(Calculating free cash flows) Spartan Stores is expanding operations with the introduction of a new distribution center. Not only will sales increase but investment in inventory will decline due to increased efficiencies in getting inventory to showrooms. As a result of this new distribution center, Spartan expects a change in EBIT of $900,000. Although inventory is expected to drop from $89,000 to $62,000, accounts receivables are expected to climb as a result of increased credit sales from $80,000 to $190,000. In addition, accounts payable are expected to increase from $67,000 to $84,000. This project will also produce $300,000 of bonus depreciation in year 1 and Spartan Stores is in the 35 percent marginal tax rate. What is the project's free cash flow in year 1?
In: Finance
johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $47,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $11,750. The grill will have no effect on revenues but will save Johnny’s $23,500 in energy expenses. The tax rate is 30%.
Required:
a. What are the operating cash flows in each year?
b. What are the total cash flows in each year?
c. Assuming the discount rate is 11%, calculate the net present value (NPV) of the cash flow stream. Should the grill be purchased?
In: Finance
Carter Enterprises can issue floating-rate debt at LIBOR + 2% or fixed-rate debt at 10%. Brence Manufacturing can issue floating-rate debt at LIBOR + 2.3% or fixed-rate debt at 12%. Suppose Carter issues floating-rate debt and Brence issues fixed-rate debt. They are considering a swap in which Carter makes a fixed-rate payment of 8.90% to Brence and Brence makes a payment of LIBOR to Carter. What are the net payments of Carter and Brence if they engage in the swap? Round your answers to two decimal places. Use a minus sign to enter negative values, if any.
What is the net payment of Carter?.......%
In: Finance
(Short Answer – Chapter 13) Downtown Stores is considering a project with an initial investment of $900,000. The present value of the future cash flows of the project is $950,000. The company can issue equity at a flotation cost of 8.76 percent and debt at 5.93 percent. The firm currently has a debt-equity ratio of 0.35. Thirty (30) percent of equity will come from retained earnings (internal sources). What should the firm use as their weighted average flotation cost? If the firm has to invest $900,000 in the project how much money does it have to raise (round to the nearest dollar)? Will the firm invest in the project if (a) there were no flotation costs and (b) there were flotation costs? Credit will only be given if you provide numerical support for your answers.
In: Finance
|
Sunrise, Inc., has no debt outstanding and a total market value of $344,400. Earnings before interest and taxes, EBIT, are projected to be $49,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 17 percent higher. If there is a recession, then EBIT will be 26 percent lower. The company is considering a $175,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,200 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant. |
| a-1. |
Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) |
|||||||||
| a-2. | Calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) | |||||||||
| b-1. | Assume the firm goes through with the proposed recapitalization. Calculate the return on equity (ROE) under each of the three economic scenarios. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) | |||||||||
| b-2. |
Assume the firm goes through with the proposed recapitalization. Calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
|
In: Finance
Use the following information to answers questions 13 to 15. (Short Answer – Chapter 7) The Quorum Company has a prospective 6-year project that requires initial fixed assets costing $963,000, annual fixed costs of $403,400, variable costs per unit of $123.60, a sales price per unit of $249, a discount rate of 14 percent, and a tax rate of 21 percent. The asset will be depreciated straight-line to zero over the life of the project.
1.Compute the accounting break even sales quantity
2. At what sales quantity per year will the investment break even on a financial basis?
In: Finance
Penguin Inc. is a company that provides refrigerated transportation for perishable products. The firm is concerned about the high costs it faces due to the amount of produce it loses during transportation as well as the fuel costs. Therefore, it is currently considering the purchase of a high-tech refrigeration vehicle which is energy efficient, environmentally friendly and will also reduce the loss of produce significantly. The vehicle (a truck) has a useful life of 8 years. If purchased, this truck will reduce total costs by 3% per year for the next three years. Thereafter, it will lose efficiency due to wear-and-tear. The truck will still help reduce total costs, but by only 1% for the remaining 5 years. The machine will be scrapped at the end of the 8th year. (Assume that the scrap value of the truck is zero.) The current transportation costs of the company are $10 million per year and the annual interest rate is 6%. (5pts) (a) What is the present value of the transportation costs the firm faces for the next 8 years if the firm does not purchase the truck? (10pts) (b)What is the present value of the transportation costs if this truck is purchased? Draw a timeline. (5pts) (c) How much will the firm save in terms of transportation costs if it purchases the truck? Should the company purchase this truck if it will cost $ 4 million today? Explain why or why not.
In: Finance
|
Account |
Balance 12/31/20162016 |
Balance 12/31/20172017 |
|
Accumulated depreciation |
$ 4 comma 242$4,242 |
$ 4 comma 860$4,860 |
|
Accounts payable |
$ 2 comma 904$2,904 |
$ 3 comma 207$3,207 |
|
Accounts receivable |
$ 3 comma 152$3,152 |
$ 3 comma 649$3,649 |
|
Cash |
$ 1 comma 200$1,200 |
$ 1 comma 499$1,499 |
|
Common stock |
$ 4 comma 781$4,781 |
$ 7 comma 281$7,281 |
|
Inventory |
$ 4 comma 359$4,359 |
$ 5 comma 171$5,171 |
|
Long-term debt |
$ 3 comma 601$3,601 |
$ 2 comma 432$2,432 |
|
Plant, property, and equipment |
$ 8 comma 682$8,682 |
$ 9 comma 843$9,843 |
|
Retained earnings |
$ 1 comma 865$1,865 |
$ 2 comma 382$2,382 |
PrintDone
construct a balance sheet for
2016 and 2017.
b. list all the working capital accounts.
c. find the net working capital for the years ending
2016 and 2017.
d. calculate the change in net working capital for the year
2017.
In: Finance
|
Balance Sheet Accounts of Roman Corporation |
||
|
Account |
Balance 12/31/20162016 |
Balance 12/31/20172017 |
|
Accumulated depreciation |
$ 2 comma 026$2,026 |
$ 2 comma 674$2,674 |
|
Accounts payable |
$ 1 comma 793$1,793 |
$ 2 comma 062$2,062 |
|
Accounts receivable |
$ 2 comma 478$2,478 |
$ 2 comma 688$2,688 |
|
Cash |
$ 1 comma 290$1,290 |
$ 1 comma 088$1,088 |
|
Common stock |
$ 4 comma 999$4,999 |
$ 4 comma 999$4,999 |
|
Inventory |
$ 5 comma 807$5,807 |
$ 6 comma 038$6,038 |
|
Long-term debt |
$ 7 comma 805$7,805 |
$ 8 comma 191$8,191 |
|
Plant, property, and equipment |
$ 8 comma 402$8,402 |
$ 9 comma 194$9,194 |
|
Retained earnings |
$ 1 comma 354$1,354 |
$ 1 comma 082$1,082 |
a. construct a balance sheet for
2016 and 2017.
b. list all the working capital accounts.
c. find the net working capital for the years ending
2016 and 2017.
d. calculate the change in net working capital for the year2017.
|
Roman Corporation |
|||||||||
In: Finance
|
Mint Company has a debt-equity ratio of .20. The required return on the company’s unlevered equity is 13 percent and the pretax cost of the firm’s debt is 6.8 percent. Sales revenue for the company is expected to remain stable indefinitely at last year’s level of $19,900,000. Variable costs amount to 55 percent of sales. The tax rate is 23 percent and the company distributes all its earnings as dividends at the end of each year. |
| a. |
If the company were financed entirely by equity, how much would it be worth? ( |
| b. | What is the required return on the firm’s levered equity? |
| c-1. | Use the weighted average cost of capital method to calculate the value of the company. |
| c-2. | What is the value of the company’s equity? |
| c-3. | What is the value of the company’s debt? |
| d. | Use the flow to equity method to calculate the value of the company’s equity. |
In: Finance
Heavy Metal Corporation is expected to generate the following free cash flows over the next five years:
|
Year |
1 |
2 |
3 |
4 |
5 |
|
FCF ($ million) |
51.8 |
67.6 |
78.6 |
74.3 |
80.8 |
Thereafter, the free cash flows are expected to grow at the industry average of
3.5 %
per year. Using the discounted free cash flow model and a weighted average cost of capital of
13.6 %:
a. Estimate the enterprise value of Heavy Metal.
b. If Heavy Metal has no excess cash, debt of
$ 283
million, and
45
million shares outstanding, estimate its share price.
a. Estimate the enterprise value of Heavy Metal.
In: Finance
BE is considering a $10 million project that will last
five years, implying straight-line depreciation per year of $2
million. The cash revenues less cash expenses per year are
$3,500,000. The corporate tax bracket is 30 percent. The cost of
unlevered equity is 20 percent. Please value the project by APV
method under two case below.
(1) Case I: BE can obtain a five-year, nonamortizing loan for
$7,500,000 after flotation costs at the risk-free rate of 10
percent. Flotation costs are fees paid when stock or debt is
issued. BE is informed that flotation costs will be 1 percent of
the gross proceeds of its loan.
(2) Case II: BE can obtain a five-year, subsidized loan for
$7,500,000.
In: Finance
|
Conrad Industries has a new project available that requires an initial investment of $5.1 million. The project will provide unlevered cash flows of $843,000 per year for the next 20 years. The company will finance the project with a debt-value ratio of .4. The company’s bonds have a YTM of 6.4 percent. The companies with operations comparable to this project have unlevered betas of 1.23, 1.16, 1.38, and 1.33. The risk-free rate is 3.8 percent and the market risk premium is 7 percent. The tax rate is 23 percent. |
|
What is the NPV of this project? |
In: Finance
PPC is a large conglomerate thinking of entering the
F&B business, where it
olans to finane projects with a debt-to-value ratio of 40 percent.
There is curre
ntly one firm in the F&B industry, QV F&Bs. This firm is
financed with 25 percen
t debt. The beta of QV's equity is 1.5. QV, has a borrowing rate of
12 percent, a
nd PPC expects to borrow for its F&B venture at 10 percent. The
corporate taxr
ate for both fims is 40, the market risk premium is 8.5 percent,
and the riskles
s interest rate is 8 percent. What is the appropriate discount rate
for PPC to use
for its F&B venture?
In: Finance
|
Jamestown, Inc., an all-equity firm, is considering an investment of $1.77 million that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate earnings before taxes and depreciation of $606,000 per year for four years. The investment will not change the risk level of the firm. The company can obtain a four-year, 8.6 percent loan to finance the project from a local bank. All principal will be repaid in one balloon payment at the end of the fourth year. The bank will charge the firm $56,000 in flotation fees, which will be amortized over the four-year life of the loan. If the company financed the project entirely with equity, the firm’s cost of capital would be 13 percent. The corporate tax rate is 25 percent. |
|
Using the adjusted present value method, calculate the APV of the project. |
In: Finance