Project (Take-Home) Fall – 2021

Department of Business Administration

Subject: Financial Management and Application Submission Day: Thursday

Instructor: Dr Aitzaz/Dr Asad/ Mr Meer Rujaib Submission Date: 20 May 2021

Program: BBA Total Marks 25

Please follow the instructions carefully:

1. Write your answers in a Word file and upload the file before the due date on Blackboard.
2. Write your name and registration ID on the first page of your Word file.
3. Answer scripts can only be uploaded on Blackboard any time before its deadline.
4. To avoid any unforeseen problems, you are advised NOT to wait for the last hour to
upload your answer script.
5. Submission of answer copy(ies) will be considered acceptable through Blackboard only.
Therefore, do not submit your document through email or any other medium.
6. Do not copy answers from the internet or other sources. The plagiarism of your answers
may be checked through Turnitin.
7. Recheck your answers before the submission on BlackBoard to correct any content or
language related errors.
8. Double check your word file before uploading it on BlackBoard to ensure that you have
uploaded the correct file with your answers.

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Project Part 1 Cost of Capital 12 Marks
Note: You can choose any company from S&P 500 listed firms except the Disney Corporation.
Suppose you are about to start your job in your favourite S&P 500 company as a manager
corporate finance and treasury department and have just been assigned to the team estimating it’s
WACC. You must estimate this WACC in preparation for a team meeting later today. You
quickly realize that the information you need is readily available online.
1. Go to http://finance.yahoo.com. Under “Market Summary,” you will find the yield to maturity
for ten-year Treasury bonds listed as “10 Yr Bond(%).” Collect this number as your risk-free
rate.
2. In the box next to the “Get Quotes” button, type your company’s ticker symbol, and click
Search. Once you see the basic information for your company, find and click “Key Statistics” on
the left side of the screen. From the key statistics, collect your company’s market capitalization
(its market value of equity), enterprise value (market value equity + net debt2) cash, and beta.
3. To get your company’s cost of debt and the market value of its long-term debt, you will need
the price and yield to maturity on the firm’s existing long-term bonds. Go to
http://www.finra.org, click on Investors and then under “Market Data,” click on Bonds. Under
“Quick Bond Search,” click “Corporate,” type your company’s ticker symbol, and click Search.
A list of company’s outstanding bond issues will appear.
Assume that your company’s policy is to use the yield to maturity on non-callable ten-year
obligations as its cost of debt. Find the non-callable bond issue that is as close to ten years from
maturity as possible. (Hint: You will see a column titled “Callable”; make sure the issue you
choose has “No” in this column.) You may have to choose a bond issued by one of its
subsidiaries. Find the yield to maturity for your chosen bond issue (it is in the column titled
“Yield”) and enter that yield as your pre-tax cost of debt into your spreadsheet. Next, copy and
paste the data in the entire table into Excel.
4. You now have the price for each bond issue, but you need to know the size of the issue.
Returning to the Web page, go to the row of the bond you chose and click the Issuer Name in the
first column (this will either be your Company or its another subsidiary). This brings up a Web
page with all of the information about the bond issue. Scroll down until you find “Amount
Outstanding” on the right side. Noting that this amount is quoted in thousands of dollars (e.g.,
$60,000 means ), record the issue amount in the appropriate row of your spreadsheet. Repeat this
step for all of the bond issues.
5. The price for each bond issue in your spreadsheet is reported as a percentage of the bond’s par
value. For example, 104.50 means that the bond issue is trading at 104.5% of its par value. You
can calculate the market value of each bond issue by multiplying the amount outstanding by
(Price/100). Do so for each issue and then calculate the total of all the bond issues. This is the
market value of your company’s debt.

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6. Compute the weights for your company’s equity and debt based on the market value of equity
and company’s market value of debt, computed in step 5.
7. Calculate company’s cost of equity capital using the CAPM, the risk-free rate you collected in
step 1, and a market risk premium of 5%.
8. Assuming that company has a tax rate of 35%, calculate its effective cost of debt capital.
9. Calculate company’s WACC.
10. Calculate company’s net debt by subtracting its cash (collected in step 2) from its debt.
Recalculate the weights for the WACC using the market value of equity, net debt, and enterprise
value. Recalculate firm’s WACC using the weights based on the net debt. How much does it
change?
11. How confident are you of your estimate? Which implicit assumptions did you make during
your data collection efforts?

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Project Part 2 Working capital policy 13 Marks
Choose any listed company of your choice. Make sure that the financial data (Balance Sheet and
Income Statement) of that company is available on yahoo finance or through financial reports.
For purpose of understanding, Lets assume that we have chosen the company British Petroleum
BP (Note: Each of you are supposed to choose different company other than BP). You are the
Chief Financial Officer (CFO) of BP. This afternoon you played golf with a member of the
company’s board of directors. Somewhere during the back nine, the board member
enthusiastically described a recent article she had read in a leading management journal. This
article noted several companies that had improved their stock price performance through
effective working capital management, and the board member was intrigued. She wondered
whether BP was managing its working capital effectively and, if not, whether BP could
accomplish something similar. How was BP managing its working capital, and how does it
compare to its competitors? Upon returning home, you decide to do a quick preliminary
investigation using information freely available on the Internet.
1. Obtain BP’s financial statements for the past three years from Yahoo! Finance (finance.
yahoo.com).
a. Enter the stock symbol (BP) in the box and click “Get Quotes.”
b. Under “Financials,” click “Income Statement.” Copy and paste the statement into Excel (if
using Internet Explorer, place the cursor in the statement and right-click the mouse, then
choose “Export to Microsoft Excel” from the menu).
c. Go back to the Web page and under “Financials,” click “Balance Sheet”; repeat the download
procedure for the balance sheet.
d. Copy and paste the balance sheet so that it is on the same worksheet as the income statement.
2. Obtain the competitors’ ratios of two firms for comparison from Yahoo! Finance
(finance.yahoo.com). For this case we have chosen for instance ExxonMobil Corporation and
Chevron Corporation (CVX).
a. Enter ExxonMobil Corporation’s stock symbol (XOM) in the box at the top and click “Get
Quotes.”
b. Follow the steps in Part 1 to obtain “net receivables” and “inventory” from the most recent
annual balance sheet, and “total revenue” and “cost of revenue” from the most recent annual
income statement.

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c. Repeat the two steps above for Chevron Corporation (CVX).
3. Compute the cash conversion cycle for BP for each of the last three years.
a. Compute the inventory days using “cost of revenue” as cost of goods sold and a 365-day year.
b. Compute accounts receivable days using a 365-day year.
c. Compute accounts payable days.
d. Compute the cash conversion cycle for each year.
4. How has BP’s CCC changed over the last few years?
5. Compare BP’s inventory and receivables turnover ratios for the most recent year to those of its
competitors.
a. Compute BP’s inventory turnover ratio as cost of revenue/inventory.
b. Compute BP’s receivable turnover ratio as total revenue/net receivables.
c. Compute the average inventory turnover ratio and average receivable turnover ratio of
Chevron and ExxonMobil. How do BP’s numbers compare to the average ratios of its
competitors? Do they confirm or refute your answer to Question 4?
6. Determine how BP’s free cash flow would change if BP’s inventory and accounts receivable
balances were adjusted to meet the industry averages.
7. Determine the amount of additional free cash flow that would be available if BP adjusted its
accounts payable days to 75 days.
8. Determine the net amount of additional free cash flow and BP’s cash conversion cycle if its
inventory and receivables turnover ratios were at the industry average and its payable days were
75 days.
9. What are your impressions regarding BP’s working capital management based on this
preliminary
analysis? Discuss any advantages and disadvantages of bringing the cash conversion cycle more
in
line with the industry averages.