Problem 12-09
Financing Deficit

Garlington Technologies Inc.'s 2016 financial statements are shown below:

Balance Sheet as of December 31, 2016

Income Statement for December 31, 2016

Suppose that in 2017 sales increase by 10% over 2016 sales and that 2017 dividends will increase to $164,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2016. Use an interest rate of 13%, and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year). Cash does not earn any interest income. Assume that the all new-debt will be in the form of a line of credit. Round your answers to the nearest dollar. Do not round intermediate calculations.

Problem 12-07
Forecasted Statements and Ratios

Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton's balance sheet as of December 31, 2016, is shown here (millions of dollars):

Sales for 2016 were $475 million and net income for the year was $14.25 million, so the firm's profit margin was 3.0%. Upton paid dividends of $5.7 million to common stockholders, so its payout ratio was 40%. Its tax rate was 40%, and it operated at full capacity. Assume that all assets/sales ratios, (spontaneous liabilities)/sales ratios, the profit margin, and the payout ratio remain constant in 2017. Do not round intermediate calculations.

1. If sales are projected to increase by $90 million, or 18.95%, during 2017, use the AFN equation to determine Upton's projected external capital requirements. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
   $________ million
   
2. Using the AFN equation, determine Upton's self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? Round your answer to two decimal places.
   ________ %
   
3. Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2017. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt).
   Assume Upton's profit margin and dividend payout ratio will be the same in 2017 as they were in 2016. What is the amount of the line of credit reported on the 2017 forecasted balance sheets? (Hint: You don't need to forecast the income statements because the line of credit is taken out on last day of the year and you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2017 addition to retained earnings for the balance sheet without actually constructing a full income statement.) Round your answers to the nearest cent.

   Upton Computers Pro Forma Balance Sheet December 31, 2017 (Millions of Dollars)
   Cash	$
   Receivables	$
   Inventories	$
   Total current assets	$
   Net fixed assets	$
   Total assets	$
   Accounts payable	$
   Notes payable	$ 18
   Line of credit	$
   Accruals	$
   Total current liabilities	$
   Mortgage loan	$ 6
   Common stock	$ 15
   Retained earnings	$ 75.45
   Total liabilities and equity	$

What is the price of a 7­-year, 8.8% semi-annual coupon bond with $1,000 face value if the yield to maturity on similar bonds is 4.4%? Round to the nearest cent.

A local finance company quotes an interest rate of 17 percent on one-year loans. So, if you borrow $34,000, the interest for the year will be $5,780. Because you must repay a total of $39,780 in one year, the finance company requires you to pay $39,780/12, or $3,315.00, per month over the next 12 months.

What rate would legally have to be quoted? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Can you please help solve using a financial calculator versus excel?

The National Financing Company paid $2.00 per share in common stock

dividends last year. The company’s policy is to allow its dividend to grow

at g₁=10 percent for 4 years and then the rate of growth changes to g₂=3 percent per year from year five and on. What is the fair value of the stock if the required rate of return is 8 percent? Would you buy this stock if the market price is $55.2?

An Apple annual coupon bond has a coupon rate of 7.6%, face value of $1,000, and 4 years to maturity. If its yield to maturity is 7.6%, what is its Modified Duration? Answer in years, rounded to three decimal places.

Your first job out of college will pay you $68,000 in year 1 (exactly one year from today), growing at a rate of 2.6% per year thereafter. You will also receive a one time bonus of $48,000 at the same time as your first salary. You plan to retire in 36 years (you'll receive 36 years of salary). If the applicable discount rate is 7%, what is the present value of these future earnings today? Round to the nearest cent.

1. * Investments in projects protected from competition by government regulation can lead to extraordinary profitability. What are the advantages and disadvantages of this type of protection.

GXY Corp. has a WACC of 15%, a cost of debt capital of 5%, and a market value debt-to-equity ratio of 0.10. GXY Corp. is not subject to taxation. Suppose that GXY Corp. increased it market value debt-to-equity ratio to 0.35, What will be the change in GXY Corp’s WACC? Enter your answer as a percent; do not include the % sign. Round your final answer to two decimals.

1. Define {with examples) what are (a) Simulation Analysis, (b) Sensitivity Analysis, and {c) Systematic risk.

choose the correct answer :

1. All of the following Influence capital budgeting cash flows EXCEPT:

_     accelerated depreciation

_    salvage value

_     tax rate changes

_    method of project financing used

2. In proper capital budgeting analysis we evaluate incremental

_  accounting income

_cash flow

_earnings

_     operating profit

3. The estimated benefits from a project are expressed as cash flows instead of income flows because:

_     it is simpler to calculate cash flows than income flows

_     it is cash, not accounting income, that is central to the firm's capital budgeting decision

_    this is required by the Internal Revenue Service

_     this is required by the Securities and Exchange Commission

4. ln estimating nafter-tax incremental operating cash flows" for a project, you should include all of the following EXCEPT:

--- sunk costs

_    opportunity cost

_    changes In working capital resulting from the project, net of spontaneous changes in C/L effects of inflation

5. A capital investment is one that

_     hasthe prospect of Jong term benefits

_     has the prospect of short term benefits

_     is only undertaken by large corporatiOns

_     applies only to investment in fixed assets

Sustainable development and the international responsibility of large multinationals in the developing world is a major issue. What do you forecast will be the strongest factors affecting the future of China and India in the context of The Atlantic article, “How Walmart is Changing in China?’ and the readings since the mid-term of Prof. Michael Santoro, Nanda Nilekani and Paul Shrivastava?

What are definitions and interpretation of Zero yield curve?

EBV is considering a $5M Series A investment in Newco. EBV proposes to structure the investment as 6M shares of convertible preferred stock. The employees of Newco have claims on 10M shares of common stock. Thus, following the Series A investment, Newco will have 10M common shares outstanding and would have 16M shares outstanding on conversion of the CP. EBV estimates a 25 percent probability for a successful exit, with an expected exit time in 5 years and an exit valuation of $500M. The $100M EBV fund has annual fees of 2 percent for each of its 10 years of life and earns 20 percent carried interest on all profits.

(a) What is your investment recommendation for EBV? (Show all steps.)

(b) How sensitive is this recommendation to different assumptions about the exit valuation and the probability of success?

(c) Given the evidence described in Chapter 7, do you think that 25 percent is an aggressive assumption about the probability of success for a first-round investment?

first national bank has assets consisting of $100 million in home equity loans with a modified duration of 2 plus $100 million in mortgages with a modified duration of 5, and liabilities of $200 million in deposits with an average modified duration of 2. The market value of FNB's assets and liabilities is very close to book value. FNB's treasurer wants to use a five-year swap (with a 4.2 modified duration) to neutralize the bank's duration position. Caculate and describe the 5-year swap position the treasurer should enter into to do so.