Question
Business Presentation
CORPORATE FINANCE
The CFO has indicated that the
company intends to have a payout ratio of 40%, such that each year 40% of free
cash flows of the project will be paid as dividends.
Requested advice
The company is asking your
team for financial advice on two issues:
(1) Do you recommend the
company to undertake the proposed project or not?
(2) If this project would be
accepted (regardless of your advice), what would be the effect on the wealth of
the shareholders?
The results of your analyses
will have to be presented to the company's executive management team. The
presentation should include (at a minimum!) the following information:
(1) An introduction of each of
the team members and their financial expertise.
(2) A brief discussion of the
newly proposed project. Which product/service is being developed? (You can
choose!)
(3) A demonstration of the
expected yearly cash flows from the project. Remember, members of the senior
management team often do not have a finance background, so you will have to
present clear tables which show the calculation of the free cash flows, and
clearly explain how the free cash flows were computed. You basically have to
explain them to them in your presentation how capital budgeting works.
(4) Advise on whether or not
the company should go ahead with the proposed project. The advice of your team
should be based on your estimations of the NPV and the IRR of the proposed
project. Again, you will need to explain to executive team what exactly the NPV
and IRR metrics are, how they are computed and why they are helpful for making
investment decisions. The CFO has asked to use the company's overall cost of
capital as discount rate.
(5) A demonstration of the effect of the proposed project on the wealth of the shareholders, if the company would decide to go ahead with the project (regardless of your recommendation) and apply the suggested payout ratio. Present a well-designed figure that shows year by year, the change in the wealth of shareholders (= the share price + total dividends received). Also show their yearly capital gains and dividend yields. Hints:Calculate for every year of the project the total dividends paid. (= the stable dividend from existing projects + the paid dividends from the project) Calculate for every year the 3-year average growth rate in total dividends - that is the average of the dividend growth rate over that year and the growth rate over the previous two years. (This can be done from year 3 onwards) Calculate for each year (from year 3 onwards) the share price using the DDM. You can use the average growth rate over the previous 3 years as the expected dividend growth rate in future.The company has encouraged the team of advisers to include any critical notes with their findings, suggestions for alternative policies, additional explanations, etc.
Expert Solution
Experienced financial experts are handling the
project. It is important to have the chief financial officer taking control of
the entire project to ensure it will be possible to advance the needs of the
business. The planning and execution of the project will be possible through
the integration of the various operations advanced and defined by the group’s
expertise. In that way, it will be possible to define the scope of commitment
in managing the new product introduction plan in the market. The course of delivering the new product will
be done by incorporating the varied professional managers through the
leadership of the chief financial officer.
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