MBA 520 Module Six Forecasting Model Questions
The questions that follow and the article Comparing the Accuracy and Explainability of Dividend, Free Cash Flow, and Abnormal Earnings Equity Value Estimates will inform your completion of Milestone Three. An understanding of the models in this assignment will assist you in hypothesizing the incremental impact of a new investment project for the company. The understanding of these models will contribute to your ability to look toward the future when considering the direction of an organization. This activity is worth a total of 75 points. See the distribution of points listed before each question.
Prompt: Once you have read the article “Comparing the Accuracy and Explainability of Dividend, Free Cash Flow, and Abnormal Earnings Equity Value Estimates” and Chapters 6 and 7 of your text, review and complete the questions below. Use the article and your text to inform your responses to the questions below.
Assignment Questions:
1. (20 points) For models 2, 2a, and 2b:
- What is the best way to minimize the weighted average cost of capital?
Weighted Average Cost of Capital (WACC) is the combined rate at which a company repays borrowed capital and comes from debit financing and equity capital. WACC can be reduced by cutting debt financing costs, lowering equity costs, and capital restructuring. In order to minimize WACC, companies can issue bonds by lowering the interest rate they offer to investors as well as, cutting down
2. Accounting analysis enables the analysts to ‘undo’ any accounting distortion by recasting a firm’s accounting numbers. Sound accounting analysis improves the reliability of conclusions from financial analysis.
The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, for valuation purposes we need to discount cash flows, not accounting income. Moreover, since many firms have a number of separate divisions, and since division managers should be compensated on their divisions' performance, not that of the entire firm, information that focuses on the divisions is needed. These factors have led to the development of information that
WACC should be decreased by leveraging, showing effects of an overall reduction in the cost of capital; thus optimising value and capital structure of the firm.source??? The WACC remaining virtually the same shows that equity and debt holders demand virtually the same amount of return after recapitalization. Therefore, recapitalization is a good move.
In the accounting field there is always a question whether it’s alright to retain paid in capital and separate it from earn capital. Accountants today have to be really be careful especially with the fact that so many accounting laws are changing in the United States. In this paper I will be explaining why it is important to keep paid-in capital and earned capital separate. I will also be explaining whether paid-in capital is more important that earned capital, or vice-versa. Following that, I will compare basic earnings per-share against diluted earnings per-share and which is more important to investors.
General comments (1) Both the analysis questions were taken from the lecture examples, additional exercise, workbook exercises and practice test. Students who had worked through these materials were competent in handling the mid-term test. Students who believe that they did not perform as well as they had expected should going through the lecture materials and workbook more thoroughly before the final exam. You may also want to work through the mid-term 2 to identify the gaps in your understanding. It is important to focus on the topics that you have not achieved an adequate mark. Please see the
Although qualitative analysis is used for physical areas, with the usage to tackle non-financial information, it can be widely useful in business and finance fields.(kesh and Raja 2005, 167) The qualitative analysis of the company level is concerned with products and services, competitive advantage, management efficiency, corporate culture. Advanced products can get increasing cash inflows and improve company value (Carter and Demissew 2008, 63) because booming demand for products and services can lead to a high reinvestment rate of the company, this creates additional wealth.( Madden 2007, 125) Competitive advantage can includes producing capacity and the efficiency of a company’s design and cost controlling better than the industry’s competitors. Generating a competitive advantage for a company will creates stakeholder value. (Vilanova, Lozano and Arenas 2009, 63) The improvement of management efficiency can lower operating costs and company culture can enhance corporate image, leading to improvement of company value.
The instructor needs to elicit from the students the notions that the dividend-payout announcement may affect stock price and that at least some stockholders prefer dividends. Students should also mention the signaling and clientele considerations.
WACC or weighted average cost of capital is the firm’s cost of capital with each category of capital weighted proportionately. The more debt that company uses, the higher the WACC. The higher the WACC, the higher the company’s risk. When using debt, the WACC begins to fall, but eventually, the costs of debt and equity will cause WACC to increase which will in turn cause the value of the company to drop. This brings us back to the optimal or target capital structure, where the debt to equity ratio maximizes the firm’s value.
The most important item in the financial statements of a company is earnings. Earnings indicate the amount of value-added activities a company has engaged in over a period of time, as well as assist in the direction of resource allocation in capital markets. Just as the eyes are the window to the soul, earnings are the window to a company’s value. Increasing earnings represent an increasing company value, while the opposite can be said about decreasing earnings. Seeing how important earnings are to a company’s value, it comes to no surprise that management has a strong incentive to report earnings in their maximum
There are two main sources that a firm can use to raise capital are equity and debt. Weighted average cost of capital is the average of the costs of these two sources of finance, and it gives each one the appropriate weighting. When a firm takes a new project, it usually
The value of a company’s stock may entice an investor to offer money. Without knowing the proper value of stocks, investors are hard-pressed to find the right time to buy or sell shares; and investors may miss opportunities solely on the stock’s market value (Zacks, n.d.). The following sections shall (1) calculate the Company’s SV based on its dividends*; and (2) discuss both those calculations’ effect on shareholder value* and the Company’s dividend policies.
This paper prepared the relation of operating cash flow and accruals with security returns. Transforming cash flows into earnings is a consequence of the accrual adjusting process, and information which provided from earnings related to operating activities is incremental in compare to information provided by cash flows. Members of the financial community have always had a challenge with the usefulness and reliability of accrual. Since the accrual process is according to historical cost and because of various Generally Accepted Accounting Principles (GAAP) which could be selected and used by managers in order to prepare financial reporting, reported earnings could be manipulated. The author is looking to know in the vision of accountants, do accruals provide more information than cash flows to help investors’ estimation about future cash flows? Rayburn stated that “if accruals have no
Students will generally claim that dividends are valuable to shareholders, and that this decision is a big deal for EMI. This discussion motivates an introduction to the
The Weighted Average Cost of Capital (WACC) is the discount rate used in a Discounted Cash Flow (DCF) analysis to present value projected free cash flows and terminal value.