Project 5: Cost of Capital, Risk/Return, and Capital Budgeting

Scenario

Your team’s work with Largo Global Inc. (LGI) is nearly complete. In your consulting role, you have recommended steps for improving the company’s financial health. You have offered advice on a revenue target, recommended steps for optimizing operations, and suggested investments that will improve LGI’s competitive position. In your final project, you will continue working on capital budgeting with a focus on the best way for LGI to finance the investments you recommend.

Your Project 5 business report will focus on ensuring LGI’s capital structure is sound and that the company is on a financially sustainable path. You will recommend a plan for financing investments that does not expose LGI to unnecessary risk. By the end of this project, the company’s financial statements should demonstrate that it has returned to a competitive position.

Step 1: Prepare for the Project

For the next two weeks, you will focus on the concepts of risk and return, the cost of capital, and capital budgeting. You will ensure that the financing plan you recommend supports LGI’s long-term financial position. Log into O’Reilly by following these instructions and complete the required reading.

Required Reading

Parrino, R., Kidwell, D. S., & Bates, T. W. (2012). Fundamentals of Corporate Finance (2nd ed.) Wiley.

Chapter 7: Risk and Return

Section 7.1 to 7.7

Chapter 10: The Fundamentals of Capital Budgeting

Sections 10.1 to 10.6

Chapter 13: The Cost of Capital

Sections 13.1 to 13.4

Step 2: Review and Practice

Using the Project 5 Review and Practice Guide, review the options for financing investments available to LGI. Then, apply what you have learned by completing the exercises and problems referenced in the Project 5 Review and Practice Guide.

You must review the guide and do the practice exercises and problems so that you

are prepared to have informed discussions with your team about capital structure and appropriate leverage,
understand risk and return,
can make recommendations for financing LGI’s investments, and
can complete your mission, turning around LGI.

Complete this review and practice by the end of Week 9.

Step 3: Participate in the Required Project 5 Discussion

You have finished reviewing the material and performing the exercises, but you have some questions. Participate in the Project 5 class discussion. Respond to the two questions below by posting in the discussion; then, respond to two of your classmates’ discussion posts by the end of the week.

Step 4: Complete the Analysis Calculation for Project 5

Your team has provided you with an Excel workbook containing LGI’s financials. You will use the Project 5 Excel workbook to perform advanced capital budgeting techniques to assess the viability of the investment you made in the previous project.

Complete the analysis calculation for the project:

Download the Project 5 Excel Workbook, click the Instructions tab, and read the instructions.
Calculate cost of debt and equity as well as weighted average cost of capital (WACC).
Apply the capital asset pricing model (CAPM).
Develop a capital budget.

If you would like instructor feedback on this step, submit your Excel file to the Assignments folder as a milestone by the end of Week 9. This is optional. If you choose to submit the milestone, you will receive instructor feedback you may use to make corrections before submitting your final Project 5. To distinguish the milestone submission from the file you will submit in Step 5, label your file as follows: P5_milestone_lastname_Calculation_date

You should use the comments your instructor made about your optional milestone submission to revise your calculations as needed. Next, proceed to Step 5, where you will answer questions about your analysis, make recommendations for LGI, and compile and submit your final report.

Step 5: Prepare the Analysis Report for Project 5

You have developed an in-depth understanding of LGI’s operating efficiency related to costing and how that impacts the bottom line. You feel confident that your investment choices will positively boost LGI’s productivity and improve the company’s operations. Thanks to your efforts, the company will have a plan for financing its investments appropriately. LGI will finally be on a path of a sustainable future. Answer the questions in the Project 5 Questions – Report Template document. Prepare your analysis report including recommendations for how the company can improve its financial situation.