MBA FPX 5014 Assessment 3 Financial Engineering to Enhance Shareholder Value

Phillip September 23, 2024 No Comments

MBA FPX 5014 Assessment 3 Financial Engineering to Enhance Shareholder Value

Name

Capella university

MBA-FPX5014 Applied Managerial Finance

Prof. Name

Date

Introduction

This presentation provides a summary of the initiative and measures taken to identify methods for generating greater shareholder value. Maria Gomez, the founder and president of ABC Healthcare Corporation, entrusted the finance team with the task of finding ways to improve the company’s financial health and long-term stability.

Overview

Summary of analysis
Data and information used during the analysis
Recommendations
Tactical objectives
Financial tools

Summary Report: Financial Condition Analysis

Deliverables
Overall financial analysis
Financial ratio analysis
Trend analysis
Competitive comparative analysis
Recommendations
Summary

The financial condition analysis aimed to enhance stakeholder value. Financial analysts evaluated computations to provide insights into the company’s business decisions, compared ABC Healthcare with industry competitors, and discovered the overall financial health of ABC.

Summary: Evaluation of Capital Projects

Deliverables
Capital project evaluation
Decision recommendations
Summary

The evaluation of capital projects aimed to understand the capital budgeting tools used to assess potential investment projects. After reviewing each project, the finance team provided recommendations for the best investment projects to bring value to the company.

Overall Financial Health: ABC Healthcare Corporation

ABC Healthcare Corporation does not appear to be competitive when compared to industry standards. A comparison with HCA Healthcare indicates that ABC Healthcare is also below financial trends. However, positive results were seen in areas like the price-to-earnings ratio and the price-to-book ratio. Overall, ABC Healthcare is undervalued and should consider the recommendations provided in the financial condition analysis.

Data Used for the Financial Condition Analysis

Ratio	2019	2018	2017
Market Price	83.62	83.62	83.62
Book Value per Share	199.1	209.05	226
Price to Book Ratio	0.42	0.40	0.37

Price/Earnings Ratio	2019	2018	2017
Market Price	83.62	83.62	83.62
Earnings per Share	6.91	7.87	9.15
Price/Earnings Ratio	12.10	10.63	9.14

Financial Condition Analysis – Trend Analysis

Trend analysis is a technique used to predict future stock price movements based on observed trend data (Hayes, 2021). The trend analysis provided insight into short-term steps that can be taken for longer-term gains. The earnings ratio chart shows that the market price is likely to remain constant, while the earnings per share decrease indicates an increase in the price-to-earnings ratio. It is important to monitor the price-to-book ratio, which continues to rise, as it measures the equity shareholders will pay for the company’s net asset value.

Recommendation to Increase Shareholder Value

Shareholder value refers to the value an investor gains by owning a single share of the company (What is shareholder value? 2018). Increasing the company’s shareholder value is essential to ABC’s success. The following actions were recommended to increase shareholder value:

Maximizing profitability: Reducing unnecessary costs, such as cutting down on redundant testing, while providing quality service to customers.
Minimizing debt: Paying off debts to positively impact investor confidence and allow the company to generate more revenue.
Paying dividends: Providing dividends to shareholders as a short-term recommendation will offer a return on investment and enhance the value of company shares, contributing to long-term success.

Evidence-Based Financial Decisions: Capital Projects

Projects	Major Equipment Purchase	Expansion into Three States	Marketing/Advertising Campaign
Cost	$10 million	$7 million (start-up) + $1 million (net working capital)	$2 million per year (for six years)
Projected Sales Growth	5% annual reduction in cost of sales	10% annual increase in sales and cost of sales	15% annual increase in sales and cost of sales
Required Rate of Return	8%	12%	10%
Timeframe	8 years	5 years	6 years

Evidence-Based Financial Decisions: Financial Data – Advertising/Marketing Campaign

Year	Marketing Cost	Sales Revenue	EBIT	Taxes (25%)	Earnings After Taxes	Cash Flow	Present Value Factor (10%)	Present Value of Cash Flow
0	$2,000,000	–	–	–	–	($8,710,521)	1.00	($8,710,521)
1	$2,000,000	$23,000,000	$9,200,000	$2,300,000	$6,900,000	$6,900,000	0.91	$6,272,727
2	$2,000,000	$26,450,000	$10,580,000	$2,645,000	$7,935,000	$7,935,000	0.83	$6,557,851
3	$2,000,000	$30,417,500	$12,167,000	$3,041,750	$9,125,250	$9,125,250	0.75	$6,855,935
4	$2,000,000	$34,980,125	$13,992,050	$3,498,013	$10,494,038	$10,494,038	0.68	$7,167,569
5	$2,000,000	$40,227,144	$16,090,858	$4,022,714	$12,068,143	$12,068,143	0.62	$7,493,367
6	$2,000,000	$46,261,215	$18,504,486	$4,626,122	$13,878,365	$13,878,365	0.56	$7,833,975

Tactical Objectives

Carry only assets that maximize value, ensuring a consistent evaluation of potential buyers willing to pay a premium for assets.
Focus on high-value-added activities, such as marketing and advertising campaigns, which can deliver reliable results at lower costs.
Return cash to shareholders when there are no credible opportunities to invest in the business.
Reward middle managers and employees for superior performance in driving value within the company.

Financial Tools

Financial statements: Regularly updated to show the company’s financial position, performance, and changes.
Financial KPIs: Include profitability, liquidity, solvency, efficiency, and valuation metrics.

References

Hayes, A. (2021, May 19). Book value per share (BVPS) definition. Investopedia. https://www.investopedia.com/terms/b/bvps.asp

Rappaport, A. (2014, August 1). Ten ways to create shareholder value. Harvard Business Review. https://hbr.org/2006/09/ten-ways-to-create-shareholder-value