AFM373 Lecture Notes - Lecture 9: Private Equity, Net Present Value, Sunk Costs

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lilacmouse857

28 Jun 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM373

Professor

Neil Brisley

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Flash

February 7, 2018 2:32 PM

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Invest or not invest

How to finance? With or without

equity

Right now Flash can factor A/R to the bank

to get more borrowing but its more

expansive with higher interest payments.

The market is competitive and Flash needs

to continually invest in R&D. Any new

products invented have a short life.

Venture capitalist ○

Private equity

○

Maybe financial institutions

○

Flash is a private company and so

shares are not available to everyone.

•

If issue equity? Who's willing to invest in

Flash and put in a few million dollars?

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Document Summary

Right now flash can factor a/r to the bank to get more borrowing but its more expansive with higher interest payments. The market is competitive and flash needs to continually invest in r&d. Any new products invented have a short life. Flash is a private company and so shares are not available to everyone. Sales growth drives asset growth (if days are kept the same) If roe (growth of equity) doesn"t keep up with sales growth, then we need more financing. However, in flash, the days of current assets are getting worse (too many days in inventory = more inefficiency) which requires a funding need. Looking at the next three years forecast, it is definitely generating a funding need because sales growth is way ahead of roe. 400k is sunk cost not included in fcff. R&d. if it was spent on this project then we"ll count it. If it wasn"t spent on this project, then we don"t.

Related Questions

I need proof reading help with my assignment please. Due tonight. Thank you.

Gross Margin shows what a company retains after incurring the direct costs associated with producing the goods and services sold. EBayâs gross margin shows they are more efficient than Amazon. Amazon has a larger cost than eBay. Amazon may sell more than eBay, but due to their cost their gross margins are far less than eBayâs. When considering gross margin for an investment opportunity it shows eBay is safer than Amazon for an investment.

After operating margin analysis we can say that eBay has a larger amount of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. In this case eBay will have some revenue left over after paying debt, interest, or other payments.

It goes without saying that most investors pay very close attention to a companyâs Net Profit Margin before they invest their money into a company or a project. Thatâs why after reviewing the Net Profit Margin of both eBay and Amazon, I would suggest investing in eBay, since they are a more profitable company than Amazon.

Interest coverage ratio arises because how effortlessly a company can pay interest on outstanding debt. In this case eBay makes their place safe since they donât have to pay any interest. On the other hand, Amazon has 12.59. In consideration of interest coverage ration it is also could be a good investment.

Market to book ratio is significant to financiers to comprehend how much are they paying for each dollar in net assets. Here Iâve calculated the total book value of its assets and its current market value. Thatâs why I can say that they have enough assets for both them to be strong in future.

ROE is expressed as the amount of net income returned as a percentage of shareholders equity. When an investor decided to finance in some company or project, he also chooses how much he will get back in the future because of their risk taking. In this case it would be more suitable for the financier to invest their money into eBay based on their return.

When somebody is getting ready to invest theyâre always attempting to know where their money goes or is their money appropriately being used? Its gives them a sense of how well a company is using its money to generate returns. Thatâs why its help investors to understand efficiency of allocating the capital under its control to make profitable investments. Since no dividends were declared their efficiency results are the same as their ROE.

In this breakdown we can see that both companies are worthwhile in related to its assets. Though further scrutiny into the figures will show the eBay is more efficient in using its assets to generate earnings. For investment perspectives eBay is the safer place to invest your money.

After all analysis we see Amazon has by far larger sales, but their profit margins are less than eBayâs this is due to their cost being too high. Though eBay may have smaller number of sales they have better profits than Amazon. This is all due to their cost efficiency and well-managed activities. As far as asset turnover Amazon did get the best of eBay, but in the end, after all my analysis I would consider eBay the better option for investment.

Are my answers correct?

Suppose you invest $10,000 in a savings account earning 2% interest (compounded yearly) with no risk. After 7 years, how much will you have?

Principal = $10,000.00

Rate = 2.00%

Year = 7

Amount (Compound interest) = P x (1 + r/n) ^nt

Where P = Principal

r rate of interest

n = number of time interest is calculated in a year

t = time

Amount after 7 years = 10,000 x (1+0.02) ^7 = $11,486.86

Repeat Question #1, but this time there is an inflation rate of 4%. How does this change your overall return on investment? If you had a chance to invest in an account with a long-term expected rate of 5%, with a 50% chance of earning 0% nominal compound interest and a 50% chance of earning 10% nominal compound interest in each year, would you choose this account, or the savings account? Why?

Effects of inflation on PV = 10,000 x (1/(1+0.04)^7) = $7,599.18

FV Adjusted for inflation = 11,486.86 x (1/(1+0.04)^7) = $ 8,729.07

Overall return on investment will decrease by 1,270.93 = 10,000 â 8,729.07

Repeat #1 with inflation:

Amount after 7 years = 10,000 x ((1+0.02)/(1+0.04)) ^7

10,000 x (0.98) ^7 = $8,729.07.

Safe vs. Risky (not including inflation)

If I get 0%, the amount after 7 years = 10,000 x (1+0.00) ^7 = $10,000.00

If I get 10%, the amount after 7 years = 10,000 x (1+0.10) ^7 = $19,487.17

If I get 5% (expected), amount after 7 years = 10,000 x (1+0.05) ^7 = $14,071.00

I would choose the account with the 5% expected rate of return because it has higher effective annual return over the saving account. There is a higher return, but the risk is higher as compared to the savings account, which provides a certain return.

Suppose you will need $50,000 in 4 years to start up a new business you have planned. With a 5% real interest rate, how much do you have to invest now in order to achieve this goal?

This condition clearly says that we need to calculate the present value of the future earnings and it has to be the present value factor and not annuity.

Therefore, to get 50000 is the future value therefore present value of 50000

Amount to be invested today =PVF@5%,4 *Amount

= .82270 * 50000

= $ 41135.12

Repeat Problem #3, but assume you can contribute an equal amount on a yearly basis. How much would you need to put into the account each year?

Amount to invested each year = Amount /FVAF@5%,4 = 11,600.66

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As of June 2004, Microsoftâs quarterly dividend was four measlycents per share. With $50 billion of cash on hand, on July 20th ofthat year, the company announced a one-time âspecial dividendâ of$32 billion, or $3 per share. Should the Microsoft investors havebeen happy that they were to be receiving gobs of cash in the formof this special dividend? Seems like a funny question. Is winningthe lottery a good thing? Am I better off getting a bonus, or not?Unlike these windfalls, shareholders receiving dividends are simplygetting what is already theirs. Before receiving the dividendcheck, they already owned that cash, because they own everything ofthe company's. "Wait!" you say. "Didn't we discuss that receiving adollar today is more valuable than receiving it in the future?"Indeed, it is, but... that's if you are comparing having a dollartoday, which you could invest and earn some rate of return on,versus receiving just one dollar in the future. That's not whatwe're talking about in the dividend decision. If you, theshareholder, get the dividend now, you'll invest it in something orother, and earn some investment return. Conversely, if you do notget the dividend now, this company will retain the funds and investthem in the company's activities, and (presumably) earn someinvestment return. How do you feel now about the Microsoftdividend?

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AFM373 Lecture Notes - Lecture 9: Private Equity, Net Present Value, Sunk Costs

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