CFTP Individual Assignment

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Apr 24, 2024

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25557 Corporate Finance: Theory and Practice Individual Assignment Written Report XXX 1. CAPM β Estimation: Complete this segment, download data from the Yahoo Finance website. Data should have the following specifications: Monthly frequency Start date: 1st Jan 2015 End date: 31st Dec 2022 (a) (5 marks) Download data on the following tickers: GM (firm), SPY (market portfolio proxy), TNX (risk-free rate). Merge the data on date (hint: Use VLOOKUP function in Excel).

(b) (5 marks) What is the estimated CAPM β. Report the regression output in the Excel spreadsheet. Provide a screenshot of the regression output in the report. - - - - - - - - - - -- - -- - -

(c) (2 marks) Interpret the CAPM β. 𝛽 (beta) measures the volatility of returns on a security relative to the market. This is especially helpful when determining good from bad investments as it determines the amount of systematic risk inherent with the stock. From the excel analysis, it shows that GM (General Motors) has a CAPM 𝛽 of 1.3961 (4d.p). This indicates that for every 1% the market moves, the security would move the equivalent of 1.3961% resulting in higher returns or losses. This is supported by the regression analysis completed on the historical data of the market, R f rate and GM prices. Whether this amount of systematic risk is desirable is decided individually by the investor. 2. Capital Structure To complete this segment, refer to the following financial information of GM, as of 31st December 2022. o There are 1.454 billion shares outstanding. o Short-term and long-term debt amounts are $38,778 million and $75,921 millions, respectively. o Last closing share price is $33.64. o Depreciation & amortization expenses are $11,276 million. o Earnings before interest and taxes are $10,314 million. o Marginal tax rate is 21% and the effective tax rate is 14.75%. o Government bond yield is 5%. (a) (5 marks) What is the WACC under the optimal capital structure suggested by the Excel spreadsheet analysis? Your answer is the baseline WACC figure. The WACC under the optimal capital structure is seen to be 8.21% within the excel when calculated. (b) (5 marks) In your baseline scenario, the expected market risk premium (MRP) is 7% and the government bond yield is 5%. However, you believe the MRP can be as 12% or as low as 5%. You also believe that the government bond yield can range from 2% to 7%. Analyse how sensitive the WACC is to your assumptions of the MRP (in increments of 0.5%) and the government bond yield (in increments of 1%). Provide a screenshot of your sensitivity analysis in the report.

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This is my Sensitivity analysis that answers the question of changing MRP and GBY by increments. (c) (3 marks) Find the highest and lowest WACCs contained in your sensitivity analysis. To derive a WACC that better accounts for extreme scenarios, you decide to assign the following probability weights: Highest (20%); Baseline (70%); Lowest (10%). Find the probability weighted average WACC. Clearly show your workings. These are the results when calculated to answer the question. Further workings and calculation to the answer can be seen on the excel sheet.

3. Capital Budgeting GM is considering a project to introduce a high-end sports car to its product line. As a business analyst, you are tasked to perform a capital budgeting analysis. Below is the information associated with this project. o GM has completed a $1 million marketing survey to assess the attractiveness of the sports car. o The project has an estimated life of 4 years. o Expected selling price is $26,000/car in Year 1. o Upfront R&D costs are $1.5 million. o Upfront new equipment costs $7.5 million; 5-year straight-line depreciation. o Annual overhead expenses are $2.8 million. o Expected manufacturing cost is $11,000/car in Year 1. o The equipment is to be housed in an existing empty factory. The factory could have been rented out for $200,000/year. o GM expects to sell 100, 125, 50 and 50 units of the sports car in Years 1 through 4, respectively. o 20% of the sports car units sold come from customers who would otherwise have bought an existing old car model made by GM. o The existing old car model sells for $10,000 in Year 1 and costs $6,000 to make. o However, if GM does not introduce the sports car, those customers would have bought sports cars from an automaker competitor. o Prices and production costs of all cars (new and old) will fall by 10% per year. o Overhead expenses and factory rentals will rise by 4% per year. o No working capital is needed in this project. o This project is as risky as the average project of GM.

(a) (3 marks) Incremental sales Total Sales = $7,525,700.00 (b) (3 marks) COGS Values are Year 0, 1, 2, 3 ,4 respectively (c) (1 mark) Depreciation expenses Values are Year 0, 1, 2, 3 ,4 respectively Depreciation of $7,500,000 over 5 years under straight line depreciation comes out to $1,500,000. Calculations can be found on the excel including the Tax shield in relation to this. (d) (2 marks) Overhead expenses Values are Year 0, 1, 2, 3 ,4 respectively Overhead expenses in this sheet were added with Factory Costs of 200,000 per year to make the capital budgeting table simpler as they both raise in costs by 4% and are both deductions. These are Overhead expenses if they are excluding the factory costs Total with factory expense for 5 years = $16, 248, 967.68 Total independent = $15, 165, 703.17 Because it is not specified within the task, question and information, I have chosen to believe that these expenses span over 5 years (time of the equipment’s life as it has to be stored, installed, etc and has overhead costs) instead of the projects 4 years. f r r

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(e) (3 marks) Cash flow adjustments. After finding the first part of cash flows such as expenses, opportunity costs, COGs, etc to deduct from revenue each year (except year 0 being the CapEx) being the first part of Cash flows. We were able to determine the depreciation tax shield which is the taxed amount of 1,500,000 multiplied by the tax rate of 21% from previous questions. The Net Revenue, depreciation tax shield and tax were all summed to find FCF of the project. The FCF for year 1-4 was then divided by (1+r)^of n (r being 8.27 and n being year) to determine the Present Value of FCF. (f) (3 marks) Finally, compute NPV of this project. The NPV of this project being the high-end car production line for GM is $-20, 041, 356.09. Here NPV < 0 which means the project should be rejected.