ACC 620 Milestone Three Guidelines and Rubric Prompt: In the second milestone, you addressed income taxes and pensions for your portfolio. In the third and final milestone, you will add leases and the statement of changes to your portfolio. IV. Leases A. What are the differences between operating and capital leases? B. Describe the particular leases of your company based on the liability section of your company’s balance sheet. C. What impact have the leases had on the company’s financial statements for the most recent year? D. Discuss the advantages and disadvantages of leasing a building versus purchasing one. VI. Statement of Changes in Financial Position A. From the perspective of an investor, determine whether or not you would invest in your chosen company based on the company’s statement of changes in financial position (SCFP). Support your opinion. B. Review the company’s SCFP for any concerns that may need to be addressed. As controller of your company, prepare a memo to your CEO, giving a summary report for possible recommendations. Guidelines for Submission: Your paper must be submitted as a 2–3-page Microsoft Word document with double spacing, 12-point Times New Roman font, oneinch margins, and at least three sources cited in APA format. Instructor Feedback: This activity uses an integrated rubric in Blackboard. Students can view instructor feedback in the Grade Center. For more information, review these instructions. Critical Elements Exemplary (100%) Proficient (90%) Needs Improvement (70%) Not Evident (0%) Value Leases: Operating and Capital Meets “Proficient” criteria, and description is exceptionally clear and contextualized Comprehensively describes the differences between operating and capital leases Describes the differences between operating and capital leases, but description is cursory or lacks detail Does not describe the differences between operating and capital leases 16 Leases: Particular Meets “Proficient” criteria, and description is exceptionally clear and contextualized Describes the particular leases of the company based on the liability section of the company’s balance sheet Describes the particular leases of the company, but does not base description on the liability section of the company’s balance sheet Does not describe the particular leases of the company 15 Leases: Impact Meets “Proficient” criteria, and defense is well supported with concrete examples Comprehensively discusses the impact the leases had on the company’s financial statements for the most recent year Discusses the impact the leases had on the company’s financial statements for the most recent year, but discussion is cursory or lacks detail Does not discuss the impact the leases had on the company’s financial statements 15 Leases: Building Meets “Proficient” criteria and uses concrete examples to illustrate claims Comprehensively discusses the advantages and disadvantages of leasing a building versus purchasing one Discusses the advantages and disadvantages of leasing a building versus purchasing one, but discussion is cursory or lacks detail Does not discuss the advantages and disadvantages of leasing a building versus purchasing one 15 Statement of Changes in Financial Position: Invest Meets “Proficient” criteria, and opinion is well supported with concrete examples Determines whether or not to invest in the company based on the SCFP and supports opinion Determines whether or not to invest in the company based on the SCFP, but does not support opinion, or support for opinion is weak or illogical Does not determine whether or not to invest in the company 16 Statement of Changes in Financial Position: Recommendations Meets “Proficient” criteria, and recommendations are well supported and logical Composes a memo to the CEO making recommendations that would effectively resolve any concerns identified in the SCFP Composes a memo to the CEO making recommendations to address concerns identified in the SCFP, but recommendations would not effectively resolve concerns Does not compose a memo to the CEO 15 Articulation of Response Submission is free of errors related to citations, grammar, spelling, syntax, and organization and is presented in a professional and easy-toread format Submission has no major errors related to citations, grammar, spelling, syntax, or organization Submission has major errors related to citations, grammar, spelling, syntax, or organization that negatively impact readability and articulation of main ideas Submission has critical errors related to citations, grammar, spelling, syntax, or organization that prevent understanding of ideas 8 Total 100%

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ASSIGNMENT

1. For GE please calculate the WACC for one of the divisions.

• Locate similar companies to that division
  •  Calculate their unlevered equity betas
  •  Re-lever the equity based on the division’s estimated capital structure
• For another company with multiple divisions (a company of your choice) calculate the WACC for one of its divisions.

– Risk characteristics of the Division are different than the risk characteristics of the Company as a whole

-Find comparative companies

1.  Stand alone companies that serve same industry
   1.  Select three
   1.  Calculate unlevered equity for each company
   1.  Compute an average unlevered equity
   1.  Re-lever the cost of equity for your division
   1.  Calculate WACC
      1. New re-levered cost of equity
      1. Company capital structure
      1. Company tax rate

HOMEWORK NOTES

DIVISIONAL COST OF CAPITAL

• Capital Structure
  •  Align with overall company – general rule
  •  Exceptions driven by debt to capital ratios sustainable by the cash flows of that business / industry. 
    •  Starting point:  debt to capital ratio OR interest coverage ratios for comparable companies
• Cost of Debt – use company
• Tax Rates  – use company or higher
• Cost of Equity – Appropriate to Risk of Assets

DIVISIONAL TAX RATE

• The relevant tax rate for a division would be what the tax rate would be if it didn’t operate as part of a larger company.
  •   Typically higher than the company’s average tax rate because ‘corporate headquarters’ is normally a generator of tax benefits for the company.
    •  Overhead costs reduce EBIT.
    •  May not be material

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