Futures
A Treasury bond futures contract (assume a 6% coupon, semiannual payment with 20 years to maturity) has a settlement price of 83'10. What is the implied annual yield? Round your answer to two decimal places.
%
Problem 24-3
Futures
What is the implied interest rate on a Treasury bond ($100,000, 6% coupon, semiannual payment with 20 years to maturity) futures contract that settled at 100'16? Round your answer to two decimal places.
%
If interest rates increased by 1%, what would be the contract's new value? Round your answer to the nearest cent.
$
Problem 24-4
Swaps
Carter Enterprises can issue floating-rate debt at LIBOR +3 percent or fixed-rate debt at 9.00%. Brence Manufacturing can issue floating-rate debt at LIBOR +3.0% or fixed-rate debt at 12%. Suppose Carter issues floating-rate debt and Brence issues fixed-rate debt. They are considering a swap in which Carter will make a fixed-rate payment of 7.90% to Brence, and Brence will make a payment of LIBOR to Carter. What is the net payment for Carter if they engage in the swap? Round your answer to two decimal places.
%
What is the net payment for Brence if they engage in the swap? Round your answer to two decimal places.
-(LIBOR + %)
Problem 25-1
Liquidation
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 $279,750, 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 if a total of $4 million is received from sale of the assets?
Distribution of proceeds on liquidation:
1. Proceeds from sale of assets | $ | |
2. First mortgage, paid from sale of assets | $ | |
3. Fees and expenses of administration of bankruptcy | $ | |
4. Wages due workers earned within 3 months prior to filing of bankruptcy petition |
$ | |
5. Taxes | $ | |
6. Unfunded pension liabilities | $ | |
7. Available to general creditors | $ |
Distribution to general creditors:
Claims of General Creditors |
Claim (1) |
Application of 100% Distribution (2) |
After Subordination Adjustment (3) |
Percentage of Original Claims Received (4) |
Notes payable | $ | $ | $ | % |
Accounts payable | $ | $ | $ | % |
Subordinated debentures | $ | $ | $ | % |
Total | $ | $ | $ |
The remaining $ will go to the common stockholders.
Problem 25-2
Reorganization
The Verbrugge Publishing Company's 2012 balance sheet and income statement are as follows (in millions of dollars).
Balance Sheet | ||||
Current assets | $168 | Current liabilities | $42 | |
Net fixed assets | 153 | Advance payments | 78 | |
Goodwill | 15 | Reserves | 6 | |
$6 preferred stock, $112.50 par value (1,200,000 shares) | 135 | |||
$10.50 preferred stock, no par, callable at $150 (60,000 shares) | 9 | |||
Common stock, $1.50 par value (6,000,000 shares) | 9 | |||
Retained earnings | 57 | |||
Total assets | $336 | Total claims | $336 |
Income | |
Net sales | $540.0 |
Operating expense | 516.0 |
Net operating income | $ 24.0 |
Other income | 3.0 |
EBT | $ 27.0 |
Taxes (50%) | 13.5 |
Net income | $ 13.5 |
Dividends on $6 preferred | 7.2 |
Dividends on $10.50 preferred | 0.6 |
Income available to common stockholders | $ 5.7 |
Verbrugge and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the $6 preferred will be exchanged for one share of $2.10 preferred with a par value of $36.00 plus one 10% subordinated income debenture with a par value of $76.5. The $10.50 preferred issue will be retired with cash.
Current assets | $ | Current liabilities | $ | |
Net fixed assets | $ | Advance payments | $ | |
Goodwill | $ | Reserves | $ | |
Subordinated debentures | $ | |||
$2.1 preferred stock, $36 par value (1,200,000 shares) | $ | |||
Common stock, $1.50 par value (6,000,000 shares) | $ | |||
Retained earnings | $ | |||
Total assets | $ | Total claims | $ |
Net sales | $ |
Operating expense | $ |
Net operating income | $ |
Other income | $ |
EBIT | $ |
Interest expense | $ |
EBT | $ |
Taxes (50%) | $ |
Net income | $ |
Dividends on $2.10 preferred | $ |
Income available to common stockholders | $ |
The required pre-tax earnings before recapitalization | $ million |
The required pre-tax earnings after recapitalization | $ million |
The debt ratio before reorganization | % |
The debt ratio after reorganization | % |
Problem 25-4
Liquidation
The following balance sheet represents Boles Electronics Corporation's position at the time it filed for bankruptcy (in thousands of dollars):
Cash | $ 10 | Account payable | $ 1,600 | |
Receivables | 100 | Notes payable | 500 | |
Inventories | 890 | Wages payable | 150 | |
Taxes payable | 50 | |||
Total current assets | $ 1,000 | Total current liabilities | $ 2,300 | |
Net plant | 4,000 | Mortgage bonds | 2,000 | |
Net equipment | 5,000 | Subordinated debentures | 2,500 | |
Preferred stock | 1,500 | |||
Common stock | 1,700 | |||
Total assets | $10,000 | Total claims | $10,000 |
The mortgage bonds are secured by the plant but not by the equipment. The subordinated debentures are subordinated to notes payable. The firm was unable to reorganize under Chapter 11; therefore, it was liquidated under Chapter 7. The trustee, whose legal and administrative fees amounted to $300,000, sold off the assets and received the following proceeds (in thousands of dollars):
Asset | Proceeds |
Plant | $1,300 |
Equipment | 2,100 |
Receivables | 50 |
Inventories | 600 |
Total | $4,050 |
In addition, the firm had $20,000 in cash available for distribution. No single wage earner had over $2,000 in claims, and there were no unfunded pension plan liabilities.
Claimant | Dollar Distribution | Percentage |
Accounts payable | $ | % |
Notes payable | $ | % |
Wages payable | $ | % |
Taxes payable | $ | % |
Mortgage bonds | $ | % |
Subordinated Debentures | $ | % |
Trustee | $ | % |
Problem 26-1
Valuation
Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt. Vandell's debt interest rate is 7.2%. Assume that the risk-free rate of interest is 3% and the market risk premium is 5%. Both Vandell and Hastings face a 40% tax rate.
Vandell's free cash flow (FCF_{0}) is $1 million per year and is expected to grow at a constant rate of 4% a year; its beta is 1.30. What is the value of Vandell's operations? (Hint:Use the corporate valuation model.) Round your answer to two decimal places. Do not round intermediate steps.
$ million
If Vandell has $9.30 million in debt, what is the current value of Vandell's stock? (Hint: Use the corporate valuation model.) Round your answer to the nearest cent. Do not round intermediate steps.
$ /share
Problem 26-2
Merger Valuation
Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt. Vandell's debt interest rate is 7.3%. Assume that the risk-free rate of interest is 7% and the market risk premium is 8%. Both Vandell and Hastings face a 35% tax rate.
Hastings estimates that if it acquires Vandell, interest payments will be $1,500,000 per year for 3 years after which the current target capital structure of 30% debt will be maintained. Interest in the fourth year will be $1.472 million after which interest and the tax shield will grow at 5%. Synergies will cause the free cash flows to be $2.4 million, $2.8 million, $3.3 million, and then $3.88 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 5% rate. What is the unlevered value of Vandell? Vandell's beta is 1.10. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. Do not round intermediate steps.
$ million
What is the value of its tax shields? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. Do not round intermediate steps.
$ million
What is the per share value of Vandell to Hastings Corporation? Assume Vandell now has $10.48 million in debt. Round your answer to the nearest cent. Do not round intermediate steps.
$ per share
Problem 26-4
Merger Valuation with Change in Capital Structure
Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt. Vandell's debt interest rate is 7.8%. Assume that the risk-free rate of interest is 6% and the market risk premium is 5%. Both Vandell and Hastings face a 35% tax rate.
Hastings estimates that if it acquires Vandell, interest payments will be $1,600,000 per year for 3 years. Suppose Hastings will increase Vandell's level of debt at the end of Year 3 to $27.0 million so that the target capital structure will be 45% debt. Assume that with this higher level of debt the interest rate would be 8.0%, and assume that interest payments in Year 4 are based on the new debt level from the end of Year 3 and new interest rate. Synergies will cause the free cash flows to be $2.5 million, $2.9 million, $3.4 million, and then $3.97 million, after which the free cash flows and tax shields will grow at a 6% rate. Assume Vandell now has $11.87 million in debt. It's beta is 1.25.
What is the value of the unlevered firm? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. Do not round intermediate steps.
$ million
What is the value of the tax shield? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. Do not round intermediate steps.
$ million
What is the maximum price that Hastings would bid for Vandell now? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. Do not round intermediate steps.
$ million
Problem 26-5
Merger Analysis
Marston Marble Corporation is considering a merger with the Conroy Concrete Company. Conroy is a publicly traded company, and its beta is 1.25. Conroy has been barely profitable, so it has paid an average of only 30% in taxes during the last several years. In addition, it uses little debt, its target ratio is just 25%, with the cost of debt 9%.
If the acquisition were made, Marston would operate Conroy as a separate, wholly owned subsidiary. Marston would pay taxes on a consolidated basis, and the tax rate would therefore increase to 40%. Marston also would increase the debt capitalization in the Conroy subsidiary to w_{d} = 35%, for a total of $23.13 million in debt by the end of Year 4, and pay 9.5% on the debt. Marston's acquisition department estimates that Conroy, if acquired, would generate the following free cash flows and interest expenses (in millions of dollars) in Years 1-5:
Year | Free Cash Flows | Interest Expense |
1 | $1.30 | $1.2 |
2 | 1.50 | 1.7 |
3 | 1.75 | 2.8 |
4 | 2.00 | 2.1 |
5 | 2.12 | ? |
In Year 5 Conroy's interest expense would be based on its beginning-of-year (that is, the end-of-Year-4) debt, and in subsequent years both interest expense and free cash flows are projected to grow at a rate of 6%.
These cash flows include all acquisition effects. Marston's cost of equity is 9.6%, its beta is 0.8, and its cost of debt is 9.5%. The risk-free rate is 6%, and the market risk premium is 4.5%.
Subject | Business |
Due By (Pacific Time) | 04/27/2013 01:00 pm |
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