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

In this assignment you will demonstrate your mastery of the following course outcomes:

Milestone 2: Evaluation of an Alternative OpportunityBefore completing this assignment, review the Final Project Document. Background information found in the Final Project Document applies to Milestones 1 through 3.

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

[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.

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.

a. 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.

b. 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.

EvaluationThis 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

Table 1. Immediate Results from the Bayer Announcement in 2015

ValuPro Net Online Valuation of MONSANTO CORPORATION – 2015

Table 2. ValuePro Net Online Valuation

Monsanto Co. 2015 (Bloomberg Market Rates)

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

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%

MON:US

Current Price 106.00 (USD)

Open 106.80

Day Range 109.69-109.54

Volume 18,049,774

Previous Close 106

Table 3. Monsanto Co. Rates

Income Statement – Monsanto Corp.

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

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

Table 4. Monsanto Income Statement

Balance Sheet – Monsanto Corp.

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

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 4,654,000Goodwill 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

Table 5. Monsanto Balance Sheet

Cash Flow – Monsanto Corp.

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

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

Table 6. Monsanto Statement of Cash Flows

Monsanto Firm Valuation

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

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