Summarize the issues one should address in the analysis of: Short term liquidity and Long-term solvency

Please discuss the issues, not definitions. Thank you

1. What is the price of a 1,000 par value semi-annual bond with 5.0 years to maturity and a coupon rate of 4.98% and a yield-to-maturity of 8.62% ?

Constellation Brands has a 45 day collection period. Sales for the next four quarters are estimated at $8,400, $8,800, $8,200, and $9,000, respectively, starting with the first quarter of the year. Given this information, which one of the following statements is correct? Assume a 360 day year.

Consider the following table:

a. Calculate the values of mean return and variance for the stock fund. (Do not round intermediate calculations. Round "Mean return" value to 1 decimal place and "Variance" to 2 decimal places.)  

b. Calculate the value of the covariance between the stock and bond funds.

3. Financial statements and reports The income statement, also known as the profit and loss (P&L) statement, provides a snapshot of the financial performance of a company during a specified period of time. It reports a firm’s gross income, expenses, net income, and the income that is available for distribution to its preferred and common shareholders. The income statement is prepared using the generally accepted accounting principles (GAAP) that match the firm’s revenues and expenses to the period in which they were incurred, not necessarily when cash was received or paid. Investors and analysts use the information given in the income statement and other financial statements and reports to evaluate the company’s financial performance and condition. Consider the following scenario: Cold Goose Metal Works Inc.’s income statement reports data for its first year of operation. The firm’s CEO would like sales to increase by 25% next year. 1. Cold Goose is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before interest and taxes (EBIT). 2. The company’s operating costs (excluding depreciation and amortization) remain at 60% of net sales, and its depreciation and amortization expenses remain constant from year to year. 3. The company’s tax rate remains constant at 40% of its pre-tax income or earnings before taxes (EBT). 4. In Year 2, Cold Goose expects to pay $100,000 and $821,100 of preferred and common stock dividends, respectively. Complete the Year 2 income statement data for Cold Goose, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar. Cold Goose Metal Works Inc.Income Statement for Year Ending December 31 Year 1 Year 2 (Forecasted) Net sales $10,000,000 $ Less: Operating costs, except depreciation and amortization 6,000,000 Less: Depreciation and amortization expenses 400,000 400,000 Operating income (or EBIT) $3,600,000 $ Less: Interest expense 360,000 Pre-tax income (or EBT) $3,240,000 $ Less: Taxes (40%) 1,296,000 Earnings after taxes $1,944,000 $ Less: Preferred stock dividends 100,000 Earnings available to common shareholders $1,844,000 $ Less: Common stock dividends 680,400 Contribution to retained earnings $1,163,600 $1,424,900 Given the results of the previous income statement calculations, complete the following statements: • In Year 2, if Cold Goose has 10,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive in annual dividends. • If Cold Goose has 500,000 shares of common stock issued and outstanding, then the firm’s earnings per share (EPS) is expected to change from in Year 1 to in Year 2. • Cold Goose’s before interest, taxes, depreciation and amortization (EBITDA) value changed from in Year 1 to in Year 2. • It is to say that Cold Goose’s net inflows and outflows of cash at the end of Years 1 and 2 are equal to the company’s annual contribution to retained earnings, $1,163,600 and $1,424,900, respectively. This is because of the items reported in the income statement involve payments and receipts of cash.

8. Madsen Motors's bonds have 23 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 7%, and the yield to maturity is 9%. What is the bond's current market price? Round your answer to the nearest cent.

9. A bond has a $1,000 par value, 10 years to maturity, and a 7% annual coupon and sells for $985.

1. What is its yield to maturity (YTM)? Round your answer to two decimal places.

10. Nesmith Corporation's outstanding bonds have a $1,000 par value, a 6% semiannual coupon, 12 years to maturity, and a 10% YTM. What is the bond's price? Round your answer to the nearest cent.

11. A firm's bonds have a maturity of 10 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 5 years at $1,049.23, and currently sell at a price of $1,095.02. What are their nominal yield to maturity and their nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places.

"Interest Rate Risk [LO2] Bond J has a coupon rate of 3 percent. Bond K has a coupon rate of 9 percent. Both bonds have 14 years to maturity, make semiannual payments, and have a YTM of 6 percent. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds? What if rates suddenly fall by 2 percent instead? What does this problem tell you about the interest rate risk of lower-coupon bonds?

Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for $130. The materials cost for a standard diamond is $80. The fixed costs incurred each year for factory upkeep and administrative expenses are $206,000. The machinery costs $1.2 million and is depreciated straight-line over 10 years to a salvage value of zero.

a. What is the accounting break-even level of sales in terms of number of diamonds sold? (Do not round intermediate calculations.)

b. What is the NPV break-even level of diamonds sold per year assuming a tax rate of 21%, a 10-year project life, and a discount rate of 12%? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

NPV Your division is considering two investment projects, each of which requires an up-front expenditure of $17 million. You estimate that the investments will produce the following net cash flows: Year Project A Project B 1 $ 6,000,000 $20,000,000 2 10,000,000 10,000,000 3 20,000,000 7,000,000 What are the two projects' net present values, assuming the cost of capital is 5%? Do not round intermediate calculations. Round your answers to the nearest dollar. Project A: $ Project B: $ What are the two projects' net present values, assuming the cost of capital is 10%? Do not round intermediate calculations. Round your answers to the nearest dollar. Project A: $ Project B: $ What are the two projects' net present values, assuming the cost of capital is 15%? Do not round intermediate calculations. Round your answers to the nearest dollar. Project A: $ Project B: $ What are the two projects' IRRs at these same costs of capital? Do not round intermediate calculations. Round your answers to two decimal places. Project A: % Project B: %

Seether Co. wants to issue new 19-year bonds for some much-needed expansion projects. The company currently has 6.4 percent coupon bonds on the market that sell for $780.37, make semiannual payments, and mature in 19 years. What coupon rate should the company set on its new bonds if it wants them to sell at par?

1. -8.47%
2. -9.25%
3. 8.69%
4. -8.45%
5. 9.54%

If interest rates suddenly rise by 5 percent, what is the percentage change in the price of Bond Dave?

1. -30.34%
2. -43.56%
3. 34.73%
4. -30.32%
5. 53.22%

If rates were to suddenly fall by 5 percent instead, what would the percentage change in the price of Bond Sam be then?

1. 9.52%
2. 8.69%
3. 9.50%
4. -8.42%
5. 9.57%

If rates were to suddenly fall by 5 percent instead, what would the percentage change in the price of Bond Dave be then?

1. 53.20%
2. 34.73%
3. 53.18%
4. -30.29%
5. 53.25%

IBM's income, assets, and stock price have been growing at an annual rate of 20% and are expected to continue to grow at this rate for 2 more years. They just paid a dividend of $2.00 and will continue to pay at the supernormal growth rate (20%) for the next two years. After that, dividends are expected to grow at the firm's constant growth rate of 8%. The required rate of return is 18%. The present value of the stock is a. $26.44 b. $23.03 c. $33.15 d. $40.01 e. $36.00

10. In the previous question, if IBM is currently selling for $40.00, then the stock is a. undervalued by $13.56 b. overvalued by $13.56 c. correctly valued d. overvalued by $16.97 e. undervalued by $16.97

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):

Cash $ 3.5 Accounts payable $ 9.0

Receivables 26.0 Notes payable 18.0

Inventories 58.0 Line of credit 0

Total current assets $ 87.5 Accruals 8.5

Net fixed assets 35.0 Total current liabilities $ 35.5

Mortgage loan 6.0

Common stock 15.0

Retained earnings 66.0

Total assets $122.5 Total liabilities and equity $122.5

Sales for 2016 were $250 million and net income for the year was $7.5 million, so the firm's profit margin was 3.0%. Upton paid dividends of $3 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.

a. If sales are projected to increase by $40 million, or 16%, 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

b. 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. %

c. 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 $

Line of credit $

Accruals $

Total current liabilities $

Mortgage loan $

Common stock $

Retained earnings $

Total liabilities and equity $