Question

In: Finance

All questions below analyze the same company. The information below will be needed to answer all...

All questions below analyze the same company. The information below will be needed to answer all questions. Consider the following information regarding ABC Corporation.
2009
2010
Sales ($ millions)
1000
1112
Cost of Goods Sold ($ millions)
500
556
Other Expenses ($ millions)
100
111
Depreciation ($ millions)
100
100
Interest Expense ($ millions)
50
55
Total Current Assets ($ millions)
600
700
Net Fixed Assets ($ millions)
1800
2000
Total Current Liabilities ($ millions)
450
550
Long-term Liabilities ($ millions)
900
975
• The firm’s plowback ratio is 60%
• The firm’s tax rate is 40%
• The company has 30 million shares outstanding. The current stock price is $35.
• The company has two bond issues outstanding. The first issue is 100,000 bonds that have YTM of 5%, coupon rate of 7%, face value of $1000, and mature in 7 years. The second issue is 500,000 bonds with YTM of 8%, face value of $1500, and mature in 13 years. These bonds are currently selling for $1200.
• The expected return on the market is 11%. The risk-free rate is 4%.
• ABC’s beta is 2.15
1. Use market values to find the percentage of the company that is debt-based (Wd).
2. Use market values to find the percentage of the company that is equity-based (We).
3. Use CAPM to find the cost of equity (Re).
4. Find a market-value based weighted average of the bonds’ YTMs (Rd).
5. Use the answers to #1-#4 to find the company’s WACC.
6. Find the company’s internal growth rate (IGR).
7. Use the IGR from #6 and the required return on the stock from #3. Use the financial data to find the current dividend. What does the dividend growth model predict the stock price to be?
8. Which of the following might be a valid reason for the large discrepancy between the predicted stock price from #7 and the actual stock price of $35?
a. The market expects the company to grow at a faster rate than the internal growth rate.
b. The market expects the company to grow at a slower rate than the internal growth rate.
c. The market requires a higher return than the one you have using CAPM?
d. The company is doing very poorly.
e. The company is doing very well.
9. Find the firm’s 2010 total cash flow.
10. Find the firm’s 2010 cash flow to shareholders.

Solutions

Expert Solution

You have asked 10 questions in a single post. I am addressing the first four of them. Please post the balance questions separately.

All financials are in $.

1. Use market values to find the percentage of the company that is debt-based (Wd).

Market value of bonds, D = Price per bond x no. of bonds = 1,200 x (100,000 + 500,000) = 720,000,000

Market value of equity, E = Price per share x nos. of shares outstanding = 35 x 30 mn = 1,050,000,000

%age of the company that is debt based = Wd = D / (D + E) = 720 / (720 + 1,050) = 40.68%

2. Use market values to find the percentage of the company that is equity-based (We).

We = 1 - Wd = 1 - 40.68% = 59.32%

3. Use CAPM to find the cost of equity (Re).

Re = Risk free rate + Beta x (Expected return in the market - risk free rate) = 4% + 2.15 x (11% - 4%) = 19.05%

4. Find a market-value based weighted average of the bonds’ YTMs (Rd).

The first issue

  • 100,000 bonds
  • YTM of 5%

The second issue is

  • 500,000 bonds
  • YTM of 8%

These bonds are currently selling for $1200.

Market-value based weighted average of the bonds’ YTMs (Rd) = 100,000 / (100,000 + 500,000) x 5% + 500,000 / (100,000 + 500,000) x 8% = 7.50%

Please post the balance part separately.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

The information below will be needed to answer all questions. 2009 2010 Sales ($ millions) 1000...
The information below will be needed to answer all questions. 2009 2010 Sales ($ millions) 1000 1112 Cost of Goods Sold ($ millions) 500 556 Other Expenses ($ millions) 100 111 Depreciation ($ millions) 100 100 Interest Expense ($ millions) 50 55 Total Current Assets ($ millions) 600 700 Total Fixed Assets ($ millions) 2200 2500 Accumulated Depreciation ($ millions) 400 This can be determined from the information given Net Fixed Assets ($ millions) 1800 2000 Total Current Liabilities ($...
Please answer 3 (or all) of the 5 questions below the background information: THIS IS ALL...
Please answer 3 (or all) of the 5 questions below the background information: THIS IS ALL THE INFORMATION AVAILABLE Background: Some years back policy makers in the Kingdom of Bahrain were faced with rising inflation caused by the fall in the value of the US dollar relative to other currencies. The Kingdom’s currency unit, the Bahraini dinar (BD), is pegged to the dollar, so when the dollar goes down in value the BD goes down as well. A weaker dollar/dinar...
Short Answer Questions 1. Use the information below to analyze XYZ Corp. Conduct a horizontal (trend)...
Short Answer Questions 1. Use the information below to analyze XYZ Corp. Conduct a horizontal (trend) analysis and comment on the performance of the company. (12pts) XYZ Corp. Income Statement For the Year End Dec 31, 2009 2009 % 2008 % 2007 Net Sales $2,500,000    $2,300,000    $2,100,000 COGS 1,400,000 1,334,000 1,154,000 Gross Profit $1,100,000 $966,000 $946,000 Operating Expenses Administrative 820,000 763,000 706,000 Marketing & Advertising 70,000 66,000 60,000 Depreciation 50,000 30,000 30,000 Total Operating Expenses 940,000 859,000 796,000...
5. Following information is available for two companies. Analyze the information and answer the questions: a....
5. Following information is available for two companies. Analyze the information and answer the questions: a. M G Industries manufactures various types of industrial chemicals. The company had a total asset turnover of 2.5 times for the year ended 31st March 2019. The sales for the year were ₹ 35,50,000. Total assets were ₹ 12,35,890 as on 31st March 2018. Assume that compared to 31st March 2019, total assets were projected to increase by 12% by 31st March 2020. The...
The below mentioned question is sample for the questions abd please answer the same questions in...
The below mentioned question is sample for the questions abd please answer the same questions in a different manner. Does the capacity shortage at the Denver facility invalidate the channel network plan? Yes, the capacity shortage at the Denver facility invalidates the channel network plan because it will affect the company profits as well as there will be an increase in operating costs. The capacity shortage needs to be supplied from one or a combination of other channel facility and...
Answer the following questions and show all working. 1.    Using the information below for a monopoly...
Answer the following questions and show all working. 1.    Using the information below for a monopoly firm, calculate TR, TC, ATC and Profits: (8) Quantity Price Total Revenue Total Cost ATC MR MC Profits 0 17 0 0 1 16 16 4 2 15 14 6 3 14 12 8 4 13 10 10 5 12 8 12 (a) What is the monopolist’s profit maximizing level of output and price? (2)        (b) At what output and price would...
Answer the following questions with “it increases,” “it decreases,” “it stays the same,” or “not enough information to answer.”
Answer the following questions with “it increases,” “it decreases,” “it stays the same,” or “not enough information to answer.” Assume any factors in the situation not mentioned in the problem remain the same. In your write-up, just list the sub-question letter and your answer – no need to restate the question or to justify your answer. As |tobt| increases, what happens to the p value? B. As |tobt| increases, what happens to the value of alpha? C. As N increases,...
Use the following information to answer the questions below:
Use the following information to answer the questions below: note: all sales are credit sales Income Stmt info: 2016 2017 Sales $ 975,000 $        1,072,500 less Cost of Goods Sold: 325,000 346,125 Gross Profit 650,000 726,375 Operating Expenses 575,000 609,500 Earnings before Interest & Taxes 75,000 116,875 Interest exp 25,000 31,000 earnings before Taxes 50,000 85,875 Taxes 20,000 34,350 Net Income $ 30,000 $              51,525 Balance Sheet info: 12/31/2016 12/31/2017 Cash 60,000 $ 63,600 Accounts Receivable 80,000 $ 84,000 Inventory...
Use the following information to answer questions [The following information applies to the questions displayed below.]...
Use the following information to answer questions [The following information applies to the questions displayed below.] The following information is available for Lock-Tite Company, which produces special-order security products and uses a job order costing system. April 30 May 31 Inventories Raw materials $ 48,000 $ 48,000 Work in process 9,900 19,700 Finished goods 67,000 33,700 Activities and information for May Raw materials purchases (paid with cash) 194,000 Factory payroll (paid with cash) 150,000 Factory overhead Indirect materials 14,000 Indirect...
Use the following information to answer questions [The following information applies to the questions displayed below.]...
Use the following information to answer questions [The following information applies to the questions displayed below.] The following information is available for Lock-Tite Company, which produces special-order security products and uses a job order costing system. April 30 May 31 Inventories Raw materials $ 44,000 $ 54,000 Work in process 9,500 18,800 Finished goods 59,000 34,000 Activities and information for May Raw materials purchases (paid with cash) 185,000 Factory payroll (paid with cash) 250,000 Factory overhead Indirect materials 10,000 Indirect...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT