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Cost of Debt and Equity

The manager of Sensible Essentials conducted an excellent seminar explaining debt and equity financing and how firms should analyze their cost of capital. Nevertheless, the guidelines failed to fully demonstrate the essence of the cost of debt and equity, which is the required rate of return expected by suppliers of funds.

You are the Genesis Energy accountant and have taken a class recently in financing. You agree to prepare a PowerPoint presentation of approximately 6–8 minutes using the examples and information below:

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  1. Debt: Jones Industries borrows $600,000 for 10 years with an annual payment of $100,000. What is the expected interest rate (cost of debt)?
  2. Internal common stock: Jones Industries has a beta of 1.39. The risk-free rate as measured by the rate on short-term US Treasury bill is 3 percent, and the expected return on the overall market is 12 percent. Determine the expected rate of return on Jones’s stock (cost of equity). Here are the details:

Jones Total Assets

$2,000,000

Long- & short-term debt

$600,000

Common internal stock equity

$400,000

New common stock equity

$1,000,000

Total liabilities & equity

$2,000,000

Develop a 5 to 7 slide presentation in PowerPoint format. Perform your calculations in an Excel spreadsheet. Cut and paste the calculations into your presentation. Include speaker’s notes to explain each point in detail. Apply APA standards to citation of sources. 

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5 Assignment 1: Discussion—Performance Measurements

Both the Genesis Energy and Sensible Essentials teams believe that the client engagement was very successful. All the critical learning tools were fully explored. However, the operations management team believes there were several topics that were not covered but are important to their respective disciplines. These topics centered primarily on selecting/developing meaningful and rational measurements of performance as they relate to measuring the success of the company’s expansion strategy. The financial indicators are important, but the team is also concerned about more forward-looking measures that might reflect product quality, customer satisfaction, internal process efficiency, performance, and perhaps, other strategic indicators.

Based on your understanding of the concepts covered in this course, address the following:

  • Develop and describe a strategic measurement “scorecard” that incorporates the financial measures applied in this course. Consider the prospect of new equity owners and explain why this is important.
  • Describe the non-financial measures that should be considered and are important to the success of an organization. Explain why these measures should also be considered in the strategic initiatives of the organization.

Write your initial response in 300–500 words. APA

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Assignment 2: Required Assignment 2—Genesis Energy Capital Plan Report

The Genesis Energy operations management team, nearing completion of its agreement with Sensible Essentials, was asked by senior management to present a capital plan for the operating expansion. The capital plan was not to be a wish list but an analysis of the necessary expenditures to successfully establish a fully equipped operating facility overseas.

In addition, senior management requested meaningful financial and operating metrics to ensure that the performance objectives for the facility were being met. The operations management team was given five days to accomplish the following:

  1. Calculate the firm’s WACC.
  2. Prepare and analyze each planned capital expenditure.
  3. Evaluate, rank, and recommend the capital expenditures according to beneficial value to the organization, using the evaluation tools NPV, payback, and IRR. Evaluation, ranking, and recommendations should be by category of expenditures. For example, facility, equipment 1, 2, and 3, and inspection.
  4. Using the selected choices in part three, calculate the full cost of establishing a fully equipped facility. This would include the facility, equipment 1, 2, and 3, and inspection. In addition, calculate the payback, NPV, and IRR for the completed facility.
  5. Construct and recommend between three and five metrics to measure the performance of the organization. At least one metric should be dividend decision-making driven.
  6. Prepare an executive summary along with a separate document showing the calculations.

Part I

Following the example of the operations management team, do the following:

  1. Download the Capital Budgeting spreadsheet, and compute the WACC for Genesis Energy.
  2. Using the information provided in the spreadsheet, analyze Genesis Energy’s project options. Then, calculate the periodic and cumulative net cash flows for each potential project and its associated options. Please note that there are five projects (facility, equipment pieces 1, 2, and 3, and internal inspection), and that each project offers multiple-configuration options (facility size, equipment type, etc.).
  3. Evaluate, rank, and recommend a specific option for each capital project according to beneficial value to the organization, using the evaluation tools NPV, payback, and IRR.
  4. Construct and recommend between three and five metrics to measure the performance of the new operating strategy. At least one metric should reflect dividend policy as it relates to rewarding shareholders.
  5. Prepare an executive summary describing your recommendations for each project and the overall cost, net cash flows, and expected returns of the operating configuration that you recommend. Be sure to justify your recommendations in terms of the investment criteria applied in Step 3 above. Be sure to report the full cost of the facility as it is configured per your recommendations. Present and justify your operating strategy performance metrics.

Your complete report should include all of your calculations as appendices (5 pages, or 1 page for each project).

Part II—Executive Summary Presentation

Because of limited resources in an era of plentiful opportunities, companies must carefully select investments. You analyzed Genesis Energy’s expansion plans and explained your findings in M5: Assignment 1.

This assignment is based on those findings. In this assignment, you will create a PowerPoint presentation that will include the following information:

  • An executive summary of your findings from M5: Assignment 1. Be sure to adhere to the following:
    • The presentation should be approximately 6–8 minutes (or 10–12 slides).
    • A statement of the problem or topic is included.
    • A concise analysis of the findings is included.
    • Specific details from M5: Assignment 1 to highlight or support the summary are incorporated.

Develop a 10–12-slide presentation in PowerPoint format. Apply APA standards to citation of sources.

 
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