Capital planning strategies
Not what you're looking for?
Universal Parts Company is considering a bond issue instead of using its credit line to fund projects A and B. The following information was considered in deciding to change the source of capital:
-The new union bargaining agreement and increases in the cost of inputs will cause an increase in working capital needs.
-UPC's credit rating has improved because of a higher than expected profitability in the just-ended accounting period. Therefore, the chief financial officer (CFO) expects a successful bond issue at a lower cost than that of the credit line.
-UPC is planning to set up automobile repair centers (project C) in 10 major cities in the United States. Project C will require a capital outlay of $40 million. UPC's current credit line will be woefully inadequate to fund the new project.
Based on your knowledge of short- and long-term capital planning strategies and UPC's business and financing needs, defend the CFO's decision to issue bonds to fund project C.
Discuss the following:
-The weaknesses in the CFO's position. Under what circumstances will the CFO's proposal for capital expenditure financing result in an unfavorable capital project outcome? Suggest other sources of financing.
-Explain the impact of credit rating on cost of capital.
-Explain how you will calculate the new WACC.
Purchase this Solution
Solution Summary
The answer to this problem explains capital planning strategies. The references related to the answer are also included.
Solution Preview
The CFO's decision to raise bonds instead of using the line of credit for Project C is reasonable because the requirement for capital is $40 million. This is far larger than what is obtained with a line of credit. Further, the line of credit has a variable rate of interest. This means that the interest rate may increase leading to further burden on the company. On the other hand the interest rate of bonds is fixed and so the interest that has to be paid can be planned. Because of changes in the interest rate in case of line of credit often payments made for paying back the principal are payments that cover only the interest cost. The balloon payment at the end of the term can be a problem in a line of credit. If Universal Parts Company uses a line of credit it will have to give collateral. Also, when ...
Education
- BSc , University of Calcutta
- MBA, Eastern Institute for Integrated Learning in Management
Recent Feedback
- "I read your comments, and thank you for this feedback. Do I need to find other studies that applied this methodology Ive used? That's where I'm stuck at."
- "Thank you kindly sir. "
- "Excellent and well explained. --Thank you kindly. "
- "Awesome notes. I appreciate you."
- "I have the follow-up project and I will assign that to you very soon. "
Purchase this Solution
Free BrainMass Quizzes
Managing the Older Worker
This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce
Team Development Strategies
This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.
Employee Orientation
Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.
Cost Concepts: Analyzing Costs in Managerial Accounting
This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.
Organizational Behavior (OB)
The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.