FIN 370 Week 2 finance Lab
1). Templeton Extended Care Facilities, Inc is considering the acquisition of a chain of cemeteries for $390 million. Since the primary assets of this business is real estate, Templeton’s management has determined that they will be able to borrow the majority of the money needed to buy the business. The current owners have no debt financing but Templeton plans to borrow $280 million and invest only $110 million in equity in the acquisition. What weights should Templeton use in computing the WAAC for this acquisition?
a). The appropriate (W d) weight is _?
b). The appropriate (W cs) weight is _?
2). Compute the cost of capital for the firm for the following:
a). A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11.2%. The bonds have a current market value of $1,127 and will mature in 10 years. The form’s marginal tax rate is 34%.
b). A new common stock issue that paid a $1.76 dividend last year. The firm’s dividends are expected to continue to grow at 7.5% per year forever. The price of the firm’s common stock is now $27.27.
c). A preferred stock paying a 9.9% dividend on a $150 par value.
d). A bond selling to yield 12.5% where the form’s tax rate is 34%.
3). Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following:
a). A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 12.2%. the bonds have a current market value of $1,127 and will mature in 10 years. The firm’s tax rate is 34%.
b. If the firm’s bonds are not frequently traded, how would you go about determining a cost of debt for this company?
c. It is standard practice to estimate the cost of debt using the yield to maturity on a portfolio of bonds with a similar credit rating and maturity as the firm’s outstanding debt.
d). A preferred stock paying a 10.4% dividend on a $126 par value. The preferred shares are currently selling for $150.92.
FIN 370 Week 3 MyFinanceLab
1. (Related to Checkpoint 4.2 on page 86) (Capital structure analysis) The liabilities and
owners’ equity for Campbell Industries is found below:
Accounts payable $ 453,000
Notes payable 250,000
Current liabilities $ 703,000
Long-term debt $1,263,000
Common equity $5,067,000
Total liabilities and equity $7,033,00
a. What percentage of the firm’s assets does the firm finance using debt (liabilities)?
2. If Campbell was to purchase a new warehouse for $1.1 million and finance it entirely with long term debt, what would be the firm’s new debt ratio?
2. The following table contains current asset and current liability balances for Deere and Company (DE):
QQ ($ thousands) 2008 2007 2006
Cash and cash equivalents 2211400 2278600 1687500
Short-term investments 0 1623300 0
Net receivables 3944200 3680900 3508100
Inventory 3041800 2337300 1957300
Total current assets 9197400 9920100 7152900
Accounts payable 6562800 3186100 4666300
Short/current long-term debt 8520500 9969400 8121200
Other current liabilities 0 2766000 0
Total current liabilities 15083300 15921500 12787500
Measure the liquidity of Deere & Co. for each year using the company’s net working capital and current ratio. Is the trend in Deere’s liquidity improving over this period? Why or why not?
3. You just received a $4,000 bonus.
a. Calculate the future value of $4,000, given that it will be held in the bank for9 years
and earn an annual interest rate of 8%.
b. Recalculate part (A) using a compounding period that (1) semiannual and (2) bimonthly
c. Recalculate parts (A) and (B) using an annual interest rate of 16%?
d. Recalculate part (A) using a time horizon of 18 years at an annual interest rate of 8%?
e. What conclusions can you draw when you compare the answers in parts (c) and (d) with the answers in parts (a) and (b)?
4. Break even analysis
2. The Marvel Mfg. Company is considering whether or not to construct a new robotic production facility. The cost of it is $582,000 and it’s expected to have a six year life with annual depreciation expense of $97,000 and no salvage value. Annual Sales from the new facility is expected 2,010 units with a price of $930 per unit. Variable production costs are $570 per unit while fixed cash expenses are $75,000 per year
a. find the accounting and the cash break-even units of production. (round to nearest interger)
b. will the plant make a profit based on its current expected level of operations?
c. will the plant contribute cash flow to the firm at the expected level of operations?
5. Given the info below.
a. calculate the missing info for each project
b. note that projects c and d share the same accounting break even. If the sales are above the breakeven point, which project would you prefer? Why?
c. calculate the cash break even for each of the projects. What do the differences in accounting and cash break even tell you about the four projects?
project accounting breakeven point units price per unit variable cost per unit fixed costs (fill in the blanks on the chart listed).
Breakeven point in units -Price per unit- Variable cost per unit -fixed costs depreciation
Project A 6210-(find price per unit) $56- $99,000-$26,000
Project B 770- $960- (findvariable cost per unit)-$499,000-$103,000
Project C 2000- $21- $15 $4,900-(find depreciation)
Project D 2000- $21- $6-(find fixed cost)-$12,000
6. (Cash budget) The Sharpe Corporation’s projected sales for the first eight months of 2011
are as follows:
January $ 90,600 May $299,000
February 120,700 June 269,300
March 134,900 July 224,400
April 240,000 August149,500
Of Sharpe’s ales, 10 percent is for cash, another 60 percent is collected in the month following sale, and 30 percent is collected in the second month following sale. November and December sales for 2010 were $220,800 and $174,200, respectively.
Sharpe purchases its raw materials two months in advance of its sales equal to 60 percent of their final sales price. The supplier is paid one month after it makes delivery. For example, purchases for April sales are made in February and payment is made in March.
In addition, Sharpe pays $9,000 per month for rent and $20,100 each month for other expenditures.
Tax prepayments of $21,800 are made each quarter, beginning in March.
The company’s cash balance at December 31, 2010, was $21,100; a minimum balance of $15,000 must be maintained at all times. Assume that any short-term financing needed to maintain the cash balance is paid off in the month following the month of financing if sufficient funds are available.
Interest on short-term loans (11 percent) is paid monthly. Borrowing to meet estimated monthly cash needs takes place at the beginning of the month. Thus, if in the month of April the firm expects to have a need for an additional $56,110, these funds would be borrowed at the beginning of April
with interest of $514 (11% × 1/12 × $56,110) owed for April and paid at the beginning of May.
a. Prepare a cash budget for Sharpe covering the first seven months of 2011.(nov sales = $220,800; dec sales = $174,200; jan sales = $90,600;
b. Sharpe has $200,900 in notes payable due in July that must be repaid or renegotiated for an extension. Will the firm have sufficient cash to repay the notes?
FIN 370 WEEK 4 MyFinanceLab
1. The target capital structure for Jowers Manufacturing is 50 percent common stock, 15 percent preferred stock, and 35 percent debt. If the cost of equity for the firm is 20 percent,
the cost of preferred stock is 12 percent, and the before-tax cost of debt is 10 percent, what is Jower’s cost of capital? The firm’s marginal tax rate is 34 percent.
2. (Weighted average cost of capital) The target capital structure for QM Industries is 40 percent common stock, 10 percent preferred stock, and 50 percent debt.
If the cost of equity for the firm is 18 percent, the cost of preferred stock is 10 percent, the before-tax cost of debt is 8 percent, and the firm’s tax rate is 35 percent,
what is QM’s weighted average cost of capital?
3. Crypton electronics has a capital structure consisting of 41% common stock and 59% debt, a debt issue of 1000 par value, 6.4 bonds that matures in 15 years and pays an annual interest well sell for $973. Common stock of the firm is selling for 30.49 per share and the firm expects to pay a 2.24 dividend next year. Dividends have grown at the rate of 5.3% per year and expected to continue to do so for the foreseeable future. What is Cryptons cost of capital where the firms tax rate is 30%
4. As a member of the finance department of ranch manufacturing, your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment for the plant under the assumption that the firms present capital structure reflects the appropriate mix of capital source for the firms, you have determined the market value of the firm’s capital structure as follows Bonds $4,500,000, preferred stock $2,300,000, common stock $ 6,200,000. To finance the purchase ranch manufacturing will sell 10 year bonds paying 6.9 % per year @ a market price of 1,055 .preferred stock paying $2.02 dividend can be sold for 25.37 common stock for ranch manufacturing is currently selling for 55.14 per share and the firm paid a 3.07 dividend last year. Dividend are expected to continue growing at a rate of 4.7 per year into the indefinite future , if the firms tax rate is 30% what discount rate should you use to evaluate the equipment purchased .
Ranch manufacturing company WACC is _____________ round 3 decimal places.
5.Abe Forrester and three Of his friends from college have interested a group of venture capitalists in backing their. The proposed operation would consist of a series of retail outlets to Distribute and service a full line of vacuum cleaners and accessories. These stores would Be located in Dallas, Houston, and San Antonio. To finance the new venture two plans Have been proposed: Plan A is an all-common-equity structure in which $2.3 million dollars would be raised By selling 80,000 shares of common stock. Plan B would involve issuing $1.1 million dollars in long-term bonds with an effective Interest rate of 12.1% plus another $1.2 million would be raised by selling 40,000 shares Of common stock. The debt funds raise funder Plan B have no fixed maturity date, in That this amount of financial leverage is considered a permanent part of the firmâ Capital structure. Abe and his partners plan to use a 34% tax rate in their analysis, and they have hired You on a consulting basis to do the following:
A. Find the EBIT indifference level associated with the two financing plans.
B. Prepare a pro forma income statement for the EBIT level solved for in Part a. that shows that EPS will be the same regardless whether Plan A or Plan B is chosen
6. Three recent graduates of the computer science program at the University of Tennessee are forming a company that will write and distribute new application software for the iPhone. Initially, the corporation will operate in the southern region of Tennessee, Georgia, North Carolina and South Carolina. A small group of private investors in the Atlanta, Georgia are interested in financing the startup company and two financing plans have been put forth into consideration.
The first plan(A) is an all common equity capital structure $2.4 million dollars would be raised by selling common stock at $10 per common share.
Plan B would involve the use of financial leverage. $1.2 million would be raised by selling bonds with an effective interest rate of 11.2% and the remaining 1.2 mill would be raised by selling common stock at the $10 price per share. The use of financial leverage is considered to be a permanent part of the firms capitalization, so no fixed date is needed for the analysis. A 35% tax rate is deemed appropriate for the analysis.
A. Find the EBIT indifference rate associated with the two financing problems
B. A detailed financial analysis of the firms prospects suggests that the long term EBIT will be above $300,000 annually. Taking this into consideration, which plan will generate the higher EPS?
FIN 370 Week 5, MyFinance Lab
1. Construct a delivery date profit or loss raph for a long position in a forward contract with a delivery price of $75.00. Analyze the profit or loss for values of the underlying asset ranging from $55 to $100 (I attached the graphs) a. Which of these graphs shows the correct profit/loss line for the long forward contract on delivery date T? A. Graph C B. Graph D C. Graph A D. Graph B
2. The specialty chemical Company operates a crude oil refinery located in New Iberia, LA. The company refines crude oil and sells the by-products to companies that make plastic bottles and jugs. The firm is currently planning for its refining needs for one year hence. Specifically, the firms analysts estimate that specialty will need to purchase 1 million barrels of crude oil at the end of of the current year to provide the feed stock for its refining needs for the coming year. The 1 million barrels of crude oil will be converted into by products at an average cost of $15 per barrel that Specialty expects to sell for $175 million, or $175 per barrel of crude used. The current spot price of oil is $120 per barrel and Specialty has been offered a forward contract by its investment banker to purchase the needed oil for a delivery price in one year of $125 per barrel.
A. Ignoring taxes, what will Specialty’s profits be if oil prices in one year are as low as $105 or as high as $145, assuming that the firm does not enter into the forward contract?
A. Ignoring taxes, what will specialty’s profits be if oil prices in one year are as low as $100 or as high as $140, assuming that the firm does not enter into forward contract? Round to the nearest dollar.
B. If the firm were to enter into forward contract, demonstrate how this would be effectively lock in the firm’s cost of fuel today, thus hedging the risk of fluctuating crude oil prices on the firm’s profits for the next year.
3. Discuss how the exchange requirements that mandate traders to put up collateral in the form of a margin requirement and to use this account to mark their profits or losses for the day, serve to eliminate credit or default risk. (fill in the blank to make the following sentence true:
Because ____________________(both parities have) or (no parties have) to post margin when they enter into a futures contract and because they mark to market ____________ (on the delivery date) or (every day until the delivery date), we are __________ ( assure) or (not assured) the party and the counter party to the contract have already posted the gain or loss to the other and the risk of default _____________ (is thereby negated) or (still exists).
4. Construct a delivery date profit or loss graph for a short position in a forward contract with a delivery price of $60. Analyze the profit or loss for values of the underlying asset ranging from $40 to $80.
Which of these graphs shows the correct profit/loss line for the short forward contract on the delivery date T?