Math Course Project

The Course Project is an opportunity for you to apply concepts learned to a real-life simulation experience. Throughout the Course Project, you will assume that you work as a financial analyst for the Coca Cola Company. The Course Project is provided in two parts as follows: Part I – In Part I, you work with Coca Cola’s staff to identify the best loan options, as well as to valuate stocks and bonds. Part II – In Part II, you will provide the company with a recommendation for purchasing a new machine. You will base your recommendation on the Net Present Value (NPV) of the capital investment project using the cost of capital (WACC) as your discount rate. This course project requires that you show all your calculations and in some cases, the information obtained on companies over the web. Acceptable ways to show your calculations include: 1. Write your formulas and numbers used. 2. Attach an excel sheet to your work. 3. Copy/paste a snapshot of an online calculation or website. 4. A link to the website used, the calculator used listing all the variables used under each box.

Introduction

TheCourse Project is an opportunity for you to apply concepts learned to a real-life simulation experience. Throughout the Course Project, you will assume that you work as a financial analyst for the Coca Cola Company. The Course Project is provided in two parts as follows:

Part I – In Part I, you work with Coca Cola’s staff to identify the best loan options, as well as to valuate stocks and bonds.

Part II – In Part II, you will provide the company with a recommendation for purchasing a new machine. You will base your recommendation on the Net Present Value (NPV) of the capital investment project using the cost of capital (WACC) as your discount rate.

This course project requires that you show all your calculations and in some cases, the information obtained on companies over the web. Acceptable ways to show your calculations include:

1. Write your formulas and numbers used.

2. Attach an excel sheet to your work.

3. Copy/paste a snapshot of an online calculation or website.

4. A link to the website used, the calculator used listing all the variables used under each box.

Task 1: Assessing loan options for Coca Cola.

The company needs to finance $8,000,000 for a new factory in Mexico. The funds will be obtained through a commercial loan and by issuing corporate bonds. Here is some of the information regarding the APRs offered by two well-known commercial banks.

Bank

APR

Number of Times Compounded

National First

Prime Rate + 8.75%

Quartertly

Regions Best

11.57

Annually

1. Assuming that Coca Cola is considering loans from National First and Regions Best, what are the EARs for these two banks? Hint for National Bank: Go to the St. Louis Federal Reserve Board’s website (

http://research.stlouisfed.org/fred2/series/MPRIME

). Select “Interest Rates” and then “Prime Bank Loan Rate”. Use the latest MPRIME. Show your calculations. (15 pts)

Step 1. You need to obtain the prime rate from the website listed above. Follow the instructions above. Once you find the rate, you need to add the prime rate to 7.75% to determine the APR of National First Bank only. For instance, if the prime rate you found is 2%, then the APR of National First would be 2%+7.75%=9.75% and the APR for Regions Best would continue to be 12.57% (no changes in this one).

Step 2. Then you need to find the EAR for the two banks. You need to use the formula located on your book, Formula

5.5. To double check your answer, you can use the calculator I provided located at:

www.pine-grove.com/financial-calculators/equivalent-rate.htm

2. Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale. (15 pts)

Here you need to provide a one to two paragraph response. This response is only conceptual in nature, but is based on your calculations on the question above. We had discussed during the week the most appropriate rate to use (EAR or APR) and why. Check my postings on the TDs and your text on EAR and APR.

3. Coca Cola has decided to take a $5,980,000 loan being offered by Regions Best at 8.4% APR for 7 years. What is the annual payment amount on this loan? Show your calculations. Do you agree with this decision when compared to the options listed under Question 1 of this task? Explain your rationale. (20 pts)

Remember that this loan requires equal payments that include interest and principal for a certain period of time, therefore this is an annuity. For guidance, you can refer to the document in Doc Sharing titled “Calculate Loan Payments”, that has some examples.

You can calculate this payment using the formula PVA = C({1 – [1/(1 + r)]t } / r)

For the second part of the question, consider how the loans proposed on item (1) on Task 1, is this the best deal? Why? Hint: Remember that in loans you want to minimize your interest payments if possible. You can simply compare the appropriate interest rate.

Task 2: Evaluating Competitor’s Stock

Coca Cola is concerned regarding recent changes in its stock prices for the company and would like to determine the stock prices for key competitors. Key competitors include Pepsico, Inc, Nestle Waters and Dr. Pepper Snapple Group.

1. Using the dividend growth model and assuming a dividend growth rate of 3%, what is the rate of return for one of three key competitors (listed above)? Use Yahoo Finance to obtain the latest dividend amount and price for one selected company. Please show the information provided (at a minimum provide company name used and dividend/price found) (15 pts)
Class, the key here is that this is the dividend growth model, please review the material on page 206. You need to find the “rate” here. If you have trouble with formulas, you can find the formula solved for the rate on Table 7.1 of the textbook or you may apply Formula 7.5 of the textbook. – See the formula that has [7.5] next to it on page 210.

2. Using the rate of return above, what should be the current share price of Coca Cola Company if the company maintains a constant 3% growth rate in dividends and the most recent dividend per share paid on the stock was $4.80? Show your calculations. (10 pts)

Once again, the clue here is on page 206. Remember that the exercise is asking for the current price, which means the P0. Use Formula [7.3] of the textbook.

3. Which one would you consider to have a higher risk, common or preferred stock? Explain. (5 pts)

Write a one or two paragraph explanation. You do not need to do any calculations here, just consider which stock would be more risky for an investor. Also consider which stock has more potential for gains. If you have higher potential for gains, then you need to pay more to obtain that return.

4. What would happen with the price you computed above if Coca Cola announces that dividends will no longer be provided in the future? (10 pts)
A one or two paragraph will be perfect here. Just make sure to understand how the rate and dividends affect the price. But again, here if you offer an option with a better payout (dividends), then you would expect the investor to pay you more for it.

Task 3: Bond Evaluation

Coca Cola would like to issue 15-year bonds to obtain remaining funds for the new Mexico plant. The company currently has 6.5% semiannual coupon bonds in the market that sell for $890 and mature in 10 years.

1. At which coupon rate shall the company issue new bonds? Explain your rationale. (10 pts)

The company should set the coupon rate on its new bonds equal to the required return. The required return can be observed in the market by finding the YTM on outstanding bonds of the company. Therefore, the coupon rate of these new bonds should be the YTM (not to be confused with the current yield) of the existing bonds.
There is a good calculator for YTM located at:

http://zenwealth.com/BusinessFinanceOnline/BV/YTM.html

Or better yet, there is a formula under your lecture for Week 3 that you can use!

2. What is the difference between the coupon rate and the YTM? Explain your rationale. (10 pts)

Please write on paragraph with your explanation. Please review pages 163 and 164 of the text as well as the TDs.

3. What factors will contribute to the riskiness of these bonds? Explain in detail your rationale. (20 pts)

Once again, this question will be reviewed extensively in the TDs, as well as your lecture. Write a couple of paragraphs. Rationale can be reviewed on Chapter 6, page 166-167 and 192.

4. Please explain the difference between covenants and a call provision. (10 pts)

Page 177 has all the answers for you.

Note that 2, 3 and 4 do not require any calculations, just your understanding of the concepts.