Assignment: Capital Budgeting And Project Valuation
The company I have chosen is AT&T.
Milestone Project Valuation is due this week.
You are working on your financial projections in the valuations tab of the project spreadsheet template. At first glance, the valuation spreadsheet can appear to be overwhelming. I have attached a simplification guide that you should find helpful when working on the spreadsheet. What I'd like you to keep in mind is what the goal is - the goal is not to fill out the spreadsheet rather to project what you think the financial performance of the company will be over the next five years. You should be leveraging the work you did in the first milestone deliverable as a starting point as often historical performance can guide us in thinking about future performance. I encourage you to break down your analysis about valuation into 5 sections. Focus on this and then the spreadsheet input.
Valuation Guidance - Priming critical thinking.
1. Revenue projections. What is the rate of growth to project for revenue? Why? How will it achieve that growth - adding new stores, adding more subscribers, etc. If so, what is the current baseline of stores or subscribers and to grow to what you think it will be in 5 years how many new stores, subscribers will there need to be to make that possible.
2. Operation margin projections. How much of revenue is absorbed by expenses and what is left? Will operating margin be increasing or decreasing and why? It is not common for operating margin to be increasing due to competitive threats but if you think there is a reason why, like supply chain optimization, you should talk about that and incorporate. There is no problem with keeping margin the same with little movement for the next few years, especially if the company appears to be in a steady state operationally.
3. Tax Rate. Keep it simple. It doesn't tend to change much. You may want to use the more recent tax rate as there was a reduction in the corporate tax rate. I would not use an average of the past few years. To calculate tax rate use "provision for income taxes paid / earnings before taxes" from the income statement.
4. Depreciation Expense. Project out the depreciation expense based on historical spend as a starting point. We need depreciation expense as this is a non-cash expense on the income statement and we have to add it back to get to cash flow.
5. Incremental Capital Investment - For the company to grow it will need to invest in new capital. How much depends on the company and how much capital is required to drive revenue. One thing to keep in mind is that the number generally if Revenue is projected to increase, is that the number is higher than depreciation expense. Look at the depreciation expense number as the dollar amount that the company needs to re-invest just to replace current equipment to maintain current revenue needs. Capital investment over and above 'depreciation expense' is targeted for growth.
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.