See attached files.
Provide a final report to the CFO and CEO which encompasses financial pros and cons and final recommendations for Superior going public and the new production plant. Be sure to include a discussion on what hurdles rates the production plant project would not pass, the debt versus no debt option (associated risk and impact to financial statements), and key financial metrics for the senior management team. Make sure your metrics include payback period, net present value, internal rate of return, and modified internal rate of return. Finally, be sure your recommendation is based on sound financial principles.
The response addresses the queries posted in 2112 words with references.
//Capital expenditure decisions and capital generation decisions are crucial for companies as they have long and enormous impact on the firm's position and financial health. Companies thus, while considering acting on these decisions, evaluate the financial statements and different concepts to take a better decision. We will discuss and react to them; but start the report by drafting the memo like this: //
To: CFO and CEO of the Superior Company
Date: November 5, 2009
From: Employee of the Superior Company
Sub: Financial analysis and recommendations
Companies before going public for fund generation must look after financial pros and cons of different financing sources along with proper analysis of its financial statements. Similarly before starting a new project, companies tend to view the expected benefits and costs associated with the project through different financial metrics.
While going in for starting a new project like a new production plant and generating funds from the public, companies should keep in mind the hurdle rates that it can or cannot passed. Hurdle rates which is often known as weighted average cost of capital is the minimal rate that the company should earn on its project either to meet out the requirements of its stakeholders or to achieve expected objectives. The company Superior should deal with the hurdle rates. As if the hurdle rates are above the expected returns from the project it should be accepted. The project of new production plant should only be accepted by the company when it is either equal or above the hurdle rates (Bragg, 2007). Superior, while determining hurdle rates, should view different factors like the opportunity cost associated with the investment cost that has been made in the project. The risk that the project bears above the prevailing market returns or safe returns and the amount of risk associated with the project. Thus, risk premium should be added by the company to mark the hurdles rates. The hurdle rates should also consider the profits associated with this project as compared to others. Thus, it should be a mixture of risk, return and opportunity cost (Peca, 2009). As discussed earlier, the hurdle rates which are above the expected cash flows or returns of the company should be passed by the company as they are unfavorable for the company. Thus, company should choose those sources of capital that reduces the hurdle rates below the expected returns of the project.
//In the above discussion, we have focused on the concept of hurdle rates and recommended which hurdle rates, the company should not pass. Now, we will move forward and discuss the pros and cons of debt and equity financing.//
Pros and Cons of Debt and Equity Financing
Superior company has low debt proportions in its capital structure right now as compared to equity as it has debt-equity ratio of 2.47% (3000/121500) in 2001, 2.43% (3100/127500) in 2002, and 2.57% (3400/132550) in 2003. Thus, the company funds its capital mostly from equity financing.
Pros and Cons of Using High Proposition of Equity relative to Debt:
High proportion of equity relative to debt increases margin of safety for the shareholders, as high ratio of equity keeps off external parties' interference in the business affairs. Moreover, high ...
The response addresses the queries posted in 2218 words with references