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 ago
Next > < Previous

Related Solutions

Southwestern Wear Inc. has the following balance sheet: Current assets$1,875,000 Accounts payable$375,000 Fixed assets1,875,000 Notes payable750,000...
Southwestern Wear Inc. has the following balance sheet: Current assets$1,875,000 Accounts payable$375,000 Fixed assets1,875,000 Notes payable750,000   Subordinated debentures750,000    Total debt$1,875,000   Common equity1,875,000 Total assets$3,750,000 Total liabilities and equity$3,750,000 The trustee's costs total $317,000, 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 receive if a total of $2.5 million is received...
Balance Sheet (in $ millions) Assets Liabilities and Stockholders' Equity Cash  ......................................    $ 7 Accounts payable ............$20 Accounts...
Balance Sheet (in $ millions) Assets Liabilities and Stockholders' Equity Cash  ......................................    $ 7 Accounts payable ............$20 Accounts receivable ............    25 Accrued wages .................7 Inventory  ..............................         28 Accrued taxes .................. 13 Current assets ...................    $80 Current liabilities .......... $40 Fixed assets .........................       25 Notes payable ..................15 Common stock .................20   Retained earnings ............ 30 Total Assets ...........................$105 Total liabilities and stockholders’ equity .......$105 If the firm’s sales for last year were $100 million, and the balance sheet at year-end is similar in percentage of sales to that of...
Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 Fixed assets...
Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 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 $3,750,000 The trustee's costs total $238,250, 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...
Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 Fixed assets...
Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 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 $3,750,000 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 investors...
Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 Fixed assets...
Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 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 $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...
Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 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 $3,750,000 The trustee's costs total $248,500, 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 investors...
Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 Fixed assets...
Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 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 $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...
Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 Fixed assets...
Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 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 $3,750,000 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 investors...
Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $   375,000 Fixed assets...
Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $   375,000 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 $3,750,000 The trustee's costs total $290,500, 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 investors...
Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 Fixed assets...
Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 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 $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 and liquidates, how much will each class of investors...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT