Milestone 2 – Evaluation of an Alternative Opportunity
Your final project for this course is to prepare a financial analysis. This final project takes a close look at two corporations, Bayer and Monsanto. Bayer is considering a bid for United States seed company Monsanto (Snider, 2016). For purposes of this project, you will act as the Chief Financial Officer of Monsanto Corporation, analyzing financial documents and determining whether Monsanto should indeed go forward with acceptance of the purchase.
project is divided into three milestones, which will be submitted at various points throughout the course to scaffold learning and ensure quality final submissions. Preliminary milestones will be submitted in Modules Four and Six. The final submission will occur in Module Eight.
Milestones
| Milestone 1: | Evaluation of the Proposal | Due in Module 4 |
| Milestone 2: | Evaluation of an Alternative Opportunity | Due in Module 6 |
| Milestone 3: | Final Project Submission | Due in Module 8 |
In this assignment you will demonstrate your mastery of the following course outcomes:
| [CO1] | Analyze financial reports to determine a firm’s performance. |
| [CO2] | Apply the strategic planning processes necessary to manage the long- and short-term financial activities of the firm. |
| [CO3] | Perform valuation of financial instruments. |
| [CO4] | Evaluate the appropriateness of an investment using applicable economic, industry, and competitive analysis. |
Milestone 2: Evaluation of an Alternative Opportunity
Before completing this assignment, review the Final Project Document. Background information found in the Final Project Document applies to Milestones 1 through 3.
As an alternative proposal means of increasing shareholder value, you have also been asked to evaluate Monsanto’s intent to expand its operations to pesticide production, which is expected to yield a sales increase of $3,950,000. There is no excess capacity, and the increase in fixed asset needs would be equal to 70% of this increase in sales, while cost of sales would run 20% of sales, using a percentage of sales approach. Assume that Monsanto issues dividends at a rate of 1.98% of net sales, and thus the firm’s retention ratio is 98.2%. Current sales are projected to be $15,239,000. Assume that the proposed project has a risk and weighted average cost of capital similar to that of Monsanto, and a firm beta similar to that of Monsanto.
- The extent to which Monsanto will have to take on additional debt, given that it wishes to retain its current dividend ratio and does not wish to sell additional equities.
- Calculate the firm’s sustainable growth rate and internal growth rate and use these measures to analyze a decision to accept this alternative proposal. Use these measures and concepts covered in assigned readings including EFN, DuPont Identity and leverage, Modules One through Six, to explain the importance of these measures to shareholder interests.
At the end of your draft, include questions and challenges that you experienced with this milestone.
Prepare your Evaluation of an Alternative Opportunity in a 2–4 page double-spaced document using 12 pt. Times New Roman font. Use APA formatting.
Compose your work in a .doc or .docx file type using a word processor (such as Microsoft Word, etc.) and save it frequently to your computer. For those assignments that are not written essays and require uploading images or PowerPoint slides, please follow uploading guidelines provided by your instructor.
Check your work and correct any spelling or grammatical errors. When you are ready to submit your work, click “Upload Submission.” Enter the submission title and then click on “Select a file to upload.” Browse your computer, and select your file. Click “Open” and verify the correct file name has appeared next to Submission File. Click on “Continue.” Confirm submission is correct and then click on “Accept Submission & Save.”
Turnitin®
This course has Turnitin® fully integrated into the course dropbox. This means that you should only submit your assignments to the dropbox below. Please do not submit your assignment directly to Turnitin.com.
Once submitted, your assignment will be evaluated by Turnitin® automatically. You will be able to view an Originality Report within minutes of your first submission that will show how much of your work has been identified as similar to other sources such as websites, textbooks, or other student papers. Use your Originality Report as a learning tool to identify areas of your assignment that you may not have cited appropriately. You may resubmit your assignment through this dropbox as many times as you need to check to see if you have made improvements, until the due date of the assignment. However, once you have made your first submission, you will need to wait 24 hours after each subsequent submission to receive a new Originality Report. Plan accordingly as you draft your assignment. Once the due date has passed, your assignment submission will be considered final.
Evaluation
This assignment will be graded using the located on the Course Rubrics page within the Start Here section of the course. Please review the rubric prior to beginning your work so that you ensure your submission meets the criteria in place for this assignment. This assignment is worth 10% of your final course grade.
Immediate Results from the Bayer Announcement in 2015
| Monsanto (MON) Share Price | Increased 8.7% |
| Bayer Crop Science Division | Sales increase 9% to $11.8 billion |
| Bayer Healthcare Division Sales | Increased 19% to $26 billion |
| Bayer Pharmaceutical Sales | Increased 12%, to $52.8 billion |
| Monsanto Sales | Decreased 5% to $15 billion |
Table 1. Immediate Results from the Bayer Announcement in 2015
ValuPro Net Online Valuation of MONSANTO CORPORATION – 2015
| Return on Assets | 8.56 | Return on Equity | 14.93 | |
| Sales ($mil) | 14,757 | Investment Rate (% of Rev) | 4.78 | |
| Growth Rate (%) | 13.5 | Working Capital (% of Rev) | 29.19 | |
| Net Oper. Profit Margin (%) | 21.3 | Short-Term Assets ($mil) | 11141 | |
| Tax Rate (%) | 30.584 | Short-Term Liab. ($mil) | 4055 | |
| Stock Price ($) | 86.74 | Equity Risk Premium (%) | 3 | |
| Shares Outstanding (mil) | 533.8 | Company Beta | 1.05 | |
| 10-Yr Treasury Yield (%) | 500% | Value Debt Out. ($mil) | 2.054 | |
| Bond Spread Treasury (%) | 1.5 | Value Pref. Stock Out. ($mil) | 0 | |
| Preferred Stock Yield (%) | 7.5 | Company WACC (%) | 8% |
Table 2. ValuePro Net Online Valuation
Monsanto Co. 2015 (Bloomberg Market Rates)
| MON:US | |
| Current Price | 106.00 (USD) |
| Open | 106.80 |
| Day Range | 109.69-109.54 |
| Volume | 18,049,774 |
| Previous Close | 106 |
| 52 Week Range | 81.22-120 |
| 1 Year Return | -7.06% |
| YTD Return | 10.94% |
| Current P/E Ratio (TTM) | 23.67 |
| Earnings Per Share (USD) (TTM) | 4.62 |
| Market Cap (B USD) | 47.747 |
| Shares Outstanding | 436.845 |
| Price/Sales (TTM) | 3.65 |
| Dividend Indicated Gross Yield | 1.98% |
| Sector | Materials |
| Industry | Chemicals |
| Sub-Industry | Agricultural Chemicals |
Table 3. Monsanto Co. Rates
Income Statement – Monsanto Corp.
| Period Ending | 31-Aug-15 | 31-Aug-14 | 31-Aug-13 | ||
| Total Sales | 15,001,000 | 15,855,000 | 14,861,000 | ||
| Cost of Sales | 6,819,000 | 7,281,000 | 7,208,000 | ||
| Gross Profit | 8,182,000 | 8,574,000 | 7,653,000 | ||
| Operating Expenses | |||||
| Research Development | 1,580,000 | 1,725,000 | 1,533,000 | ||
| Selling General and Administrative | 2,686,000 | 2,774,000 | 2,550,000 | ||
| Non Recurring | 393,000 | – | – | ||
| Others | – | – | – | ||
| Total Operating Expenses | – | – | – | ||
| Operating Income or Loss | 3,523,000 | 4,075,000 | 3,570,000 | ||
| Income from Continuing Operations | |||||
| Total Other Income/Expenses Net | 71,000 | – | 31,000 | ||
| Earnings Before Interest and Taxes | 3,594,000 | 4,075,000 | 3,601,000 | ||
| Interest Expense | 433,000 | 248,000 | 172,000 | ||
| Income Before Tax | 3,161,000 | 3,827,000 | 3,429,000 | ||
| Income Tax Expense | 864,000 | 1,078,000 | 915,000 | ||
| Minority Interest | -11,000 | -22,000 | -43,000 | ||
| Net Income from Continuing Ops | 2,286,000 | 2,727,000 | 2,471,000 | ||
| Non-recurring Events | |||||
| Discontinued Operations | 28,000 | 13,000 | 11,000 | ||
| Extraordinary Items | – | – | – | ||
| Effect of Accounting Changes | – | – | – | ||
| Other Items | – | – | – | ||
| Net Income | 2,314,000 | 2,740,000 | 2,482,000 | ||
| Preferred Stock and Other Adjustments | – | – | – | ||
| Net Income Applicable to Common Shares | 2,314,000 | 2,740,000 | 2,482,000 | ||
Table 4. Monsanto Income Statement
Balance Sheet – Monsanto Corp.
| Period Ending | 31-Aug-15 | 31-Aug-14 | 31-Aug-13 | |
| Assets | ||||
| Current Assets | ||||
| Cash and Cash Equivalents | 3,701,000 | 2,367,000 | 3,668,000 | |
| Short Term Investments | 47,000 | 40,000 | 254,000 | |
| Net Receivables | 3,182,000 | 3,466,000 | 3,042,000 | |
| Inventory | 3,496,000 | 3,597,000 | 2,947,000 | |
| Other Current Assets | 199,000 | 205,000 | 166,000 | |
| Total Current Assets | 10,625,000 | 9,675,000 | 10,077,000 | |
| Long Term Investments | 42,000 | 92,000 | 237,000 | |
| Property Plant and Equipment | 4,973,000 | 5,082,000 | 4,654,000 | |
| Goodwill | 4,061,000 | 4,319,000 | 3,520,000 | |
| Intangible Assets | 1,332,000 | 1,554,000 | 1,226,000 | |
| Accumulated Amortization | – | – | – | |
| Other Assets | 610,000 | 746,000 | 496,000 | |
| Deferred Long Term Asset Charges | 277,000 | 450,000 | 454,000 | |
| Total Assets | 21,920,000 | 21,918,000 | 20,664,000 | |
| Liabilities | ||||
| Current Liabilities | ||||
| Accounts Payable | 3,950,000 | 4,359,000 | 3,756,000 | |
| Short/Current Long Term Debt | 687,000 | 315,000 | 63,000 | |
| Other Current Liabilities | 540,000 | 438,000 | 517,000 | |
| Total Liabilities | 14,930,000 | 14,043,000 | 8,105,000 | |
| Stockholders’ Equity | ||||
| Misc. Stocks Options Warrants | – | – | – | |
| Redeemable Preferred Stock | – | – | – | |
| Preferred Stock | – | – | – | |
| Common Stock | 6,000 | 6,000 | 6,000 | |
| Retained Earnings | 10,374,000 | 9,012,000 | 7,188,000 | |
| Treasury Stock | -12,053,000 | -10,032,000 | -4,140,000 | |
| Capital Surplus | 11,464,000 | 10,003,000 | 10,783,000 | |
| Other Stockholder Equity | -2,801,000 | -1,114,000 | -1,278,000 | |
| Total Stockholder Equity | 6,990,000 | 7,875,000 | 12,559,000 | |
| Net Tangible Assets | 1,597,000 | 2,002,000 | 7,813,000 | |
Table 5. Monsanto Balance Sheet
Cash Flow – Monsanto Corp.
| Period Ending | 31-Aug-15 | 31-Aug-14 | 31-Aug-13 | |
| Net Income | 2,314,000 | 2,740,000 | 2,482,000 | |
| Operating Activities, Cash Flows Provided By or Used In | ||||
| Depreciation | 716,000 | 691,000 | 615,000 | |
| Adjustments to Net Income | 240,000 | 233,000 | 113,000 | |
| Changes in Accounts Receivables | 68,000 | -172,000 | 222,000 | |
| Changes in Liabilities | 457,000 | 482,000 | -129,000 | |
| Changes in Inventories | -425,000 | -650,000 | -192,000 | |
| Changes in Other Operating Activities | -273,000 | -292,000 | -414,000 | |
| Total Cash Flow from Operating Activities | 3,108,000 | 3,054,000 | 2,740,000 | |
| Investing Activities, Cash Flows Provided By or Used In | ||||
| Capital Expenditures | -967,000 | -1,005,000 | -741,000 | |
| Investments | 4,000 | 235,000 | 217,000 | |
| Other Cash Flows from Investing Activities | -56,000 | -1,235,000 | -253,000 | |
| Total Cash Flows from Investing Activities | -1,019,000 | -2,095,000 | -777,000 | |
| Financing Activities, Cash Flows Provided by or Used in | ||||
| Dividends Paid | -966,000 | -932,000 | -976,000 | |
| Sale Purchase of Stock | -698,000 | -6,834,000 | -705,000 | |
| Net Borrowings | 1,238,000 | -5,536,000 | 127,000 | |
| Other Cash Flows from Financing Activities | -36,000 | -48,000 | -10,000 | |
| Total Cash Flows from Financing Activities | -430,000 | -2,259,000 | -1,485,000 | |
| Effect of Exchange Rate Changes | -325,000 | -1,000 | -93,000 | |
| Change In Cash and Cash Equivalents | 1,334,000 | -1,301,000 | 385,000 | |
Table 6. Monsanto Statement of Cash Flows
Monsanto Firm Valuation
| Valuation Component | Previous 3-Year Average | Year 1 | Firm Value | |
| EBIT | $3,511,347 | Note that all values are in thousands. This table may be used to present your NPV calculations. | ||
| Depreciation | $674,000 | |||
| Taxes* | $1,228,971 | |||
| Change in NWC | $227,911 | |||
| Capital Spending | -$1,000,000 | |||
| CFA* | 3,728,464 | |||
| Discount factor | ||||
| Discounted CFA* | NPV | |||
| Debt | $12,359,933 | NPV-Debt | ||
Table 7. Monsanto Firm Valuation Using Average Expected Sales Based on 3-Year Average of Previous Results
