McCormick & Company approached MCS because they would like to increase the production of their products and are considering purchasing a new factory in Largo, Maryland. This new factory would allow the company to increase its overall production capacity. As McCormick decides whether to purchase the new factory, they are asking our finance team to evaluate options to finance this purchase. McCormick has provided MCS with the purchase price, expected cash flow, and two new product line projects they expect to run in the new factory.
To understand which financing option would be best for the client, you must first understand time value of money, present value, future value, and loan amortization. These topics will help your group make recommendations about the relative benefits and drawbacks of each option.
Working in the attached Excel Workbook, complete the Financing and Investing worksheet with your assigned group. The Financing and Investing worksheet contains information about present value, revenue, expenses, and cash flows, as well as questions that will help Frank guide the client in selecting the best financing option.
McCormick & Company is also interested in gaining further insight on the corporate valuation of the company, as they need to know how much capital they’ll need to raise to purchase a new factory. To understand valuation, you must review dividends, options, warrants, derivatives, discount rate, and yield.
Frank tasks your group with recommending a method for raising sufficient capital. “McCormick & Company has been paying dividends to its shareholders for several years now,” he says. “The company has given us some data and would like us to recommend ways they can further leverage their financing activities. The company is interested in potentially issuing more stock or purchasing bonds to raise additional capital for the purchase of the new factory. I will need your group to answer a few questions about the company’s stock prices and minimum acceptable rate of return. Your answers will help me make a recommendation to McCormick.”