Course Project 1



Course Project 1- FedEx Corporation Long Term Financial Planning

Introduction

Financial planning is constructing a conscious decision in order to save or to invest money for future benefits and security. F financial plan comprises of company goals, time horizon, investment and saving methods and expected rate of return which requires in accomplishing these mention goals. The main purpose of long term fanatical plan is to protect against the financial loss. The long-term financial planning tunes the operational decisions on the financial goals. It is in addition to short-term planning which needed to meet higher uncertainty due to change in market trends in long-term decisions. This uncertainty is reduced, for example, by planning various scenarios (worst case / best case).

This paper focuses on the Long Term Financial Planning in FedEx Corporation. The project has two sections: in the first section, FedEx Corporation cost of capital will be estimated while in the second part, FedEx cost of capital will be applied to assess the extent to which a particular (hypothetical) investment project should be approved by the FedEx Corporation, and the NPV of this proposed investment.

Discussion

Estimation of the company's weighted average cost of capital

In order to estimate the cost of capital of FedEx Corporation; consolidated balance sheet for year 2010 has been used (FedEx Annual Report 2010).

For the consolidated balance sheet, the following figures have been used:

FEDEX CORPORATION

 

Amount

Portion

Common stock

31.4

0.003321

Preferred stock

0

0

Other long-term debt

4778

0.505373

Debt

4645

0.491306

Total Book Value of Equity and debt

9454.4

 

Tax Rate

35%

Re = cost of equity 

4.9%

Rd = cost of debt 

0.194%

E = market value of the firm's equity

58224.26

(312+314)*93.01 as of 2010 annual report

D = market value of the firm's debt

9423

 

67647.26

Re = cost of equity 

CAPM)

E(Rj) = RF + ßi[E(RM) - RF

RF

0.17%

ßi

1.24

(RM)

6%

Re

4.9%

for Long term debt we have taken 1 year Municipal Bonds return rate

WACC

 

 

4.20%

= 58224.26/67647.26*4.9%+9423/67647.26*0.174 %*( 1*-0.35)

= 4.20%

The WACC of FedEx Corporation is 4.20% which means that 4.2% must be earn by the company on an existing asset in order to satisfy their creditor, investors and owners. In order words, it is the discount rate which used to discount the operating cash flows of each year. The calculation of the WACC takes in to the consideration of the proportional weights of each capital structure elements. The more complex the structure of the capital the more laborious is to calculate the WACC.

The capital structure is the mix of long-term financing used by the FedEx. For example, FedEx could use very little long-term debt, preferred ...