Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.18. Its current stock price is $51 per share, with 2.6 billion shares outstanding. The firm enjoys very stable demand for its products, and consequently it has a low equity beta of 0.45 and can borrow at 4.6%, just 20 basis points over the risk-free rate of 4.4%. The expected return of the market is 9.5%, and PKGR's tax rate is 30%.
a. This year, PKGR is expected to have free cash flows of $6.1 billion. What constant expected growth rate of free cash flow is consistent with its current stock price?
b. PKGR believes it can increase debt without any serious risk of distress or other costs. With a higher debt-equity ratio of 0.45, it believes its borrowing costs will rise only slightly to 4.9%. If PKGR announces that it will raise its debt-equity ratio to 0.45 through a leveraged recap, determine the increase or decrease in the stock price that would result from the anticipated tax savings.
In: Finance
if you were a hospital administrator which side of the aisle would you prefer to work on - cost management or cost allocation side? Please explain and cite your response.
In: Finance
Liquidation
At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining Company had the balance sheet shown below (in thousands of dollars). The court, after trying unsuccessfully to reorganize the firm, decided that the only recourse was liquidation under Chapter 7. Sale of the fixed assets, which were pledged as collateral to the mortgage bondholders, brought in $410,000, while the current assets were sold for another $250,000. Thus, the total proceeds from the liquidation sale were $660,000. The trustee's costs amounted to $30,000; no single worker was due more than the maximum allowable wages per worker; and there were no unfunded pension plan liabilities.
| Balance Sheet (Thousands of Dollars) | ||||||
| Current assets | $ | 400 | Account payable | $ | 50 | |
| Net fixed assets | 600 | Accrued taxes | 40 | |||
| Accrued wages | 30 | |||||
| Notes payable | 180 | |||||
| Total current liabilities | $ | 300 | ||||
| First-mortgage bondsa | 300 | |||||
| Second-mortgage bondsa | 200 | |||||
| Debentures | 200 | |||||
| Subordinated debenturesb | 100 | |||||
| Common stock | 50 | |||||
| Retained earnings | (150) | |||||
| Total assets | $ | 1,000 | Total liabilities & equity | $ | 1,000 | |
| Notes: aAll fixed assets are pledged as collateral to the mortgage bonds. bSubordinated to notes payable only. |
||||||
$
The first mortgage bondholders will receive $ from collateralized assets that -Select-isis notItem 3 equal to their full claim. Therefore, the first mortgage holders have $ in unsatisfied claims.
The second mortgage bondholders will receive $ from collateralized assets that -Select-isis notItem 6 equal to their full claim. Therefore, the second mortgage holders have $ in unsatisfied claims.
| Remainging primary claimants | Amount |
| Trustee's expenses | $ |
| Workers' wages due | $ |
| Governments' taxes due | $ |
| Total | $ |
Account |
Amount Received before subordination adjustment |
||
| Accounts payable | $ | ||
| Notes payable | $ | ||
| Second mortgage bonds | $ | ||
| Debentures | $ | ||
| Subordinated debentures | $ | ||
| Total | $ | ||
How much will the remaining general creditors receive after subordination? Do not round intermediate calculations. Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answers to the nearest dollar. If no entry is required, enter "0".
Account |
Amount Received after subordination adjustment |
||
| Accounts payable | $ | ||
| Notes payable | $ | ||
| Second mortgage bonds | $ | ||
| Debentures | $ | ||
| Subordinated debentures | $ | ||
| Total | $ | ||
How much in total will the second mortgage holders receive (include the amount received from collateral)? Do not round intermediate calculations. Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answer to the nearest dollar.
$
In: Finance
|
Jet Black is an international conglomerate with a petroleum division and is currently competing in an auction to win the right to drill for crude oil on a large piece of land in one year. The current market price of crude oil is $109 per barrel and the land is believed to contain 616,000 barrels of oil. If found, the oil would cost $117 million to extract. Treasury bills that mature in one year yield a continuously compounded interest rate of 6 percent and the standard deviation of the returns on the price of crude oil is 65 percent. |
|
Use the Black-Scholes model to calculate the maximum bid that the company should be willing to make at the auction. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) Maximum bid = ? |
In: Finance
4. Cost of trade credit
Firms usually offer their customers some form of trade credit. This allowance comes with certain terms of credit, which will affect the actual cost of asset being sold for the buyer and the seller.
Consider this case:
Tasty Tuna Corporation buys most of its raw materials from a single supplier. This supplier sells to Tasty Tuna on terms of 1/15, net 60.
a. The cost per period of the trade credit extended to Tasty Tuna is __________? A. 0.81% B. 0.89% C.1.15% D. 1.01%
(Note: Round all intermediate calculations to four decimal places, and your final answer to two decimal places.).
b. Tasty Tuna’s trade credit has a nominal annual cost of _____________ , assuming a 365-day year. A. 5.73% B.7.37% C.9.66% D 8.19%
(Note: Round all intermediate calculations to four decimal places, and your final answer to two decimal places.)
c. If Tasty Tuna Corporation’s supplier shortens its discount period to five days, this will __________ the cost of the trade credit. Decrease or Increase
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You are a US firm and expect to receive 10,000,000 Malaysian Ringitt (MR) from a customer for sure after six months. How would you achieve a complete hedge if you had the following: Spot rate $0.22/MR, six month US$ risk-free rate = 2.5 percent and six month MR risk-free rate is 3.5 percent. Describe the transactions in detail. 2 Suppose the payment in MR from your customer is not certain, and, in addition to the spot and risk-free rates mentioned above, you also have an options market in which MR calls trade. How would you construct the appropriate hedge in this case? Describe the transactions in detail.
In: Finance
Do you see value in the premise of resource dependency theory as an individual? How does resource dependency theory benefit an organization?
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An asset used in a four-year project falls in the five-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $7,200,000 and will be sold for $1,620,000 at the end of the project.
A) What is the book value of the equipment at the end of Year 4?
B) If the tax rate is 24 percent, what is the aftertax salvage value of the asset?
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Gary Levin is the chief executive officer of Mountainbrook Trading Company. The board of directors has just granted Mr. Levin 14,000 at-the-money European call options on the company’s stock, which is currently trading at $115 per share. The stock pays no dividends. The options will expire in five years and the standard deviation of the returns on the stock is 56 percent. Treasury bills that mature in five years currently yield a continuously compounded interest rate of 7 percent.
a. Use the Black-Scholes model to calculate the value of the stock options. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Value of option grant=?
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Explain your opinion on Corporate Governance?
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You are given the following information for Lightning Power Co. Assume the company's tax rate is 25 percent.
Debt: 15,000 6.4 percent coupon bonds outstanding$1,000 par value, 28 years to maturity, selling for 106 percent of par, the bonds make semiannual payments.
Common Stock: 480,000 shares outstanding, selling for $66 per share; beta is 1.17.
Preferred Stock: 21,000 shares of 4.2 percent preferred stock outstanding, currently selling for $87 per share. The par value is $100 per share.
5 percent market risk premium and 5.3 percent risk-free rate.
what is the companys WACC
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|
Option A |
Option B |
|
|
Initial cost |
$160,000 |
$227,000 |
|
Annual cash inflows |
$71,000 |
$80,000 |
|
Annual cash outflows |
$30,000 |
$31,000 |
|
Cost to rebuild (end of year 4) |
$50,000 |
$0 |
|
Salvage value |
$0 |
$8,000 |
|
Estimated useful life |
7 years |
7 years |
Instructions
a. 1.
Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option.
b.
Which option should be accepted? Explain your answer!
In: Finance
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.4 million. The equipment will be depreciated straight line over 6 years to a value of zero, but in fact it can be sold after 6 years for $668,000. The firm believes that working capital at each date must be maintained at a level of 15% of next year’s forecast sales. The firm estimates production costs equal to $1.60 per trap and believes that the traps can be sold for $6 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm’s tax bracket is 35%, and the required rate of return on the project is 9%. Use the MACRS depreciation schedule.
Year: Sales (millions of traps)
Year 0 ---------------------0
Year 1----------------------0.6
Year 2----------------------0.8
Year 3----------------------1.0
Year 4----------------------1.0
Year 5----------------------0.9
Year 6----------------------0.6
Thereafter-----------------0
a. What is project NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places.)
NPV-----------$
b. By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule? (Do not round intermediate calculations. Enter your answer in whole dollars not in millions.)
The NPV increases by $
In: Finance
Assume these were the inflation rates and U.S. stock market and Treasury bill returns between 1929 and 1933:
| Year | Inflation(%) | Stock Market Return(%) | T-Bill Return(%) |
| 1929 | 0.5 | –14.2 | 7.0 |
| 1930 | –3.4 | –31.5 | 2.3 |
| 1931 | –9.2 | –47.2 | 1.4 |
| 1932 | –11.4 | –10.4 | 0.9 |
| 1933 | 0.7 | 63.2 | 0.2 |
What was the real return on the stock market in each year?
What was the average real return?
What was the risk premium in each year?
What was the average risk premium?
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FuelSource Co (FuelSource) is a U.S. company with a December 31st year-end that prepares its financial statements in accordance with U.S. GAAP. FuelSource is planning to issue its financial statements on March 20, 2018. It is now March 18, 2018 and FuelSource management is evaluating new information regarding future contingencies and subsequent events to determine their impact (if any) on the December 31, 2017 financial statements. Environmental Clean-Up FuelSource operates in the oil industry, and its operations sometimes result in soil contamination. One of FuelSource’s subsidiaries is located outside of the U.S. in Dirty Country where there is no environmental legislation. However, FuelSource has a widely published environmental policy in which it undertakes to clean up all contamination that it causes, regardless of whether it occurs in a jurisdiction with no environmental regulations. FuelSource has a record of honoring this published policy. In November 2017, FuelSource contaminated land while operating in Dirty Country and anticipates that cleanup efforts will begin in May of 2018 and are estimated to cost approximately $1 million. Acquisition of an Oil Refinery Company Using the funds from a line of credit, FuelSource’s management drew $10 million on March 10, 2018, to acquire an oil refinery in the northeast United States. On the basis of its initial assessment from the Company’s due diligence (that started shortly before the balance sheet date), management’s best estimate of the allocation of the $10 million purchase price is as follows: $2 million of current assets and $8 million noncurrent assets (comprising $5 million of identifiable noncurrent assets, $2 million of intangible assets, and $1 million of goodwill). The estimated purchase price allocation has not been finalized, but is expected to be after the financial statements are issued. Required: Answer the following questions. Be sure to fully discuss the accounting options available to FuelSource for the above events and provide your recommendations for the best accounting treatments. Your responses should be supported by the FASB Codification and any other resources you find helpful (e.g., Conceptual Framework, real-world examples, etc.). 1. How do you think FuelSource should account for the environmental cleanup costs it anticipates incurring during 2018? Should Fuelsource record or disclosing anything about these costs in its December 31, 2017 financial statements? Explain why or why not.
In: Finance