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Graded project corporate financePease follow the instruction very well.
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Graded Project: Corporate Finance
Your project must be submitted as an Excel document. Your project will be individually graded
by your instructor and, therefore, will take up to a few weeks to grade.
Be sure that each of your files contains the following information:
Part 1: El Cap Climbing Company
El Cap Climbing Company (ECCC) is a small startup that manufactures and sells high-quality
climbing gear in Fresno, California. The founder of the company, Leah, has been incredibly
successful, but she hasn’t kept the company’s financial records as well as she might have.
The initial investment for El Cap was provided by her friends and family and was small.
However, current operations can’t meet the demand for the product, and Leah has plans to
increase both production and the number of storefronts.
These plans require a large investment from both equity and debt financing. The new investors
and creditors require detailed financial statements. Leah has hired you, a financial analyst, to
prepare these statements and give insight into the financial position of the firm. Leah has
provided information from her bank statements, bills, and receipts in an Excel spreadsheet,
which is found in your downloaded project files. She explained to you that taxes are paid at a
rate of 30 percent, and dividends are paid at a rate of 40 percent. (Note: You can create the
statements in the same Excel spreadsheet that has the financial information. Be sure to let the
instructor know if you choose to do this instead of creating them in a Word document.)
Prepare the following:
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▪
▪
▪
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An income statement for 2021 and 2022
A balance sheet for 2021 and 2022
Operating cash flows for the two years
Cash flows from assets in 2022
Cash flows to creditors for 2022
Cash flows to stockholders for 2022
B. Answer the following:
1. How would you describe the financial position of the firm in 2022? Write a brief
overview.
2. What do you think about Leah’s plans to expand?
Part 2: Mortgage Decision
To expand, El Cap Climbing Company (ECCC) is considering taking out a mortgage for a new
store location, a nonresidential real property that includes land and a building. Leah is unsure if
she has the cash flow to take on any more debt. She asked you to create a loan amortization
schedule for the proposed mortgage loan. Then, you’ll create a chart that represents the portion
of each payment that goes toward principal and interest.
A. Prepare the following:
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A loan amortization schedule
A chart showing the percentage of the payment applied to the principal and interest
Loan Amortization Schedule
First, you’ll need to create a loan amortization schedule in the downloaded Excel spreadsheet.
Create the table on the tab named “Part 2 Loan Amortization Sched.” The following table
illustrates the payments and interest amounts for a fixed-rate, 30-year, $500,000 mortgage, at a
five-percent interest rate. The monthly payment will be $2,684.11.
Payment
Number
Payment
Amount
5% Interest
Expense
Principal
0
Balance
Annual Interest
Expense
500,000.00
–
1
2,684.11
2,083.33
600.78
499,399.22
2
2,684.11
2,080.83
603.28
498,795.94
…break in the sequence…
Totals
466,278.03
500,000.00
359
2,684.11
22.22
2,661.89
2,671.41
360
2,682.54
11.13
2,671.41
–
855.56
The table serves as an example of what you’ll create in Excel. Note that the table shows only the
figures for the first and the last year of payments; you’ll need to calculate the amounts for the
remaining payments and fill them in.
Once you’ve determined how each amount in the table is obtained, you can use relative and
absolute cell references to fill in the full 360 payments.
The following is an explanation of the columns in the table:
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Payment number—the first column in the table shows the 360 payments required to pay off the
mortgage loan (30 years, with 12 monthly payments per year).
Payment amount—the second column shows the monthly payment amount.
Interest—the third column shows the portion of the monthly payment that goes to interest.
Principal—the fourth column shows the portion paid toward the principal.
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▪
▪
▪
▪
▪
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Balance—the fifth column shows the starting balance of $500,000 and the remaining
balance each month after the principal is subtracted.
Annual interest expense—the last column provides a running total of the interest expense
on the mortgage for the entire 12-month period. It’s the amount that would be reported on
the financial statements.
Totals—the “Totals” under the “5% Interest Expense” and “Principal” columns show the
final totals for the 30-year life of the mortgage.
Balance—the fifth column shows the starting balance of $500,000 and the remaining balance
each month after the principal are subtracted.
Annual interest expense—the last column provides a running total of the interest expense on
the mortgage for the entire 12-month period. It’s the amount that would be reported on the
financial statements.
Totals—the “Totals” under the “5% Interest Expense” and “Principal” columns show the final
totals for the 30-year life of the mortgage.
Mortgage Principal and Interest Chart
Next, you’ll create a chart following these steps. Create the table on the tab named “Part 2
Chart.”
1. Start by selecting the Interest Expense and Principal columns. Make sure to select the column
headers and values. Don’t select the Totals row.
2. Click on the Insert tab and select a “Stacked Column.” Make sure to label the x-axis (payment
month) and y-axis (dollars), and include a legend for the two values (interest and principal).
3. Your final chart should be set up similar to the chart below, with the data populating the chart.
(The increments don’t need to be the same).
B. Answer the following:
1. How can you describe the relationship between time and the amount paid towards
principal and interest?
2. Knowing what you know about ECCC’s cash flow from Part 1, is it reasonable to believe
that ECCC can take on this new debt?
Part 3: Can We Upgrade?
It’s now 2023, and El Cap Climbing Company (ECCC) has continued to grow. One of ECCC’s
major revenue-producing products is a spring-loaded camming device called SLCD, or cams. It’s
a device with a small handle (called the “trigger”) and two spring-loaded “cams” on an axle.
When the trigger is pulled, the cams move together, decreasing the size of the cams. It’s then
inserted into a crack or pocket in the rock. When the trigger is released, the cams expand. These
cams are used as anchors when “trad” rock climbing.
ECCC currently has one set of cams on the market, and sales have been excellent. The cams are
lighter and perform better than their competitors’. However, as with any high-performance item,
technology changes rapidly, and the cams are now falling behind the competition.
ECCC spent $200,000 to develop a prototype for a new line of cams that has all the features of
the existing cams but are made from an even lighter and stronger 7075-T6 aluminum alloy. The
company has spent a further $150,000 for a marketing study to determine the expected sales
figures for the cam line.
ECCC can manufacture a set of the new cams for an average of $140 each in variable costs.
Fixed costs for the operation are estimated to run an additional $2.1 million per year if the new
project is undertaken. The estimated sales volume is 75,000, 85,000, 80,000, 70,000, and 60,000
per year for the next five years, respectively. The unit price of the new cam set will be $240. The
necessary equipment can be purchased for $10.5 million and will be depreciated on a seven-year
MACRS schedule. It’s believed the value of the equipment in five years will be $1.1 million.
Production of the current cam line is expected to be terminated in two years. If ECCC doesn’t
introduce the new line of cams, sales will be 45,000 units and 25,000 units for the next two
years, respectively. The price of the cam set is $150, with variable costs of $95 each, and fixed
costs of $1.5 million per year. If ECCC does introduce the new cams, sales of the existing
product will fall by 10,000 units per year, and the price of the existing sets should be lowered to
$120 each. Net working capital for the cams will be 22 percent of sales and will occur with the
timing of the cash flows for the year; for example, there’s no initial outlay for NWC, but changes
in NWC will occur in Year 1 with the first year’s sales. ECCC has a 30-percent corporate tax
rate and a required return of 10 percent. (Note: You can create the solutions in the same Excel
spreadsheet that has the data report information. Be sure to let the instructor know if you choose
to do this instead of creating them in a Word document.)
Leah has provided you with a data report in an Excel spreadsheet that contains information to
answer the following questions:
1. What’s the payback period of the project?
2. What’s the profitability index of the project?
3. What’s the IRR of the project?
4. What’s the NPV of the project?
5. Should Leah accept the project?
6. If Leah needs to adjust the price of the product, what’s the lowest Leah could make the price of
the new cam set and still have a positive NPV project (keeping all other assumptions the same)?
Part 4: Risky Business
Lastly, just for fun, El Cap Climbing Company (ECCC) is looking at determining its sensitivity
to market fluctuations.
Since ECCC isn’t publically traded and can’t look at its own stock history, it must evaluate its
competitors. Black Diamond Equipment is its closest competitor, but the company doesn’t have
enough trading volume to make any sound conclusions. Leah identifies Callaway Golf Company
(ELY) as ECCC’s closest publicly-traded competitor. Even though ELY sells golf equipment, it
too is a specialized company selling high-tech sports equipment.
Finding Beta with CAPM
Note: This information is also in your textbook.
CAPM is one of the most thoroughly researched models in financial economics. When beta is
estimated in practice, a variation of CAPM, called the market model, is often used. To derive the
market model, start with the CAPM:
E(Ri) = Rf + β[E(RM) − Rf]
Since CAPM is an equation, you can subtract the risk-free rate from both sides, which gives you:
E(Ri) − Rf = β[E(RM) − Rf]
This equation is deterministic—that is, exact. In a regression, you’ll realize that there’s some
indeterminate error. You need to formally recognize this in the equation by adding epsilon,
which represents this error:
E(Ri) − Rf = β [E(RM) − Rf] + ε
Finally, think of the above equation in a regression. Since there’s no intercept in the equation, the
intercept is zero. However, when you estimate the regression equation, you can add an intercept
term, which is called alpha here:
E(Ri) − Rf = αi + β[E(RM) − Rf] + ε
The intercept term is known as Jensen’s alpha, and it represents the “excess” return. If CAPM
holds exactly, this intercept should be zero. Think of alpha in terms of the SML: If the alpha is
positive, the stock plots above the SML; if the alpha is negative, the stock plots below the SML.
You’ll first create a scatter plot and then perform a regression analysis for ELY stock and the
mutual fund. Then, use those results to compare and analyze the results.
A. Scatter Plotting and Regression Analysis
Use the following steps to create the scatter plot:
1. Go to the Part 4 Stock Data tab in your Excel spreadsheet. Highlight column K–M
headings and then hold down the Ctrl button and select cells K-3 through M-62.
2. Go to the Insert tab, click on Scatter Chart, and select the first style.
1. Move the chart to the side of the data, and increase the size of the chart. Click on
the Chart Title and change it to Risk Premium Analysis.
2. In the Design tab, click on Quick Layout. Select the layout that gives you the y formulas
and the R2.
1. Move the y formulas and the R2 to the bottom right-hand corner of the chart.
Now, use the following steps to create a regression analysis for ELY and for the Mutual Fund:
1. First, check to see that you have the ability to run the analysis. Go to the Data tab in
Excel, and look for the Data Analysis feature shown in the following image.
If you don’t see Data Analysis, you might need to add
Analysis Toolpak in Excel. For instructions on how to load
the Analysis Toolpak into your version of Excel,
visit https://support.office.com/en-us/article/Load-theAnalysis-ToolPak-6a63e598-cd6d-42e3-93176b40ba1a66b4. Contact Microsoft Support if you have any
issues with this add-in. Once you’ve completed all these
steps, you can continue with your project.
2. Click on Data Analysis. A dialog box with a list of
analysis tools will open. Select Regression from the
list and click OK.
3. Next, another dialog box opens for you to select your
Inputs and Output for the regression. Select the input
data ranges by highlighting S&P Risk Premium
numbers (x-axes range) and the number for the asset
you’re comparing as the y-axes range. Output to a
new worksheet (do not type a name in the text box).
Select the checkboxes for Labels, Confidence Level,
and Residuals. Click OK.
4. Your regression analysis will open in a new worksheet. Rename the worksheet based on
the premium being compared to the S&P premium, for example: “ELY Regression
Analysis.”
5. Answer the following questions:
1. In this regression, Rt is the return on the stock, and Rft is the risk-free rate for the same
period. RMt is the return on a stock market index, such as the S&P 500 index. αi is the
regression intercept, and βi is the slope (and the stock’s estimated beta). εt represents the
residuals for the regression. The intercept, αi, is often called Jensen’s alpha. What does it
measure? If an asset has a positive Jensen’s alpha, where would it plot with respect to the
SML?
Rt − Rft = αi + βi [RMt – Rft] + εt
2. Is the alpha of either ELY or the mutual fund significantly more or less than zero?
(Hint: The alpha is the intercept.)
3. How do you interpret the beta for the stock and the mutual fund? (Hint: The beta is next
to the coefficient.)
4. Which of the two regression estimates has the highest R-squared? Is this what you would
have expected? Use the scatterplot to explain why.
This spreadsheet contains information needed to
complete the project. You’ll be submitting this Excel
spreadsheet along with your project.
Purchase answer to see full
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