Dingel Inc. is attempting to evaluate three alternative capital structures - A,B,C. The following table shows the three structures along with relevant cost data. The firm is subject to a 40% tax rate. The risk-free rate is 5.3% and the market return is currently 10.7%

		Capital Structure
Item	A	B	C
Debt($ million)	35	45	55
Preferred Stock ($ million)	0	10	10
Common Stock ($ million)	65	45	35
Total Capital	100	100	100
Debt (yield to maturity)	7.0%	7.5%	8.5%
Annual Preferred Stock Dividend	-	$2.80	$2.20
Preferred Stock (Market Price)	-	$30.00	$21.00
Common Stock Beta	.95	1.10	1.25

(a) Calculate the after-tax cost of debt for each capital structure

(b) Calculate the cost of preferred stock for each capital structure

(c) Calculate the cost of common stock for each capital structure

(d) Calculcate the weighted average cost of capital (WACC) for each capital structure

(e) compare the WACCs calculated in part (d) and discuss the impact of the firm's financial leverage on its WACC and its related risk

Please include detail of work

Sales Increase

Maggie's Muffins Bakery generated $2,000,000 in sales during 2016, and its year-end total assets were $1,400,000. Also, at year-end 2016, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2017, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 6%, and its payout ratio will be 55%. How large a sales increase can the company achieve without having to raise funds externally—that is, what is its self-supporting growth rate? Do not round intermediate calculations. Round your answers to the nearest whole.

Question:

Sales can increase by

① $    ,

② that is　by    %

Anderson international Limited is evaluating a project in Erewhon. The project will create the following cash flows:

year Cash flow

0 -$1,190,000

1 365,000

2 430,000

3 325,000

4 280,000

All cash flows will occur in Erewhon and are expressed in dollars. In an attempt to improve its economy, the Erewhonian government has declared that

all cash flows created by a foreign company are "blocked" and must be reinvested with the government for one year. The reinvestment rate for these funds

is 5 percent.

If Anderson uses a required return of 9 percent on this project, what are the NPV and IRR of the project?

Financial Forecasting:

To determine potential future financial needs, one must generate a plan based not only on past relationships but also on reasonable future projections. Using ratios to help formulate a forecast where sales drive results is an important step in the planning process.

The financial planning models generated by forecasting activities help synthesize the financial manager's thinking about financial, as well as operational, relationships. To generate an estimate of future funding needs, financial planning models use the traditional financial statements you know and love the balance sheet, the income statement, and the statement of cash flows. There are some slight differences, however, between an accounting approach and a financial approach to planning. Specifically, from a current assets and current liabilities perspective, the focus is on firm operations, and not the financial instruments that represent short-term balance entries.

For example, accounts receivable and inventories are used from the current assets section, but cash and marketable securities are not. Accounts payable, taxes payable, and wages payable are used from the current liabilities section, but short-term debt and current portion of long-term debt are not used in the planning process. Remember the focus... Generating a financial plan helps determine future financing needs, incorporates operational plans into financial plans, and provides bases for firm valuation. All those factors should be driven by operations, and not access to short-term financial instruments. Although the outcome of a plan may be a need or estimated need for access for "what-to-do," e.g. how much short-term borrowing should we do in the short-term, the starting point excludes those factors.

Required:

When planning an acquisition, financial forecasts often provide guidance for future activities.

1. How long in the future do you think is an appropriate length of time to formulate a financial plan? Write 50 words.

2. What financial forecasting experience do you have? Write 100 words.

3. Why do you think financial forecasting might be problematic? Write 100 words.

Please write in your own words. Please don't copy from anywhere and give the link which is used for writing.

Delectable Parsnip, Inc.’s, net income for the most recent year was $15,221. The tax rate was 23 percent. The firm paid $5,010 in total interest expense and deducted $5,447 in depreciation expense.

What was the company’s cash coverage ratio for the year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

You need to pay for the property taxes on your house in 6 months. The property taxes at that time will be $6,000 . How much do you have to invest each month, starting next month, for 5 months to exactly pay for the taxes if your investments earn 5.00% APR (compounded monthly)? a. 1,185 b. 1,227 c. 1,221 d. 1,140 d.

Financial Derivatives

40. Identify the formation of a butterfly spread, straddle and strangle. Identify the formation of Tunel, Condor, Ratio Spread Call and Put

The market value of Owl Fund Industries common stock is $125 million and the market value of its debt is $25 million. The beta of the company's common stock is 1.0 and the expected risk premium on the market portfolio is 6.5 percent. If the Treasury bill rate is 3 percent and the yield on its debt is 4%, what is the company's cost of capital assuming the tax rate is 0%.

You are asked to evaluate the following two projects for the Norton corporation. Use a discount rate of 14 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Project X (Videotapes of the Weather Report) ($46,000 Investment)						Project Y (Slow-Motion Replays of Commercials) ($66,000 Investment)
Year		Cash Flow				Year		Cash Flow
1		$	23,000			1		$	33,000
2			21,000			2			26,000
3			22,000			3			27,000
4			21,600			4			29,000

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .75. It’s considering building a new $47 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $5.9 million 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 7.7 percent of the amount raised. The required return on the company’s new equity is 15 percent.
2.	A new issue of 20-year bonds: The flotation costs of the new bonds would be 3.3 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 5.6 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. Management has a target ratio of accounts payable to long-term debt of .10. Assume there is no difference between the pretax and aftertax accounts payable costs.

What is the NPV of the new plant? Assume that PC has a 23 percent tax rate. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.)

***Note: Answer is NOT $5,567,662

This is the predicted cash flow stream of an investment project related to the launch of a new automotive vehicle for a fictitious firm:

Estimated Income Statement (simplified)
	YR0	YR1	YR2	YR3	YR4	YR5	YR6	YR7	YR8	YR9
Sales Forecast (units)		0	200	200	200	200	200	200	200	200
Unit Contribution ($)			$3300	$3300	$3300	$3300	$3300	$3300	$3300	$3300
Depreciation			200K	200K	200K	200K	200K
Free Cash (before taxes)	$-1M	$-2.5M	$710K	$710K	$710K	$710K	$710K	$510K	$510K	$510K

Be aware that this is a stylized Income Statement, designed for educational purposes, in order to force your critical thinking.  

Parameters considered in the DCF:

WACC = 9.5% (weighted average cost of capital)
Price = $22,000 /unit
Variable Costs = $18,700/unit
Fixed Costs = 150K
Investment = $3.5M (including the Cost of Equipment @$1M and R&D and Mkt expenses @$2.5M)

Supporting formulas:

a) free cash = unit contribution - Fixed Cost + Depreciation;

b) unit contribution = unit sales*(price - variable costs)

Note on the Investment and depreciation: the total initial investment was $3.5M, but $1M was paid in advance to purchase equipment and expand capacity. The remaining $2.5M was used in R&D and Marketing expenses paid at the end of Year #1. Manufacturing/sales effectively start in Year #2, so depreciation is initiated then for 5 consecutive years. The immediate investment cost of manufacturing is incurred in Time 0 and it is not affected by the discount rate (i.e., initial investment). Assume that production is interrupted in Year #10, with no residual value (the machinery cannot be sold due to high levels of specificity!).

Assignment Questions:

1) Based on the simplified information provided above, discuss whether you would support this investment. Why? or Why not? (Feel free to use Excel or a Financial Calculator)

Currently, Meyers Manufacturing Enterprises (MME) has a capital structure consisting of 35% debt and 65% equity. MME's debt currently has a 6.6% yield to maturity. The risk-free rate (r_RF) is 4.6%, and the market risk premium (r_M – r_RF) is 5.6%. Using the CAPM, MME estimates that its cost of equity is currently 10%. The company has a 40% tax rate.

a. What is MME's current WACC? Round your answer to 2 decimal places. Do not round intermediate calculations.

b. What is the current beta on MME's common stock? Round your answer to 4 decimal places. Do not round intermediate calculations.

c. What would MME's beta be if the company had no debt in its capital structure? (That is, what is MME's unlevered beta, b_U?) Round your answer to 4 decimal places. Do not round intermediate calculations.

d. MME's financial staff is considering changing its capital structure to 45% debt and 55% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 7.1%. The proposed change will have no effect on the company's tax rate.

e. What would be the company's new cost of equity if it adopted the proposed change in capital structure? Round your answer to 2 decimal places. Do not round intermediate calculations.

f. What would be the company's new WACC if it adopted the proposed change in capital structure? Round your answer to 2 decimal places. Do not round intermediate calculations.

Mary Smith, a CFA candidate, was recently hired for an analyst position at the Bank of Ireland. Her first assignment is to examine the competitive strategies employed by various French wineries.

Smith’s report identifies four wineries that are the major players in the French wine industry. Key characteristics of each are cited in the table below. In the body of Smith’s report, she includes a discussion of the competitive structure of the French wine industry. She notes that over the past five years, the French wine industry has not responded to changing consumer tastes. Profit margins have declined steadily, and the number of firms representing the industry has decreased from 10 to 4. It appears that participants in the French wine industry must consolidate to survive.

Characteristics of Four Major French Wineries

	South Winery	North Winery	East Winery	West Winery
Founding date	1750	1903	1812	1947
Generic competitive strategy	?	Cost leadership	Cost leadership	Cost leadership
Major customer market (more than 80% concentration)	France	France	England	U.S.
Production site	France	France	France	France

Smith’s report notes that French consumers have strong bargaining power over the industry. She supports this conclusion with five key points, which she labels “Bargaining Power of Buyers”:

• Many consumers are drinking more beer than wine with meals and at social occasions.
• Increasing sales over the Internet have allowed consumers to better research the wines, read opinions from other customers, and identify which producers have the best prices.
• The French wine industry is consolidating and consists of only 4 wineries today compared to 10 wineries five years ago.
• More than 65% of the business for the French wine industry consists of purchases from restaurants. Restaurants typically make purchases in bulk, buying four to five cases of wine at a time.
• Land where the soil is fertile enough to grow grapes necessary for the wine production process is scarce in France.

After completing the first draft of her report, Smith takes it to her boss, RonVanDriesen, to review. VanDriesen tells her that he is a wine connoisseur himself and often makes purchases from the South Winery. Smith tells VanDriesen, “In my report I have classified the South Winery as a stuck-in-the-middle firm. It tries to be a cost leader by selling its wine at a price that is slightly below the other firms, but it also tries to differentiate itself from its competitors by producing wine in bottles with curved necks, which increases its cost structure. The end result is that the South Winery’s profit margin gets squeezed from both sides.” VanDriesen replies, “I have met members of the management team from the South Winery at a couple of the wine conventions I have attended. I believe that the South Winery could succeed at following both a cost leadership and a differentiation strategy if its operations were separated into distinct operating units, with each unit pursuing a different competitive strategy.” Smith makes a note to do more research on generic competitive strategies to verify VanDriesen’s assertions before publishing the final draft of her report.

Smith knows that a firm’s generic strategy should be the centerpiece of a firm’s strategic plan. On the basis of a compilation of research and documents, Smith makes three observations about the North Winery and its strategic planning process. Which of these observation(s) least support the conclusion that the North Winery’s strategic planning process is guided and informed by its generic competitive strategy? (Select all that apply. In order to receive full credit, you must make a selection for each option. For correct answer(s), click the option once to place a check mark. For incorrect answer(s), click the option twice to place an "x".)

• North Winery's price and cost forecasts account for future changes in the structure of the French wine industry.unchecked
• North Winery is a list of unrelated action items that does not lead to a sustainable competitive advantage.unanswered
• North Winery places each of its business units into one of three categories: build, hold, or harvest.unanswered
• North Winery's price and cost forecasts account for future changes in the structure of the French wine industry.unanswered
• North Winery uses market share as the key measure of its competitive position.unanswered
• North Winery places each of its business units into one of three categories: build, hold, or harvest.unanswered
• North Winery uses market share as the key measure of its competitive position.unanswered

The following table shows the nominal returns on Brazilian stocks and the rate of inflation.

Year Nominal Return (%) Inflation (%)

2012 0.5 6.8

2013 -14.0 6.9

2014 -12.0 7.4

2015 -42.4 11.7

2016 67.2 7.3

2017 27.9 3.9

a. What was the standard deviation of the market returns?

b. Calculate the average real return.

Ebenezer Scrooge has invested 50% of his money in share A and the remainder in share B. He assesses their prospects as follows:

A B

Expected return (%) 18 19

Standard deviation (%) 20 24

Correlation between returns 0.3

a. What are the expected return and standard deviation of returns on his portfolio?

b. How would your answer change if the correlation coefficient were 0 or –0.30?