Saint Leo University Business Discussion


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Part 1. Must be read and the problem worked fully each step.

Your submission should be a one-page executive summary of what you found in your analysis with two external citations and a copy of the Microsoft Excel spreadsheet that you used to complete your analysis. Graphs and figures should be presented as appendices (i.e. not presented within the body of the executive summary).


Data Case

Toyota Motor Company is expanding the production of their gas-electric hybrid drive systems and plans to shift production in the United States. To enable the expansion, they are contemplating investing $1.5 billion in a new plant with an expected 10-year life. The anticipated free cash flows from the new plant would be $220 million the first year of operation and grow by 10% for each of the next two years and then 5% per year for the remaining seven years. As a newly hired MBA in the capital budgeting division you have been asked to evaluate the new project using the WACC, Adjusted Present Value, and Flow-to-Equity methods. You will compute the appropriate costs of capital and the net present values with each method. Because this is your first major assignment with the firm, they want you to demonstrate that you are capable of handling the different valuation methods. You must seek out the information necessary to value the free cash flows but will be provided some directions to follow. (This is an involved assignment, but at least you don’t have to come up with the actual cash flows for the project!)

  1. Go to Nasdaq ( and get the quote for Toyota (symbol: TM).
    1. Click on the income statement. The income statements for the last three fiscal years will appear. Copy and paste the data into Excel.
    2. Go back to the Web page and select “Balance Sheets” from the top of the page. Repeat the download procedure for the balance sheets, then copy and paste them into the same worksheet as the income statements.
    3. Now go to Yahoo! Finance ( and get the quote for Toyota. Click “Historical prices” in the left column, and find Toyota’s stock price for the last day of the month at the end of each of the past three fiscal years. Record the stock price on each date in your spreadsheet.
  2. Create a timeline in Excel with the free cash flows for the 10 years of the project.
  3. Determine the WACC using the equation 18.1 in your textbook:
    1. For the cost of debt:
      1. Go to and click to search. Enter Toyota’s symbol (TM), select the Corporate toggle, and press “Enter.”
      2. Look at the average credit rating for Toyota long-term bonds. If you find that they have a rating of A or above, then you can make the approximation that the cost of debt is the risk-free rate. If Toyota’s credit rating has slipped, use Table 12.3 to estimate the beta of debt from the credit rating.
    2. For the cost of equity:
      1. Get the yield on the 10-year U.S. Treasury Bond from Yahoo! Finance ( Click on “Market Data” then click on “US Treasury Bond Rates.” Enter that yield as the risk-free rate.
      2. Find the beta for Toyota from Yahoo! Finance. Enter the symbol for Toyota and click “Statistics.” The beta for Toyota will be listed there.
      3. Use a market risk premium of 4.50% to compute the cost of debt using the CAPM.
    3. Determine the values for E and D for Eq. 18.1 for Toyota and the debt-to-value and equity-to-value ratios.
      1. To compute the net debt for Toyota, add the long-term debt and the short-term debt and subtract cash and cash equivalents for each year on the balance sheet.
      2. Obtain the historical number of shares outstanding from ( Enter Toyota’s ticker in the search box, click “Financials.” Look on the income statement for “Diluted Weighted Average Shares.” Multiply the historical stock prices by the number of shares outstanding you collected to compute Toyota’s market capitalization at the end of each fiscal year. Note: Use 1.4 billion for the shares outstanding each year – this is a simplifying assumption.
      3. Compute Toyota’s enterprise value at the end of each fiscal year by combining the values obtained for its equity market capitalization and its net debt.
      4. Compute Toyota’s debt-to-value ratio at the end of each year by dividing its net debt by its enterprise value. Use the average ratio from the last four three years as an estimate for Toyota’s target debt-to-value ratio.
    4. Determine Toyota’s tax rate by dividing the income tax by earnings before tax for each year. Take the average of the three rates as Toyota’s marginal corporate tax rate.
    5. Compute the WACC for Toyota using Eq. 18.1.
  4. Compute the NPV of the hybrid engine expansion given the free cash flows you calculated using the WACC method of valuation.
  5. Determine the NPV using the Adjusted Present Value Method, and also using the Flow-to-Equity method. In both cases, assume Toyota maintains the target leverage ratio you computed in Question 3c.
  6. Compare the results under the three methods and explain how the resulting NPVs are achieved under each of the three different methods.

I will also provide the access for the school as well.

Part 2(a) This is a discussion post response. Please respond back to the peer. Must use at least 2 references.

The capital budget consists of the projects and investments that a firm plan to undertake over the coming year, and the capital budgeting process identifies which projects will bring the company the most value. Capital budgeting includes advanced techniques for assessing the feasibility of projects. Among these are periodic adjustments to debt, leverage, and cost of capital, the WACC method with changing leverage, and personal taxes.

If pursuing an example with hotels, Company A should create a full business operations layout, from there, the layout should be able to determine the building, operating, and sustaining. The capital budget should be secured in phases and should provide a separate account to each phase. For the building, the Company A should contract five construction contractors and should take an average of the five quotes and secure the funding from the lender who is providing the capital on this deal.

There should be 20% assessorial or markup of the average quotes of any miscellaneous or unforeseen issues should present itself to who is supplying capital, there should be a contract in place between Company A and contractor so the work can be ensured it is executed in a timely manner. Create an employee roster based on the occupancy, operations, logistics, and human resources. Additionally, structure the budget surrounding employee expenses and present the above budget to the lender and the funds should be accessible during the operations phase. Employee motivation, reward and retention, collaboration, and monitoring excessive optimism regarding projects in which employees are involved behavioral biases (Cornell, n.d.). Also, calculating the average monthly expenses to operate the business and multiply that by 12 to retrieve the amount annually, then send the number to the lender so they can reclaim a line of credit for the specific amount.

According to Berk & DeMarzo (2020), when firms adjust their debt levels only periodically, the risk of the tax shield declines and its value increases. A business plan needs to be created. Firms should incorporate their capital budgeting plan to adjust debt levels as needed throughout the project. It is important to know how much the hotel is going to make instead of the value of the building – commercial real estate it is! This is capital budgeting is different because it is being processed in phases so that there are no pauses in production, and it includes direct funding.


Berk, J. B., & DeMarzo, P. M. (2020). Corporate finance: The Core (5th ed.). Boston, MA: Pearson.

Cornell, B. (n.d.). Capital budgeting: a “general equilibrium” analysis.


Part 2(B)

Capital budgeting is the process that allow a business to undertake to evaluate the best or potential projects that could generate positive NPV for firms. Not all projects will be benefit for firms, but we should evaluate each project cautiously to determinate which one has the highest positive NPV while we will study leverage policies, the relationship between a firm equity and unlevered cost of capital and the implementation of WACC and FTE methods. In most cases, the decision to accept or reject a project is granted to a team of qualified employees who are experts in various skills knowledgeable fields. We can affirm that the capital budgeting is also an investment appraisal.

Berk & DeMarzo (2020) stated that “when the market risk of the project is similar to the average market risk of the firm’s investments, then its cost of capital is equal to the firm’s weighted average cost of capital (WACC).” If firm does not take a risk to grow, how they will be competitive on the market or even make profits? Companies’ management/ financial strategies are clearly elaborated to allow firms objectives goals and missions to select investment that add a net value to company’s assets throughout a well-organized planning process with independents projects. Independent projects should minimize costs associated to an investment with a minimum cut off point for the project. The adjusted present value (APV) method is an alternative valuation method in which we determine the levered value VL of an investment by first calculating its unlevered value VU, which is its value without any leverage, and then adding the value of the interest tax shield (Myers, 1974).

Hampton Roads Bridge-Tunnel (HRBT) construction is the example of project I selected to illustrate capital budgeting because this is one the investment where firms that oversee this project are working diligently to deliver the entire project on time November 2025. Before this contract was awarded, twelve firms submitted detailed technical approaches regarding the project costs in response to the request proposals. Dragados USA is the lead firm of Hampton Roads Connector Partners project that is realizing the project within a total budget of 3.8 billion (HRBT, 2019). Before Dragados USA was selected, they evaluated their proposal in term of NPV, the long-term benefit of this project for their company. They also examined standard deviations and coefficient variations. In the FTE method, the FCFE incorporates the after-tax cash flows to and from debt holders, so debt is excluded from the weighted average cost of capital which is simply the equity cost of capital?(Berk & DeMarzo, 2020, pg. 662). Managers should focus on the well-being of their employees by providing to them career path associated with retirement benefits with the possibility to become shareholders in their firms. When employees are happy with firms financial and leadership decisions, this will help to address issues where competitors firms try to hire your competent employees putting your firm at risk. Before decisions are made, managers in charge of selecting projects should evaluate the following components such time value of money, opportunities cost of funds for firms, risk adjusting related to firm equity and debts from its creditors. A rate of return above the hurdle rate creates value for the company while a project that has a return that is less than the hurdle rate would not be chosen (Myers, 1974). Firms involved in this project are creating a lot of jobs for employees and they identified this project that it will produce cash flows that exceed costs of the project where over 1,500 workers are being paid for their expertise. Funding of this project is provided by Hampton Roads Transportation Accountability Commission (HRTAC), with federal supports because this is a vital project Virginia economy. According to Cohen (2015), when the HRBT is completed, it is estimated to create about 2,000 jobs and give a double-digit boost to the country’s GDP.


Berk, J.B. & DeMarzo, P.M (2020). Corporate finance: The Core (5th ed.). Pearson

Cohen, M. (2015). Building The Chinese Century Hits a Wall at Baha Forbes Accessed on 2/5/2017.

HRBT, (2019). HDR and Mott MacDonald. Project Cost: $3.8 Billion. HRBT Expansion Project. The Current Design-Build Project.…

Myers, S.C. (1974). Interactions of Corporate Financing and Investment Decisions. Implications for Capital Budgeting. Journal of Finance 29, 1–25.

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