the basic strategies for determining the appropried financing mix are
Morning Coffee, Inc. has 90,000 shares of stock outstanding and 4 open positions on its board of directors. Each share of stock is entitled to one vote and the
firm uses cumulative voting. How many shares of stock do you need to own to guarantee your election to the board assuming no one else votes for you?
Present and Future Values for difference periods: Find the following values using the equations and then a financial calculator. Compounding/discounting occurs
Today, Crunchy Snacks is investing $487,000 in a new oven. As a result, the company expects its cash flows to increase by $62,000 a year for
the next two years and by $98,000 a year for the following three years. How long must the firm wait until it recovers all of its initial investment?
An investment will pay you $19,000 in ten years. If the appropriate discount rate is 8 percent compounded daily, the present value is $. (Do not include the dollar sign ($). Round your
answer to 2 decimal places. (e.g., 32.16))
Your stockbroker suggests you concentrate your portfolio on stocks with low P/E ratios. She explains that these firms are likely to be out of favor with investors
because they have a low price relative to their current earnings. Is this necessarily a good investment practice? Why or why not?
Investing in stocks of companies with low P/E Ratio is not necessarily a healthy practice. The strategy may work for a few companies where the markets have tended to overlook for some reason, but the it may not be secularly applicable for the entire market as a whole. One has to understand that when the market is according a low P/E Ratio to the stock, it implies that the market is giving little weightage to the growth that the company is going to record in forseeable future. P/E Ratio defined as Market price dividend by Earnings is a forward-looking measure. This is so becuase the denominator comprises Earnings which is likely to arise in the future. When one is taking this stance, one is harping on Forward P/E Ratio which is to be looked at while investing in stocks. When the estimated growth from a company’s operations is lower, the market participants would be…
Sara Lehn, chief financial officer of Merit Enterprise Corp., was reviewing her presentation one last time before her upcoming meeting with the board of directors. Merit’s business had been brisk for the last two years, and the company’s CEO was pushing for a dramatic expansion of Merit’s production capacity. Executing the CEO’s plans would require $4 billion in capital in addition to $2 billion in excess cash that the firm had built up. Sara’s immediate task was to brief the board on options for raising the needed $4 billion. Unlike most companies its size, Merit had maintained its status as a private company, financing its growth by reinvesting profits and, when necessary, borrowing from banks. Whether Merit could follow that same strategy to raise the $4 billion necessary to expand at the pace envisioned by the firm’s CEO was uncertain, though it seemed unlikely to Sara. She had identified two options for the board to consider: Option 1: Merit could approach JPMorgan Chase, a bank that had served Merit well for many years with seasonal credit lines as well as medium-term loans. Lehn believed that JPMorgan was unlikely to make a $4 billion loan to Merit on its own, but it could probably gather a group of banks together to make a loan of this magni- tude. However, the banks would undoubtedly demand that Merit limit further bor- rowing and provide JPMorgan with periodic financial disclosures so that they could monitor Merit’s financial condition as it expanded its operations. Option 2: Merit could convert to public ownership, issuing stock to the public in the primary market. With Merit’s excellent financial performance in recent years, Sara thought that its stock could command a high price in the market and that many investors would want to participate in any stock offering that Merit conducted. Becoming a public company would also allow Merit, for the first time, to offer employees compensation in the form of stock or stock options, thereby creating stronger incentives for employees to help the firm succeed. On the other hand, Sara knew that public companies faced extensive disclosure requirements and other regu- lations that Merit had never had to confront as a private firm. Furthermore, with stock trading in the secondary market, who knew what kind of individuals or insti- tutions might wind up holding a large chunk of Merit stock? TO DO a. Discuss the pros and cons of option 1, and prioritize your thoughts. What are the most positive aspects of this option, and what are the biggest drawbacks? b. Do the same for option 2.
Solution-a Background: Merit Enterprise Corp, a private limited company has strong financial balance sheet with cash reserve of USD 2 billion. Company requires additional capital of USD 4 billion and for that CFO Sara Lehn is exploring various opportunities before putting it (on board). Option1: Raising money through syndicated bank borrowing: JPMorgan Chase being a lead bank has been approached by the company, JP Morgan was unlikely to make a $4 billion loan to Merit on its own rather it could act as a lead bank and arrange the funds through syndication with different bank. But the major disadvantage to the company is that their entire limit with JP Morgan would get utilised with this transaction and this could create liquidity problem in their day to day business activity. Moreover additional disclosure and regular update has to be provided to the syndicated banks which will involve lot of administrative issues. From financial perspective if entire amount is financed through debt, then the debt proportion in the balance sheet would increase considerably suppressing the profit and loss account in the form of huge interest outflows. Considering the quantum of investment and above mentioned factors raising entire amount through debt is not a wise decision
P9 20 Payback, NPV, and IRRRieger International is attempting to evaluate the feasibility of investing $ 95,000 in a piece of equipment that has a 5- year life. The firm has estimated the cash inflows associated with the proposal as shown in the table at the right. The firm has a 12% cost of capit…
Calculation of payback period: Year cash flow cumulative cash flow 1 20000 20000 2 25000 45000 3 30000 75000 4 35000 110000 5 40000 150000 Payback period = completed years (remaining amount/available amount) = 3 (20000/75000) = 3.27 years appx. Calculation of NPV: Year cash flow PVF@12% PV(Cashflow*PVF) 0 -95000 1 -95000 1 20000 .893 17860 2 25000 .797 19925 3 30000 .712 21360 4 35000 .636 22260 5 40000 .567 22680 NPV = 9085 Calculation of IRR: IRR is the rate of return at which NPV is zero. First calculate NPV at 17% Calculation of NPV: Year cash flow PVF@17% PV(Cashflow*PVF) 0 -95000 1…
18. Keith Johnson has $100,000 invested in a 2-stock portfolio. $30,000 is invested in Potts Manufacturing and the remainder is invested in Stohs Corporation. Potts’ beta is 1.60 and Stohs beta is 0.60. What is the portfolio’s beta?a. 0.60b. 0.66c. 0.74d. 0.82e. 0.9019. Ritter Company’s stock…
Read Transtutorss Policy… You can only post 1 question at a time 18) its E.. heres how:- A portfolio beta is the weighted average of the betas of individual securities in a portfolio. In this case, Company Amount invested Weight Potts Manufacturing 30,000 (30,000/100,000)*100=30% Stohs Corporation 70,000 (70,000/100,000)*100=70% TOTAL 100,000 100% Potts Manufacturing has a beta of 1.6 while Stohs has a beta of 0.6, so the portfolio beta is,…
Q1- Given that a company’s net operating cash flows are $2 million per year in perpetuity and the market value of capital is $10 million, what is the company’s cost of capital?Answer a.20% b.15% c.5% d.25% e.Cannot be determined.Q2- Calculate the cost of equity capital using CAPM if the risk-free rate of interest is 5 per cent, the return on the market portfolio is 12 per cent and beta of equity is 0.8:Answer a.10.6% b.14% c.12.2% d.12% e.cannot be determinedQuestion 4If a company has on issue debentures paying a coupon rate of 12% p.a.
Do some research, probably on the Web, and find out the market prices of some stocks and bonds. Are they really worth the price ? How do we determine the intrinsic value of stocks and bonds? Welcome to the exciting world of stock and bond valuations!
the basic strategies for determining the appropried financing mix are
LeCompte Corp. has $312,900 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $620,000, and its net income after
taxes was $24,655. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin
would LeCompte need in order to achieve the 15% ROE, holding everything else constant?
Solution: Computation of the Profit Margin Total assets= Equity because zero debt $312,900 Sales $620,000 Net income $24,655 Target ROE 15.00% Net income required to achieve target ROE = Target ROE Equity = $46,935 Profit margin needed to achieve target ROE = NI/Sales Total assets = Equity because zero debt $312,900 Sales $620,000 Net…
The Sterling Tire Company’s income statement for 2010 is as follows: Sterling Tire Company Income Statement For the Year Ended December 31,2010 Sales (20,000 tires
at $60 each) $1,200, 000 Less: Variable costs (20,000 tires at $30) $ 600,000 Fixed cost $ 400,000 Earnings before interest and taxes (EBIT) $ 200,000 Interest
Expense $ 50,000 Earnings before tax (EBT) $ 150,000 Income tax expense (30%) $ 45,000 Earnings after taxes (EAT) $ 105,000 Give the income statement, compute the
following: a. Degree of operating leverage b. Degree of financial leverage c. Degree of combined leverage d. Break-even point in units Please show all steps
Degree of Operating Leverage = (Sales- Variable cost)/EBIT = (1200,000-600,000)/200,000 = 3Degree of Financial Leverage = EBIT/(EBIT – Interest) = 200,000/(200,000-50,000) = 1.33Degree of Combined Leverage =Degree of Operating Leverage X…
1. Northwest Lumber had a profit margin of 5.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm’s ROE?
a. 12.79%b. 13.47%
2. Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?
A. Market interest rates decline sharply.
B. The company’s bonds are downgraded.
C. Market interest rates rise sharply.
D. Inflation increases significantly.
E. The company’s financial situation deteriorates significantly.
3. Ryngaert Inc. recently issued noncallable bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 5.7%. If the current market interest rate is 7.0%, at what price should the bonds sell?
ANS: 1) C Profit margin 5.25% TATO 1.50 Equity…
Kelsey Drums, Inc., is a well- established supplier of fine percussion instruments to orchestras all over the United States. The company class A common stock has paid a dividend of $ 5.00 per share per year for the last 15 years. Management expects to continue to pay at that amount for the foresee-a…
As dividend have not grown in last 10 years & will not increase in future, growth rate g=0 10 Yrs ago, Reqd return Ks = 16% & D=5.00 SO Stock Price P = D/Ks = 5/16% = $31.25……………..(a) As growth g=0, the Stock price will remain same for 10 yrs. Now Reqt rate…
Integrative Case 3: Lasting Impressions CompanyLasting
Impressions (LI) Company is a medium-sized commercial printer of
promotional advertising brochures, booklets, and other direct-mail
pieces.The firms major clients are ad agencies based in New York
and Chicago. The typical job is characterized by high quality and
production runs of more than 50,000 units. LI has not been able to
compete effectively with larger printers because of its existing older,
inefficient presses. The firm is currently having problems cost
effectively meeting run length requirements as well as meeting quality
standards.The general manager has proposed the purchase of one of
two large, six-color presses designed for long, high-quality runs. The
purchase of a new press would enable LI to reduce its cost of labor and
therefore the price to the client, putting the firm in a more
competitive position. The key financial characteristics of the old press
and of the two proposed presses are summarized in what follows.Old
press Originally purchased 3 years ago at an installed cost of
$400,000; it is being depreciated under MACRS using a 5-year recovery
period. The old press has a remaining economic life of 5 years. It can
be sold today to net $420,000 before taxes; if it is retained, it can be
sold to net $150,000 before taxes at the end of 5 years.Press A
This highly automated press can be purchased for $830,000 and will
require $40,000 in installation costs. It will be depreciated under
MACRS using a 5-year recovery period. At the end of the 5 years, the
machine could be sold to net $400,000 before taxes. If this machine is
acquired, it is anticipated that the following current account changes
would result:Cash + $25,400Accounts Receivable + $120,000Inventories – $20,000Accounts Payable +$35,000Press
B This press is not as sophisticated as press A. It costs $640,000 and
requires $20,000 in installation costs. It will be depreciated under
MACRS using a 5-year recovery period. At the end of 5 years, it can be
sold to net $330,000 before taxes. Acquisition of this press will have
no effect on the firms net working capital investment.The firm
estimates that its earnings before depreciation, interest, and taxes
with the old press and with press A or press B for each of the 5 years
would be as shown in Table 1. The firm is subject to a 40% tax rate.
The firms cost of capital, r, applicable to the proposed replacement is
14%.Table 1Earnings Before Depreciation, Interest, and Taxesfor Lasting Impressions Companys PressesYear Old Press Press A Press B1 $120,000 $250,000 $210,0002 120,000 270,000 210,0003 120,000 300,000 210,0004 120,000 330,000 210,0005 120,000 370,000 210,000To Doa. For each of the two proposed replacement presses, determine:(1) Initial investment.(2) Operating cash inflows. (Note: Be sure to consider the depreciation in year 6.)(3) Terminal cash flow. (Note: This is at the end of year 5.)b.
Using the data developed in part a, find and depicts on a time line the
relevant cash flow stream associated with each of the two proposed
replacement presses, assuming that each is terminated at the end of 5
years.c. Using the data developed in part b, apply each of the following decision techniques:(1) Payback period. (Note: For year 5, use only the operating cash inflowsthatis, exclude terminal cash flowwhen making this calculation.)(2) Net present value (NPV).(3) Internal rate of return (IRR).d. Draw net present value profiles for the two replacement presses on the same setof axes, and discuss conflicting rankings of the two presses, if any, resulting fromuse of NPV and IRR decision techniques.e. Recommend which, if either, of the presses the firm should acquire if the firm has(1) unlimited funds or (2) capital rationing.f. What is the impact on your recommendation of the fact that the operating cashinflows associated with press A are characterized as very risky in contrast to thelow-risk operating cash inflows of press B?
Q1 Polycorp is considering an investment in new plant of $3 million. The project will be financed with a loan of $2,000,000 which will be repaid over the next five years in equal annual end of year instalments at a rate if 9 percent pa. Assume straight-line depreciation over a five-year life, and no taxes. The projects cash flows before loan repayments and interest are shown in the table below. Cost of capital is 15.5% pa (the required rate of return on the project).
A ski chalet at Peak n’ Peak now costs $250,000. Inflation is expected to cause this price to increase at 5% per year over the next 10 years before Chris and
Julie retire from successful investment bankign careers. How large are an equal annual end – of – year deposit must be made into an account paying an annual
rate of interest of 13% in order to buy the ski chalet upon retirement?
Xiao Li wishes to accumulate $50,000 by the end of 10 years by making equal annual end-of-year deposits over the next 10 years. If Xiao Li can earn 5 percent
on her investments, how much must she deposit at the end of each year?
Concept: Future Value of asset provides a value of an asset in the future at a specified time. Future value can be calculated as: Future Value = Present Value*(1+r)^n Future Value of Annuity can be calculated by: Future Value of Annuity = Annual Cash Flow*[((1+r)^n)-1]/r Where r -> Annual Interest Rate n -> Number of Periods Solution: Required Amount (Future Value of Annuity) = $50000…
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