Interest Rate Implication Analysis Specifically, the following critical elements must be addressed: V. Macroeconomic Items: The CEO of the company is conv

Interest Rate Implication Analysis Specifically, the following critical elements must be addressed:

V. Macroeconomic Items: The CEO of the company is convinced that financial analysis should hinge only on what is happening internally within the company. Convince him otherwise based on the following:

Analyze the implications of interest rate changes on any of the calculations you performed. Be sure to substantiate your claims.
How might an issue (negative or positive) within the overall stock market impact the company’s stock valuation numbers, other financialvariables, or its overall portfolio management? Be sure your response is supported by evidence.
Analyze the impact of any external factor (i.e., external to the company) discussed throughout the course on the company’s financial position. Besure to justify your reasoning.

Please see the attachment for section 4 only (INTEREST RATE IMPLICATIONS. The above questions apply to this section only. The formulas have already been filled in. Just need the questions answered. Milestone One: Time Value of Money (please fill in YELLOW cells)
Interest Rate
FCF – Years
Amounts*
8%
FCF – 2015 FCF – 2016 FCF – 2017
5,052.00
3,546.00
(3,718.00)
Pv*
(4,677.78)
Total Pv*
*In millions
(4,766.43)
Pv=FVN/(1+I)^N
(3,040.12)
PV(I,N,0,FV)
2,951.47
Explanations:
FCF (Free Cash Flows) is the net change in cash generated by the operations of
a business during a reporting period, minus cash outlays for working capital,
capital expenditures, and dividends during the same period. This is a strong
indicator of the ability of an entity to remain in business.
Note: For Milestone One, please use the Free Cash Flows from the United
Parcel Service 2017 Annual Report for the years 2015, 2016, and 2017 located
on Page 2 of the Report.
Interest Rate (given) – For purposes of this exercise, use 8% interest rate.
ted by the operations of
or working capital,
d. This is a strong
ws from the United
2016, and 2017 located
e 8% interest rate.
Milestone Two: Stock Valuation and Bond Issuance (fill in the YELLOW cells)
PART I: STOCK VALUATION
Dividend from Financial Statements:
Read the Explanations to the right of the calculation cells for specific information on the data.
Year
Cash
Div/share ($)
2015
2016
2017
2.92
3.12
3.32
Dividend
Yield
Stockholder’s
Equity (in
millions)
3.00%
2.70%
2.60%
2,491
429
1,030
Stock Price
97.33333333
115.5555556
127.6923077
1. Stock Valuation – The new dividend yield if the company increased its dividend per share by 1.75
Year
2015
2016
2017
Cash
Div/Share ($)
+1.75
4.67
4.87
5.07
Dividend
Yield
4.80%
4.21%
3.97%
Stockholder’s
Equity (in
millions)
2,491
429
1,030
Stock Price
97.33333333
115.5555556
127.6923077
2. The dividend yield if the firm doubled it’s outstanding shares
Year
Cash
Div/Share ($)
2015
2016
2017
1.46
1.56
1.66
Stockholder’s
Equity (in
millions) -doubled
1.50%
4,982
1.35%
858
1.30%
2,060
Dividend
Yield
Stock Price
97.33333333
115.5555556
127.6923077
3. The rate of return on equity (i.e., the cost of stock) based on the new dividend yield you calculated above
Year
2015
2016
2017
Cash
Div/Share ($) Stock Price
+1.75
4.67 97.33333333
4.87 115.5555556
5.07 127.6923077
Return on
Investment
CALCULATE ROI
5.73% (Dividends + Capital gain)/ Divide
5.34% (D1 + (P1-P0)) / PO
PART II: BOND ISSUANCE
Newly issued 10-year bond
Present Value
Periods
Interest
Payments
Future Value
PV
N
I
PMT
FV
Calculate the Present Value in the three scenarios below
($138,973)
20
0.025
5,000
$100,000
Semi-annual payment: 2017-2027 = 10 years *2 = 20 periods
Interest paid semi-annually: 5.00%/2 = 2.5%
This bond make regular semi-annual payments of interest.
Future Value in 20 years – Enter as a positive number
1. The new value of the bond if overall rates in the market increased by 2%
Present Value
Periods
Interest
Payments
Future Value
PV
N
I
PMT
FV
($121,319)
20
0.035 Please adjust interest
5000
$100,000
2. The new value of the bond if overall rates in the market decreased by 2%
Present Value
Periods
Interest
Payments
Future Value
PV
N
I
PMT
FV
($160,090)
20
0.015 Please adjust interest
5000
$100,000 CALCULATING PV (see help on the right hand side of the s
3. The value of the bond if overall rates in the market stayed exactly the same
– identical to CURRENT BOND VALUE from Financial Statements
cells)
calculated above
ds + Capital gain)/ Divided by the original Price
Explanations:
Note:
1. The dividends declared and paid by UPS for 2015, 2016, a
second page of the 2017 UPS Annual Report.
2. The dividend yield for 2015, 2016, and 2017 are found on t
UPS Annual Report.
3. Stockholder’s/Shareholder’s equity for 2015, 2016, and 201
page of the UPS Annual Report.
Dividend Yield – annual cash dividend per share of common sto
of a share of the common stock. (Dividend yield = Annual Divide
Note: Current Stock Price is not part of the Financial Statement
for Dividend Yield
Stockholder’s Equity = Assets – Liabilities. This represents the
Owners are called stockholder because they hold stocks or share
of every corporate manager is to generate shareholder value.
Note: Shareholder’s Equity for 2015, 2016 and 2017 will be f
UPS Annual Report.
Return on Equity – for this part we will modify and use return o
Using the formula: Dividend (+1.75)/+[(new price-old price)/old
narios below
7 = 10 years *2 = 20 periods
nual payments of interest.
as a positive number
Bonds are a long-term debt for corporations. By buying a bond, t
the corporation. The borrower promises to pay specified interest
and at the maturity, payback the entire principle. In case of bank
priority over stockholders for any payment distributions.
Bonds = Debt……………Bondholders = Lenders
Stock=Equity…………….Stockholders = OwnersCalculation:
For purposes of this exercise, assume that UPS issues a new t
will mature in 2027. The Future Value of this bond is therefo
issued in December 2017 at a market rate of 5.0% fixed for 1
payments made semi-annually. What is the Present Value of
scenarios in Part II: Bond Issuance. The coupon rate, which
annual PMTs for this bond is 10%.
%+2% = .00%/2 = %
.00%-2% = %/2 = %
PV (Present Value Calculation) – using Excel Formula
Step 1) Select Formulas
Step 2) Click on Financial
Step 3) Select PV – you will see the formula below
Step 4) Enter the following:
Rate – enter as decimal, no % sign. Example: 4% as 0.04 if p
Nper – number of periods where dividends are paid. For exam
Pmt – payment – The semiannual payment of dividends in do
Fv – Future value. Enter as positive. Example 1,000 should b
Type – leave blank
n the right hand side of the sheet)
Updated: 10/2018 by RFB
nd paid by UPS for 2015, 2016, and 2017 are found on the
S Annual Report.
15, 2016, and 2017 are found on the second page of the 2017
r’s equity for 2015, 2016, and 2017 are found on the second
port.
dividend per share of common stock divided by the market price
ck. (Dividend yield = Annual Dividend/Current Stock Price)
ot part of the Financial Statements – calculated using the formula
ts – Liabilities. This represents the ownership of a corporations.
because they hold stocks or share of the company. The main goal
to generate shareholder value.
for 2015, 2016 and 2017 will be found on page 2 of the 2017
art we will modify and use return on investment instead.
+1.75)/+[(new price-old price)/old price]
r corporations. By buying a bond, the bond-owner lends money to
promises to pay specified interest rate during the loans lifetime
he entire principle. In case of bankruptcy, bondholders have
any payment distributions.
olders = Lenders
holders = OwnersCalculation:
e, assume that UPS issues a new ten-year bond for 100,000 that
ture Value of this bond is therefore $100,000. The bond was
a market rate of 5.0% fixed for 10 years, with interest
lly. What is the Present Value of this bond using the three
suance. The coupon rate, which is used to calculate the semis 10%.
on) – using Excel Formula
see the formula below
% sign. Example: 4% as 0.04 if paid annually.
If paid semiannually 4/2 = 2% 0.02
here dividends are paid. For example, a 10 year bond pays diviends annually. N = 10.
nual payment of dividends in dollars
positive. Example 1,000 should be 1,000
If semiannualy 10 X 2 = 20 N=2
semiannualy 10 X 2 = 20 N=20
Milestone Three: Capital Budgeting Data (fill in YELLOW cells)
Initial Outlay
CF1
($65,000,000)
Cash Flows (Sales)
– Operating Costs (excluding Depreciation)
– Depreciation Rate of 20%
Operating Income (EBIT)
– Income Tax (Rate 25%)
After-Tax EBIT
+ Depreciation
Cash Flows
($65,000,000)
NPV
IRR
$50,000,000
$25,500,000
(13,000,000)
11,500,000
2,875,000
8,625,000
13,000,000
21,625,000
$15,404,422.60
19%
Time value for money (TVM) is the concept of worth for money at the present time (now) as compared to the same at a fu
amount of money is worth more the sooner it is received.
Stock is a unit of ownership.
The return on investment to the shareholders of UPS is 5.73% and 5.34% in 2016 and 2017 respectively. From the dividend
the increase in yield as a result of purchasing units of stock in UPS, hence returns.
Bonds (fixed income security) is a debt instrument by companies for the purpose of raising funds a specific amount of mon
time and which has a periodic interest payment obligation at agreed intervals.
In issuance of bonds, the present value of the bond is affected by interest rates in the market. When the interest rate goes
value of the bond decreases by $17,654 ($138,973 – $121,319) whereas, when rates go down the present value of the sam
($160,090 – $138,973).
Stock pricing is another process altogether which is not affected by dividend yielding.
Positive net present value (NPV) figure is okay to warrant acceptance of a capital project. The internal rate of return which
of interest that will give an NPV of zero.
Changes in interest rates have an effect on the net present value. The closer the interest rates are to the internal rate of
desirable it will be, since break-even point will be arrived at quicker. Of the three: 5%, 8% and 15%; the most desirable opt
WACC
CF2
CF3
$45,000,000
$25,500,000
(13,000,000)
6,500,000
1,625,000
4,875,000
13,000,000
17,875,000
$65,500,000
$25,500,000
(13,000,000)
27,000,000
6,750,000
20,250,000
13,000,000
33,250,000
9%
CF4
CF5
$55,000,000
$25,500,000
(13,000,000)
16,500,000
4,125,000
12,375,000
13,000,000
25,375,000
Select from drop
down below:
ACCEPT
ACCEPT
time (now) as compared to the same at a future date. In this case, an
16 and 2017 respectively. From the dividend yield in the periods, and
se of raising funds a specific amount of money for a specific period of
in the market. When the interest rate goes up by 2% the present
rates go down the present value of the same goes up by $21,117
al project. The internal rate of return which is at 19% refers to the rate
e interest rates are to the internal rate of return (IRR) the more
ee: 5%, 8% and 15%; the most desirable option would be 15%.
$25,000,000
$25,500,000
(13,000,000)
(13,500,000)
(3,375,000)
(10,125,000)
13,000,000
2,875,000
Capital Budgeting Example Set-up
ACCEPT
Initial investment $65,000,000
REJECT
Straight-line Depreciation of 20%
Income Tax @25%
WACC: use 9% (UPS WACC was about 9.43%)
Cash Flow (which in this case are Sales Revenues) are as follows:
CF1: $50,000,000
CF2: $45,000,000
CF3: $65,500,000
CF4: $55,000,000
CF5: $25,000,000
Operating Costs
CF1: $25,500,000
CF2: $25,500,000
CF3: $25,500,000
CF4: $25,500,000
CF5: $25,500,000
WACC- why do we use WACC rate for new projects? If the project
doesn’t earn more percent than WACC, the corporation should
abandon the project and invest money elsewhere.
Initial Investment – always negative. Corporation has to invest
money (“lose” it till they recover it via sales) in order to gain future
benefit.
Milestone Four: Interest Rate Implication (fill in YELLOW cells)
1. Original Scenario from Milestone 1 – Time Value of Money using 8%
Interest Rate
8.00%
FCF – 2015 FCF – 2016 FCF – 2017
5,052.00
3,546.00
(3,718.00)
Amounts*
Pv*
(4,677.78)
Total Pv*
*In millions
(4,766.43)
(3,040.12)
2,951.47
2. Change in interest rate and its implications – Lower Interest Rate (5%)
Interest Rate
5.00%
FCF – 2015 FCF – 2016 FCF – 2017
5,052.00
3,546.00
(3,718.00)
Amounts*
Pv*
(4,811.43)
Total Pv*
*In millions
(4,816.01)
(3,216.33)
3,211.75
3. Change in interest rate and its implications – Higher Interest Rate (15%)
Interest Rate
Amounts*
15.00%
FCF – 2015 FCF – 2016 FCF – 2017
5,052.00
3,546.00
(3,718.00)
Pv*
(4,393.04)
Total Pv*
*In millions
(4,629.68)
(2,681.29)
2,444.65
Explanation:
Use Milestone One and Time Value of Money for Milestone Four an
Two cases will be analyzed:
Lower Interest Rate at 5%
Higher Interest Rate at 15%

Purchase answer to see full
attachment