Capital Budget Decision Making

Assignment: Capital Budget Decision Making for an Organization—Part 2

Note: In Week 6, you submitted Part 1 of the Module 3 Assignment. You will complete and submit Part 2 this week. Next week, you will complete and submit Part 3 and the executive summary.

As a reminder, you will continue to play the role of a consultant who has been hired by a mid-sized company that recently went public to provide some recommendations related to their short-term and long-term financial needs. Your first project is to analyze the short- and long-term capital budget needs of the company. You will prepare and submit a 3- to 5-page report, including an executive summary in which you synthesize your recommendations for the following fiscal year, along with the provided Excel spreadsheet with your calculations. Explain your findings and your recommendations.

For each of the items in your report, you will complete the calculations in the Module 3 Assignment Part 1 Template and will then use that financial information to develop your report to the owner using the Module 3 Assignment Part 2 Template. In your report, be sure to include relevant citations from the Learning Resources, the Walden Library, and/or other appropriate academic sources to support your work.

To prepare for this Assignment:

• Return to the Module 3 Assignment Part 1 Template to continue completing the calculations.
• Return to your Module 3 Assignment Part 2 Template to complete Part 2 of your report. Note: Be sure to keep a copy of your completed Assignment this week, as you will be adding to the same file for your Week 8 Assignment.

By Day 7

Submit your synthesis of financial data related to long-term financing needs for an organization, to include the following:

Part 2: Long-Term Working Capital Considerations: Time Value of Money and Bonds (1–2 pages, plus calculations in Excel)

• Future Value: If the company deposits \$2 million in a bank account that pays 6% interest annually, how much will be in the account after 5 years?
• Present Value: What is the present value of a security that will pay \$29,000 in 20 years if securities of equal risk pay 5% annually?
• Required Interest Rates: The company owner has said she will retire in 19 years. She currently has \$350,000 saved and thinks she will need \$800,000 at retirement. What annual interest rate must she earn to reach that goal, assuming she does not save any additional funds?
• Future Value of an Annuity: Find the future values of these ordinary annuities. Compounding occurs once a year.
• \$500 per year for 8 years at 14%
• \$250 per year for 4 years at 7%
• \$700 per year for 4 years at 0%
• Present Value of an Annuity: Find the present values of these ordinary annuities. Discounting occurs once a year.
• \$600 per year for 12 years at 8%
• \$300 per year for 6 years at 4%
• \$500 per year for 6 years at 0%
• Bond Valuation: The company has two bonds in their investment portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of \$1,000, and has a yield to maturity of 8.2%. Bond C pays an 11.5% annual coupon, while Bond Z is a zero-coupon bond.

Assuming that the yield to maturity of each bond remains at 8.2% over the next 4 years, calculate the price of the bonds at each of the following years to maturity. Explain any observed differences from the pricing calculations of the two bonds.

 Years to Maturity Price of Bond C Price of Bond Z 4 3 2 1 0
• Yield to Maturity and Yield to Call: The owner is interested in investing some retained earnings in corporate bonds. She is considering the following:
• Bond A has a 7% annual coupon, matures in 12 years, and has a \$1,000 face value.
• Bond B has a 9% annual coupon, matures in 12 years, and has a \$1,000 face value.
• Bond C has an 11% annual coupon, matures in 12 years, and has a \$1,000 face value.

Each bond has a yield to maturity of 9%.

1. Before calculating the prices of the bonds, identify whether each bond is trading at a premium, at a discount, or at par.
b. Calculate the price of each of the three bonds.
c. Calculate the current yield for each of the three bonds.