HCJ Corporation is completing their cash budget for the following year. They are going to buy an industrial robot. They will make the acquisition on January 2 of next year, and it will take most of the year to train the personnel and reorganize the production process to take full advantage of the new equipment.”
The robot will cost $1,000,000 financed with a a one-year $1,000,000 loan from My Bank and Trust Company. I’ve negotiated a repayment schedule of four equal installments on the last day of each quarter.
The interest rate will be 10 percent, and interest payments will be quarterly as well
HCJ Corporation is a manufacturer of metal picture frames. The firm’s two product lines are designated as S (small frames; 5 x 7 inches) and L (large frames; 8 x10 inches). The primary raw materials are flexible metal strips and 9-inch by 24-inch glass sheets. Other raw materials, such as cardboard backing, are insignificant in cost and are treated as indirect materials.
Here is the provided budget information
1. Sales in the fourth quarter of 20x0 are expected to be 50,000 S frames and 40,000 L frames. Over the next two years, sales in each product line will grow by 5,000 units each quarter over the previous quarter. For example, S frame sales in the first quarter of 20x1 are expected to be 55,000 units.
2. HCJ's sales history indicates that 60 percent of all sales are on credit, with the remainder of the sales in cash. The company’s collection experience shows that 80 percent of the credit sales are collected during the quarter in which the sale is made, while the remaining 20 percent is collected in the following quarter. (For simplicity, assume the company is able to collect 100 percent of its accounts receivable.)
3. The S frame sells for $10, and the L frame sells for $15. These prices are expected to hold constant
throughout 20x1.
4. HCJ's production team attempts to end each quarter with enough finished-goods inventory in each product line to cover 20 percent of the following quarter’s sales. Moreover, an attempt is made to end each quarter with 20 percent of the glass sheets needed for the following quarter’s production. Since metal strips are purchased locally, HCJ buys on a just-in-time basis; inventory is negligible. The purchase and production quantities are shown.
5. All direct-material purchases are made on account, and 80 percent of each quarter’s purchases are paid in cash during the same quarter as the purchase. The other 20 percent is paid in the next quarter.
6. Indirect materials are purchased as needed and paid for in cash. Work-in-process inventory is negligible.
7. Projected manufacturing costs in 20x1 are as follows:
Direct material:
Metal strips. @ $1 per foot
Glass sheets: $8 per sheet
Direct labor for both products .1 hour @ $20 per hour
Manufacturing overhead: .1 direct-labor hour @ $10 per hour
Total manufacturing cost per unit . S: $7 L: $10
1. Sales budget:
2. Cash receipts budget:
3. Cash disbursements budget: (including purchases of direct materials and payments for same)
4. Summary cash budget:
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In: Finance
You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $26 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $3.8 million. Investors are willing to provide you with $3.8 million in initial capital in exchange for 40% of the unlevered equity in the firm.
a. What is the total market value of the firm without leverage?
b.Suppose you borrow $0.8 million. According to MM, what fraction of the firm's equity will you need to sell to raise the additional $3.0 million you need?
c. What is the value of your share of the firm's equity in cases
(a)
and
(b)?
a. What is the total market value of the firm without leverage?
The market value without leverage is
$nothing
million. (Round to one decimal place.)
b.
Suppose you borrow
$ 0.8$0.8
million. According to MM, what fraction of the firm's equity will you need to sell to raise the additional
$ 3.0$3.0
million you need?The fraction of the firm's equity you will need to sell is
nothing%.
(Round to the nearest whole percentage.)c. What is the value of your share of the firm's equity in cases
(a)
and
(b)?
The value of your share of the firm's equity:
Case
(a)
is
$nothing
million. (Round to one decimal place.)Case
(b)
is
$nothing
million. (Round to one decimal place.)
In: Finance
|
YEAR |
Returns of the Stock 1
R |
Variances σ2 |
YEAR |
Returns of the Stock 2
R |
Variances σ2 |
|
1 |
6.31% |
1 |
12.25% |
||
|
2 |
5.98% |
2 |
12.98% |
||
|
3 |
5.74% |
3 |
12.86% |
||
|
4 |
5.12% |
4 |
9.76% |
||
|
5 |
4.76% |
5 |
-3.21% |
||
|
6 |
4.01% |
6 |
4.01% |
||
|
7 |
-2.57% |
7 |
4.21% |
||
|
8 |
3.50% |
8 |
5.98% |
||
|
SUM |
SUM |
||||
|
AVERAGE |
AVERAGE |
In: Finance
You own a stock portfolio invested 15 percent in Stock Q, 25 percent in Stock R, 10 percent in Stock S, and 50 percent in Stock T. The betas for these four stocks are 0.66, 1.18, 1.6, and 1.67, respectively. What is the portfolio beta?
Multiple Choice
1.42
1.36
1.46
1.39
1.32
In: Finance
Your corporation is considering investing in a new product line. The annual revenues (sales) for the new product line are expected to be $163,994.00 with variable costs equal to 50% of these sales. In addition annual fixed costs associated with this new product line are expected to be $56,720.00 . The old equipment currently has no market value. The new equipment cost $74,629.00 . The new equipment will be depreciated to zero using straight-line depreciation for the three-year life of the project. At the end of the project the equipment is expected to have a salvage value of $28,509.00 . An increase in net working capital of $66,220.00 is also required for the life of the project. The corporation has a beta of 0.804 , a tax rate of 33.52% , and a target capital structure consisting of 61.43% equity and 38.57% debt. Treasury securities have a yield of 3.43% and the expected return on the market is 12.00% . In addition, the company currently has outstanding bonds that have a yield to maturity of 8.36%.
b) What are the estimated annual operating cash flows?
c) What is the terminal cash flow?
d) What is the corporations cost of equity?
e) What is the WACC?
f) What is the NPV for this project?
In: Finance
ABC Inc. expects to generate cash flows of $1 million per year in perpetuity. The firm is 100% equity financed and its cost of equity is 10%.
suppose the corporate tax rate is 40%
*
*What is the value of the unlevered firm?
*Suppose the firm changes its capital structure to 50% debt at an interest rate of 5%.
*According to M&M, what is the value of the levered firm?
*What will be the new cost of equity?
*What is the new WACC?
*Use the WACC to estimate firm value. Do you get the same answer?
In: Finance
|
You want to create a portfolio equally as risky as the market, and you have $1,300,000 to invest. Consider the following information: |
| Asset | Investment | Beta |
| Stock A | $325,000 | 0.65 |
| Stock B | $455,000 | 1.20 |
| Stock C | 1.40 | |
| Risk-free asset | ||
| Required: |
| (a) | What is the investment in Stock C? (Do not round your intermediate calculations.) |
| (Click to select) $387,679 $403,186 $372,172 $368,295 $293,164 |
| (b) | What is the investment in risk-free asset? (Do not round your intermediate calculations.) |
| (Click to select) $137,614 $125,705 $132,321 $127,028 $226,836 |
In: Finance
Cape Fear Marine Mini Case
Sarah Connor was recently hired by Cape Fear Marine Company to assist the company with its short-term financial planning and to evaluate the firm’s financial performance. Sarah graduated from college five years ago with a degree in finance and had been employed in the treasury department of a large firm in Raleigh, North Carolina since then.
Kyle Reese founded Cape Fear Marine Company 15 years ago. The company’s operations are located near Wilmington, North Carolina. The firm is structured as an LLC. Cape Fear Marine manufactures a diverse line of boats, ranging from low-end fishing boats to high-end luxury craft. The company and its products have received high reviews for safety and reliability, as well as awards for customer satisfaction.
The marine products/boating industry is fragmented, with a number of manufacturers. As with any industry, there are market leaders, but the diverse nature of the industry ensures that no manufacturer dominates the market. The competition in the market, as well as the product cost, ensures that attention to detail is a necessity.
To get Sarah started with her analysis, Kyle has provided the following financial data. Sarah has gathered the industry ratios for the boat manufacturing industry.
|
CAPE FEAR MARINE CO. 2018 Income Statement |
||
|
Sales |
$ 167,310,000 |
|
|
Cost of Goods Sold |
127,910,000 |
|
|
Other Expenses |
19,994,000 |
|
|
Depreciation |
5,460,000 |
|
|
Earnings Before Interest & Taxes (EBIT) |
$ 13,946,000 |
|
|
Interest Expense |
4,509,000 |
|
|
Taxable Income |
$ 9,437,000 |
|
|
Income Taxes |
3,774,800 |
|
|
Net Income |
$ 5,662,200 |
|
|
Dividends |
$ 3,537,320 |
|
|
Addition to Retained Earnings |
$ 2,124,880 |
|
|
CAPE FEAR MARINE CO. Balance Sheet as of 31 December 2018 |
||||
|
Assets |
Liabilities & Equity |
|||
|
Current Assets |
Current Liabilities |
|||
|
Cash |
$ 3,042,000 |
Accounts Payable |
$ 6,461,000 |
|
|
Accounts Receivable |
4,473,000 |
Notes Payable |
18,078,000 |
|
|
Inventory |
8,136,000 |
Total |
$ 24,539,000 |
|
|
Total |
$ 15,651,000 |
|
||
|
Fixed Assets |
Long-term Debt |
$ 43,735,000 |
||
|
Net Plant & Equipment |
$ 93,964,000 |
|||
|
Shareholders’ Equity |
||||
|
Common Stock |
$ 5,200,000 |
|||
|
Retained Earnings |
36,141,000 |
|||
|
Total Equity |
$ 41,341,000 |
|||
|
Total Assets |
$ 109,615,000 |
Total Liabilities & Equity |
$ 109,615,000 |
|
|
Boat Manufacturing Industry Ratios |
|||
|
Lower Quartile |
Median |
Upper Quartile |
|
|
Current Ratio |
0.50 |
1.43 |
1.89 |
|
Quick Ratio |
0.21 |
0.38 |
0.62 |
|
Total Asset Turnover |
0.68 |
0.85 |
1.38 |
|
Inventory Turnover |
4.89 |
6.15 |
10.89 |
|
Receivable Turnover |
6.27 |
9.82 |
14.11 |
|
Total Debt Ratio |
0.44 |
0.52 |
0.61 |
|
Debt to Equity Ratio |
0.79 |
1.08 |
1.56 |
|
Equity Multiplier |
1.79 |
2.08 |
2.56 |
|
Times Interest Earned |
5.18 |
8.06 |
9.83 |
|
Profit Margin |
4.05% |
6.98% |
9.87% |
|
Return on Assets |
6.05% |
10.53% |
13.21% |
|
Return on Equity |
9.93% |
16.54% |
26.15% |
a. Calculate all of the ratios listed in the industry table for Cape Fear Marine.
b. Compare the performance of Cape Fear Marine with the industry as a whole. For each ratio, comment on why it might be viewed as a positive or negative relative to the industry.
In: Finance
In: Finance
CHAPTER 8-21
Nonconstant Growth Stock Valuation
Conroy Consulting Corporation (CCC) has been growing at a rate of 20% per year in recent years. This same non-constant growth rate is expected to last for another 2 years (g0,1 = g1,2 = 20%).
| Dividend yield | _______% |
| Capital gains yield | _______% |
In: Finance
Question Workspace
|
In: Finance
The Dauten Toy Corporation uses an injection molding machine that was purchased prior to the new tax legislation. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is $2,100, and it can be sold for $2,500 at this time. Thus, the annual depreciation expense is $2,100/6 = $350 per year. If the old machine is not replaced, it can be sold for $500 at the end of its useful life. Dauten is offered a replacement machine which has a cost of $9,000, an estimated useful life of 6 years, and an estimated salvage value of $800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase. The replacement machine would permit an output expansion, so sales would rise by $800 per year; even so, the new machine's much greater efficiency would cause operating expenses to decline by $1,000 per year. The new machine would require that inventories be increased by $2,500, but accounts payable would simultaneously increase by $500. Dauten's marginal federal-plus-state tax rate is 25%, and its WACC is 11%. What is the NPV of the incremental cash flow stream? Negative value, if any, should be indicated by a minus sign. Round your answer to the nearest cent.
In: Finance
|
Year |
Stock X |
Stock Y |
|
1 |
12.00% |
10.00% |
|
2 |
4.00% |
18.00% |
|
3 |
15.00% |
2.00% |
|
4 |
1.00% |
8.00% |
What is the covariance of the returns of Stock X with the returns of Stock Y?
Please round to 6 decimal places.
In: Finance
A 10-year, 12 percent semiannual coupon bond, with a par value of
GH¢1,000, may be called in 4 years at a call price of GH¢1,060. The
bond sells for GH¢1,100. (Assume that the bond has just been
issued.)
(i) What is the bond's yield to maturity?
(ii) What is the bond's current
yield?
(iii) What is the bond's capital gain or loss
yield?
(iv) What is the bond's yield to call?
In: Finance
|
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $2.8 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $5.9 million on an aftertax basis. In five years, the aftertax value of the land will be $6.3 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $32.5 million to build. The following market data on DEI’s securities are current: |
| Debt: |
240,000 bonds with a coupon rate of 5.9 percent outstanding, 22 years to maturity, selling for 104 percent of par; the bonds have a $1,000 par value each and make semiannual payments. |
| Common stock: |
9,400,000 shares outstanding, selling for $72.80 per share; the beta is 1.25. |
| Preferred stock: |
460,000 shares of 3.7 percent preferred stock outstanding, selling for $82.75 per share. The par value is $100. |
| Market: |
5.9 percent expected market risk premium; 2.8 percent risk-free rate. |
|
DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEI spreads of 6.5 percent on new common stock issues, 4 percent on new preferred stock issues, and 2 percent on new debt issues. Wharton has included all direct and indirect issuance costs (along with its profit) in setting these spreads. Wharton has recommended to DEI that it raise the funds needed to build the plant by issuing new shares of common stock. DEI’s tax rate is 21 percent. The project requires $1,450,000 in initial net working capital investment to get operational. Assume DEI raises all equity for new projects externally and that the NWC does not require floatation costs.. |
| a. |
Calculate the project’s initial Time 0 cash flow, taking into account all side effects. |
| b. | The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +1.0 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| c. | The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation to a zero salvage value. At the end of the project (that is, the end of Year 5), the plant and equipment can be scrapped for $5.1 million. What is the aftertax salvage value of this plant and equipment? |
| d. | The company will incur $7,400,000 in annual fixed costs. The plan is to manufacture 19,525 RDSs per year and sell them at $11,060 per machine; the variable production costs are $9,675 per RDS. What is the annual operating cash flow (OCF) from this project? |
| e. | DEI’s comptroller is primarily interested in the impact of DEI’s investments on the bottom line of reported accounting statements. What will you tell her is the accounting break-even quantity of RDSs sold for this project? |
| f. |
Finally, DEI’s president wants you to throw all your calculations, assumptions, and everything else into the report for the chief financial officer; all he wants to know is what the RDS project’s internal rate of return (IRR) and net present value (NPV) are. |
In: Finance