Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $2 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 3%.
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1. Problem 11.07
| Click here to read the eBook: Net Present Value (NPV) Click here to read the eBook: Internal Rate of Return (IRR) Click here to read the eBook: Modified Internal Rate of Return (MIRR) Click here to read the eBook: Payback Period CAPITAL BUDGETING CRITERIA A firm with a 13% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:
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Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $5 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 7%, and the forecasted retention ratio is 45%. Use the AFN equation to forecast Carlsbad's additional funds needed for the coming year. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.
$
Now assume the company's assets totaled $3 million at the end of
2016. Is the company's "capital intensity" the same or different
comparing to initial situation?
-Select-DifferentThe sameItem 2
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Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $4 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 4%, and the forecasted retention ratio is 35%. Use the AFN equation to forecast the additional funds Carlsbad will need for the coming year. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.
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3. A firm has the following three projections of revenue estimates:
Current Year1 Year 2 Year 3
Revenue $1,500 $1,650 $1,815 $2,000
EAT $95 $106 $117 $130
The company also receives a royalty net after taxes of $10 million per year. It is expected that the cash flows equal to depreciation will have to be reinvested to keep the firm operating. Further, capital expenditures equal to 60 percent of the net cash flow will need to be invested to keep the firm growing. Other items on the balance sheet remain unchanged. The CFO believes that it will just forecast for the first three years and then simply assume a 6 percent annual growth rate after the third year.
T-bills yield 8 percent and the market return is 13 percent. The company’s beta using Hamada equation is 1.2. What is the value of the company or what would you pay for the firm if you were interested in it.
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The most recent year-end financial data for company “A” is as follows:
Revenues=$112 million; Depreciation=$7 million
Operating income (EBIT) =$28 million
Earnings after taxes=$12 million Total assets=$172 million
Interest bearing debt=$54 million Common equity=$40 million
Shares outstanding=5.6 million Current price of the stock=$16.25
The company “B” is considering acquiring A. The investment bankers believe that the acquisition is a good one even if B were to pay a premium of 40%. Presently A’s cash flow is as follows:
EBIT (operating profit) after taxes $17
Depreciation … 7
Total … $24
Less: capital expenditures 8
Incremental working capital 3
Free cash flow … $13
The company believes that with synergy it can grow the operating income by 20% per year for the next 3 years and then 12% per year for the next 3 years. At the same time, it plans to hold capital expenditures and working capital additions to a combined increase of only $2 million per year. At the end of 6 years, B is advised by investment bankers the cash flow will probably grow at 5% per year. The cost of capital computed by the IBs is 15%.
Certain comparable data of some recent M & A is as follows:
Equity value to book value 2.9x
Enterprise value to sales 1.4x
Equity value to earnings 15.3x
Enterprise value to EBITDA 7.8x
As B’ CFO, would you go ahead with the acquisition?
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2. Company currently sells for $24/share. Management holds 40% of the 1 million shares outstanding. Chang Inc. is considering acquiring Li because of positive synergies. The estimated present value of these synergies is $8 million. In addition, Chang feels that the management of Li is overpaid and have a lot of unnecessary perks like yachts and jets to fly around. Getting rid of all these will save the firm about $400,000 per year. This would add $3 million in value to the acquisition.
What is the maximum price per share that Chang should pay?
What price would you offer?
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Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $3 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 3%.
Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent. $
Why is this AFN different from the one when the company pays dividends?
1.Under this scenario the company would have a lower level of retained earnings, which would decrease the amount of additional funds needed.
2.Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed.
3.Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of assets needed.
4.Under this scenario the company would have a higher level of spontaneous liabilities, which would reduce the amount of additional funds needed.
5.Under this scenario the company would have a lower level of retained earnings, which would increase the amount of additional funds needed.
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We are evaluating a project that costs $912,000, has an thirteen-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 147,000 units per year. Price per unit is $36, variable cost per unit is $29, and fixed costs are $921,120 per year. The tax rate is 33 percent, and we require a 18 percent return on this project. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 14 percent. (a) Calculate the best-case NPV. (b) Calculate the worst-case NPV.
Please use Excel and show formulas. Thanks.
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Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $3 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 6%, and the forecasted retention ratio is 40%. Use the AFN equation to forecast the additional funds Carlsbad will need for the coming year. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.
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Jan sold her house on December 31 and took a $30,000 mortgage as part of the payment. The 10-year mortgage has an 11% nominal interest rate, but it calls for semiannual payments beginning next June 30. Next year Jan must report on Schedule B of her IRS Form 1040 the amount of interest that was included in the two payments she received during the year.
What is the dollar amount of each payment Jan receives? Round your answer to the nearest cent.
How much interest was included in the first payment? Round your answer to the nearest cent.
How much repayment of principal was included? Do not round intermediate calculations. Round your answer to the nearest cent.
How much interest must Jan report on Schedule B for the first
year? Do not round intermediate calculations. Round your answer to
the nearest cent.
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A manager buys three shares of stock today, and then sells one of those shares each year for the next 3 years. His actions and the price history of the stock are summarized below. The stock pays no dividends.
| Time | Price | Action | |||||||||
| 0 | $ | 120 | Buy 3 shares | ||||||||
| 1 | 150 | Sell 1 share | |||||||||
| 2 | 150 | Sell 1 share | |||||||||
| 3 | 150 | Sell 1 share | |||||||||
a. Calculate the time-weighted geometric average return on this portfolio. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. Calculate the time-weighted arithmetic average return on this portfolio. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
c. Calculate the dollar-weighted average return on this portfolio. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
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Consider the following information regarding the performance of a money manager in a recent month. The table represents the actual return of each sector of the manager’s portfolio in column 1, the fraction of the portfolio allocated to each sector in column 2, the benchmark or neutral sector allocations in column 3, and the returns of sector indices in column 4.
| Actual Return | Actual Weight | Benchmark Weight | Index Return | |||||||||
| Equity | 2.6 | % | 0.4 | 0.6 | 3.1% (S&P 500) | |||||||
| Bonds | 1.5 | 0.2 | 0.1 | 1.7 (Barclay’s Aggregate) | ||||||||
| Cash | 0.7 | 0.4 | 0.3 | 0.8 | ||||||||
a-1. What was the manager’s return in the month? (Do not round intermediate calculations. Input all amounts as positive values. Round your answer to 2 decimal places.)
a-2. What was her overperformance or underperformance? (Do not round intermediate calculations. Input all amounts as positive values. Round your answer to 2 decimal places.)
b. What was the contribution of security selection to relative performance? (Do not round intermediate calculations. Round your answer to 2 decimal places. Negative amount should be indicated by a minus sign.)
c. What was the contribution of asset allocation to relative performance? (Do not round intermediate calculations. Round your answer to 2 decimal places. Negative amount should be indicated by a minus sign.)
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Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 5%, and the market’s average return was 14%. Performance is measured using an index model regression on excess returns.
| Stock A | Stock B | ||||||||||
| Index model regression estimates | 1% + 1.2(rM − rf) | 2% + 0.8(rM − rf) | |||||||||
| R-square | 0.611 | 0.454 | |||||||||
| Residual standard deviation, σ(e) | 10.9% | 19.7% | |||||||||
| Standard deviation of excess returns | 22.2% | 26.1% | |||||||||
a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places.)
Stock A & Stock B
i.Alpha
ii.Information ratio
iii.Sharpe ratio
iv.Treynor measure
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The table lists the monthly total returns on Adobe Systems Inc. common stock and the market rates of return for a 24-month period. Observation Month Adobe rate of return (%) Market rate of return (%) 1 Aug 2014 3.83 4.18 2 Sep 2014 -3.77 -2.11 3 Oct 2014 1.34 2.74 4 Nov 2014 5.08 2.43 5 Dec 2014 -1.33 -0.01 6 Jan 2015 -3.54 -2.77 7 Feb 2015 12.79 5.78 8 Mar 2015 -6.52 -1.01 9 Apr 2015 2.87 0.42 10 May 2015 3.98 1.39 11 Jun 2015 2.43 -1.70 12 Jul 2015 1.21 1.65 13 Aug 2015 -4.17 -6.00 14 Sep 2015 4.65 -2.95 15 Oct 2015 7.83 7.86 16 Nov 2015 3.16 0.56 17 Dec 2015 2.71 -2.04 18 Jan 2016 -5.12 -5.67 19 Feb 2016 -4.47 -0.02 20 Mar 2016 10.16 7.03 21 Apr 2016 0.45 0.63 22 May 2016 5.57 1.79 23 Jun 2016 -3.70 0.23 24 Jul 2016 2.16 3.97 Estimate beta to two decimal places for Adobe based on this data. Hint: see Examples 16 and 17 in the lecture. 1.73 1.27 1.58 1.04 1.42
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