Finance questions for pavan 1001

1.(Financial forecasting)This question is the same as question 1 from last week’s questions only the dollar amounts and balance sheet figures are different . I will provide balance sheet figures in a separate pdf document. The question needs to be answered exactly like last week’s similar question. The dollar value changes are as follows.

Last year Zapatera had $12.34 million in sales with net income of $1.24 million. The firm anticipates that next year’s sales will reach $15.91 million and with net income rising to $2.06 million.

Estimate Zapatera’s total financing requirements(total assets) and its net funding requirements (discretionary financing needed) for 2014. Use the percentage of sales given in Zapatera balance sheet for 2013.

*Hint: make sure to round all intermediate calculations to at least 5 decimal places.

a. The 2014 retained earnings are $________. (round to nearest dollar)

b. Complete Pro forma Balance sheet the same as last week. (round to nearest dollar)

c. Zapatera’s total financing requirements (total assets) for 2014 are $_______( round to nearest dollar)

d. Zapatera’s net funding requirements(discretionary financing needed) for 2014 are $______.(round to nearest dollar)

2.(Weighted average cost of capital) A firm has to re-evaluate its weighted average cost of capital following a significant issue of debt. The firm now has financed 40% of its assets using debt and 60% using equity. Calculate the firms weighted average cost of capital where the firm’s borrowing rate on debt is 8.6%, it faces a 35% tax rate, and the common stockholders require a 19.5% rate of return.

The firms weighted average cost of capital is____% (round to three decimal places)

3.(Adjusting a firms capital structure) A firm operates two restaurants and has the following financial structure. The firm is considering an expansion that would involve raising an additional $2.3 million.

Data Table

Accounts payable $104,000

Short-term debt 406,000

Current Liabilities $510,000

Long term debt 2,094,000

Owner’s Equity 1,527,000

Total $4,131,000

The firms debt ratio is_____% (round one decimal place)

The firms interest bearing debt ratio is_____% (round one decimal place)

If the firm wants a 50% debt ratio, the equity the firm needs to raise is $_____.(round to nearest dollar)

4.(Preferred stock valuation) ABC Corp. preferred stock is selling for $35 dollars in the market and pays a $4.50 annual dividend.

If the markets required yield is 11%, what is the value of the stock for an investor$____ per share. (round to nearest cent)

The investor (should/should not) purchase the stock because it is currently selling (overpriced/underpriced )in the market.

5.(Computing interest tax savings) A supply company has earnings before interest and taxes(EBIT) of $582,000, interest expenses of $273,000, and faces a corporate tax rate of 35%.

The supply company’s net income is $________. (round to nearest dollar)

If the supply company didn’t have any debt, the supply company’s net income is$______. (round to nearest dollar).

The firms interest tax savings are$_______.(round to nearest dollar)

6.(Calculating changes in net operating working capital) A company is introducing a new product and has an expected change in net operating income of $495,000. The company has a 33% marginal tax rate. The project will also produce $101,000 of depreciation per year. In addition, this project will also cause the following changes in year 1.

Without project With project

Accounts receivable $49,000 $59,000

Inventory 68,000 81,000

Accounts payable 69,000 93,000

The free cash flow for the project in year 1 is $_______.(round to nearest dollar)

7.(IRR calculation) A company is considering a project that costs $775,000 and is expected to last 11 years and produce future cash flows of $200,000 per year. If the appropriate discount rate for this project is 22%.

What is the projects IRR_______% (round two decimal places)

8.(Cost of preferred stock) A firm is planning to issue preferred stock. The stock is expected to sell for $97.97 a share and will have a $100 par value on which the firm will pay 14.6% dividend.

The firms cost of capital for the preferred stock is_______%. (round two decimal places)

9.(Measuring growth) If a company’s return on equity is 17% and the management plans to retain 57% of earnings for investment purposes,

The firms growth rate will be_______%.(round two decimal places)

10.(Flotation costs) A company recently borrowed $16 million from a group of banks and agreed to pay 8.4% interest before considering taxes of 34%. The banks also charged the firm a fee of 2.7% of the issue to make all the arrangements. The firm plans to invest $30 million in a new distribution facility and will finance the remainder using cash from prior years retained earnings. Given the firm’s plans, what should the initial outlay for the plant expansion be if flotation costs are accounted for by adjusting the initial outlay.

The initial outlay for the plant expansion must be $________.(round to nearest dollar)

11.(Discretionary finance needs) A printing company’s plans were disrupted when they landed a large printing contract that they expect will run for several years. The new contract would increase the firms revenues by 100%. Consequently, the firm knew that they would have to make significant changes to their capacity. The following balance sheet for 2013 and pro forma balance sheet for 2014 reflect the firms estimates of the financial impact of the 100% revenue growth. ( I will provide data table for 2013 balance sheet and 2014 pro forma balance sheet in separate pdf document)

The discretionary finance needs are $_______. ( round to nearest dollar)

Given the nature of the new contract and the specific needs for financing that the firm expects, what recommendations might you offer to the firms CFO as to specific sources of financing the firm should seek to fulfill its DFN.

Select all the choices that apply below

a. Long term debt

b. Sale of fixed assets

c. Retained earnings

d. Notes payable

e. Common stock

12.(Leverage and EPS)You have developed the following pro forma income statement for your company.(pro forma data will be provided in separate pdf document). It represents the most recent year’s operations which ended yesterday.

If sales should increase by 25%, the percent change in earnings before interest and taxes is______%.(round two decimal places)

If sales should increase by 25%, the percent change in net income is ______%.(round two decimal places).

If sales should decrease by 25%, the percent change in earnings before interest and taxes is______%.(round two decimal places)

If sales should decrease by 25%, the percent change in net income is ______%.(round two decimal places).

If sales should increase by 25%, and interest expense should decrease by 50%, the percent change in earnings before interest and taxes is______%.(round two decimal places)

If sales should increase by 25%, and interest expense should decrease by 50%, the percent change in net income is_________%.(round two decimal places)

If sales should decrease by 25%, and interest expense should decrease by 50%, the percent change in earnings before interest and taxes is______%.(round two decimal places)

If sales should decrease by 25%, and interest expense should decrease by 50%, the percent change in net income is_________%.(round two decimal places)

13.(Defining capital structure weights)In August of 2009 the capital structure for EMR Inc. (measured in book and market value)appeared as follows.

Thousands of $ Book values Market values

Short term debt $1,280,000 $1,280,000

Long term debt 11,854,000 11,854,000

Common Equity 9,205,000 26,152,000

Total capital $22,339,000 $39,286,000

The appropriate weight of debt is________%.(round one decimal place)

The appropriate weight of common equity is ______%.(round one decimal place)

14.(Calculating the operating and cash conversion cycle) A firm is considering ways to reduce its investment in working capital in order to make itself more profitable. At present the firm has an inventory conversion period of 88 days and the majority of its customers take advantage of its credit terms of 27 days. The company purchases its inventory items on credit terms that allow them 48 days to pay but has always followed a policy of making cash payments for invoices as soon as they are received, so the accounts payable deferral period is typically only 8 days.

The company’s operating cycle is _____days. ( round to nearest whole number)

The company’s cash conversion cycle is ____days.( round to nearest whole number)

If firm should decide to take full advantage of its credit terms and delay payment until the last possible date, their cash conversion cycle is _________days.(round to nearest whole number)

What would be your recommendations for company with regard to their working capital management practices.

Select the best choice from below options.

a. Firm should take its suppliers offer to finance its sales with an extended payment period

b. Firm should pay its suppliers sooner to shorten its operating cycle

c. Firm should take its suppliers offer to finance its inventory with the interest free 40 day loan

d. Firm should pay its suppliers sooner to avoid interest charges on delayed payments.

15.(Common stock valuation) A firm paid a $3.96 dividend last year. At a constant growth rate of 6%, what is the value of the common stock if the investors require a 9% rate of return.

Value of the common stock is $________.(round to nearest cent)