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FIN 370 Week 2 MyFinance Lab




Question;FIN 370 Week 2 MyFinance Lab;1). Templeton;Extended Care Facilities, Inc is considering the acquisition of a chain of;cemeteries for $390 million. Since the primary assets of this business is real;estate, Templeton's management has determined that they will be able to borrow;the majority of the money needed to buy the business. The current owners have;no debt financing but Templeton plans to borrow $280 million and invest only;$110 million in equity in the acquisition. What weights should Templeton use in;computing the WAAC for this acquisition?;a). The appropriate (W d) weight is _?;b). The appropriate (W cs) weight is _?;2). 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 11.2%. The bonds have a current market;value of $1,127 and will mature in 10 years. The form's marginal tax rate is;34%.;b). A new common stock issue that paid a $1.76 dividend last;year. The firm's dividends are expected to continue to grow at 7.5% per year;forever. The price of the firm's common stock is now $27.27.;c). A preferred stock paying a 9.9% dividend on a $150 par;value.;d). A bond selling to yield 12.5% where the form's tax rate;is 34%.;3). Your firm is;considering a new investment proposal and would like to calculate its weighted;average cost of capital. To help in this, 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 12.2%. the bonds have a current market;value of $1,127 and will mature in 10 years. The firm's tax rate is 34%.;b. If the firm?s bonds are not frequently traded, how would;you go about determining a cost of debt for this company?;c. It is standard practice to estimate the cost of debt;using the yield to maturity on a portfolio of bonds with a similar credit;rating and maturity as the firm?s outstanding debt.;d). A preferred stock paying a 10.4% dividend on a $126 par;value. The preferred shares are currently selling for $150.92.;FIN 370 Week 3 MyFinanceLab;1.(Related to Checkpoint 4.2 on page;86) (Capital structure analysis) The liabilities and;owners? equity for Campbell Industries is found below;Accounts payable $;453,000;Notes payable 250,000;Current liabilities $;703,000;Long-term debt $1,263,000;Common equity $5,067,000;Total liabilities and equity $7,033,000;a. What percentage of the firm?s assets does the firm finance using debt;(liabilities)?;2. If Campbell was to purchase a;new warehouse for $1.1 million and finance it entirely with long term debt;what would be the firm?s new debt ratio?;2.The following table;contains current asset and current liability balances for Deere and Company;(DE);QQ ($ thousands) 2008 2007 2006;Current assets;Cash and cash equivalents 2211400 2278600;1687500;Short-term investments 0 1623300;0;Net receivables 3944200 3680900 3508100;Inventory 3041800 2337300 1957300;Total current assets 9197400 9920100 7152900;Current liabilities;Accounts payable 6562800 3186100 4666300;Short/current long-term debt;8520500 9969400 8121200;Other current liabilities 0 2766000;0;Total current liabilities 15083300 15921500 12787500;Measure the liquidity of Deere;Co. for each year using the company?s net working capital and current;ratio. Is the trend in Deere?s liquidity improving over this period? Why or why;not?;3. You just received a $4,000 bonus.;a. Calculate the future value of $4,000, given that it will be held in the bank;for9 years;and earn an annual interest rate of 8%.;b. Recalculate part (A) using a compounding period that (1) semiannual and (2);bimonthly;c. Recalculate parts (A) and (B) using an annual interest rate of 16%?;d. Recalculate part (A) using a time horizon of 18 years at an annual interest;rate of 8%?;e. What conclusions can you draw when you compare the answers in parts (c) and;(d) with the answers in parts (a) and (b)?;4.Break;even analysis;2. The Marvel Mfg. Company is considering whether or not to construct a new;robotic production facility. The cost of it is $582,000 and it?s expected to;have a six year life with annual depreciation expense of $97,000 and no salvage;value. Annual Sales from the new facility is expected 2,010 units with a price;of $930 per unit. Variable production costs are $570 per unit while fixed cash;expenses are $75,000 per year;a. find the accounting and the cash break-even units of production. (round to;nearest interger);b. will the plant make a profit based on its current expected level of;operations?;c. will the plant contribute cash flow to the firm at the expected level of;operations?5.Given the info below.;a. calculate the missing info for each project;b. note that projects c and d share the same accounting break even. If the;sales are above the breakeven point, which project would you prefer? Why?;c. calculate the cash break even for each of the projects. What do the;differences in accounting and cash break even tell you about the four projects?;project accounting breakeven point units price per unit variable cost per unit;fixed costs (fill in the blanks on the chart listed).;Breakeven point in units -Price per unit- Variable cost per unit -fixed costs depreciation;Project A 6210-(find price per unit) $56- $99,000-$26,000;Project B 770- $960- (findvariable cost;per unit)-$499,000-$103,000;Project C 2000- $21- $15 $4,900-(find;depreciation);Project D 2000- $21- $6-(find fixed;cost)-$12,000;6. (Cash budget) The Sharpe Corporation?s projected sales for the first;eight months of 2011;are as follows;January $ 90,600 May $299,000;February 120,700 June 269,300;March 134,900 July 224,400;April 240,000 August149,500;Of Sharpe?s sales;10 percent is for cash, another 60 percent is collected in the month following;sale, and 30 percent is collected in the second month following sale. November;and December sales for 2010 were $220,800 and $174,200, respectively.;Sharpe purchases its raw materials two months in advance of its sales equal to;60 percent of their final sales price. The supplier is paid one month after it;makes delivery. For example, purchases for April sales are made in February and;payment is made in March.;In addition, Sharpe pays $9,000 per month for rent and $20,100 each month for;other expenditures.;Tax prepayments of $21,800 are made each quarter, beginning in March.;The company?s cash balance at December 31, 2010, was $21,100, a minimum balance;of $15,000 must be maintained at all times. Assume that any short-term;financing needed to maintain the cash balance is paid off in the month;following the month of financing if sufficient funds are available.;Interest on short-term loans (11 percent) is paid monthly. Borrowing to meet;estimated monthly cash needs takes place at the beginning of the month. Thus;if in the month of April the firm expects to have a need for an additional;$56,110, these funds would be borrowed at the beginning of April;with interest of $514 (11% ? 1/12 ? $56,110) owed for April and paid at the;beginning of May.;a. Prepare a cash;budget for Sharpe covering the first seven months of 2011.(nov sales =;$220,800, dec sales = $174,200, jan sales = $90,600;b. Sharpe has $200,900 in notes payable due in July that must be repaid or;renegotiated for an extension. Will the firm have sufficient cash to repay the;notes?;FIN 370 WEEK 4 MyFinanceLab;1. The target capital structure for Jowers;Manufacturing is 50 percent common stock, 15 percent preferred stock, and 35;percent debt. If the cost of equity for the firm is 20 percent;the cost of;preferred stock is 12 percent, and the before-tax cost of debt is 10 percent;what is Jower?s cost of capital? The firm?s marginal tax rate is 34 percent.;2. (Weighted;average cost of capital) The target capital structure for QM Industries is 40;percent common stock, 10 percent preferred stock, and 50 percent debt.;If the cost of;equity for the firm is 18 percent, the cost of preferred stock is 10 percent;the before-tax cost of debt is 8 percent, and the firm's tax rate is 35;percent;what is QM's;weighted average cost of capital?;3. Crypton;electronics has a capital structure consisting of 41% common stock and 59%;debt, a debt issue of 1000 par value, 6.4 bonds that matures in 15 years and;pays an annual interest well sell for $973. Common stock of the firm is selling;for 30.49 per share and the firm expects to pay a 2.24 dividend next year.;Dividends have grown at the rate of 5.3% per year and expected to continue to;do so for the foreseeable future. What is Cryptons cost of capital where the;firms tax rate is 30%;4. As a;member of the finance department of ranch manufacturing, your supervisor has;asked you to compute the appropriate discount rate to use when evaluating the;purchase of new packaging equipment for the plant under the assumption that the;firms present capital structure reflects the appropriate mix of capital source;for the firms, you have determined the market value of the firm?s capital;structure as follows Bonds $4,500,000, preferred stock $2,300,000, common stock;$ 6,200,000. To finance the purchase ranch manufacturing will sell 10 year;bonds paying 6.9 % per year @ a market price of 1,055.preferred stock paying;$2.02 dividend can be sold for 25.37 common stock for ranch manufacturing is;currently selling for 55.14 per share and the firm paid a 3.07 dividend last;year. Dividend are expected to continue growing at a rate of 4.7 per year into;the indefinite future, if the firms tax rate is 30% what discount rate should;you use to evaluate the equipment purchased.;Ranch manufacturing;company WACC is _____________ round 3 decimal places.;5.Abe Forrester and three Of his friends from college have interested a;group of venture capitalists in backing their. The proposed operation would;consist of a series of retail outlets to?Distribute and service a full line of vacuum;cleaners and accessories. These stores would?Be located in Dallas, Houston, and San;Antonio. To finance the new venture two plans?Have been proposed:?Plan;A is an all-common-equity structure in which $2.3 million dollars would be;raised?By;selling 80,000 shares of common stock.?Plan B would involve issuing $1.1 million;dollars in long-term bonds with an effective?Interest rate of 12.1% plus another $1.2;million would be raised by selling 40,000 shares?Of common stock. The debt funds raise funder;Plan B have no fixed maturity date, in?That this amount of financial leverage is;considered a permanent part of the firm??Capital structure. Abe and his partners plan;to use a 34% tax rate in their analysis, and they have hired?You;on a consulting basis to do the following;A. Find the EBIT;indifference level associated with the two financing plans.;B. Prepare a pro;forma income statement for the EBIT level solved for in Part a. that shows that;EPS will be the same regardless whether Plan A or Plan B is chosen;6. Three;recent graduates of the computer science program at the University of Tennessee;are forming a company that will write and distribute new application software;for the iPhone. Initially, the corporation will operate in the southern region;of Tennessee, Georgia, North Carolina and South Carolina. A small group of;private investors in the Atlanta, Georgia are interested in financing the;startup company and two financing plans have been put forth into consideration.;The first plan(A) is;an all common equity capital structure $2.4 million dollars would be raised by;selling common stock at $10 per common share.;Plan B would involve;the use of financial leverage. $1.2 million would be raised by selling bonds;with an effective interest rate of 11.2% and the remaining 1.2 mill would be;raised by selling common stock at the $10 price per share. The use of financial;leverage is considered to be a permanent part of the firms capitalization, so;no fixed date is needed for the analysis. A 35% tax rate is deemed appropriate;for the analysis.;A. Find the EBIT;indifference rate associated with the two financing problems;B. A detailed;financial analysis of the firms prospects suggests that the long term EBIT will;be above $300,000 annually. Taking this into consideration, which plan will;generate the higher EPS?;FIN 370 Week 5, MyFinance Lab;1. Construct a;delivery date profit or loss raph for a long position in a forward contract;with a delivery price of $75.00. Analyze the profit or loss for values of the;underlying asset ranging from $55 to $100 (I attached the graphs) a. Which of;these graphs shows the correct profit/loss line for the long forward contract;on delivery date T? A. Graph C B. Graph D C. Graph A D. Graph B;2. The specialty chemical Company;operates a crude oil refinery located in New Iberia, LA. The company refines;crude oil and sells the by-products to companies that make plastic bottles and;jugs. The firm is currently planning for its refining needs for one year hence.;Specifically, the firms analysts estimate that specialty will need to purchase;1 million barrels of crude oil at the end of of the current year to provide the;feed stock for its refining needs for the coming year. The 1 million barrels of;crude oil will be converted into by products at an average cost of $15 per;barrel that Specialty expects to sell for $175 million, or $175 per barrel of;crude used. The current spot price of oil is $120 per barrel and Specialty has;been offered a forward contract by its investment banker to purchase the needed;oil for a delivery price in one year of $125 per barrel.;A. Ignoring;taxes, what will Specialty's profits be if oil prices in one year are as low as;$105 or as high as $145, assuming that the firm does not enter into the forward;contract?;A.;Ignoring taxes, what will specialty's profits be if oil prices in one year are;as low as $100 or as high as $140, assuming that the firm does not enter into;forward contract? Round to the nearest dollar.;B. If;the firm were to enter into forward contract, demonstrate how this would be;effectively lock in the firm's cost of fuel today, thus hedging the risk of;fluctuating crude oil prices on the firm's profits for the next year.;3.Discuss how the exchange requirements that mandate;traders to put up collateral in the form of a margin requirement and to use;this account to mark their profits or losses for the day, serve to eliminate;credit or default risk. (fill in the blank to make the following sentence true;Because ____________________(both parities have) or (no;parties have) to post margin when they enter into a futures contract and;because they mark to market ____________ (on the delivery date) or (every day;until the delivery date), we are __________ (assure) or (not assured) the;party and the counter party to the contract have already posted the gain or;loss to the other and the risk of default _____________ (is thereby negated) or;(still exists).;4.Construct a;delivery date profit or loss graph for a short position in a forward contract;with a delivery price of $60. Analyze the profit or loss for values of the;underlying asset ranging from $40 to $80.;Which of these graphs shows the correct profit/loss line for;the short forward contract on the delivery date T?;Graph C;Graph B;Graph D;Graph A


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