Recently, Carlo University undertook a building project which required $6.5 mill
ID: 2734430 • Letter: R
Question
Recently, Carlo University undertook a building project which required $6.5 million of capital. The university had endowment funds of more than $15 million and a triple A bond rating. After careful consideration, the Board and Management decided to finance the project through operations rather than using the endowment or borrowing the funds. As an investment analyst, critique this decision. Evaluate the pro’s and con’s and determine if this was the best decision given the circumstances. Is there any information missing which makes this decision difficult? As a result of this decision, what other tactical decisions might need to be made in terms of future staffing, raises, other capital projects?
Explanation / Answer
Answer
Answer 1
As an investment analyst, critique this decision. Evaluate the pro’s and con’s and determine if this was the best decision given the circumstances.
Answer
Advantage
The Board and Management decided to finance the project through operations rather than using the endowment or borrowing the funds. So If the university has enough stable free operating cash flow generated through its operations after paying all operational expenditures, then University can maintain endowment funds of more than $15 million as buffer reserve for future better projects. Additionally if University uses internal operational cash flows for a building project which will reduce project risk and it will help in maintaining better credit rating.
Disadvantage
The Board and Management decided to finance the project through operations rather than using the endowment or borrowing the funds. So If the university does not have enough stable free operating cash flow generated through its operations then university will face problems in paying recurring operational expenditures later on and ultimately in the end, University may be forced to use long term funds like endowment or borrowing the funds to pay operational expenditures and this will lead to liquidity mismatch and liquidity crunch which will create financial stress and downgrade of credit rating.
Answer 2
Is there any information missing which makes this decision difficult? As a result of this decision, what other tactical decisions might need to be made in terms of future staffing, raises, other capital projects?
Answer
Audited Financial statements of last 5 years and projected Financials of upcoming 3 years of university, feasibility study of building project are missing which makes this decision difficult.
The Board and Management decided to finance the project through operations rather than using the endowment or borrowing the funds. Following other tactical decisions might need to be made in terms of future staffing, raises, other capital projects.
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