For this assignment, you will read the
SSRN
case study titled Caterpillar, Inc.: The Impact of Decision Biases and Risk on Capital Budgeting, which analyzes the Caterpillar organization and the impact of emerging markets on capital investment decisions.
Caterpillar is expanding to foreign markets with the introduction of their new hybrid/electric exoloader. Using Caterpillar's capital expenditure model (CapX), you will evaluate two scenarios:
- Scenario A: Expanding and refocusing an existing production facility in Aurora, IL
- Scenario B: Building a new facility in China
In this short paper, you will closely examine the alternative models available to decision makers, and answer the questions listed in the rubric document. 3 pages.
FIN 630 Module Six Short Paper Guidelines and Rubric Overview: For this assignment, you will read the SSRN case study titled Caterpillar, Inc.: The Impact of Decision Biases and Risk on Capital Budgeting, which analyzes the Caterpillar organization and the impact of emerging markets on capital investment decisions. Caterpillar is expanding to foreign markets with the introduction of their new hybrid/electric exoloader. Using Caterpillar’s capital expenditure model (CapX), you will evaluate two scenarios: Scenario A: Expanding and refocusing an existing production facility in Aurora, IL Scenario B: Building a new facility in China In this short paper, you will closely examine the alternative models available to decision makers. Prompt: In your paper, pay special attention to the following elements of the case study: Benefits of the expansion Operating costs Capital spending Risks to the overall company The case study is based on data from financial statements from 2011. You will use current financial statements for your answers. Specifically, the following critical elements must be addressed: I. Download the current yearly financial statement (10-K) for Caterpillar (CAT). You can use SEC Edgar Company Filings. Note that the Caterpillar fiscal year end is December 31. They have 120 days to file with the SEC, but generally they release new financial statements in February. II. Using the financial statements, determine the discount rate and calculate WACC. In order to do that, you need to calculate: A. Cost of debt B. Cost of equity: Think CAPM (Capital Asset Pricing Model) or SLM (Security Market Line). C. Can Caterpillar use preferred stock financing? (Analyze financial statements and answer yes or no; explain how you arrived at your answer.) Helpful hints for this step: Use the ValuePro website to obtain an approximate estimation of WACC for Caterpillar. You can use Calculating Weighted Average Cost of Capital (WACC) or other YouTube videos as a guide on how to calculate WACC using financial statements. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2132944 https://www.sec.gov/edgar/searchedgar/companysearch.html http://www.valuepro.net/ https://www.youtube.com/watch?v=1aMH_zPu4FQ An optional article in Module Five, Understanding Weighted Average Cost of Capital: A Pedagogical Application, also provides a WACC calculation guide III. Risk Analysis: Read items 1A (Risk Factors) and 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) in the 10-K financial statements. Then, address the following: A. How would these risk factors impact the two projects? B. Consider the risk factors and calculate each project’s risk-adjusted hurdle rate: i. Scenario A: Is the risk-adjusted hurdle rate higher or lower than the WACC? ii. Scenario B: Is the risk-adjusted hurdle rate higher or lower than the WACC? C. How would you mitigate the risks? Helpful resource for this step: How to Set the Hurdle Rate for Capital Investments. (See more detail in the Module Six Required Resources section.) Rubric Guidelines for Submission: Your paper should be 2–3 pages long, double spaced, with 12-pt. Times New Roman font, one-inch margins, APA citations, and at least two references. Show your WACC calculations either directly in the Word document or attached as a separate Excel file (if you have calculated WACC in an Excel spreadsheet). Critical Elements Proficient (100%) Needs Improvement (70%) Not Evident (0%) Value Calculate WACC WACC is correctly calculated, and all calculation work is shown, including cost of debt and cost of equity WACC is correctly calculated, but not all calculation work is shown WACC is not correctly calculated 20 Preferred Stock Financing The question is answered correctly and supported with an appropriate explanation The question is answered correctly but not supported with an appropriate explanation The question is not answered correctly 10 Risk Analysis: Risk Factors Provides analysis that demonstrates complete understanding of risk factors for both projects Provides analysis that demonstrates understanding of some risk factors for both projects Does not provide analysis, and/or shows lack of understanding of risk factors 20 Risk Analysis: Risk- Adjusted Hurdle Rate Provides correct answers that demonstrate complete understanding of risk-adjusted hurdle rate for both scenarios Provides one correct answer that demonstrates some understanding of risk- adjusted hurdle rate for scenarios Does not provide correct answers regarding risk-adjusted hurdle rate for both scenarios 20 Risk Analysis: Mitigate Draws informed conclusions regarding risk mitigation that are justified with evidence Draws logical conclusions regarding risk mitigation but does not defend with evidence Does not draw logical conclusions regarding risk mitigation 20 Writing (Mechanics/Citations) No errors related to organization, grammar and style, and citations Some errors related to organization, grammar and style, and citations Major errors related to organization, grammar and style, and citations 10 Total 100% http://ezproxy.snhu.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=edsjsr&AN=edsjsr.24331031&site=eds-live&scope=site http://www.financepractitioner.com/mergers-and-acquisitions-best-practice/how-to-set-the-hurdle-rate-for-capital-investments?full