Please refer to the excel file for this case questions and analysis. I need to complete the DYOD analysis on sheet Ex 2 DYOD and answer the questionsin sheet Q1 recommendations. Please do not hesitate to contact if need additional information. Thank you
READ THIS FIRST CaseNew Heritage Doll Company USE TAB Q1 IN THIS EXCEL FILE TO ANSWER THE QUESTIONS. TYPE DIRECTLY INTO THE BOXES PROVIDED. SAVE AS: YOUR NAME NEW HERITAGE Learning Objectives You will learn the three steps in capital budgeting: 1Identify relevant incremental cash flows 2Calculate cost of capital (k-wacc) to use as the discount rate 3Calculate the metrics of capital budgeting: Net Present Value, Profitability Index, Internal Rate of Return, and Payback Period. Then, you will apply the metrics and information in the case study to make a recommendation about which of the two projects to accept. The essence of the capital budgeting process is to make sure, before an investment is made, that its prospective rate of return is high enough to justify the investment. ReadingCohen finance book chapter 4 is a review of Time Value of Money, which you covered in a previous course, probably more than once. Review it as necessary, but defer the review until you look at the TVM applications in chapter 5 beginning on p 79, and in the case exhibits. You need to know TVM to understand the capital budgeting metrics of NPV, PI, and IRR. Make sure you have that context in mind before reviewing the TVM chapter 4 (only if you need to). Read the Heritage Doll Company case, focussing first on the two case exhibits, shown in the Ex. 1 and Ex. 2 tabs. Study the completed analysis in Ex. 1-MMDC Then complete the analysis in Ex. 2-DYOD following the MMDC example. With all decision metrics in hand, prepare to make the recommendation as requested in the Q1 Recommendations tab, by considering the facts and opinions in the case IN ADDITION to the decision metrics. Read Cohen finance book chapter 5 selectively. Focus on: See the FLOW DIAGRAM in GREEN depicting the CAPITAL BUDGETING template. See the IS/BS Model in GREEN depicting the connection between PPE (BS) and operating expense (IS). Read about weighted average cost of capital. Read about Net Working Capital. Read about NPV, PI, IRR, PP. Study the Generic Capital Budgeting Template. Realize that both the Generic Capital Budgeting Template and the New Heritage case exhibits are very similar - they are both constructed to calculate FREE CASH FLOW=EBIT-TAX+DEPREC+/-CHANGE NWC+/-CAPEX. Flow Diagram THUMBNAIL SKETCH:FINANCINGDEBT EQUITY BRIEF ANALYSISDEBT DUPONT RATIOSHISTORICAL RATIOSI/S & B/S FORECASTEFN TIE NORMAL DEBT RATIOWORKING CAPITALI/S, B/S, & RATIOSEQUITY STOCK PRICEEBIT CHART MKT CAP EXTENDED ANALYSIS FULL RATIOS LIQUIDITYincomeriskcontrolmktbltyflexbltytiming LEVERAGE ASSET USE PROFITABILITY VALUATION GROWTHCAPITAL BUDGETINGOP & CAP NATCF, NPV, IRR, PAYBACK ANALYSIS STEPS: 1-HISTORICAL RATIOS 2-K-WACC 3-CAPITAL BUDGETING 4-FORECAST & EFNK-WACC 5-EQUITY VALUATION 6-FINANCING VALUATIONENTERPRISE VALUE USING FREE CASH FLOW MARKET MULTIPLES: P/E, MV/BV, REV, EBIT IS-BS Model INCOME STATEMENT BALANCE SHEETWORKING CAPITAL RevenueASSETSLIABILITIES AND EQUITYchanges spontaneously with revenue Cost of salesCurrent assetsCurrent liabilities ?what levels of ca, cl, s-t loans? Gross profitCash Trade payablesCAPITAL BUDGETING Other operating incomeInvestmentsOther accruals ?which projects to accept? Other operating expensesTrade receivablesTax liabilitiesFINANCING Total cost and expensesInventoriesShort-term loans, leases ?how much debt capacity? Operating profit (EBIT)Non-current assetsNon-current liabilities Interest, finance costsProperty, plant & equipmentLoans, debt, leases due after 1 year Profit before taxInvestment propertyRetirement benefit obligationCOST OF DEBT Income taxGoodwillDeferred tax liabilities Net profit after tax Total non-current liabilities Dividends K-WACC Reinvested in the businessStockholder's equity (Net worth) Preferred stock OPERATING LEVERAGECommon stock COST OF EQUITY Additional paid-in-capital FINANCIAL LEVERAGERetained earningsVALUATION CASH FLOW Total assets Total liabilities & equityCOST OF CAPITAL Ex. 1-MMDC New Heritage Doll Company: Capital Budgeting Exhibit 1 MMDC 20102011201220132014201520162017201820192020 Revenue4,5006,8608,4099,0829,80810,59311,44012,35513,34414,411 Revenue GrowthNA52.4%22.6%8.0%8.0%8.0%8.0%8.0%8.0%8.0% Production Costs Fixed Production Expense (excl depreciation)575575587598610622635648660674 Variable Production Costs2,0353,4044,2914,6695,0785,5216,0006,5197,0797,685 Depreciation152152152152164178192207224242 Total Production Costs02,7624,1315,0295,4195,8536,3216,8277,3737,9638,600 Selling, General & Administrative1,2501,1551,7352,1022,2702,4522,6482,8603,0893,3363,603 Total Operating Expenses1,2503,9175,8667,1327,6908,3058,9699,68710,46211,29912,203 Operating Profit(1,250)5839941,2771,3921,5031,6231,7531,8932,0452,209 Operating Profit/Sales0.1300.1450.1520.1530.1530.1530.1530.1530.1530.153 SG&A/Sales0.2570.2530.2500.2500.2500.2500.2500.2500.2500.250 Working Capital Assumptions: Minimum Cash Balance as % of SalesNA3.0%3.0%3.0%3.0%3.0%3.0%3.0%3.0%3.0%3.0% Days Sales OutstandingNA59.2x59.2x59.2x59.2x59.2x59.2x59.2x59.2x59.2x59.2x Inventory Turnover (prod. cost/ending inv.)NA7.7x8.3x12.7x12.7x12.7x12.7x12.7x12.7x12.7x12.7x Days Payable Outstanding (based on tot. op. exp.)0.0x30.8x30.9x31.0x31.0x31.0x31.0x31.0x31.0x31.0x31.0x Capital Expenditures1,470952152152334361389421454491530 Growth in capex-35.2%-84.0%0.0%119.3%8.0%8.0%8.0%8.0%8.0%8.0% Net Working Capital Accounts20102011201220132014201520162017201820192020 Cash135206252272294318343371400432 Accounts Receivable729111213631472159017171855200321632336 Inventory360500396427461498538581627677 Accounts Payable3174845936406927478078719411016 Net Working Capital800907133414181531165317861929208322502429 DNWC10742784113122132143154167180 NWC/Sales0.2020.1950.1690.1690.1690.1690.1690.1690.1690.169 NPV Analysis Free Cash Flows20102011201220132014201520162017201820192020 EBIT(1-t)(750)3505967668359029741,0521,1361,2271,325 plus depreciation0152152152152164178192207224242 less DNWC(107)(427)(84)(113)(122)(132)(143)(154)(167)(180) less capital expenditures(952)(152)(152)(334)(361)(389)(421)(454)(491)(530) Free Cash Flow(750)(557)169682541583630680735793857 Terminal value 3.00%16,345 Initial Outlays Net working capital(800) Net property, plant & equipment(1470) Discount factor 8.40%1.00000.92250.85100.78510.72420.66810.61630.56860.52450.48390.4464 Present value(3,020)(514)1445363923903883873853847679 Net Present Value$ 7,150 NPV without Terminal Value$ (146) IRR Analysis 20102011201220132014201520162017201820192020 Cash Flows(3,020)(557)16968254158363068073579317,202 IRR24.0% Payback Analysis 20102011201220132014201520162017201820192020 Cash flows(3,020)(557)16968254158363068073579317,202 Cumulative cash flow(3,020)(3,577)(3,408)(2,726)(2,185)(1,602)(972)(291)443 Payback period7.40years 5-year Cumulative EBITDA$ 6,522 Profitability Index NPV/Initial Investment2.37 Ex, 2-DYOD New Heritage Doll Company: Capital Budgeting Exhibit 2 DYOD 20102011201220132014201520162017201820192020 Revenue06,00014,36020,22221,43522,72124,08425,52927,06128,685 Revenue GrowthNA139.3%40.8%6.0%6.0%6.0%6.0%6.0%6.0% Production Costs Fixed Production Expense (excl depreciation)01,6501,6831,7171,7511,7861,8221,8581,8951,933 Additional development costs (IT personnel) 435 Variable Production Costs02,2507,65111,42712,18212,98313,83314,73615,69416,712 Depreciation0310310310436462490520551584 Total Production Costs04354,2109,64413,45414,36915,23116,14517,11318,14019,229 Selling, General & Administrative1,20101,2402,9224,0444,2874,5444,8175,1065,4125,737 Total Operating Expenses1,2014355,45012,56617,49818,65619,77520,96222,21923,55324,966 Operating Profit(1,201)(435)5501,7942,7242,7792,9463,1233,3103,5083,719 Operating Profit/Sales0.0920.1250.1350.1300.1300.1300.1300.1300.130 SG&A/Sales0.2070.2030.2000.2000.2000.2000.2000.2000.200 Working Capital Assumptions: Minimum Cash Balance as % of SalesNANA3.0%3.0%3.0%3.0%3.0%3.0%3.0%3.0%3.0% Days Sales OutstandingNANA59.2x59.2x59.2x59.2x59.2x59.2x59.2x59.2x59.2x Inventory Turnover (prod. cost/ending inv.)NANA12.2x12.3x12.6x12.7x12.7x12.7x12.7x12.7x12.7x Days Payable Outstanding (based on tot. op. exp.)NANA33.7x33.8x33.9x33.9x33.9x33.9x33.9x33.9x33.9x Capital Expenditures4,61003103102,1928268759289831,0431,105 Growth in capex0%608%-62%6%6%6%6%6% Net Working Capital Accounts20102011201220132014201520162017201820192020 Cash Accounts Receivable Inventory Accounts Payable Net Working Capital DNWC NWC/Sales NPV Analysis 20102011201220132014201520162017201820192020 Free Cash Flows EBIT(1-t) plus depreciation less DNWC less capital expenditures Free Cash Flow Terminal value Discount factor Present value Net Present Value NPV without Terminal Value IRR Analysis 20102011201220132014201520162017201820192020 Cash Flows IRR Payback Analysis 20102011201220132014201520162017201820192020 Cash flows Cumulative cash flow Payback period 5-year Cumulative EBITDA Profitability Index NPV/Initial Investment The input data are provided in rows 4-28 above. Use the Ex. 1- MMDC example to complete the DYOD analysis. Q1-Recommendations Q1a Briefly present the business cases for each project. Which one is the most compelling and why? Q1b How do the capital budgeting metrics you calculated in Q1 and Q2 influence Emily's deliberations? Which project creates more value for Heritage Doll Company? Q1c Does Emily need additional information to complete her analysis, and if so, what questions should she put to the sponsors of each prioject. Q1d As Emily, using the information you have and your professional judgment, make the recommendation and justify it. New Heritage Doll Company: Capital Budgeting ________________________________________________________________________________________________________________ HBS Professor Timothy Luehrman and HBS MBA Heide Abelli prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. This case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional references to actual companies in the narration. Copyright © 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. T I M O T H Y L U E H R M A N H E I D E A B E L L I New Heritage Doll Company: Capital Budgeting In mid-September of 2010, Emily Harris, vice president of New Heritage Doll Company’s production division, was weighing project proposals for the company’s upcoming capital budgeting meetings in October. Two proposals stood out based on their potential to strengthen the division’s innovative product lines and drive future growth. However, due to constraints on financial and managerial resources, Harris knew it was possible that the firm’s capital budgeting committee would decline to approve both projects. She also knew that New Heritage’s licensing and retail divisions would promote compelling projects of their own. Consequently, Harris had to be prepared to recommend one of her projects over the other. The Doll Industry Revenues in the U.S. toy and game industry totaled $42 billion in 2008 and were projected to increase by 4.6% per year to $52.5 billion by 2013. The market was divided into two broad segments: video games (48%) and traditional toys and games (52%). The second segment was further divided into infant/preschool toys (14.5%), dolls (14.1%), outdoor & sports toys (12.3%), and other toys & games (59.1%) including arts and crafts, plush toys, action figures, vehicles, and youth electronics. The U.S. market for toys and games was dominated by large global enterprises that enjoyed economies