Broussard Skateboard's sales are expected to increase by 20% from $8.6 million in 2016 to $10.32 million in 2017. Its assets totaled $3 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 4%, and the forecasted payout ratio is 65%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year. Round your answer to the nearest dollar. Do not round intermediate calculations.

1. We find the following information on NPNG (No-Pain-No-Gain) Inc. (18 marks total)

• EBIT = $2,000,000
• Depreciation = $250,000
• Change in net working capital = $100,000
• Net capital spending = $300,000

These numbers are projected to increase at the following supernormal rates for the next three years, and 5% after the third year for the foreseeable future:

• EBIT: 10%
• Depreciation: 15%
• Change in net working capital: 20%
• Net capital spending: 15%

The firm’s tax rate is 35%, and it has 1,000,000 outstanding shares and $6,000,000 in debt. We have estimated the WACC to be 15%.

a.   Calculate the EBIT, Depreciation, Changes in NWC, and Net Capital Spending for the next four years.                                                                           

b.   Calculate the CFA* for each of the next four years, using the following formula:

CFA* = EBIT(1 – T) + Depr – ΔNWC – NCS                                                  

d.   Calculate the present value of growing perpetuity at Year 3.                   (1 mark)

e.   Calculate the firm’s value at time 0 using the WACC of the firm as the discount rate. (Note that the first CFA* to be discounted is the cash flow from one year into the future.)                                                                                           

f.   Calculate the firm’s equity value at time 0.                                                    (1 mark)

g.   Calculate the firm’s share price at time 0.                                           (1 mark)

What are the three major objectives of technological investments at FIs? What are the major risks involved with these investments?

Musical Instruments Business

A group of musicians have established a company selling medieval period musical instruments by mail order and appointed themselves company directors. The musicians have raised £750,000 of the capital required themselves and borrowed a further £500,000 in the form of a long-term bank loan. In order to establish the business, they have undertaken the following transactions.

• Bought premises for £850,000 (paid by cheque).
• Bought furniture and fittings for £100,000 (paid by cheque).
• Bought (on credit) stock of instruments for resale for £300,000.
• Bought a motor van for £20,000 (paid by cheque).

The remaining £280,000 of the total initial funds provided is deposited in the business’s bank account.

During the first year of trading, the following transactions occurred:

• instruments costing £1,400,000 were sold on credit terms for £2,000,000
• more instruments were purchased on credit terms for £1,500,000
• wages and other expenses of £300,000 were paid in cash
• cash totalling £1,250,000 was received from debtors
• cash totalling £1,400,000 was paid to creditors
• interest (paid cash) on the long-term loan was 10%.

At the end of the year, the directors decided to make a provision for bad debts of 5% of the year end debtors’ figure.

Closing stock (valued at cost) was £400,000.

An allowance for depreciation is to be made as follows:

• buildings, 2% of cost = £17,000
• furniture and fittings, 10% of cost = £10,000
• motor van, 20% of cost = £4,000.

Task

Construct a cash flow statement and use the information provided by it. The purpose is to highlight the factors that determine an organisation’s liquidity.

Refer to figures above for the Musical Instruments Business. You will need this information to prepare a cash flow statement for the business.

During the first year of trading, the directors of Musical Instruments Business have frequently experienced serious cash shortages – even though the enterprise has made a profit.

Advise them how to improve the business’s liquidity. To do this. use Table 2 to record your output. You will need, firstly, to prepare a cash flow statement for the business, for the first year of trading, and use the information this provides to make your recommendations.

Not all of the different categories of cash flow given in the text example – Terrestrial Trading Company – will appear in the first year of trading for Musical Instruments Business. The template below (Table 1) provides you with the structure and content of the cash flow statement: all you have to do is fill in the numbers.

Table 1 Cash flow statement for Musical Instruments Business first year of trading

Table 2 Advice on improving liquidity for Musical Instruments Business

This should illustrate that profit does not equal cash (the profitability of an organisation does not automatically result in its liquidity). The cash flow statement you have prepared should indicate the main source of this organisation’s lack of liquidity. Such information should enable management to take appropriate remedial action, as well as enable other stakeholders (such as the providers of funds) to form an opinion about the financial management of the organisation. You may have noticed, in preparing the cash flow statement, that the net cash outflow for the year exceeded the business’s cash/bank balances at the beginning of the year; how do you think it financed this deficit?

Can Bankruptcy be considered as a  legitimate and ethical management vehicle to be used for the benefit of the company's stakeholders?

WaFlo Co is a -based company which has the following expected transactions..

One month: Expected receipt of         240,000

One month: Expected payment of    140,000

Three months: Expected receipts of    300,000

As the Corporate Finance Manager for WaFlo CO. you collect the following information:

Spot rate (K per K):             1.7820 ± 0.0002

One month forward rate (K per K):     1.7829 ± 0.0003

Three months forward rate (K per K):     1.7846 ± 0.0004

Money market rates for WaFlo Co:

                        Borrowing         Deposit

One year Kwacha interest rate:             4.9%             4.6

One year dollar interest rate:             5.4%             5.1

Assume that it is now 1 April.

Required:

(a) Discuss the differences between transaction risk, translation risk and economic risk. 

(b) Explain how inflation rates can be used to forecast exchange rates. 

(c) Calculate the expected Kwacha receipts in one month and in three months using the forward market.

(d) Calculate the expected Kwacha receipts in three months using a money-market hedge and recommend whether a forward market hedge or a money market hedge should be used. 

(e) Discuss how Kwacha currency futures contracts could be used to hedge the three-month dollar receipt.

Zambian based company

In 2018, Laureen is currently single. She paid $2,560 of qualified tuition and related expenses for each of her twin daughters Sheri and Meri to attend State University as freshmen ($2,560 each for a total of $5,120). Sheri and Meri qualify as Laureen’s dependents. Laureen also paid $1,830 for her son Ryan’s (also Laureen’s dependent) tuition and related expenses to attend his junior year at State University. Finally, Laureen paid $1,330 for herself to attend seminars at a community college to help her improve her job skills.

What is the maximum amount of education credits Laureen can claim for these expenditures in each of the following alternative scenarios? (Leave no answer blank. Enter zero if applicable.)

a. Laureen's AGI is $45,000.

American opportunity credit=. ????

Lifetime learning credit= ?????

Blue Lagoon Inc., a publically-traded company, manufactures a wide variety of scuba diving equipment and supplies, in addition to owning a chain of retail scuba stores and scuba diving training centers. Eighteen months ago the company developed and began to market a new product line of oxygen tanks under various trade names. Sales and profitability of this product line during the current fiscal year greatly exceeded management's expectations. The new product line will account for 10 percent of the company's total sales and 12 percent of the company's operating income for this fiscal year. Additionally, Management believes sales and profits will be significant for several years. Blue Lagoon is concerned that its market share and competitive position may suffer if it discloses the volume and profitability of its new product line in its annual financial statements. Management is not sure how ASC 280 applies in this case.

• Is Blue Lagoon required to report the Scuba Tank operations as a separate segment? Please justify your opinion.
• What options, if any, does Blue Lagoon, Inc. have with the disclosure of its new product line? Be sure to explain your answer and support your conclusions with references to the authoritative literature.

Consider the following spot rate curve:

(a) What is the forward interest rate that applies from period 3 to period 5? That is, what is the value of f_3,5? Assume annual compounding. (Keep your answer to 4 decimal places, e.g. 0.1234.)

(b) If the market forward rate from period 3 to period 5 is not equal to the value derived in (a), how can you create an arbitrage opportunity? (No need to key-in here.)

Straight Supply Straight Supply is a major supplier of medical components to large pharmaceutical corporations. Bonnie Straight is a second generation CEO of the company founded by her father forty years ago. Originally established in Moorhead, Minnesota, Bonnie moved the company operations to Denver ten years ago so she could see the mountains from her office window. The Denver location proved profitable for Straight Supply as the company could take advantage of a larger pool of labor and find and train skilled employees to assemble quality products efficiently. The location also made it easier for shipping around the country as many trucking companies were looking for loads out of the Denver area. Additionally, Bonnie could more easily take advantage of business and medical conferences. An unexpected benefit of being headquartered in Denver was the close proximity to Colorado Springs and the many Christian organizations based in the area like Focus on the Family. Bonnie became an active contributor to several of these organizations and was invited to serve on the board of some of them. Her work in the medical supply area also provided opportunities to help worthwhile causes through the donation of medical supplies and materials to these organizations. At least ten percent of company profits were donated to Christian organizations every year. One of Straight Supply’s most successful products is an insulin-monitoring pump, which monitors and measures insulin concentrations and automatically injects insulin into diabetic patients. Due to the technical nature of this pump and its critical function, exacting standards are needed in its design and manufacture. There are several critical components requiring highly skilled labor and the finest quality materials. Recently, a competitor, began promoting a similar insulin monitoring and pump type product. One of the large pharmaceutical companies, which has been a major customer of Straight, indicated that they were giving serious consideration to the competitors product. This customer wanted to give Straight Supply every opportunity to continue business with them since they have a good relationship, which has existed over a number of years, however, business is business. Bonnie learned that the competing product was close in quality, but definitely lower in price. While this other insulin pump did not have as long a history for product reliability, the competing company had introduced several successful medical products over the last few years. There was every indication that the competitor’s insulin pump could reach the quality standards required by these major companies at a favorable price. Straight anticipated that if they wanted to remain a product leader in the insulin monitoring pump product area and maintain their current customer base, they were going to have to make their product more competitive. Given that competitors were able to offer a similar quality product at a lower price meant that Straight would have to consider lower its selling price. However, at the same time, they wanted to maintain as much of the profit margin as possible as this was a critical product to the overall success of the company. Bonnie realized that they were going to have to reduce production costs. Given that the company had produced this product for some time, they had pretty much taken advantage of the learning curve phenomena. All production efficiencies and the resulting cost savings had pretty much been incorporated into the current cost of the product and it would be difficult to introduce additional efficiencies of cost savings into the production process. Material costs were somewhat out of their control as they had to rely on other suppliers to provide materials and additionally, material costs was not that great of a component of the total costs of the product. When it came to overhead costs, the company used activity based costing to attempt to get as accurate a measure as possible of appropriate indirect costs to allocate to this particular product line. While there is never a guarantee of complete accuracy with the allocation process, top management believed that their costing procedure was reasonable. This process of determining total costs was further confirmed by an independent consulting firm which recommended and implemented their current cost allocation system. Outsourcing was quickly becoming the only option for production of this product. The production process was fairly labor intensive, involving a skilled workforce to insure that the critical intricacies and components of the product were properly assembled. Straight had depended on some of their most talented work force to assemble this important product. Naturally, the labor cost on a per part basis was relatively high due to many factors. The product was made in the Denver plant, which also had a high cost of living, and the demand for qualified employees was critical which resulted in a higher wage rate. Also, well-trained technically skilled individuals were needed in many disciplines, which also demanded a higher wage rate. The employees working for Straight were some of the more dependable with a greater number of years working at the company which added to the labor costs. The potential for considerable cost savings in labor was available if the product could be assembled overseas. Straight identified a medical supply company in India that apparently employed a highly skilled work force with appropriate training in the assembly of similar products. The labor rate was considerably lower, enough so, that the product could be shipped to India and back by air for just the assembly process and money could be saved. Before making any critical decisions of this nature, Bonnie thought it best to conduct a financial analysis of alternative proposals for a five-year time period. The choice for Straight Supply in this situation was to either continue production in Denver or have the product assembled in India. The production and finance departments came up with some critical cost factors to aid in the decision process. At the Denver plant, 25 employees worked on this specific product. Their average wage rate including benefits is $30 per hour. Employees at the Denver plant are able to produce 75 of the insulin pumps per hour on an eight-hour shift for 250 days in the year. Indirect costs related to the production of the insulin pump were allocated to the product at 180 percent of the direct labor costs. Wage rates will increase at 6 percent per year. The cost to ship the product to their pharmaceutical customer in Chicago was $0.75 per item and that shipping cost would increase 4 percent per year. If the insulin pump were no longer assembled in Denver, in addition to a reduction in the labor force, there would be an immediate one-time reduction in capacity related costs of $120,000. For this current year, the anticipated annual demand was equal to the current production capacity. If Straight Supply maintains its market share with existing customers, there should be a 10% increase in demand for this product for each of the next five years. The annual increase in demand could actually have been 20%; however, top management thought it better to estimate conservatively given the potential increase in competition. Additional employees would need to be hired at the Denver plant to keep up with demand. Each insulin pump sold for $100 this year with the price forecasted to increase at five percent per year over the next five years. Increases in working capital directly associated with the product have been equal to 12 percent of the total sales revenue figure. In India the wage rate was only $10.50 per hour, and each employee could assemble an average of two insulin pumps per hour. Given this was a new production process at the India location, learning curve efficiencies could apply to the insulin pump and it was expected that production levels would increase 15% per year over the next three years before leveling out in the fourth and fifth years. Also, the hourly rate would increase at 10% per year for each of the next five years. The management at the India plant promised to hire enough skilled workers to meet the production demand every year. Round trip shipping cost to and from India would be at $5.00 per item with that rate increasing at 4% per year. The additional shipping requirement will increase the production time by one week. To maintain its just-in-time inventory philosophy Straight Supply will need to begin the production of the insulin pump one week earlier so the final product will be available to the customer at the agreed upon delivery date. Starting the production process one week sooner will create an initial cost increase of $260,000 for the earlier ordering of required materials. In completing capital budgeting projects, Straight Supply has used a weighted average cost of capital process to determine a correct discount rate and then add a premium depending on perceived additional risk factors. The basic discount rate for this year is 14.8%. If a new product is being considered a risk premium of 2.5% is added. If there is a change in a domestic location a risk premium of 1.5% is added. A project involving an international element results in a risk premium of from 3.0% to 6.0% depending upon a number of factors including political stability, economic security, language and cultural differences, and governmental factors.  

Required: 1. Evaluate the two proposed alternatives regarding the insulin pump.

After-tax cost of debt  Personal Finance Problem  Bella Wans is interested in buying a new motorcycle. She has decided to borrow the money to pay the

​$30,000

purchase price of the bike. She is in the

33​%

income tax bracket. She can either borrow the money at an interest rate of

7​%

from the motorcycle​ dealer, or she could take out a second mortgage on her home. That mortgage would come with an interest rate of

9​%.

Interest payments on the mortgage would be tax deductible for​ Bella, but interest payments on the loan from the motorcycle dealer could not be deducted on​ Bella's federal tax return.

a.  Calculate the ​after-tax cost of borrowing from the motorcycle dealership.

b. Calculate the ​after-tax cost of borrowing through a second mortgage on​ Bella's home.

c.  Which source of borrowing is less costly for​ Bella?

d.  Should Bella consider any other factors when deciding which loan to take​ out?

a. The​ after-tax cost of borrowing from the motorcycle dealership is

____ ​%.

​(Round to the nearest whole​ percentage.)b. The​ after-tax cost of borrowing through a second mortgage is

____ ​%.

​ (Round to two decimal​ places.)

c.  Which source of borrowing is less costly for​ Bella?  ​(Select the best answer​ below.)

A.

Bella should borrow by taking the

second mortgagesecond mortgage.

B.

Both loans have the same rate of

33​%,

so Bella should choose the loan she likes best.

C.

Bella should borrow by taking the

dealership loandealership loan.

D.

Both loans have the same rate of

33​%,

so Bella should not take either loan.

d.  Is there any other consideration that Bella ought to think about when deciding which loan to take out to pay for the​ motorcycle?  ​(Select the best answer​ below.)

A.

Using the motorcycle dealership loan does put Bella at risk of losing her home and motorcycle if she is unable to make the loan payments.

B.

Using the second home mortgage does put Bella at risk of losing her motorcycle if she is unable to make the mortgage payments.

C.

Using the second home mortgage does put Bella at risk of losing her home if she is unable to make the mortgage payments.

D.

Using the motorcycle dealership loan does put Bella at risk of losing her home if she is unable to make the loan payments.