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FIN 370 My finance lab Week 2
1). Templeton Extended Care Facilities, Inc is considering the acquisition of a chain of cemeteries for $390 million. Since the primary assest 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 _? (round to one decimal place)
b). The appropriate (W cs) weight is _? (round to one decimal place)
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 My finance lab WEEK 3
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 $7,033,000
a. What percentage of the firm’s assets does the firm finance using debt (liabilities)? (round to one decimal place)
2. If Campbell was to purchase a new warehouse for $1.1 million and finance it entirely with long term debt, what would be the firms new debt ratio?
2. The following table contains current asset and current liability balances for Deere and Company (DE):
($ 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 for 9 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 integer)
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 sales, 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?
5-1A. (Compound interest) to what amount will the following investments accumulate?
a. To what amount will 5,000 invested for 10 years at 10% compounded annually
b. $8,000 invested for 7 years at 8 percent compounded annually
c. $775 invested for 12 years at 12 percent compounded annually
d. $21,000 invested for 5 years at 5 percent compounded annually
5-2A. (Compound value solving for n) How many years will the following take?
a. $500 to grow to $1,039.50 if invested at 5 percent compounded annually
b. $35 to grow to $53.87 if invested at 9 percent compounded annually
c. $100 to grow to $298.60 if invested at 20 percent compounded annually
d. $53 to grow to $78.76 if invested at 2 percent compounded annually
5-3A. (Compound value solving for I) at what annual rate would the following have to be invested?
a. $500 to grow to $1,948.00 in 12 years
b. $300 to grow to $422.10 in 7 years
c. $50 to grow to $280.20 in 20 years
d. $200 to grow to $497.60 in 5 years
5-4A. (Present value) what is the present value of the following future amounts?
a. $800 to be received 10 years from now discounted back to the present at 10 percent
b. $300 to be received 5 years from now discounted back to the present at 5 percent
c. $1,000 to be received 8 years from now discounted back to the present at 3 percent
d. $1,000 to be received 8 years from now discounted back to the present at 20 percent
5-5A. (Compound annuity) what is the accumulated sum of each of the following streams of payments?
a. $500 a year for 10 years compounded annually at 5 percent
b. $100 a year for 5 years compounded annually at 10 percent
c. $35 a year for 7 years compounded annually at 7 percent
d. $25 a year for 3 years compounded annually at 2 percent
5-6A. (Present value of an annuity) what is the present value of the following annuities?
a. $2,500 a year for 10 years discounted back to the present at 7 percent
b. $70 a year for 3 years discounted back to the present at 3 percent
c. $280 a year for 7 years discounted back to the present at 6 percent
d. $500 a year for 10 years discounted back to the present at 10 percent
FIN 370 My finance lab WEEK 4
1) The target capital structure for QM industries is 39% common stock 14% preferred stock and 47% debt. If the cost of common Equity for the firm is 1734% the cost of preferred stock is 9.4% the before tax cost of debt is 8.9% and the firms tax rate is 35% what is QM weighted average cost of capital? QM WACC is what % (Round to three decimal places
2) Crypton Electronics has a capital structure consisting of 41% common stock and 59% debt. A debt issue of $1,000 par value, 6.2% bonds that mature in 15 years and pay annual interest will sell for $976 common stock of the firm is currently selling for $29.96 per share and the firm expects to pay a $2.21 dividend next year. Dividends have grown at the rate of 5.2% per year and are expected to continue to do so for the foreseeable future. What is Crypton’s cost of capital where the firm’s tax rate is 30%? Cypton’s cost for capital is what % (round to three decimal places)
3) The target capital structure for Jowers Manufacturing is 49% common stock, 10% preferred stock and 41% debt. If the cost of common equity for the firm is 20.3% the cost of preferred stock is 12.2% and the before tax cost of debt is 10.3% what is Jowers cost of capital? The firm’s tax rate is 34% Jowers WACC is what % (round to three decimal places)
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 sources for the firm you have determined the market value for the firm’s capital structure as follows
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 firm’s 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 My finance lab WEEK 5
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.
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?
MISCELLANEOUS EXCEL FILE CONTAINS THE BELOW QUESTIONS
1. (Net present value, profitability index, and internal rate of return calculations) You are considering two independent projects, project A and project B. The initial cash outlay associated with project A is $50,000 and the initial cash outlay associated with project B is $70,000. The required rate of return on both projects is 12 percent.
The expected annual free cash flows from each project are as follows:
Year Project A Project B
0 -50,000 -70,000
1 12,000 13,000
2 12,000 13,000
3 12,000 13,000
4 12,000 13,000
5 12,000 13,000
6 12,000 13,000
Calculate the NPV, PI, and IRR for each project and indicate if the project should be accepted.
2. (NPV with varying rates of return) Johnson Motors is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay of $5,000,000 and will generate annual free cash inflows of $1 million per year for eight years. Calculate the project’s NPV given:
1. A required rate of return of 9 percent
2. A required rate of return of 11 percent
3. A required rate of return of 13 percent
4. A required rate of return of 15 percent
3. (NPV with varying required rates of return) Big Steve’s, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $100,000 and will generate free cash inflows of $18,000 per year for 10 years. For each of the listed required rates of return, determine the project’s net present value.
1. The required rate of return is 10 percent. 2. The required rate of return is 15 percent. 3. Would the project be accepted under part (a) or (b)? 4. What is this project’s internal rate of return?
4.(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?
5. (Weighted cost of capital) The capital structure for the Bias Corporation follows. The company plans to maintain its debt structure in the future. If the firm has a 6 percent
after-tax cost of debt, a 13.5 percent cost of preferred stock, and a 19 percent cost of common stock, what is the firm’s weighted cost of capital?
Capital structure ($000)
Preferred stock 250
Common stock 3,700
6. 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.
Given the following information:
Project Accounting Break-even Points (in units) Price per unit Variable Cost per Unit Fixed costs Depreciation
A 6,210 ——– $54 $103,000 $22,000
B 750 $1,050 —— $498,000 $98,000
C 1,980 $22 $15 $4,900 —–
D 1,980 $22 $8 —— $13,000
Calculate the missing information for each of the above projects.
Note that projects C and D share the same accounting break-even. If sales are above the break. Even-point, which project would you prefer? Explain why.
Calculate the cash break-even for each of the above of the above projects. What do the differences in accounting and cash break-even tell you about the four projects?
The price per unit for Project A is $ _____. (Round to the nearest cent.)
HERE IS THE REST OF THE COURSE WITHOUT MY FINANCE LAB FIN 370 ENTIRE COURSE
This package includes the following:
Why might a large corporation want to raise long-term capital through a private -placement rather than a public offering
-What is the capital market? How is the primary market different from the secondary market? In your opinion, are these markets efficient? Why?
What are three primary roles of the Securities and Exchange Commission (SEC)? How does the Sarbanes-Oxley Act of 2002 augment the SEC’s role in managing financial governance? Do you think businesses became more ethical after Sarbanes-Oxley was passed?
What ratios measure a corporation’s liquidity? What are some problems associated with using such ratios? How would the DuPont analysis overcome these problems? What are the limitations of the DuPont analysis?
What is the breakeven point in finance? What decisions does the breakeven point help an organization to make?
Week 1 Individual Assignment Defining Financial Terms
Rate of Return
Return on Investment
How would you describe strategic planning? What are some differences between strategic and financial planning? What financial problems might an organization encounter when implementing a strategic plan?
What information is needed to prepare a cash budget? Why is it important for an organization to prepare a cash budget?
How would you explain the use of time value of money (TVM) in business? What considerations are made when calculating TVM? How can you use TVM to create your own, or someone else’s, retirement plan?
Prepare responses to the following chapter study questions located in Chapter 14 and 15 of the Financial Management: Principles and Applications text, by Keown. Please review the self test problems as a guide for the chapter problem 12A. (Found on page 535 of the text, answers on page 548.)
14-1What are financial markets? What function do they perform? How would an economy be worse off without them?
14-3 Distinguish between the money and capital markets.
14-4 What major benefits do corporations and investors enjoy because of the existence of organized security exchanges?
15-12A (Break-even point) You are a hard-working analyst in the office of financial operations for a manufacturing firm that produces a single product. You have developed the following cost structure information for this company. All of it pertains to an output level of 10 million units. Using this information, find the break-even point in units of output for the firm.
Return on operating assets | = 25% |
Operating asset turnover | = 5 times |
Operating assets | = $20 million |
Degree of operating leverage | = 4 times |
15-13A (Break-even point and operating leverage) Allison Radios manufactures a complete line of radio and communication equipment for law enforcement agencies. The averageselling price of its finished product is $180 per unit. The variable cost for these same units is $126. Allison Radios incurs fixed costs of $540,000 per
a. What is the break-even point in units for the company?
b. What is the dollar sales volume the firm must achieve in order to reach the break-even point?
c. What would be the firm’s profit or loss at the following units of production sold: 12,000 units? 15,000 units? 20,000 units?
d. Find the degree of operating leverage for the production and sales levels given in part
Company Evaluation Paper
a. Select an organization from the following list:
1) Pepsi Co.
5) Barnes and Noble
7) Hewlett Packard
b. Obtain a copy of your selected organization’s annual report
c. Evaluate your selected organization’s financial performance over the past two years using financial ratios. Calculate at least two ratios from the following categories and evaluate the performance. Discuss the trend of the ratio and what that means.
FIN 370 WEEK 2 TEAM ASSIGNMENT – ETHICS AND COMPLIANCE PAPER
• Ethics and Compliance Paper
Select an organization from the following list:
Barnes and Noble Amazon.com
Hewlett Packard Dell
• Be sure to obtain faculty approval of your selection prior to beginning this assignment.
• Obtain a copy of your selected organization’s annual reports and SEC filings for the past two years.
• Prepare a 1,400-1,750-word paper in which you analyze the data in your selected organization’s annual reports and SEC filings. In your analysis, be sure to address the following:
o Assess the role of ethics and compliance in your selected organization’s financial environment.
o Describe the procedures that your selected organization has put in place to ensure ethical behavior.
o Identify the processes the organization uses to comply with SEC regulations.
o Evaluate your selected organization’s financial performance over the past two years using financial ratios. Calculate the following ratios for each year:
ROE (Return on Equity)
Days Receivable Outstanding
Be sure to define how each ratio is calculated, analyze the trend for each ratio, and discuss what it tells you about the organization’s financial health.
How would you define working capital? What could happen if an organization neglected to manage its working capital? What techniques would you recommend for your organization? Why?
What is capital planning? Why is IRR, Internal Rate of Return, important to an organization?
Why is NPV important to a project? How do you select from multiple projects presented to an organization?
What is a lease? Why would you choose to lease instead of buy a capital item? What steps would you follow to decide whether to lease or buy a computer system?
FIN 370 WEEK 3 INDIVIDUAL ASSIGNMENT – CHAPTER STUDY QUESTIONS
Week 3 Individual Assignment: Assignments from the Readings (Sharp Corporation Cash Budget Worksheet)
(Cash budget) The Sharpe Corporation’s projected sales for the first eight months of 2004 are as follows:
January $ 90,000
Of Sharpe’s sales, 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 2003 were $220,000 and $175,000, 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 $10,000 per month for rent and $20,000 each month for other expenditures. Tax prepayments of $22,500 are made each quarter, beginning in March
The company’s cash balance at December 31, 2003, was $22,000; 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 (12 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 $60,500, these funds would be borrowed at the beginning of April with interest of $605 (.12 × 1/12 × $60,500) owed for April and paid at the beginning of May.
1. Prepare a cash budget for Sharpe covering the first seven months of 2004.
2. Sharpe has $200,000 in notes payable due in July that must be repaid or renegotiated for an extension. Will the firm have ample cash to repay the notes?
(Compound interest) To what amount will the following investments accumulate?
1. $5,000 invested for 10 years at 10 percent compounded annually
2. $8,000 invested for 7 years at 8 percent compounded annually
3. $775 invested for 12 years at 12 percent compounded annually
4. $21,000 invested for 5 years at 5 percent compounded annually
(Present value) What is the present value of the following future amounts?
1. $800 to be received 10 years from now discounted back to the present at 10 percent
2. $300 to be received 5 years from now discounted back to the present at 5 percent
3. $1,000 to be received 8 years from now discounted back to the present at 3 percent
4. $1,000 to be received 8 years from now discounted back to the present at 20 percent
(Compound annuity) What is the accumulated sum of each of the following streams of payments?
1. $500 a year for 10 years compounded annually at 5 percent
2. $100 a year for 5 years compounded annually at 10 percent
3. $35 a year for 7 years compounded annually at 7 percent
4. $25 a year for 3 years compounded annually at 2 percent
(Present value of an annuity) What is the present value of the following annuities?
1. $2,500 a year for 10 years discounted back to the present at 7 percent
2. $70 a year for 3 years discounted back to the present at 3 percent
3. $280 a year for 7 years discounted back to the present at 6 percent
4. $500 a year for 10 years discounted back to the present at 10 percent
FIN 370 WEEK 3 TEAM ASSIGNMENT – STRATEGIC INITIATIVE PAPER
• Strategic Initiative Paper:s
Using the selected organization from your Learning Team Week Two assignment, prepare a 1,050-1,400-word paper in which you describe the relationship between strategic planning and financial planning. In your paper, be sure to address the following:
• Describe the strategic planning process for your selected organization and identify a strategic initiative discussed in the organization’s annual report.
• Describe how this initiative will impact the organization’s financial planning.
• How will the organization’s initiative impact costs?
• How will the organization’s initiative impact sales?
• Describe the risks associated with the initiative and the financial impact that these risks may have.
What are the main elements in calculating cost of capital? How would an increase in debt affect the cost of capital?
How would you identify the optimal cost of capital for an organization?
What is meant by WACC? What are some components of WACC? Why is WACC a more appropriate discount rate when doing capital budgeting? What is the effect on WACC when an organization raises long-term capital?
What is meant by Weighted Average Cost of Capital (WACC)? What are the components of WACC? Why is WACC a more appropriate discount rate when doing capital budgeting?
What is the impact on WACC when an organization needs to raise long term capital?
What is an Initial Public Offering (IPO)? How does it help a company grow?
What is an IPO? How does an IPO allow an organization to grow financially? When is a merger or an acquisition, instead of an IPO, more appropriate?
Prepare a 350-700 word case study analysis of Case #16: “Reed’s Clothier” located in the Cases in Financial Management text, by Sulock and Dunkelberg. Be sure to address the following in your analysis:
Briefly summarize the case.
Formulate answers to questions 1 through 8.
*For Question 1, calculate all the ratios as presented in Exhibit 4 in the case, and provide detailed explanations comparing Reed’s ratios to the industry.
* Please note, the definition of total asset turnover provided in Exhibit 4 is incorrect; it should be: total asset turnover = sales / total assets
1. Calculate a few ratios and compare Reed’s results with industry averages. (Some industry averages are shown in Exhibit 16.4.) What do these ratios indicate?
Why does Holmes want Reed’s to have an inventory reduction sale, and what does he think will be accomplished by it?
Jim Reed had adopted a very loose working capital policy with higher current assets than industry averages. If he merely tightens his working capital policy to the averages, should this affect his sales?
4. Assuming that Reed’s can improve its operations to be in line with the industry averages, construct a 1995 pro forma income statement. Assume that net sales will be reduced 5 percent to $1,938,000 but that depreciation and amortization will not change but remain at $32,000.
5. What type of inventory control system would you suggest to Jim Reed?
6. What type of accounts receivable control would you suggest to Jim Reed?
7. Is the increase in sales related to the increase in inventory?
8. What is Reed’s cost of not taking the suppliers’ discounts?
FIN 370 WEEK 4 TEAM ASSIGNMENT – CALEDONIA PRODUCTS INTEGRATIVE PROBLEM
• “Caledonia Products” Integrative Problem
Based on your Week Three readings, prepare a response to the Caledonia Products Integrative Problem located in Chapter 10 of the Financial Management: Principles and Applications text by Keown.
In your response, be sure to address the following:
• Formulate answers to questions 1 through 10.
• Include a spreadsheet similar to Table 10-7.
• Formulate answers to questions 12a-12e.
• Describe the factors that Caledonia would have to consider if they were making a lease versus buy decision for the two projects.
It has been 2 months since you took a position as an assistant financial analyst at Caledonia Products. Although your boss has been pleased with your work, he is still a bit hesitant about unleashing you without supervision. Your next assignment involves both the calculation of the cash flows associated with a new investment under consideration and the evaluation of several mutually exclusive projects. Given your lack of tenure and Caledonia, you have been asked not only to provide a recommendation but also to respond to a number of questions aimed at judging your understanding of the capital-budgeting process. The memorandum you received outlining your assignment follows: To: The Assistant Financial Analyst From: Mr. V. Morrison, CEO, Caledonia Products Re: Cash Flow Analysis and Capital Rationing We are considering the introduction of a new product. Currently we are in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital. This project is expected to last 5 years and then, because this is somewhat of a fad product, be terminated. The following information describes the new project: Cost of new plant and equipment: $7,900,000 Shipping and installation costs: $100,000 Unit Sales: Year 1: Units sold: 70,000 Year 2: Units sold: 120,000 Year 3: Units sold: 140,000 Year 4: Units sold 80,000 Year 5: Units sold 60,000 Sales price per unit: $300/unit in years 1 through 4, $260/unit in year 5 Variable Cost per unit: $180/unit Annual Fixed Costs: $200,000 Working capital requirements: There will be an initial working-capital requirement of $100,000 just to get production started. For each year, the total investment in new working capital will be equal to 10 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5. The depreciation method: Use the simplified straight-line method over 5 years. Assume that the plant and equipment will have no salvage value after 5 years.
1.) Should Caledonia focus on cash flows or accounting profits in making its capital-budgeting decisions? Should the company be interested in incremental cash flows, incremental profits, total free cash flows, or total profits?
2.) How does depreciation affect free cash flows or total profits?
3.) How do sunk costs affect the determination of cash flows?
4.) What is the project’s initial outlay?
5.) What are the differential cash flows over the project’s life?
6.) What is the terminal cash flow?
7.) Draw a cash flow diagram for this project
8.) What is its net present value?
9.) What is its internal rate of return?
10.) Should the project be accepted? Why or why not?
A.) In capital budgeting, risk can be measured from three perspectives. What are those three measures of a projects risk?
B.) According to CAPM, which measurement of a project’s risk is relevant? What complications does reality introduce into the CAPM view of risk, and what does that mean for our view of the relevant measure of a project’s risk?
C.) Explain how simulation works. What is the value in using a simulation approach?
D.) What is sensitivity analysis and what is its purpose? Please provide answers in excel showing the work for each answer.
Prepare a response to problem 3 located in Chapter 21 of the Basic Finance: An Introduction to Financial Institutions, Investments, and Management text by Mayo.
3. A firm’s current balance sheet is as follows:
Assets $100 Debt $10
a. What is the firm’s weighted-average cost of capital at various combinations of
debt and equity, given the following information?
Debt/Assets After-Tax Cost of Debt Cost of Equity Cost of Capital
0% 8% 12% ?
10 8 12 ?
20 8 12 ?
30 8 13 ?
40 9 14 ?
50 10 15 ?
60 12 16 ?
b. Construct a pro forma balance sheet that indicates the firm’s optimal capital
structure. Compare this balance sheet with the firm’s current balance sheet.
What course of action should the firm take?
Assets $100 Debt $?
c. As a firm initially substitutes debt for equity financing, what happens to the cost of capital, and why?
d. If a firm uses too much debt financing
Week 5 Individual Assignment
Chapter 20 Problem
1. Firm A has $10,000 in assets entirely financed with equity. Firm B also has $10,000 in assets, but these assets are financed by $5,000 in debt (with a 10 percent rate of interest) and $5,000 in equity. Both firms sell 10,000 units of output at $2.50 per unit. The variable costs of production are $1, and fixed production costs are $12,000. (To ease the calculation, assume no income tax.)
a. What is the operating income (EBIT) for both firms?
b. What are the earnings after interest?
c. If sales increase by 10 percent to 11,000 units, by what percentage will each firm’s earnings after interest increase? To answer the question, determine the earnings after taxes and compute the percentage increase in these earnings from the answers you derived in part b.
d. Why are the percentage changes different?
Review the Integrative Problem found at the end of Chapter 22 in the Keown text, Financial Management: Principles and Applications.
Prepare responses to questions 1 through 9.
Show All Calculations.
For your job as the business reporter for a local newspaper, you are asked to put together a series of articles on multinational finance and the international currency markets for your readers. Much recent local press coverage has been given to losses in the foreign exchange markets by JGAR, a local firm that is the subsidiary of Daedlufetarg, a large German manufacturing firm. Your editor would like you to address several specific questions dealing with multinational finance. Prepare a response to the following memorandum from your editor: To: Business Reporter From: Perry White, Editor, Daily Planet Re: Upcoming Series on Multinational Finance In your upcoming series on multinational finance, I would like to make sure you cover several specific points. Before you begin this assignment, I want to make sure we are all reading from the same script because accuracy has always been the cornerstone of the Daily Planet. I’d like a response to the following questions before we proceed: a. What new problems and factors are encountered in international, as opposed to domestic, financial management? b. What does the term arbitrage profits mean? c. What can a firm do to reduce exchange risk? d. What are the differences among a forward contract, a futures contract, and options? e. An America business needs to pay (a) 15,000 Canadian dollars (b)1.5 million yen, and (c) 55,000 Swiss franc to business abroad. What are the dollar payments to the respective countries? f. An American business pays $20,000, $5,000, and $15,000 to supplier in, respectively, Japan, Switzerland, and Canada. How much, in local currencies, do the suppliers receive? g. Compute the indirect quote for the spot and forward Canadian dollar Contract?
h. You own $10,000. The dollar rate in Tokyo is 216.6752. The yen rate in New York is given in the preceding table. Are arbitrage profits possible? Set-up an arbitrage scheme with your capital. What is the gain (loss) in dollars. i. Compute the Canadian dollar/yen spot rate from the data in the preceding table
Use the following data in your response to the remaining questions:
Selling Quotes for Foreign Currencies in New York
Country-Currency Contract S/Foreign
Canada-dollar Spot 0.8450
Japan-Yen Spot 0.004700
Switzerland-franc Spot 0.5150
e. An America business needs to pay (a) 15,000 Canadian dollars (b)1.5 million yen, and (c) 55,000 Swiss franc to business abroad. What are the dollar payments to the respective countries?
f. An American business pays $20,000, $5,000, and $15,000 to supplier in, respectively, Japan,Switzerland, and Canada. How much, in local currencies, do the suppliers receive?
g. Compute the indirect quote for the spot and forward Canadian dollar Contract?
h. You own $10,000. The dollar rate in Tokyo is 216.6752. The yen rate in New York is given in the preceding table. Are arbitrage profits possible? Set-up an arbitrage scheme with your capital. What is the gain (loss) in dollars.
i. Compute the Canadian dollar/yen spot rate from the data in the preceding table
FIN 370 Week 5 Team Assignment – Virtual Organization Strategy Paper
Virtual Organization Strategy Paper
Using the link on the Materials page, access the Virtual Organizations.
Select one of the Virtual Organizations. Assume that your selected organization is a privately held company and that it wants to expand its operations. The organization is faced with three options to expand its operations:
They can go public through an IPO.
They can acquire another company in the same industry.
They can merge with another organization.
Using the Internet, texts, Electronic Reserve Readings (ERR), and other resources, prepare a 1,050-1,400-word paper in which you compare and contrast the three options and make a recommendation as to which strategy the selected organization should choose. Be sure to address the following in your paper:
Strengths of each approach
Weaknesses of each approach
Opportunities of each approach
Threats of each approach
Final Exam Papers – maximum final set papers with A+ score