Question

In: Finance

In-Charge is a publicly listed firm that provides technology allowing customers to monitor their credit and...

In-Charge is a publicly listed firm that provides technology allowing customers to monitor their credit and debit card use, set spending limits and activate and de-activate cards through apps on mobile devices. The company recently struck deals with key payment processing companies to adopt this technology in order to prevent fraud. In-Charge is entering a fast growth phase, which is expected to last for 5 years. The following table contains reported income statement information for the recent year 2018 (all numbers are in $1,000s):

Year

2018

Revenues

4,500

Operating Costs (incl. Depreciation.)

2,250

EBIT

2,250

Interest expense

2,025

EBT

225

Taxes

      90

Net Income

    135

Detailed projections (in $1,000s) for the years 2019-2023 are given below:

  • Expected growth in revenues is 100% per year.
  • Operating profit (EBIT) equals 50% of revenues in each of the years 2019-2023.
  • The increase in net working capital equals 25% of revenues in each of the years 2019-2023.
  • Gross investments in fixed assets equal $1,200 in each of the years 2019-2023.
  • The amount of depreciation is equal to $700 in each of the years 2019-2023.

In-Charge currently has 2 million shares outstanding and has a debt ratio (D/V) of 50% in market value terms. The firm has a BBB bond rating and its equity beta equals 1.90. The interest rate on T-bonds equals 2.5%, the expected yield on BBB-rated bonds is 4% and the market risk premium is 5%. Finally, you can assume that all cash flows will be realized at the end of the year and that the firm is subject to a 40% marginal corporate tax rate. With this information answer the following four questions.

  1. Determine the relevant Free Cash Flows for a valuation of the firm for the years 2019-2023 (in

$1,000s). Show your calculations.

  1. Calculate the weighted average cost of capital for In-Charge. Show all your calculations.
  1. Determine In-Charge’s business risk (or asset beta). Show all your calculations.
  1. Now suppose that In-Charge wants to immediately change its leverage to 25% with a corresponding cost of debt of 3%. If we assume that In-Charge maintains a constant growth rate of 2% after 2023, what is In-Charge’s share price?

Solutions

Expert Solution

For Q's (i) - (iii)

For Q iv)

jeff jeffy answered 6 months ago
Next > < Previous

Related Solutions

Some universities charge tuition by the credit hour, while others charge tuition by the semester, allowing...
Some universities charge tuition by the credit hour, while others charge tuition by the semester, allowing students to take as many classes as they desire. How do these tuition structures affect the incentives students face when deciding how many classes to take? Provide an example of a beneficial effect and an example of a potentially harmful effect resulting from the incentives created with each system. How does marginal analysis affect the incentives with each system
When a company lets customers buy on credit, the company attracts more customers. Allowing sales on...
When a company lets customers buy on credit, the company attracts more customers. Allowing sales on credit is a part of doing business. However, it is not without risk! The result may be attracting some customers who will never pay the amount they owe to the business. When this money is not paid, the business has an uncollectible account which must be written-off. If a business has too many uncollectible accounts, the business suffers and the end result can spell...
You are evaluating a new project for the firm you work for, a publicly listed firm....
You are evaluating a new project for the firm you work for, a publicly listed firm. The firm typically finances new projects using the same mix of financing as in its capital structure, but this project is in a different industry than the firm’s core business. Describe the procedure for estimating the appropriate discount rate (cost of capital) to be used in the evaluation of the project
You are evaluating a new project for the firm you work for, a publicly listed firm....
You are evaluating a new project for the firm you work for, a publicly listed firm. The firm typically finances new projects using the same mix of financing as in its capital structure, but this project is in a different industry than the firm’s core business. Describe the procedure for estimating the appropriate discount rate (cost of capital) to be used in the evaluation of the project.
Allowing customers to receive goods and services now and pay for these latter is another use of the word Credit.
Allowing customers to receive goods and services now and pay for these latter is another use of the word Credit. Discuss why a company would provide goods and services now and allow someone to pay latter. What factors should a company consider when allowing a customer to postpone payment? When should a company consider that some customers are not going to honor their debt? How does the realization that some customers are not going to pay impact the operations of...
A firm currently makes only cash sales. It estimates that allowing trade credit on terms of...
A firm currently makes only cash sales. It estimates that allowing trade credit on terms of net 30 would increase monthly sales from 500 to 600 units per month. The price per unit is $75 and the cost (in present value terms) is $60. The interest rate is 1 percent per month. Should the firm change its credit policy if 5 percent of all customers fail to pay their bills under the new policy? A) Yes, profits will increase by...
Bruhaha Ltd (BL) is an Australian publicly listed firm on the ASX. The company has a...
Bruhaha Ltd (BL) is an Australian publicly listed firm on the ASX. The company has a long-term target capital structure of 50% ordinary equity, 10% preference shares, and 40% debt. All shareholders of BL are Australian residents for tax purposes. To fund a major expansion BL Ltd needs to raise a $200 million in capital from debt and equity markets. BL’s broker advises that they can sell new 10 year corporate bonds to investors for $105 with an annual coupon...
Cloudstreet Ltd is an Australian firm which is publicly-listed on the ASX. The company has a...
Cloudstreet Ltd is an Australian firm which is publicly-listed on the ASX. The company has a long term target capital structure of 60% Ordinary Equity, 10% Preference Shares, and 30% Debt. All of the shareholders of Cloudstreet are Australian residents for tax purposes. To fund a major expansion Cloudstreet Ltd needs to raise a $120 million in capital from debt and equity markets. Cloudstreet Ltd’s broker advises that they can sell new corporate bonds to investors for $1030 with a...
The Superstar Corporation, one of US merchandisers (Non-publicly Corporation), Provides merchandising goods for specific customers. The...
The Superstar Corporation, one of US merchandisers (Non-publicly Corporation), Provides merchandising goods for specific customers. The company’s fiscal year ends on December 31. For the year ended December 31, 2019, the company collected $1,300,000 from regular customers and paid out $650,000 for various operating expenses (not including income taxes and restructuring costs). The following information also is available. Partial balance sheet information: 12/31/19 12/31/18 Accounting receivable 120,000 95,000 Accounts payable (for operating expenses) 50,000 65,000 Unearned Revenue                             180,000            150,000 Additional...
You work for a business information firm that provides clients with summaries of publicly available information...
You work for a business information firm that provides clients with summaries of publicly available information on a range of businesses. Your boss comes to you and says that an increasing number of clients have been asking that the firm develop a catalog of company profiles on businesses that have something to do with the oil and gas industry. The clients want this catalog so that they can quickly identify which companies they may want to carry out additional research...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT