Long term financial mgmt

Task 7- FIN 620 Long-Term Financial Management

In your discussions with the CFO, you have talked about the impact of a dividend on your firm’s market price and financial statements. He has asked that you and your team evaluate the impact of issuing a dividend.

Your starting point for analyzing dividends is the Modigliani-Miller (MM) Theorem. If MM assumptions are true, what would be your recommendation for dividends?

Now assume that the only MM assumption that is not true is that payments to debt holders may be deducted as an expense for tax purposes, what would be your recommendation for dividends?

Now assume that the rate of long-term capital gains is lower than the marginal income tax rate for your equity holders, what would be your recommendation for the choice between dividends and share repurchase?

Moving on from MM, now use the income statement and balance sheet provided to make a recommendation for the amount of dividend (if any). How are retained earnings impacted and what does this mean for the organization?

Concept Check: Dividends are distributions of profits to your investors who placed their capital at risk for you. Theoretically, every company should eventually provide a dividend distribution to their investors.

Helpful Hint: Dividends are voted on every quarter by the Board of Directors for a company; the amount of the dividend or if any is paid can be decided at that time.

FIN 620 Long-Term Investments

Task 8

Share repurchase proposal: Currently, the firm has available capital (cash and net income) of approximately $7,000,000. There is a large block of stock available at $35 a share.

For the sake of this exercise let us disregard tax implications and effects.

If the firm decides to spend this amount of excess cash on a share repurchase program, how many shares will be repurchased??

What are the benefits of repurchasing shares? How will this affect the capital structure of the company? How can this be interpreted in the marketplace?

Suppose the market price of the shares is $35.75 a share. Why do you think the seller of the large block would agree to see at $35 a share?

Suppose the assumptions of MM are true, then what would happen to the market price of shares once the purchase of the large block at $35 a share is completed? Would it rise above $35.75, remain unchanged or fall?

Would a dividend be better? Please discuss the pros and cons of dividends and share buybacks. Make a recommendation to management.

Helpful Hint: Think about the impact on the ratios that companies usually are measured by in the marketplace. Look at these policies through the eyes of current and potential investors as well as the management of XYZ.

 

FIN 620 Long-Term Financial Management Task 9

Evaluation of potential acquisition : XYZ is considering the acquisition of Martin & Sons, which has $5.3 million in net working capital. They also have total assets with a book value of $58.6 million and a market value of $63.4 million. They currently carry no debt on their balance sheet, sales are expected to be $52 million next year, and their tax rate is like XYZ at 36%. Through a mixture of synergistic savings and increased market share, this acquisition should add $2.3 million in net profit per year for the next 10 years. XYZ is considering buying the company for $60 million in cash. The acquisition will be recorded using the purchase accounting method.

How do you recommend the firm finance this transaction?

Is there a danger that BBE could damage their finances to the point that bankruptcy is a potential?

Concept Check:

5-factor model of the Altman Z-score (a for private manufacturing firms):

Z-score = 0.717T1 + 0.847T2 + 3.107T3 + 0.42T4 + 0.998T5

where,

T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Equity / Total Liabilities T5 = Sales / Total Assets

Zones of Discrimination:

· 23 or less – “Distress” Zone

· from 1.23 to 2.9 – “Grey” Zone

· 9 or more – “Safe” Zone

Interpretation of Altman Z-Score

The Z-Scores help predicts corporate defaults as well as an easy-to-calculate measure of control for the financial distress status of companies in academic studies. A Z-Score above 2.6 (2.9) indicates a company to be healthy. Besides, such a company is also not likely to enter bankruptcy. However, Z-Scores ranging from 1.1-2.6 (1.23-2.9) are taken to lie in the grey area.

Financial Statements for XYZ

Here are the financial statements BELOW:

XYZ		Balance Sheet
Assets
Current assets:	2020	2021	change
Cash	1,500,000	1,800,000	300,000
Investments	1,000,000	1,025,000	25,000
Inventories	112,000,000	127,000,000	15,000,000
Accounts receivable	11,950,000	12,500,000	550,000
Pre-paid expenses	2,500,000	2,650,000	150,000
Other	0	0
Total current assets	128,950,000	144,975,000	16,025,000
Fixed assets:	2020	2021	change
Property and equipment	155,000,000	172,500,000	17,500,000
Leasehold improvements	0	0	0
Equity and other investments	48,000,000	57,000,000	9,000,000
Total fixed assets	203,000,000	229,500,000	26,500,000
Other assets:	2020	2021	change
Goodwill	85,000,000	70,000,000	-15,000,000
Total other assets	85,000,000	70,000,000	-15,000,000
Total assets	416,950,000	444,475,000	27,525,000
Liabilities and owner's equity
Current liabilities:	2020	2021	change
Accounts payable	38,500,000	43,200,000	4,700,000
Accrued wages	75,000,000	80,500,000	5,500,000
Accrued compensation	10,000,000	10,255,000	255,000

Income taxes payable	4,024,000	4,697,000	673,000
current portion of LT debt	5,000,000	5,350,000	350,000
Other	0	0	0
Total current liabilities	132,524,000	144,002,000	11,478,000
Long-term liabilities:	2020	2021	change
Long term debt	115,000,000	130,000,000	15,000,000
Total long-term liabilities	115,000,000	130,000,000	15,000,000
Owner's equity:	2020	2021	change
Common stock	122,000,000	122,000,000	0
Preferred stock	16,725,000	16,725,000	0
Accumulated retained earnings	30,701,000	31,748,000	1,047,000
Total owner's equity	169,426,000	170,473,000	1,047,000
Total liabilities and owner's equity	416,950,000	444,475,000	27,525,000

Income Statement

XYZ

December 2021

Financial Statements in '000s of U.S. Dollars

Revenue

282,000

2,500

279,500

Gross Sales

Less: Sales Returns and Allowances

Net Sales

Cost of Goods Sold

7,500

4,500

-

75,000

15,000

102,000

102,000

Beginning Inventory

Add: Purchases

Freight-in Direct Labor

Indirect Expenses

Inventory Available Less: Ending Inventory

Cost of Goods Sold Gross Profit (Loss)

145,500

Expenses

18,500

-

5,000

500

-

18,750

2,500

10,350

100

-

10

100

5,625

3

5,000

2,000

120

1,750

70,000

450

25,000

164,758

Advertising Amortization Bad Debts Depreciation

Dues and Subscriptions Employee Benefit Programs Insurance

Interest

Legal and Professional Fees Licenses and Fees Miscellaneous

Office Expense Payroll Taxes Postage

Rent

Repairs and Maintenance Supplies

Telephone Travel Utilities

Vehicle Expenses Wages

Total Expenses

Net Operating Income

12,742

Other Income

1,000

1,000

4,697

9,045

Gain (Loss) on Sale of Assets Interest Income

Total Other Income

Taxes

Net Income (Loss)