6 Finance questions for pavan 1001
bdkell
finance_case_study_a_bond_has_a.docx
1.(Individual or component costs of capital) Compute the cost of capital for the firm for the following.
a)Currently bonds with a similar credit rating and maturity as the firm’s outstanding debt are selling to yield 7.12% while the borrowing firms corporate tax rate is 34%.
The after tax cost of debt for the firm is--------% (round two decimal places)
b)Common stock for a firm that paid $1.03 dividend last year. The dividends are expected to grow at a rate of 4.3%.per year, well into the future. The price of this stock is now $25.21
The cost of common equity for the firm is-------%(round two decimal places)
c)A bond has a $1000 par value and a coupon rate of 11.5% with interest paid semiannually. A new issue would sell for $1,147 per bond and mature in 20 years. Firms tax rate = 34%
The after tax cost of debt for firm is---------% (round two decimal places)
d)A preferred stock paying a dividend of 7.8% on a $90 par value. If a new issue was offered, the shares would sell for $84.29
The cost of preferred stock for the firm is-------%(round two decimal places)
2.(Individual or component costs of capital) Compute the cost of capital for the firm for the following
a)A bond has a $1000 par value and a coupon rate of 11.6% with interest paid semiannually. A new issue would sell for $1,123 per bond and mature in 10 years. Firms tax rate = 34%
The after tax cost of debt for firm is---------% (round two decimal places)
b)A new common stock issue that paid a $1.77 dividend last year. The par value of the stock is $15 and the firms dividends per share have grown 7.9% per year. The price of this stock is now $27.51.
The cost of common equity for the firm is-------%(round two decimal places)
c)A preferred stock paying a dividend of 10.2% on a $121 par value. The preferred shares are currently selling for $148.93
The cost of preferred stock for the firm is-------%(round two decimal places)
d)A bond selling to yield 13.4% for the purchaser of the bond. The buying firm faces a tax rate of 34%
The after tax cost of debt for firm is---------% (round two decimal places)
3.(Leverage and EPS)You have developed the following pro forma income statement. It represents the most recent years operations. The company controller wants answers to the following questions
Pro forma income statement
Sales 45,728,000
Variable costs (22,758,000)
_____________
Revenue before fixed costs 22,970,000
Fixed costs (9,110,000)
____________
EBIT 13,860,000
Interest Expense (1,345,000)
_____________
Earnings before taxes 12,515,000
Taxes(50%) 6,257,000
______________
Net Income 6,257,000
a) If sales increase by 30% , the % change in earnings before interest and taxes equals____% , the % change in net income equals____%(round two decimal places)
b) a)If sales decrease by 30% , the % change in earnings before interest and taxes equals____% , the % change in net income equals____%(round two decimal places)
c) If firm were to reduce its reliance on debt financing such that interest expense were cut in half, how would this affect your answers to part a and b.
4. (EBIT-EPS analysis)The following two finance plans are put forth for consideration
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--$1.5 million would be raised by selling bonds with effective interest rate of 10.7%(per annum) and the remaining $0.9 million would be raised by selling common stock at $10 per share. The use of financial leverage is considered to be a permanent part of the firm’s capitalization, so no fixed maturity date is needed for the analysis. A 34% tax rate is deemed appropriate for the analysis.
a) Find the EBIT indifference level associated with the two financing plans.
(round to nearest dollar)
b) Using EBIT of $316,000, complete the segment of the income statement for Plan A below. (round income statement amounts to nearest dollar, round EPS to nearest cent)
Stock Plan
EBIT $_______
Less interest expense $_______
Earnings before taxes $_______
Less taxes at 34% $_______
Net income $_______
Number of common shares $_______
EPS $_______
c) Using EBIT of $316,000, complete the segment of the income statement for Plan B below. (round income statement amounts to nearest dollar, round EPS to nearest cent)
Stock Plan
EBIT $_______
Less interest expense $_______
Earnings before taxes $_______
Less taxes at 34% $_______
Net income $_______
Number of common shares $_______
EPS $_______
d) Which plan generates the highest EPS
5.(Financial forecasting)The balance sheet for ABC company follows. ABC had sales for the year ended 12/31/13 of $49.45 million dollars. The firm follows a policy of paying all net earnings out to its common stockholders in cash dividends. Thus, ABC generates no funds from its earnings that can be used to expand operations.(assume the depreciation expense is just equal to the cost of replacing worn out assets)
a) if ABC anticipates sales of $81.58 million during the coming year, develop a pro forma balance sheet for 12/31/14. Assume that current assets vary as a percentage of sales, net fixed assets remain unchanged, and accounts payable vary as a percent of sales. Use notes payable as a balancing entry.
ABC Pro Forma Balance sheet
Current assets $________
Net fixed assets _________
Total assets $________
Accounts payable _________
Notes payable ________
Bonds payable _________
Common equity __________
Total liabilities and total equity $_________
b) ABC total financing needs for next year are_______(round to nearest dollar) ABC discretionary financing needs for next year are______( round to nearest dollar)
6.(Incremental earnings from lowering product prices)The popularity of iPads pushed Apple’s competitors to offer similar touch screen products. One such manufacturer was XYX Industries. The XYZ product had a number of appealing features but the obscurity of the company didn’t help product sales. In fact, the product was initially sold for $550, and disappointing sales led XYZ to consider a 10% price break on its product which costs $350 to manufacture and sell.
a)If XYZ goes through with the price adjustment and it leads to total sales of 250,00 units, what are the incremental revenues attributable to the new pricing strategy. (SELECT THE BEST CHOICE)
$123,750,000, $36,250,000, $137,500,000 OR $50,000,000
b)Now suppose that for each new unit it sells, the firm also sells $100 worth of applications on which the firm has a 35% profit margin(i.e. the firm earns $35 in additional operating profits for each $100 application sales) What is the incremental impact on firms operating profits of the newer lower price strategy under these conditions?
