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Vijay

Landman Corporation (LC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .80 and is considering building a new $45 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $5.7 million a year in perpetuity. The company raises all equity from outside financing. There are three financing options: 1. A new issue of common stock: The flotation costs of the new common stock would be 7.5 percent of the amount raised. The required return on the company's new equity is 14 percent. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 5 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 8 percent, they will sell at par. 3. Increased use of accounts payable financing: Because this financing is part of the company's ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC.…

Penny Arcades, Inc., is trying to decide between the following two alternatives to finance its new $34 million gaming center: a. Issue $34 million of 6% bonds at face amount.b. Issue 1 million shares of common stock for $34 per share. 1. Assuming bonds or shares of stock are issued at the beginning of the year, complete the income statement for each alternative. (Enter your answer in dollars, not millions. (i.e., $5.5 million should be entered as 5,500,000). Round your "Earnings per Share" to 2 decimal places. Round your "Earnings per Share" to 2 decimal places.)   Issue Bonds Issue stock   Operating income 10,900,000 10,900,000 Interest expense (bonds only)     Income before tax     Income tax expense (40%)     Net Income     Number of shares 3,900,000 4,900,000 Earnings per share

Vijay

Global Internet company is looking to expand their operations. They are evaluating their cost of capital based on various financing options. Investment bankers informed them that they can issue new debt in the form of bonds at a cost of 8%, and issue new preferred stocks for the price of $25 per share paying $2.5 dividends per share. Their common stock is currently selling for $20 per share and will pay a dividend of $1.5 per share next year. They expect a growth rate in dividends of 5% per year, and their marginal tax rate is 35%. a)      If Global raises capital using 45% debt, 5% preferred stock, and 50% common stock what is their cost of capital?  b)      If Global raises capital using 30% debt, 5% preferred stock, and 65% common stock what is their cost of capital? c)    Evaluate the two finance options and identify which one they should choose? Assess the advantages and disadvantages of your choice?

(EBIT-EPS analysis) A group of retired college professors has decided to form a small manufacturing corporation that will produce a full line of traditional office furniture. The investors have proposed two financing plans. Plan A is an all-common-equity alternative. Under this agreement, 1 million common shares will be sold to net the firm $20 per share. Plan B involves the use of financial leverage. A debt issue with a 20-year maturity period will be privately placed. The debt issue will carry an interest rate of 10 percent, and the principal borrowed will amount to $6 million. The marginal corporate tax rate is 21 percent. a. Find the EBIT indifference level associated with the two financing proposals. b. Prepare a pro forma income statement that proves EPS will be the same regardless of the plan chosen at the EBIT level found in part a. c. Prepare an EBIT-EPS analysis chart for this situation. d. If a detailed financial analysis projects that long-term EBIT will always be close to…

A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company's equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target's cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 5 1 $38 Free cash flows 2 3 4 $53 $58 $63 $ 63 $ 756 Selling price Total free cash flows $38 $53 $58 $63 $819 To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk premium 5 percent a. Estimate the target firm's…

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .66. It’s considering building a new $65.6 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.45 million in perpetuity. There are three financing options:   a. A new issue of common stock: The required return on the company’s new equity is 15.2 percent. b. A new issue of 20-year bonds: If the company issues these new bonds at an annual coupon rate of 7.1 percent, they will sell at par. c. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .12. (Assume there is no difference between the pretax and aftertax accounts payable cost.)   If the tax rate is 21 percent, what is the NPV of the…

Wal-Mart plans to open a new store near Campus. Wal-Mart is going to finance via bond market and stock market. Total capital required is 10 million dollars. 3 million dollars are going to be financed via stock market. Wal-Mart’s beta is 0.70. Three month Treasury Bill rate is 2% (risk free rate) and the S&P500 index return is 8% (market return). How much is the cost of equity to Wal-Mart stockholders? 2% 5% 2% 1%

A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows.     ($ millions) Year 1 2 3 4 5 Free cash flows $38 $53 $58 $63 $ 63   Selling price         $ 756   Total free cash flows $38 $53 $58 $63 $ 819       To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition.   Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…

A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows.     ($ millions) Year 1 2 3 4 5 Free cash flows $38 $53 $58 $63 $ 63   Selling price         $ 756   Total free cash flows $38 $53 $58 $63 $ 819       To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition.   Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…

A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows.     ($ millions) Year 1 2 3 4 5 Free cash flows $33 $48 $53 $58 $ 58   Selling price         $ 696   Total free cash flows $33 $48 $53 $58 $ 754       To finance the purchase, the investors have negotiated a $480 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition.   Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…

Zola Sdn Bhd wants to develop new product through research and development whichrequires additional financing of RM2 million. Zola Sdn Bhd is considering selling one security to raise the needed funds from the following options:  i. To sell bonds at RM950,14 percent coupon rate with maturity of 15 years. The underwriting fee is 8 percent of market price. The tax rate for the company is 35 percent. ii. To sell preferred shares at RM85 with 9 percent dividend and RM5 for issuing cost. iii. To issue new common shares at RM23 per share and RM1.20 for floatation cost. The company has just paid RM0.80 in dividend and the earnings is expected to grow at 9 percent annually  Calculate the after-tax cost of: i) Bond ii) Preferred shares iii) Common shares iv) Which source should the firm choose? Why?

Wal-Mart plans to open a new store near Campus. Wal-Mart is going to finance via bond market and stock market. Total capital required is 10 million dollars. 3 million dollars are going to be financed via stock market. Wal-Mart plans to pay $3 per share next year. The dividend is expected to grow at the rate of 5% each year. The stock is traded at $60 per share. How much is the cost of equity (stock)? The flotation fee is 5%. 26% 85% 71% 19%

A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company's equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target's cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. Year Free cash flows Selling price Total free cash flows ($ millions) 1 $ 31 2 $ 46 3 4 859 $ 51 $ 56 $ 31 $ 46 $51 $ 56 $ 56 $672 $ 728 To finance the purchase, the investors have negotiated a $460 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Tax rate Selected Additional Information 40 percent Risk-free interest rate Market risk premium a. Estimate the target firm's asset beta 3…

Your firm is planning to invest in a new electrostatic power generation system. Ampthill Inc is a firm that specializes in this business. Ampthill has a stock price of $25 per share with 20 million shares outstanding. Ampthill's equity beta is 1.4. It also has $220 million in debt outstanding with a debt beta of 0.1. Your estimate of the asset beta for electrostatic power generators is closest to       1.18     1     0.79     1.3