Money and Banking Module 4 Assignment #2 Summer 2020
To complete assignment #4 you must write a paper in your own words that addresses the following:
1. Describe the tools the Fed has in its toolbox and how/when does the Fed use these to meet their dual mandate from Congress?
2. What is the FED’s current monetary policy? What does the FED expect to happen in the U.S. economy in the near future? How can you tell what the FED’s expectations are?
3. Discuss the Quantity Theory of Money (QTM). Based on this theory, what is the potential for inflation in the US economy, considering the Fed’s accommodative policies during the Great Recession?
Your submission should meet the following requirements:
1. Your paper must be prepared as a WORD document and submitted through Blackboard by August 1st.
2. You must include a Cover Page, Table of Contents, and a References page.
3. The body of your paper (excluding the Cover Page, Table of Contents, and References page) should be 6-10 pages.
4. Your text should be double-spaced, with 1” margins, Times New Roman font, with each paragraph indented.
5. References should be in APA, 6th edition, format.
6. The textbook may be used as a source. In addition, you should have at least 5 other sources. Do not use a blog as a source.
7. Avoid the use of quotes in your paper. No more than 10% of your paper should be quoted material from any source – including the textbook.
8. Use in-text citations whenever appropriate and be sure to include all cited sources in your References page.
9. Use proper grammar.
10. Write using third person.
Safe Assign will be used by the instructor in this course on all assignments to monitor students’ assignment submissions for plagiarism and compliance with the limitation for quoted material.
Rubric: This assignment is worth 50 points. 30% of your grade will be based on following the above format requirements and 70% will be based on content.
You are considering the purchase of a new car, the reborn VW Beetle, and you have been offered two different deals from two different dealers. Dealer A offers to sell you the car for $20,000, but allows you to put down $2,000 and pay back $18,000 over 36 months (fixed payment each month) at a rate of 8% compounded monthly. Dealer B offers to sell you the car for $19,500 but requires a down payment of $4,000 with repayment of the remaining $15,500 over 36 months at 10% compounded monthly.
Which deal would you choose? (Hint: Find ranges of market interest rates that make one deal more attractive than the other.)3. Dear Financial Adviser, My spouse and I are each 62 and hope to retire in 3 years. After retirement we will receive $5,000 per month after taxes from our employer’s pension plans and $1000 per month after taxes from Social Security. Unfortunately, our monthly living expenses are $15,000. Our social obligations preclude further economies. We have $1,200,000 invested in a high-grade corporate-bond mutual fund. Unfortunately, the after-tax return on the fund has dropped to 3.5% per year. We plan to make annual withdrawals from the fund to cover the difference between our pension and social security income and our living expenses. How long will the money last? Sincerely, Luxury Challenged Marblehead, MA
Financial planning and forecasting
The CFO of St Frances has asked you as a Business Analyst to do a 5-year business plan for this new Outpatient Diagnostic Center.
They want to do the following imaging services at the new Outpatient Diagnostic Center: X-rays, computerized tomography (CT) scans and magnetic resonance imaging (MRI).
Based on the prior experience and the community needs, they estimate the following volume of diagnostic exams by Financial Class/Payor in the first year of operation.
Based on the current charges at their other diagnostic centers, gross charges for the new services will be as follows:
X-ray $250.00
Ct Scan $650.00
MRI $1,050.00
Based on their current contracts with the different payors, they expect the net revenue per imaging will be as follows:
Operating expenses are estimated as follows:
Staffing: 2 Full Time Supervisors at $42.00 an hour, 9 Full Time Technicians/Technologists at $32.00 an hour, 3 Clerical staff at $22.00 an hour (1 FTE = 2,080 hours per year).
Current benefits (including health insurance) are running at 30% of salaries.
Other operating expenses:
Supplies $8,000 per month
Rent $20,000 per month
Utilities $10,000 per month
Other department expenses $4,000 per month
Direct Overhead expenses including billing, collection, coding, registration, etc. are estimated to be at $25 per exam.
Corporate office overhead allocations are estimated at 20% of the total department expenses (including direct overhead but excluding depreciation).
The capital expenditure for this project are estimated as follows:
Imaging machines have 5 years of useful life. St Francis uses straight-line method to depreciate all imaging machines and other capital expenses related to installation and renovation of diagnostic centers. The best estimate of the machines net salvage value after the five years of use is $500,000.
St. Francis Healthcare’s weighted average cost of capital (WACC) is 12% and is used as their discount rate when budgeting for a new project.
It is estimated that the gross charges will increase by 4% per year. It is a growing community and St Francis management expects that the volume will grow by 2% per annum. Based on their current insurance contracts, the Net Revenue is expected to increase by 3% per year. Also, expenses are expected to increase by 4% per year.
Using the information given above, you are asked to develop a business plan for this Outpatient Diagnostic center.
The business plan should include the following data/information:
1. a. Gross and Net Patient Service revenue by Financial class/Payor budget for the period of 5 years.
b. Detail Expense budget for 5 years.
c. Income statement for 5 years.
d. What is the project’s payback period? What are the deficiencies of payback method when used as a project selection criterion?
e. What is the project’s NPV at WACC of 12%?
2. What is the payor mix % for Year 1 using gross revenue?
3. Would you recommend opening this new Diagnostic Center?
4. What other factors including internal and external would you consider when doing this business plan?
5. There is a rumor that a big national company is also looking to open a free-standing diagnostic center in that area within the next two years. It is estimated that if the new diagnostic center is opened, it will result in decrease in volume for St. Francis by 5% per year (in year 3-5). Also, Commercial/Managed Care insurance companies are looking ways to cut their cost by reducing hospital reimbursement. One way is to index their reimbursement to Medicare. Managed Care/Commercial insurance are considering paying 150% of Medicare rates starting year 3. Assuming everything else remains the same, show the impact this will have on net revenue, income statement, payback period and NPV using 12% cost of capital. What would be your recommendation based on the new information?
Stock Valuation
Chapter 9 Stocks: Show your steps either following the textbook guidelines for setting up these stock valuation problems or your own steps: If you follow the textbook Pages 275 – 278 it gives you’re the information to complete these three.
There are three steps:
1. Calculate the dividend/cash flow each year using the growth rate
2. Determine where the growth of the company becomes constant (this is the key constant growth rate model), this is called the terminal or horizon value.
3. Place each of these cash flows into the calculator or excel using the interest rate given and calculate NPV which is now called the intrinsic value. Note: The book examples do these the long way with formulas and math.
The trick with the Free cash flow questions (2 and 3) is to remember to divide your final answer by the number of shares to get the stock price otherwise known as the intrinsic value.
The earnings of Best Forecasting Company are expected to grow at an annual rate of 14% over the next 5 years and then slow to a constant rate of 10% per year. Best currently pays a dividend of $0.36 per share. What is the value of Best stock to an investor who requires a 16% rate of return? If stock has a market price of $15 do you buy?
Financial Management Project
My publicly traded company from NYSE is (DIS-Walt Disney) 2019-2020
PART II
Economic Factors: Give a brief statement about the fundamental future growth of your company. What are some qualitative factors that you, as the analyst should consider when evaluating your company’s likely future financial performance? How much would the Federal Reserve’s function affect your firm? Is business risk a concern for your organization?
PART III
Bond Rating and Debt Percentage: Find your firm’s most recent bond rating. Who gave the rating? Is it investment grade? What is the debt percentage in the capital structure? What is the Yield to Maturity (YTM) for a long-term bond for sale? This information can be found in the “Bonds” section of Morningstar.com, on Yahoo Finance, or Mergent (Sullivan University). If your company has no debt, just state such. Watch Part III Project FIN324 for additional help.
PART IV
Capital Asset Price Model (CAPM): Briefly discuss CAPM from the standpoint of investors and managers. Now calculate your firm’s CAPM. It is recommended that you use treasury security as the risk-free rate - you pick which one (It would probably be best to use the 5- or 10-year Treasury note). Beta can be either calculated or you can use one from the internet (provide reference). Yahoo finance lists the most current beta under “key statistics.” As for the risk for the market, search the most recent. Usually it is around 5% to 6%.
PART V
- Weighted Average Cost of Capital (WACC): Find the most recent capital structure. With your best effort, calculate the WACC. Use the YTM found in the bond rating section for cost of debt. Do not forget to account for taxes. It is suggested that you use a 35% tax bracket. Use your CAPM for the cost of stock. You can use Morningstar for the weight of the capital structure.
- Overview: Provide a summary and overview of your company. What are the firm’s major weaknesses and strengths? Given what you see with just these numbers, would you invest money in this company?