1. Warren and Sami are holding the winning Lottery ticket for the Tennessee Education Enhancement lottery pool. It will be paid to them over the next 20 years. But, they “want their money now”. B.J.Wantyormoni, your new boss, is considering buying their Lottery ticket for cash now. He wants you to describe how to value this winning Lottery Ticket. Please do so. That is, describe how to value an asset.
You are considering an investment in Joe’s Pool Rooms, Inc common stock. Your assistant has estimated (forecast) the dividends expected for the stock over the next three years to be $1.35, $1.80, and $2.60 respectively. Thereafter, the best estimate is that dividend payments are expected to grow at about 39% per year which is the average of the two growth rates.
If you require a 6.75% rate of return, what is the value of Joe’s Pool Rooms, Inc. stock?
3. Discuss the methodology for historical performance analysis. Include in your discussion,
the areas of management to be evaluated and ratios relevant to that area of management,
how ratios are evaluated (how compared),
benefits and limitations of ratio analysis.
4. Suppose a firm has the following forecast estimates Address the question below:
2014 Sales $2235000
2014 Net profit Margin .030
2014 Dividends 0
2013 Retained Earnings (historical) 7500
2014 Total Assets 350000
2014 LTD 131000
2014 Common Stock 100000
What is the firm’s estimated Additional Funds Needed for 2014?
You were given the forecast for 2014. Your task is to prepare the Proform I/S and B/S, and calculate the AFN.
You do not use an equation. It was not discussed in the notes. Your case did not use it.
Remember the calculation for Retained Earnings
5. Debt and the Cost of Capital
A firm’s outstanding bonds have the following terms and information. Then address the questions below:
Coupon rate: 7.75%
Years to maturity: 8
Interest payments: Semi-annual
Currently trading at: $919.00
Tax rate: .35
What is the yield to maturity on the bonds?
Ignoring flotation costs, what is the firm’s cost of debt (before tax)?
What is its after-tax cost of debt?
6. Cost of Capital
Suppose the cost of debt is 7% (before tax)
The tax rate is .45
D0 = $2.75
g = 3%
Beta = 1.35
rRF = 4.1%
RPm = 6%
Flotation costs (F) = 5% of issue price
The debt is trading at $998.25. with 7,456 bonds outstanding.
The firm has 200,000 shares of common stock outstanding, which are trading at $35.36/share (P0).
a. (5 points)
Given the above information, what is the Market value of the firm’s debt?
Given the above information, what is the Market value of the firm’s equity?
Now calculate the weight of debt for the firm (Wd). You will use this to calculate the WACC.
|Due By (Pacific Time)||04/08/2014 12:00 am|
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