Assignment 1: Discussion—Finance Organization and Long-Term Planning
Considering Genesis Energy’s aggressive growth plan, Sensible Essentials suggested that its client should broaden the scope of financing beyond short-term loans and consider long-term financing options. These options would greatly enhance the ability of the operations management team to fund the capital investments and growth in operating expenses.
One option is selling more equity in the company. A public stock offering might be a possibility; however, a company as young and small as Genesis Energy might be hard to value. Sensible Essentials believes that another private investor might require preferred stock dividends in order to mitigate some of the financial risk. Another option is a long-term bank loan.
Acting as the finance expert for Sensible Essentials, respond to the following:
- Determine the cost of debt and equity for Genesis Energy and its weighted average cost of capital. Go to www.yahoofinance.com and look under SEC filings. Use a US publicly traded company, such as Apple, Google, DuPont, etc.
- Identify the sources of long-term financing for Genesis Energy.
- Analyze the potential costs and benefits of each option.
- Explain how relative risk (from the investor’s perspective) impacts the cost of capital for Genesis Energy.
- Determine the cost of debt and equity for Genesis Energy and its weighted average cost of capital.
- Calculate the required rate of return for Genesis Energy using the capital asset pricing model (CAPM). What is the required return for Genesis Energy shareholders?
By the due date assigned, post your response to the Discussion Area. Through the end of the module, review and comment on at least two peers’ responses.
Write your initial response in 300–500 words. Your response should be thorough and address all components of the discussion question in detail, include citations of all sources, where needed, according to the APA Style, and demonstrate accurate spelling, grammar, and punctuation
Do the following when responding to your peers:
- Read your peers’ answers.
- Provide substantive comments by
- contributing new, relevant information from course readings, Web sites, or other sources;
- building on the remarks or questions of others; or
- sharing practical examples of key concepts from your professional or personal experiences
- Respond to feedback on your posting and provide feedback to other students on their ideas.
- Make sure your writing
- is clear, concise, and organized;
- demonstrates ethical scholarship in accurate representation and attribution of sources; and
- displays accurate spelling, grammar, and punctuation.
Assignment 2: Genesis Energy Cash Position Analysis
The Genesis Energy operations management team is now preparing to implement the operating expansion plan. Previously, the firm’s cash position did not pose a challenge. However, the planned foreign expansion requires Genesis Energy to have a reliable source of funds for both short-term and long-term needs.
One of Genesis Energy’s potential lenders tells the team that in order to be considered as a viable customer, Genesis Energy must prepare and submit a monthly cash budget for the current year and a monthly cash budget for the subsequent year. The lender will review the cash budget and determine whether or not Genesis Energy can meet the loan repayment terms. Genesis Energy’s ability to repay the loan depends not only on sales and expenses but also on how quickly the company can collect payment from customers and how well it manages its supplier terms and other operating expenses. The Genesis Energy team members agreed that being fully prepared with factual data would allow them to maximize their position as well as negotiate favorable financing terms.
The Genesis Energy management team held a brainstorming session to chart a plan of action, which is detailed here.
- Evaluate historical data and prepare assumptions that will drive the planning process.
- Produce a detailed 2 year cash budget that summarizes cash inflow, outflow, and financing needs.
- Identify and compare interest rates, both short-term and long-term, using debt and equity.
- Analyze the financing mix (short/long) and the cost associated with the recommendation.
Since this expansion is critical to Genesis Energy expanding into new overseas markets, the operations management team has been asked to prepare an executive summary with supporting details for Genesis Energy’s senior executives.
Working over a weekend, the management team developed realistic assumptions to construct a working capital budget.
- Sales: The marketing expert and the newly created customer service personnel developed sales projections based on historical data and forecast research. Please use the sales projections provided in the template. See “Download” in item 1 below.
- Other cash receipt: Rental income $15,000 per month for Y1 and 20,000 for Y2.
- Production material: The production manager forecasted material cost based on cost quotes from reliable vendors, the average of which is 45 percent of sales
- Other production cost: Based on historical cost data, this cost on an average is 30 percent of the material cost and occurs in the month after material purchase
- Selling and marketing expense: Six percent of sales
- General and administrative expense: 18 percent of sales
- Interest payments: $10,000—Payable in December Y1 and $0 payable in December Y2.
- Tax payments: $15,000—Quarterly due on 1st of April, July, October, and January
- Minimum cash balance desired: $25,000 per month
- Cash balance start of month (December): $10,000
- Available short-term annual interest rate is 8 percent, long-term debt rate is 9 percent, and long-term equity is 10 percent. All funds would be available the first month when the firm encounters a deficit
- Dividend payment: None
Based on this information, do the following:
- Using the Cash Budget spreadsheet, calculate detailed company cash budgets for the forthcoming and subsequent year. Summarize the sources and uses of cash, and identify the external financing needs for both the forthcoming and subsequent years.
Download this Excel spreadsheet to view the company’s cash budget. You will calculate the company’s monthly cash budget for the forthcoming year and quarterly budget for the subsequent year using this information.
- In an executive-level report, summarize the company’s financing needs for the forecast period and provide your recommendations for financing the planned activities. Be sure to comment on the following:
- Your recommended financing solution and cost to the firm: If Genesis Energy needs operating cash, how should it fund this need? Are there internal policy changes with regard to collections or payables management you would recommend? What types of external financing are available?
- Your concerns associated with the firm’s cash budget. Is this a sign of weak sales performance or poor cost control? Why or why not?
Write a 7-page paper in Word format. Apply APA standards to citation of sources. Use the following file naming convention: LastnameFirstInitial_M3_A2.doc.
By the due date assigned, deliver your assignment to the Submissions Area.