Flatworld Airlines Inc. is expected to generate free cash flow of $308.834 million at the end of the year. Analysts expect Flatworld's cash flows to grow in perpetuity atthe rate of 2.5%. Flatworld has debt worth $1,667.67 million. The annual coupon rate is 8% and the yield on the bonds is also 8%. Flatworld's debt-to-value ratio is 40%and management plan to maintain that ratio in perpetuity. Flatworld's stockholders require a return of 13%. The tax rate is 34%. Use this information to answer thequestions that follow.Part 1What is free cash flow to equity? Express your answer in millions of dollars rounded to one decimal place.Free cash flow to equity = $MPart 2What is the value of the equity using the FCFE approach? Express your answer in millions of dollars rounded to one decimal place.Value of equity = $MPart 3What is the value of the equity using the DCF/WACC approach? Express your answer in millions of dollars rounded to one decimal place.Value of equity = $M

Answered: Flatworld Airlines Inc. is expected to…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $335,000, operating costs to be $290,000, assets (which is equal to its total invested capital) to be $210,000, and its tax rate to be 25%. Under Plan A it would finance the firm using 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but under a contract with existing bondholders the TIE ratio would have to be maintained at or above 4.2. Under Plan B, the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs, assets, total invested capital, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure? Do not round your intermediate calculations.
Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $300,000, operating costs to be $265,000, assets (which is equal to its total invested capital) to be $200,000, and its tax rate to be 35%. Under Plan A it would finance the firm using 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but under a contract with existing bondholders the TIE ratio would have to be maintained at or above 5.0. Under Plan B, the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs, assets, total invested capital, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure? Do not round your intermediate calculations. a. 1.68% b. 1.85% c. 2.03% d. 1.52% e. 2.31%
ZZZ company has $27 million of current assets and $29 million of noncurrent assets. It forecasts an EBIT of $5.2 million and pays income taxes at a 21% rate. Short-term bank notes carry a 4% interest rate, and the company can issue long-term bonds at 7%. The company has set a target debt ratio of 45%. Required: A. For a maturity mix of 60% current and 40% long-term debt, prepare the company's abbreviated balance sheet. B. For a maturity mix of 60% current and 40% long-term debt, prepare the company's financial half of its income statement. C. Based on the financial statements above, calculate the (1) return on equity ratio and the (2) current ratio in order to evaluate the company's risk and return. I also would love to see the excel formulas please
Mary, Inc. is considering a project for next year, which will cost $5 million. Mary plans to use the following combination of debt and equity to finance the investment. Issue $1.5 million of 10-year bonds at a price of 101, with a coupon/contract rate of 4%, and flotation costs of 2% of par. Use $3.5 million of funds generated from retained earnings. The equity market is expected to earn 8%. U.S. Treasury bonds are currently yielding 3%. The beta coefficient for Mary, Inc. is estimated to be .70. Mary is subject to an effective corporate income tax rate of 30 percent. Compute Mary's expected rate of return using the Capital Asset Pricing Model (CAPM). Please show calculations.
Altamonte Telecommunications has a target capital structure that consists of 60% debt and 40% equity. The company anticipates that its capital budget for the upcoming year will be $2,000,000. If Altamonte reports net income of $1,300,000 and it follows a residual dividend payout policy, what will be its dividend payout ratio? Round your answer to two decimal places.
On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $15 million in new projects. The firm's present market value capital structure, here below, is considered to be optimal. There is no short-term debt. Debt Common equity $30,000,000 Total capital 30,000,000 $60,000,000 New bonds will have a 7% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4%.) The marginal tax rate is 25%. a. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Round your answer to the nearest dollar. $ b. Assuming there is sufficient cash flow for Tysseland to maintain its target capital structure without…
On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $25 million in new projects. The firm's present market value capital structure, shown below, is considered to be optimal. Assume that there is no short-term debt. Debt $30,000,000 Common equity 30,000,000 Total capital $60,000,000 New bonds will have an 9% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so $1.20/$30 = 4%.) The marginal corporate tax rate is 35%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Open spreadsheet In order to maintain the present capital structure, how much of the…
On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $30 million in new projects. The firm's present market value capital structure, here below, is considered to be optimal. There is no short-term debt. Debt Common equity Total capital $30,000,000 30,000,000 $60,000,000 New bonds will have a 9% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4%.) The marginal tax rate is 25%. a. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Round your answer to the nearest dollar. $ b. Assuming there is sufficient cash flow for Tysseland to maintain its target capital structure without…
Avicorp has a $13.3 million debt issue outstanding, with a 5.8% coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 94% of a. What is Avicorp's pre-tax cost of debt? Note: Compute the effective annual return. b. If Avicorp faces a 40% tax rate, what is its after-tax cost of debt? Note: Assume that the firm will always be able to utilize its full interest tax shield. par value. a. The cost of debt is % per year. (Round to four decimal places.) b. If Avicorp faces a 40% tax rate, the after-tax cost of debt is %. (Round to four decimal places.)
Avicorp has a $10.9 million debt issue outstanding, with a 6.1% coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 94.03% of par value. a. What is Avicorp's pretax cost of debt? b. If Avicorp faces a 25% tax rate, what is its after-tax cost of debt? Note: Assume that the firm will always be able to utilize its full interest tax shield.
Avicorp has a $13.3 million debt issue outstanding, with a 6.1% coupon rate. The debt has semi-annual coupons, the ne: coupon is due in six months, and the debt matures in five years. It is currently priced at 93% of par value. a. What is Avicorp's pre-tax cost of debt? Note: Compute the effective annual return. b. If Avicorp faces a 40% tax rate, what is its after-tax cost of debt? Note: Assume that the firm will always be able to utilize its full interest tax shield. a. The cost of debt is % per year. (Round to four decimal places.) b. If Avicorp faces a 40% tax rate, the after-tax cost of debt is %. (Round to four decimal places.)
On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $30 million in new projects. The firm's present market value capital structure, here below, is considered to be optimal. There is no short-term debt. Debt $30,000,000 Common equity 30,000,000 Total capital $60,000,000 New bonds will have a 6% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4%.) The marginal tax rate is 25%. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Round your answer to the nearest dollar. $ Assuming there is sufficient cash flow for Tysseland to maintain its target capital…

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