial Data and Strategic Decision Making

You must produce a presentation for Pietro Yon to use at the next meeting of the Chamber of Commerce. The presentation should be based on your research of Samsung PLC and other relevant information. It must be accompanied by supporting notes.
Your presentation must include the following:

• An evaluation of the sources of financial data which can be used to inform business strategy.
• An assessment of the need for financial data and information in relation to the formulation of business strategy.
• An analysis of the risks related to financial business decisions.
• A review of methods that can be used for appraising strategic capital expenditure projects and strategic direction.

Task 2 – Discussion Paper

A meeting has been arranged with Pietro Yon and other members of the committee and you have been asked to produce a paper for discussion which provides:

• An interpretation of the financial statements of Samsung PLC to assess the current viability of the organisation.
• A comparative analysis of financial data using ratio analysis for Samsung PLC. You are advised to download consecutive year’s accounts from the Samsung PLC website.
• Makes recommendations to Samsung PLC based on your analysis and interpretation of the financial position.

Task 3 – Information Leaflet

Produce an information leaflet for the Chamber of Commerce to distribute to the members. The leaflet should assess the following:

• The impact of ‘creative accounting’ techniques when making strategic decisions.
• The limitations of ratio analysis as a tool for strategic decision making.
• The importance of cash flow management when evaluating proposals for capital expenditure.
• Recommend, with justifications, methods and tools that allow businesses to analyse financial data for strategic decision making purposes.

Task 4 – Capital Expenditure Appraisal

Pietro Yon has been supplied with information from a component manufacturer who has asked for advice on the best project to accept for the purchase / replacement of a piece of machinery.

The company are considering selling their old machine that has a capital cost of £260 000 and replacing it with an up to date model costing £220 000. For immediate purchase the company will receive £120 000-part exchange allowance.

Both the current and new machines are able to meet the expected company demand, estimated at: Year 1 -> 90000 Units, Year 2 -> 50000, Year 3 -> 30000.

After three years, it is predicted that demand will be zero due to the technological developments in the industry.

The following data has been provided for the existing and new machine: Current Machine (£ per unit), New Machine (£ per unit):

• Direct Materials, 1.80, 1.80
• Direct Labour, 0.75, 0.60
• Variable Overheads, 0.45, 0.30
• Depreciation, 0.35, 0.55

Additional information:

• (1) The selling price for each component is £5.00 and this will remain constant for the next three years.
• (2) The company expect the cost of direct materials and direct labour to increase by 5% each year.
• (3) The company predicts that repair and maintenance costs for the current machine will be £7000 per annum.
• (4) The current machine is expected to have a zero-residual value at the end of year 3.
• (5) The company predicts that repair and maintenance costs for the new machine will be £1000 per annum.
• (6) The new machine is expected to have a £75 000 residual value at the end of year 3.

The company’s cost of capital is 15%.

Extract from the present value table for £1 at 15%

• Year, Units
• 1, 0.870
• 2, 0.756
• 3, 0.658
• 4, 0.572

Pietro would like you to produce a business report that can be given to the company offering advice on the best course of action for the purchase / replacement machine.

REQUIRED

Prepare a report that evaluates the capital expenditure proposals using appropriate financial techniques.
You must include an assessment of the impact of the business proposal on the strategic direction of the organisation.

Provide an evaluation of the sources of financial data which can be used to inform business strategy and an assessment of the need for financial data and information in relation to business strategy. Continue with an analysis of the risks related to financial business decisions.

Carefully interpret the financial statements, make assessment and judgements on current viability of the business and prepare a comparative analysis of financial data using ratio analysis.

Provide a detailed assessment of the impact of ‘creative accounting’ techniques when making strategic decisions. Use appropriate examples to demonstrate their understanding of the importance of accurate financial data in formulating and delivering business strategy. Assess the limitations of ratio analysis as a tool for strategic decision making leading to balanced judgements. Assessment of the importance of cash flow management when evaluating proposals for capital expenditure.

Evaluate the business proposals for capital expenditure identifying benefits and issues and reaching conclusions. Use appropriate financial techniques including payback, accounting rate of return, net present value and internal rate of return. Evaluate the business proposals for capital expenditure using appropriate financial techniques. Consider non-financial factors, cost benefit analysis and value for money. Provide an assessment, with appropriate justifications of the impact of a business proposal on the strategic direction of a business organisation.