Imagine you are a manager working at a publicly traded company.

(You will select a company from the

list below.) You have been tasked with preparing an investment proposal for a large bank loan to finance
a major expansion into another country. Your funding request will include both narrative text and
financial models designed to clearly explain and justify the investment proposal, how it will be financed,
and its likely impact on the company. As support, you will show the proposal’s most likely financial
implications and the consolidated financial projection with and without the project. You should also
consider risks—including

global microeconomic factors outside the company that may affect the investment’s success in the
targeted country—and describe alternative financial scenarios should sales exceed or underperform
your assumptions.

Your funding request should be well organized, clear, concise, and free of distracting errors. Because
business executives seldom have perfect or complete information, you should base your proposal on
data from authoritative sources when possible and make reasonable assumptions where information is
not available. As in real life, however, you must clearly specify your assumptions.

To begin, choose one of the following publicly traded companies. Once you have chosen your company,
you will determine the investment opportunity for which you are seeking funding as well as the country
into which your company will be expanding

Specifically, the following critical elements must be addressed:

Executive Summary: Briefly summarize the key points of your proposal, giving the loan committee the
most essential information while convincing them to read further. Remember this is the first, and
sometimes the only, section a selection committee will read in an initial screening.

Investment Project: Use this section to describe the investment for which you are seeking funding, its
costs, and time frame. Specifically, you should:

Describe the investment project. Be sure to provide sufficient detail to give the loan committee a firm
sense of the parameters of the activity, the need for it, and what financial metrics are relevant for
determining success. In other words, what do you propose to do, where, what marketplace need will it
fill, and how will you measure success?
Specify the resources the project will require and where these resources will come from. In addition to
noting the amount of the loan you are requesting, you should also consider human resources, facilities,
government approvals, intellectual property, access to natural resources, and other resources that
might be required to carry out the project.

Time frame. When will the project start, what is the anticipated economic life of the proposed
expansion, and how will you decide if, when, or how to exit? Justify your choices with appropriate
financial metrics.

Justification: In this section, you should analyze the impact of the investment proposal on your business.
In particular, you should cover:

Why is now a good time for this investment given the global context? Justify your response, citing
specific external factors such as trade regulations, foreign currency considerations, or trends in foreign
direct investment that might affect business financial decisions.

Strategic fit. Use this section to discuss why the investment proposal makes sense for your company
strategically. Specifically:

1. How does the investment align with the company’s organizational and financial priorities? Support
your argument with evidence from company reports and financial statement analysis designed to
persuade the lender that the investment is a good strategic fit for your company.

How does the project fit within the global microeconomic environment? Support your response with
evidence. For example, would the expansion tap unmet demand for the company’s key products or
services or fill a new niche? How do you know?

How does the project build on the organization’s core competencies and comparative advantage? For
example, does the company have a strategic advantage in regards to intellectual property, regional
expertise, suppliers, or organizational structure?

C. Financial impact. This section should discuss the project’s most likely financial implications and the
consolidated financial projection with and without the project. Be sure to:

Project the incremental, annual, and cumulative cash benefits and outflows associated with the
proposed expansion for the next seven to 10 years, using a spreadsheet or other relevant presentation
vehicle to support your narrative. Be sure to justify your assumptions and methodology based on sound
microeconomic and financial principles. For example, what assumptions have you made about demand,
price, volume, capital purchase costs, incremental hiring, and so on?

Develop a consolidated financial projection of revenue, pretax income, and cash flow for the overall
business, over that same number of years, both with and without the proposed investment. Use a
spreadsheet or other relevant presentation vehicle to support your narrative, being sure to describe any
relevant assumptions.

Risks: Use this section to discuss any risks that might affect the success of the project and how you have
planned for those contingencies. In particular: A. Internal. What are the company’s most significant
internal risks and opportunities related to the project? How might they affect your financial estimates
and how will you address them? Support your response with specific examples.B. External. How will you
address significant qualitative risks outside the company that might affect project success? Give specific
examples. For example, how might culture or politics in the target country affect the proposed
investment’s financial success? Natural disasters? How have you planned for these risks?C.
Microeconomic. Assess the microeconomic factors that might affect decisions about the proposed
investment. Support your response with specific examples. For example, how competitive is the market
you will be entering? How elastic is the price for your product or service?D. Alternate financial scenarios.
Use this section to discuss the sensitivity of your financial projections to different scenarios. Be sure to
address:

How would your projected financial performance change if sales fall 20% short of or are 20% higher than
your base assumption? What does your analysis of these two scenarios imply for the proposed
investment? Justify your response.

What do the net present value, internal rate of return, and payback values from your base scenario and
the sales variation scenarios above imply for the proposed investment? Be sure to explain how the time
value of money affects your calculations and analysis.

Financing: In this section, compare the proposed loan to alternative financing methods. Specifically:

Weigh the pros and cons of raising money using internal financing mechanisms versus seeking funding
through global capital markets via loans, commercial paper, bonds, or equity financing. Which might be
viable alternatives should the loan not be approved? Support your answer with appropriate research
and evidence.

Assess the viability of a business combination as a mechanism for expanding into the new market. Is this
a reasonable option for the company? Why or why not? Support your answer with appropriate research
and evidence.

Track Record: Use this section to persuade the lender that you are credit-worthy. You must:
Convincingly argue that your organization is on solid financial footing, and thus at a low risk for default,
supporting your argument recent with appropriate financial statements, ratios, and other indicators of
financial performance and health.

Convincingly argue for your organization’s trustworthiness, providing credible evidence of legal and
ethical financial behavior. For example, this might include recent audit results; credit history; absence of
significant lawsuits, recalls, or regulatory judgments; or other evidence designed to show that the
company holds itself to the highest legal and ethical standards.

VII. Questions and Answers: End your proposal by constructing a persuasive, evidence-based question-
and-answer section that addresses additional financial questions you think the loan committee might
ask, including legal and ethical concerns and why the loan would be attractive to the bank.

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Read the instructions and hints before attempting to complete the solution. Enter your responses and answers in the areas specified.
There are 50 total points for this assignment. The point value of each exercise is determined by dividing the 50 points by the number of
exercises per assignment.
If you have difficulty with any of the exercises, take advantage of the collaboration discussion forum.
Workshop 3
6 Nontax costs of tax planning 5, 6
7 The importance of marginal tax rates and dynamic planning considerations 1, 4
5. Suppose Sonics Inc. just started business this period. The firm purchased 400 units during the period at various prices as follows:

DateUnitsUnit Cost Total

January100$10$1,000
March100$12$1,200
June100$14$1,400
October100$15$1,500
Total400 $5,100
The firm sold 250 units at $30 each on the following dates:
Date Units Unit Price Total Sales
February75$30$2,250
May90$30$2,700
August75$30$2,250
December10$30$300
Total250$30$7,500

Required (assume the firm faces a marginal tax rate of 35%):

a. Calculate taxable income and taxes payable assuming the firm uses FIFO (first-in, first-out) for inventory costing purposes.

b. Calculate taxable income and taxes payable assuming the firm uses LIFO (last-in, first-out) for inventory costing purposes.

Discuss your results, including any nontax costs that might be associated with either inventory costing system.

a. Calculate taxable income and taxes payable assuming the firm uses FIFO (first-in, first-out) for inventory costing purposes.
Relate this problem to your Managerial accounting courses.
unitsprice
Sales $0formula created for you. Fill in yellow cells.
Less cost of goods sold
create formulas to left and enter result
Taxable income0formula created for you.
Tax @ 35%$0<-- answer formula created for you.

b. Calculate taxable income and taxes payable assuming the firm uses LIFO (last-in, first-out) for inventory costing purposes.
An additional assumption needs to be made. Is LIFO being applied at each sale (so only the latest cost figures at the sale date can be used,
known as the continuous method) or applied at the end of the year (so the latest cost figures for the year are used regardless of when the
sale occurred within the year, known as the periodic method)? We will assume the latter as this minimizes taxable income and hence taxes.
unitsprice
Sales $0formula created for you. Fill in yellow cells.
Less cost of goods sold
create formulas to left and enter result
Taxable income0formula created for you.
Tax @ 35%$0<-- answer formula created for you.

Now compare the difference and discuss. also are there financial accounting (reporting) issues using LIFO vs FIFO?
Exercise 6
6. Assume Sonics Inc., from the prior exercise, uses LIFO with the periodic inventory system. Thus the LIFO cost of ending inventory at year
1 of 150 units is $1,600 (100 @ $10 + 50 @ $12). Suppose in year 2, Sonics reports the following purchases and sales:
DateUnits Unit Cost/PriceTotal
Purchases
June100$17$1,700

Sales
July200$30$6,000
Required:
a. Calculate taxable income and taxes payable (again assuming Sonics faces a marginal tax rate of 35%) for year 2.

-How many more units did Sonics sell than purchase?

-What is the difference in the unit cost and latest purchase price for each of these units?

b. Instead of purchasing 100 units in June, Sonics purchased 110 units. Recalculate taxable income and taxes payable.

c. Instead of purchasing 100 units in June, Sonics purchased 90 units. Recalculate taxable income and taxes payable.

d. How many units should Sonics have purchased to avoid dipping into earlier layers of inventory?

e. Do you notice any opportunities for Sonics Inc. to smooth reported net income (by varying the amount purchased relative to sales)? Are
there any costs associated with this strategy? Does FIFO offer the same opportunities?

f. Suppose the top managers of Sonics are compensated, in part, by a bonus linked to reported net income. What inventory costing method
might you expect the managers to favor? What costs to the firm arise from this choice?
a. unitsprice
Sales $0formula created for you. Fill in yellow cells.
Less cost of goods sold
create formulas to left and enter result
Taxable income0formula created for you.
Tax @ 35%$0<-- answer formula created for you.
How many more units did Sonics sell than purchase?
-What is the difference in the unit cost and latest purchase price for each of these units?
b.unitsprice
Sales $0formula created for you. Fill in yellow cells.
Less cost of goods sold
create formulas to left and enter result
Taxable income0formula created for you.
Tax @ 35%$0<-- answer formula created for you.
Note the change in taxable income of $-70. Analyze this change and explain below.
......
Note the change in taxable income of $+70. Analyze this change and explain below.

d. How many units should Sonics have purchased to avoid dipping into earlier layers of inventory?
f. Suppose the top managers of Sonics are compensated, in part, by a bonus linked to reported net income. What inventory costing method
might you expect the managers to favor? What costs to the firm arise from this choice?

By varying the number of units purchased at year-end, managers can increase or decrease taxable income AND reported earnings. illustrate
this statement both mathematically and in writing below.
Increasing purchases at year-end (even if units purchased is greater than units sold) allows the latest unit prices to be used in calculating
cost of goods sold and taxable income thus lowering taxable income and taxes. Note disadvantages of this practice below.
Why doesn't FIFO offer the same opportunity as LIFO. Consider rising prices due to inflation in your response below
f. Suppose the top managers of Sonics are compensated, in part, by a bonus linked to reported net income. What inventory costing method
might you expect the managers to favor? What costs to the firm arise from this choice?
Managers face a trade-off. Discuss this tradeoff below. Consider which inventory method would report higher earnings when prices were
increasing.
Exercise 1
1. Suppose a firm is equally likely to earn $2 million this year or lose $3 million. The firm faces a tax rate of 40% on each dollar of taxable
income, and the firm pays no taxes on losses. In this simple one-period scenario, ignore the carryback and carryforward rules. The firm’s
expected taxable income is thus a loss of $500,000 calculated as .50(−$3) + .50($2). What is the firm’s expected marginal tax rate?

Suppose a second firm is equally likely to earn $3 million this year or lose $2 million. This firm also faces a tax rate of 40% on each dollar of
taxable income (and the firm pays no taxes on losses). Again in this simple one-period scenario, ignore the carryback and carryforward rules.
The firm’s expected taxable income is thus a profit of $500,000 calculated as .50($3) + .50(−$2).
What is the firm’s expected marginal tax rate?

Explain and discuss your results.

What is the firm’s expected marginal tax rate?

E = expectedmtr = marginal tax rate
.5 x mrt of .4+.5 x mrt of 0=nn%
Firm 1: Expected marginal tax rate, E(mtr) = <-create formula
.5 x mrt of .4+.5 x mrt of 0=nn%
Firm 2: Expected marginal tax rate, E(mtr)= <-create formula
Note that each Firm has the same Expected marginal tax rate

Fill in the blank lines

For firm 1, while the expected taxable income is a loss of $500,000 there is a __% chance of its mtr being __% and a __% chance of its mtr
being _ thus the correct answer is .50(.40%) + .50(0%) = __% rather than E(TI) = -$500,000, with an E(mtr) = 0.

If the firm were to earn another dollar of income, what effect would this have on its tax bill? This effect is the mtr. There is a __% chance the
additional dollar will be taxed at __% and a __% chance that the dollar will not be taxed giving, in expectation, an mtr of __%. Similar
reasoning applies to firm 2.
Exercise 4
4. Find the annual report for some publicly listed high-technology company that has losses. Refer to the tax footnote in the report to extract
the NOL carryforward. Assume an after-tax discount rate of 10%.

Calculate the firm’s marginal explicit tax rate using the Manzon (1994) market-value approach. Discuss and explain your result.
Under the Manzon (1994) approach, first calculate expected annual taxable income : TI = MVE*r, where MVE is the market value of equity of
the firm and r is the after-tax discount rate.
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