Question
In: Finance
Winston & Company, Inc Balance Sheet Assets: Liabilities: Current Assets $995,000 Accounts Payable $300,000 Notes Payable...
Winston & Company, Inc Balance Sheet Assets: Liabilities: Current Assets $995,000 Accounts Payable $300,000 Notes Payable $700,000 Fixed Assets $3,000,000 Other Current Liabilities $195,000 Bonds Payable $1,200,000 Total Liabilities $2,395,000 Equity $1,600,000 Total Assets: $3,995,000 $3,995,000
Current Market Information: 700 Bonds - $1,000 20 years, 10 % stated rate, issued 8 years ago – currently selling at .97 500 Bonds - $1,000, 10 years, 15% stated rate, issued 3 years ago – currently selling at 1.05 100,000 shares of common stock – currently selling for $21.00 per share. Financial Analysis: b = 1.15, RM = 22% RRF = 2.5% Tax Rate = 40% Lender
Requirements: Funds will only be distributed in even amounts of $50,000. (50,000, 100,000, 150,000, etc.) If AFN > $200,000 then the Pre-tax Cost of debt will be 15%; otherwise, it will be 18%. Project Term: 5 years Outlay: $500,000 for Equipment, depreciable over 5 years, salvage value of $30,000 $200,000 lost opportunity with an existing vendor $100,000 required NWC recoverable in Year 5. In the first year, sales will increase $1,400,000. Sales are currently $14,000,000. The current profit margin is 20% and the payout ratio is 30%. After Year 1, it is likely that sales will grow 5% per year, and Cost of Goods Sold will grow by 2% per year. The company will need to borrow any funds identified through AFN analysis. 1. AFN Analysis 2. WACC 3. Cash Flow 4. NPV
Solutions
Expert Solution
1. Additional Fund Analysis
AFN is the addtional funds procured from the external sources without changing the current operations level and performance. They are meant to provide funds without putting stress on the current performance and profitability of the company
Additional Funds Needed = (Current Level of Assets x percentage Increase in Sales) - (Current Level of Liabilities x percentage Increase in Sales) - (New level of Sales x profit margin x retention ratio)
Percentage Increse in sales = 140,000/1,400,000 = 10%
AFN = ($3,995,000 x 0.1) - ($2,395,000 x 0.1) - ($1,540,000 x 0.2 x 0.7) = ($1,996,000)
2. WACC
As AFN is negative, no extra debt will be availed.
Cost of Debt(Pre-tax)
Bond 1 = 10*0.6 = 6%
Bond 2 = 15*0.6 = 9%
Cost of equity shall be calculated using CAPM.
Ex = Risk Free rate + Beta (Market Return - Risk Free rate)
= 24.925 %
WACC
| Particulars | rate | Value | Weights | Weighted Return |
| Equity | 24.93 | 16,00,000 | 0.57 | 14.24 |
| Bond 1 | 6.00 | 7,00,000 | 0.25 | 1.50 |
| Bond 2 | 9.00 | 5,00,000 | 0.18 | 1.61 |
| WACC | 28,00,000 | 15.74 % |
3. Cash Flow
COGS = Sales * (1- Gross Margin)
= $12,320,000
| Year | Outlay | Lost Opportunity Cost | Sales | COGS | Salvage | Net Working Capital | Net Inflow Before Tax | Net Inflow After Tax |
| 0 | 5,00,000.00 | 2,00,000.00 | - | - | - | 1,00,000.00 | -8,00,000.00 | -8,00,000.00 |
| 1 | - | - | 1,54,00,000.00 | 1,23,20,000.00 | - | - | 30,80,000.00 | 18,48,000.00 |
| 2 | - | - | 1,61,70,000.00 | 1,25,66,400.00 | - | - | 36,03,600.00 | 21,62,160.00 |
| 3 | - | - | 1,69,78,500.00 | 1,28,17,728.00 | - | - | 41,60,772.00 | 24,96,463.20 |
| 4 | - | - | 1,78,27,425.00 | 1,30,74,082.56 | - | - | 47,53,342.44 | 28,52,005.46 |
| 5 | - | - | 1,87,18,796.25 | 1,33,35,564.21 | 30,000.00 | 1,00,000.00 | 55,13,232.04 | 33,59,939.22 |
| Total Cash Flow | $ 1,19,18,567.89 |
4. NPV
| Year | Outlay | Lost Opportunity Cost | Sales | COGS | Salvage | Net Working Capital | Net Inflow Before Tax | Net Inflow After Tax | DCF @ 15.74% | NPV |
| 0 | 5,00,000.00 | 2,00,000.00 | - | - | - | 1,00,000.00 | -8,00,000.00 | -8,00,000.00 | 1.00 | -8,00,000.00 |
| 1 | - | - | 1,54,00,000.00 | 1,23,20,000.00 | - | - | 30,80,000.00 | 18,48,000.00 | 0.86 | 15,96,682.22 |
| 2 | - | - | 1,61,70,000.00 | 1,25,66,400.00 | - | - | 36,03,600.00 | 21,62,160.00 | 0.75 | 16,14,064.45 |
| 3 | - | - | 1,69,78,500.00 | 1,28,17,728.00 | - | - | 41,60,772.00 | 24,96,463.20 | 0.64 | 16,10,181.14 |
| 4 | - | - | 1,78,27,425.00 | 1,30,74,082.56 | - | - | 47,53,342.44 | 28,52,005.46 | 0.56 | 15,89,338.64 |
| 5 | - | - | 1,87,18,796.25 | 1,33,35,564.21 | 30,000.00 | 1,00,000.00 | 55,13,232.04 | 33,59,939.22 | 0.48 | 16,17,759.77 |
| $ 72,28,026.21 |
jeff jeffy answered 1 year agoRelated Solutions
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has no unfunded pension liabilities. The debentures are
subordinated only to the notes payable. If the firm goes bankrupt
and liquidates, how much will each class of investors...
Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 Fixed assets...
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Current assets
$1,875,000
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$375,000
Fixed assets
1,875,000
Notes payable
750,000
Subordinated debentures
750,000
Total debt
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Common equity
1,875,000
Total assets
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Total liabilities and equity
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The trustee's costs total $263,750, and the firm has no accrued
taxes or wages. Southwestern has no unfunded pension liabilities.
The debentures are subordinated only to the notes payable. If the
firm goes bankrupt and liquidates, how much will each class of
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Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 Fixed assets...
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Current assets
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Fixed assets
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Notes payable
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750,000
Total debt
$1,875,000
Common
equity 1,875,000
Total assets
$3,750,000
Total liabilities and equity
$3,750,000
The trustee's costs total $323,750, and the firm has no accrued
taxes or wages. Southwestern has no unfunded pension liabilities.
The debentures are subordinated only to the notes payable. If the
firm goes bankrupt and liquidates, how much will each class of
investors receive...
Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 Fixed assets...
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1,875,000
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$3,750,000
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Accounts payable
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Fixed assets
1,875,000
Notes payable
750,000
Subordinated debentures
750,000
Total debt
$1,875,000
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Total liabilities and equity
$3,750,000
The trustee's costs total $228,000, and the firm has no accrued
taxes or wages. Southwestern has no unfunded pension liabilities.
The debentures are subordinated only to the notes payable. If the
firm goes bankrupt and liquidates, how much will each class of
investors...
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$1,875,000
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Fixed assets
1,875,000
Notes payable
750,000
Subordinated debentures
750,000
Total debt
$1,875,000
Common equity
1,875,000
Total assets
$3,750,000
Total liabilities and equity
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The trustee's costs total $323,500, and the firm has no accrued
taxes or wages. Southwestern has no unfunded pension liabilities.
The debentures are subordinated only to the notes payable. If the
firm goes bankrupt and liquidates, how much will each class of
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1,875,000
Notes payable
750,000
Subordinated debentures
750,000
Total debt
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Common equity
1,875,000
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$1,875,000 Common equity 1,875,000 Total assets $3,750,000 Total
liabilities and equity $3,750,000 The trustee's costs total
$326,000, and the firm has no accrued taxes or wages. Southwestern
has no unfunded pension liabilities. The debentures are
subordinated only to the notes payable. If the firm goes bankrupt
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