Assignment I: Discussion-Finance Organization and Long-Term Planning
Considering Genesis Energy's aggressive growth plan, Sensible Essentials suggested that its client should broaden the scope of financing beyond short-term loans and consider long-term financing options. These options would greatly enhance the ability of the operations management team to fund the capital investments and growth in operating expenses. One option is selling more equity in the company. A public stock offering might be a possibility; however, a company as young and small as Genesis Energy might be hard to value.
Sensible Essentials believes that another private investor might require preferred stock dividends in order to mitigate some of the financial risk. Another option is a long-term bank loan.
Acting as the finance expert for Sensible Essentials, respond to the following:
•Determine the cost of debt and equity for Genesis Energy and its weighted average cost of capital. Go to www.yahoofinance.com and look under SEC filings. Use a US publicly traded company, such as Apple, Google, DuPont, etc.
•Identify the sources of long-term financing for Genesis Energy.
•Analyze the potential costs and benefits of each option.
•Explain how relative risk (from the investor's perspective) impacts the cost of capital for Genesis Energy.
•Determine the cost of debt and equity for Genesis Energy and its weighted average cost of capital.
•Calculate the required rate of return for Genesis Energy using the capital asset pricing model (CAPM). What is the required return for Genesis Energy shareholders?
Assignment II: Discussion-Managing Finance
The Genesis Energy operations management team was excited to understand the various options for securing financing to fund the rapid growth plans. The team was surprised by the cost associated with using funds supplied by others after accounting for risk of investments in its small but profitable company. Sensible Essentials explained how the cost of external financing can be calculated.
Explain with examples how the cost of capital is determined.
•Calculate the differences in cost and risk. Explain why the costs and risks of external financing are important for the organization to understand.
•Explain why rapid growth plans are important to a small company. Would there be a more efficient way to fund a growing company? Why or why not? Justify your answer.
Assignment III: Discussion-Performance Measurements
Both the Genesis Energy and Sensible Essentials teams believe that the client engagement was very successful. All the critical learning tools were fully explored. However, the operations management team believes there were several topics that were not covered but are important to their respective disciplines. These topics centered primarily on selecting/developing meaningful and rational measurements of performance as they relate to measuring the success of the company's expansion strategy. The financial indicators are important, but the team is also concerned about more forward-looking measures that might reflect product quality, customer satisfaction, internal process efficiency, performance, and perhaps, other strategic indicators. Based on your understanding of the concepts covered in this course, address the following:
•Develop and describe a strategic measurement "scorecard" that incorporates the financial measures applied in this course. Consider the prospect of new equity owners and explain why this is important.
•Describe the non-financial measures that should be considered and are important to the success of an organization. Explain why these measures should also be considered in the strategic initiatives of the organization.