Comp 3 = Fin
Review Walmart’s Financials and Business Model.
Describe the business, including the type of business.
Create the business case:
- Determine why funding is needed for the company.
- Determine the sources of funding. Consider self-funding, borrowing, equity, venture capital, and so on.
- Evaluate the requirements of each funding source you determined appropriate.
- Analyze the associated risks of each funding source.
- Decide which sources are the best fit for your company based on the requirements of each. Justify your decision.
- Estimate the cost of capital for both short-term and long-term funding sources. Research current estimated APRs for your selected sources of funding. Consider creating a table or chart to display this information.
Create a profit-and-loss statement for a 3-year period. Project revenue. State any realistic assumptions, such as growth per year, in your projections.
Estimate direct costs, including capital, marketing, labor, and supply costs.
Requirements:
Follow my outline below. Logic and consistency are key to this assignment so that you do not omit any requirements. Start with the outline and then fill in the details. Number and subtitle the requirements as you go along so you do not omit a requirement. This may look overwhelming, but just take it one section at a time.
1) Consider yourself the CEO of the firm used in Comps 1 & 2. You need to choose a specific project or financial goal. In other words, you need to figure out a way to add value to your firm. So, choose a project such as an expansion, specific R&D, computer upgrades, etc. Describe the project. You need to be specific as to how you plan on adding value to your firm.
2) Once you choose a project, you need to state how much funding you will need. This is your total amount of funding required. This must be stated clearly as the remaining sections depend on this figure. You just need ONE sentence for this requirement.
3) Next, you need to tell me how you will spend this funding. Break this figure down into categories and figures. These are your direct costs. Direct costs should total the amount of funding required in #2. The easiest way to do this is to include a table with a total row. That total should match the total in #2 above. Direct costs should be specific and relevant to your project. In other words, categories should stand on their own. If not, then you need to provide an additional discussion explaining your categories.
4) Next, you need to explain your options as to sources of funding along with the risks. State the requirements and risks of each. Stick with debt, equity (external equity), or self-funding (internal equity). Discuss all three choices as they apply to your firm.
5) Next, you need to make a choice as to which option or options you are choosing for your project. Are you going with 100% self-funding, 100% debt, 100% equity or some combination? If you choose a combination, then you need to tell me the breakdown between the categories. This will be important for the next step. Debt is anything that needs to be paid back. Equity is anything that involves ownership (ie issuing new shares). If and only if, your firm has the funds available (cash or assets that can be converted into cash easily), then self-funding is also an option and the way to go for most firms. Self-funding is a form of equity, however it is NOT considered new capital as you do not need to source new funds. If you are self-funding, you need to justify that you actually have the funds to do so by including the last full year’s cash assets, net income and end cash position figures. Lastly, no matter your choice, wrap up the discussion with the pros of your chosen option(s).
6) Your next section is WACC or Weighted Average Cost of Capital. Whether you need to perform a new calculation or not depends upon your choices in #5 above. Use an online calculator such as the following: WACC Calculator. The variables will depend on your previous choices. Source the variables on Yahoo Finance or online. CITE all variables. Also, don’t forget to include a discussion as to what WACC measures, your variables and what the overall calculation means for your firm (ie minimum rate of return, vs ROIC, etc). HINT: If you are 100% self-funding, then you may simply source and CITE a current WACC figure on the internet for your firm and use that figure with NO further calculation required. Include a sentence within your discussion that those funds are already included in your WACC figure within the total equity variable. If you are raising NEW capital via debt and/or equity, then you will need to go through the actual calculation and revise your total debt and total equity variables accordingly.
7) Lastly, you need to give me 3 years worth of PROJECTED income statements (so, you are looking three years into the future). Income statements should reflect the firm as a whole, not just your project. These are estimated figures but you must still have a basis. Use Excel for the creation of these statements and then copy and paste the finished statements back into your Word document.
Go to your firm’s Yahoo Finance page. Click on the Financials tab and the blue Income Statement link. Copy the last full year (not the TTM column) to Excel. Only copy the first 10 or 11 rows up through Net Income Common Stockholders. Do NOT open arrows. Now, you will project those figures for the next three years (end dates will depend on your firm so I will just refer to these as base year and Years 1-3 for purposes of this hint). But, you will need to provide your dates on your income statements. Keep all figures as they were stated in Yahoo and add a statement that “all figures are posted in thousands”. Also, keep these as whole numbers, no “cents” as this will simplify the process for you.
Confirm your formula from top to bottom: total rev – cost of rev = gross profit – op exp = op inc + net non op + other inc = pretax inc – taxes = net income.
Start with Total Revenue. Go to your firm’s Yahoo Finance page. Click on the Analysis tab. Yahoo gives you the revenue estimates for CURRENT YEAR and NEXT YEAR. Use the HIGH estimates INCLUSIVE of the value your project brings to the table. For the 3rd year, Yahoo gives you the PER ANNUM GROWTH ESTIMATE FOR THE NEXT FIVE YEARS (bottom of the page). Simply multiply this % with the NEXT YEAR revenue estimate to calculate the total revenue figure for the 3rd year. Revenues are done.
For all other NON-SUBTOTAL categories (cost of rev, op exp, net non op, other inc and taxes), simply take the % for your base year and apply that to the next 3 years.
Take cost of rev/rev for the base year and apply that % to Years 1-3.
Take op exp/gross profit for the base year and apply that % to Years 1-3
Take net non op/op inc for base year and apply that % to Years 1-3
Take other inc/op inc for base year and apply that % to Years 1-3
Take taxes/pretax inc for base year and apply that % to Years 1-3
This will give you the foundation for your statements as you are relying on your base year data. From there, you may make additional manual adjustments if your project dictates (ie increasing or decreasing cost of rev or op exp %) or if you are starting with a negative profit (ie increasing or decreasing net non op inc or other inc %). In the end, you want to see a nice and steady increase in net income. That is the goal.
For the the discussion, you need to provide your reasoning and assumptions along with the overall % increases for revenues and net income. This is your (End-Beg)/Beg formula from Comp 1. You already have that reasoning for revenues above (you used the HIGH estimates from Yahoo inclusive of the value of your project for Years 1 & 2 with a ?% growth rate for Year 3). For all other categories, you simply used the same pecentages for your base year as you do not expect material changes, unless you made additional manual adjustments. In that case, you will need to explain those adjustments. This results in a ?% increase in total revenue and a ?% increase in net income. Finish the discussion with a plug as to your project and the value it will bring.
Follow the steps above so that you do not omit a requirement. Logic and consistency are key to this assignment.
Again, the outline should be as follows:
1-PROJECT DESCRIPTION
2-FUNDING REQUIRED
3-DIRECT COSTS
4-FUNDING OPTIONS
5-FUNDING CHOICE
6-WACC/COST OF CAPITAL
7-THREE-YEAR PROJECTED INCOME STATEMENTS
Finally, please make sure to include references so we avoid any potential plagiarism issues.
