Here’s a challenging finance question suitable for MBA students, presented in HTML format:
Scenario: Imagine you are the CFO of “EcoTech Solutions,” a rapidly growing company specializing in sustainable energy storage. EcoTech is currently privately held, but the Board is seriously considering an Initial Public Offering (IPO) within the next 24 months to fuel further expansion and R&D.
EcoTech has several potential projects under consideration, each promising to increase shareholder value, but resources are constrained. You need to prioritize these projects and simultaneously prepare the company for the scrutiny that comes with being a publicly traded entity.
The Projects:
- Project A: Invest in a new battery technology promising a 20% increase in energy density. This project requires a significant upfront investment of $50 million and is expected to generate $15 million in annual cash flows for the next 7 years. The risk associated with this project is considered average for the industry.
- Project B: Expand the existing manufacturing facility to increase production capacity by 50%. This requires an investment of $30 million and is projected to increase annual revenues by $45 million, with associated operating costs increasing by $30 million annually, for the foreseeable future. This project is considered relatively low risk.
- Project C: Acquire a smaller competitor specializing in solar panel installation. The acquisition cost is $25 million, and due diligence suggests it could add $8 million to EcoTech’s bottom line annually. However, integrating the two companies presents integration challenges and potential cultural clashes, resulting in a higher risk profile.
Considerations:
- EcoTech’s current Weighted Average Cost of Capital (WACC) is 10%. Assume this is appropriate for projects with average risk. Project B warrants a WACC of 8%, and Project C warrants a WACC of 12%.
- The IPO process will require significant investment in accounting systems, internal controls, and legal counsel. Estimate these costs to be $5 million spread evenly over the next two years.
- The Board emphasizes sustainability and ethical business practices.
- The company has $60 million in cash on hand and access to a $40 million line of credit at an interest rate of 6%.
Questions:
- Using appropriate capital budgeting techniques (NPV, IRR, Payback Period), analyze each project and recommend which projects EcoTech should undertake. Clearly justify your recommendations, considering both quantitative and qualitative factors.
- How should EcoTech finance these projects? Explore different financing options, including using existing cash, drawing on the line of credit, or a combination thereof. Explain the rationale behind your chosen financing strategy.
- What steps should you take as CFO to prepare EcoTech for the upcoming IPO? Address the financial reporting requirements, internal controls, and communication strategies necessary for a successful IPO.
- How does the company’s commitment to sustainability influence your decision-making process regarding project selection and financing?
This case requires a comprehensive understanding of capital budgeting, corporate finance, and IPO readiness. Good luck!
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