# United Parcel Service Capital Budgeting Data Please explain the answer in a word document. For this milestone, submit a draft of the Capital Budgeting Data

United Parcel Service Capital Budgeting Data Please explain the answer in a word document. For this milestone, submit a draft of the Capital Budgeting Data section of the final project, along with your supporting explanations. Base your calculations on the data provided in 2017 UPS Annual Report. Be sure to substantiate your claims.Submit your calculations on the designated tab of the Final Project Student Workbook and your supporting explanations as a Microsoft Word document.This milestone will be used in your final project. For additional details, please refer to the Final Project Guidelines and Rubric document and the Milestone Three Guidelines and Rubric document. Milestone One: Time Value of Money (please fill in YELLOW cells)

Interest Rate

FCF – Years

Amounts*

8%

FCF – 2015

Pv*

0.00

Total Pv*

*In millions

0.00

Pv=FVN/(1+I)^N

FCF – 2016

0.00

PV(I,N,0,FV)

FCF – 2017

0.00

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 ($)

Dividend

Yield

Stockholder’s

Equity (in

millions)

Stock Price

2015

2016

2017

#DIV/0!

#DIV/0!

#DIV/0!

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

1.75

1.75

1.75

Dividend

Yield

Stockholder’s

Equity (in

millions)

#DIV/0!

#DIV/0!

#DIV/0!

Stock Price

0

0

0

#DIV/0!

#DIV/0!

#DIV/0!

2. The dividend yield if the firm doubled it’s outstanding shares

Year

Cash

Div/Share ($)

Dividend

Yield

2015

2016

2017

0

0

0

#DIV/0!

#DIV/0!

#DIV/0!

Stockholder’s

Equity (in

Stock Price

millions) -doubled

0 #DIV/0!

0 #DIV/0!

0 #DIV/0!

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

1.75

#DIV/0!

1.75

#DIV/0!

1.75

#DIV/0!

Return on

Investment

CALCULATE ROI

(Dividends + Capital gain)/ Divide

(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

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

Please adjust interest

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

Please adjust interest

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

LLOW cells)

ion on the data.

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.

per share by 1.75

eld you calculated above

ALCULATE ROI

Dividends + Capital gain)/ Divided by the original Price

1 + (P1-P0)) / PO

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

ree scenarios below

017-2027 = 10 years *2 = 20 periods

ly: 5.00%/2 = 2.5%

emi-annual payments of interest.

– Enter 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

e help on 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%

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

Select from drop

down below:

ACCEPT

ACCEPT

$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

$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

Amounts*

Pv*

0.00

Total Pv*

*In millions

0.00

0.00

0.00

2. Change in interest rate and its implications – Lower Interest Rate (5%)

Interest Rate

FCF – 2015

FCF – 2016

FCF – 2017

Amounts*

Pv*

0.00

Total Pv*

*In millions

0.00

0.00

0.00

3. Change in interest rate and its implications – Higher Interest Rate (15%)

Interest Rate

FCF – 2015

FCF – 2016

FCF – 2017

Amounts*

Pv*

0.00

Total Pv*

*In millions

0.00

0.00

0.00

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%

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