A local family business is facing a dilemma. Dottie’s Grocery has been a landmark company in a small city located in the United States. Over the past 45 years, what began as a single fresh fruit and vegetable store, has now become a full-service grocery store chain with many stores throughout the city. Dottie’s is incorporated with only 7 shareholders, which are all family members. They are faced with a decision on how to raise much needed capital to maintain its current business operations and to allow the possibility of growth in the future. The family believes it needs an additional $23 million dollars. This sum is too large for a bank line of credit and no one in the family has additional funding to invest into the company. The family is considering other alternatives.

One alternative is to publicly issue debt (corporate bonds), the other alternative is to issue common stock to the public. Using your expertise in financial management, you have been asked by the management team of Dottie’s Grocery to conduct an analysis of the current situation and provide a summary of your recommendations. In your summary you must:

• Describe the process (in detail) of how a public offering occurs.
  • A chronological account of how most public offerings would be an appropriate format, although not required.

• Discuss the impact and implications of each alternative.
• Explain how each alternative affects control over the company.

• As a small family business, the internal affairs and finances of the company were well guarded from the public view by the family.
  • As a new IPO, how would the guarding of their finance change?
  • What are the financial reporting effects of this decision?
  • How will additional debt impact future earnings?
  • How will new stockholders change the management of the company?

Superior papers will explain the following elements:

• Provide a narrative about the impact of issuing stock to the public. The narrative will include the topics of loss of control of the company and the requirements that future financial statements will be available to the public.
• Provide a narrative about the impact of issuing debt to the public. The narrative will include the topics of a potential loss of the company if debt covenants are breached and the requirements that future financial statements will be available to the public.
• Provide a narrative on the initial public offering (IPO) process using at least four research sources in addition to the textbook material. The narrative of the IPO process steps should include the:
  • role of an investment banker
  • deal negotiation
  • preparation and submission to the SEC of the registration statement
  • SEC approval
  • setting an issue date
  • setting an issue price

Hankins, Inc., is considering a project that will result in initial aftertax cash savings of $5.2 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The firm has a target debt-equity ratio of .51, a cost of equity of 13.1 percent, and an aftertax cost of debt of 6.5 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +3 percent to the cost of capital for such risky projects.

A loan of $100,000 is made today. The borrower will make equal repayments of $3613.5 per month with the first payment being exactly one month from today. The interest being charged on this loan is constant (but unknown). For the following two scenarios, calculate the interest rate being charged on this loan, expressed as a nominal annual rate compounded monthly in percentage:

(a) The loan is fully repaid exactly after 31 monthly repayments, i.e., the loan outstanding immediately after 31 repayments is exactly 0.

(b) The term of the loan is unknown but it is known that the loan outstanding 2 years later equals to $28733.72.

You are attempting to value a call option with an exercise price of $75 and one year to expiration. The underlying stock pays no dividends, its current price is $75, and you believe it has a 50% chance of increasing to $95 and a 50% chance of decreasing to $55. The risk-free rate of interest is 10%. Based upon your assumptions, calculate your estimate of the the call option's value using the two-state stock price model. (Do not round intermediate calculations. Round your answer to 2 decimal places.)  

Value of the call            $   

Hands Insurance Company issued a $90 million, 1-year, zero-coupon note at 8 percent add-on annual interest (paying one coupon at the end of the year). The proceeds were used to fund a $100 million, 2-year commercial loan at 10 percent annual interest. Immediately after these transactions were simultaneously closed, all market interest rates increased 2 percent .

a. What is the true market value of the loan investment and the liability after the change in interest rates?

b. What impact did these changes in market value have on the market value of the equity?

c. What was the duration of the loan investment and the liability at the time of issuance?

d. Use these duration values to calculate the expected change in the value of the loan and the liability for the predicted increase of 2 percent in interest rates.

Penny Company has an opportunity to sell some equipment for $40,000. Such a sale will result in a tax-deductible loss of $4,000. If the equipment is not sold, it is expected to produce net cash inflows after taxes of $8,000 for the next 10 years. After 10 years, the equipment can be sold for its book value of $4,000. Assume a 40% federal income tax rate.

Management currently has other opportunities that will yield 18%. Using the net present value method, show whether the company should sell the equipment. Prepare a schedule to support your conclusion.

What is option trading strategies (hedging, speculative strategies to bet on price direction and volatility)?

What is designing a currency swap using comparative advantage?

Compute the break-even point in sales dollars.

a. Assume that fixed costs of Celtics Company are $180,000 per year, variable cost is $12 per unit, and selling price is $30 per unit. Determine the break-even point in sales dollars.

b. Hawks Corporation breaks even when its sales amount to $89,600,000. In 2014, its sales were $14,400,000, and its variable costs amounted to $5,760,000. Determine the amount of its fixed costs.

c. The sales of Niners Corporation last year amounted to $20,000,000, its variable costs were $6,000,000, and its fixed costs were $4,000,000. At what level of sales dollars would the Niners Corporation break even?

d. What would have been the net income of the Niners Corporation in part ( c ), if sales volume had been 10% higher but selling prices had remained unchanged?

e. What would have been the net income of the Niners Corporation in part ( c ), if variable costs had been 10% lower?

f. What would have been the net income of the Niners Corporation in part ( c ), if fixed costs had been 10% lower?

g. Determine the break-even point in sales dollars for the Niners Corporation on the basis of the data given in ( e ) and then in ( f ).

Kay Construction has the following mutually exclusive projects available. The company has historically used a three year cutoff for projects. The required return is 12 percent.

Year. Project A Project B

0. -$126,000. -$196,000

1. 64500. 44500

2. 45500. 59500

3. 55500. 85500

4. 50500. 115500

5. 45500. 130500

a. Calculate the payback period for both projects.

b. Calculate the NPV for both projects.

c. Which project, if any, should the company accept?

What is calculating “breakeven” CDS spread and valuing existing CDS?

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):

Sales for 2016 were $275 million and net income for the year was $8.25 million, so the firm's profit margin was 3.0%. Upton paid dividends of $3.3 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.

1. If sales are projected to increase by $100 million, or 36.36%, 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
   
2. 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.
   %
   
3. 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	$

(Individual or component costs of​ capital)  Compute the cost of capital for the firm for the​ following:

a.  A bond that has a ​$1,000 par value​ (face value) and a contract or coupon interest rate of 10.2 percent. Interest payments are $51.00 and are paid semiannually. The bonds have a current market value of $1,130 and will mature in 10 years. The​ firm's marginal tax rate is 34 percet.

b.  A new common stock issue that paid a $1.81 dividend last year. The​ firm's dividends are expected to continue to grow at 6.8 percent per​ year, forever. The price of the​ firm's common stock is now $27.45.

c.  A preferred stock that sells for $143 pays a dividend of 9.3 ​percent, and has a​ $100 par value.  

d.  A bond selling to yield 12.1 percent where the​ firm's tax rate is 34 percent.

a. The​ after-tax cost of debt is .... ​%. ​(Round to two decimal​ places.)

b.  The cost of common equity is......​%. ​(Round to two decimal​ places.)

c.  The cost of preferred stock is ....%. ​(Round to two decimal​ places.)

d.  The​ after-tax cost of debt is ......​%. ​(Round to two decimal​ places.)