Project #4994 - Finance

1) 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. 

 

2) 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 100'24? Round your answer to two decimal places.
 %

If interest rates increased by 3%, what would be the contract's new value? Round your answer to the nearest cent.
$  

3)Swaps

Carter Enterprises can issue floating-rate debt at LIBOR +1 percent or fixed-rate debt at 10.00%. Brence Manufacturing can issue floating-rate debt at LIBOR +4.0% 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 8.15% 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 + %) 

 

4) 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 $344,250, 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 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.

5) 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 $2.50 preferred with a par value of $38.00 plus one 10% subordinated income debenture with a par value of $74.5. The $10.50 preferred issue will be retired with cash.

 

  1. Construct the projected balance sheet while assuming that reorganization takes place. Show the new preferred at its par value. Enter your answers in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.
    The projected balance sheet (in millions of dollars) follows:
    Current assets $      Current liabilities $   
    Net fixed assets $      Advance payments $   
    Goodwill $      Reserves $   
          Subordinated debentures $   
          $2.5 preferred stock, $38 par value (1,200,000 shares) $   
          Common stock, $1.50 par value (6,000,000 shares) $   
          Retained earnings $   
    Total assets $      Total claims $   


  2. Construct the projected income statement. What is the income available to common shareholders in the proposed recapitalization? Enter your answers in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.
    The projected income statement (in millions of dollars) follows: 
    Net sales $   
    Operating expense $   
    Net operating income $   
    Other income $   
    EBIT $   
    Interest expense $   
    EBT $   
    Taxes (50%) $   
    Net income $   
    Dividends on $2.50 preferred $   
    Income available to common stockholders $   


  3. Required earnings is defined as the amount that is just enough to meet fixed charges (debenture interest and/or preferred dividends). What are the required pre-tax earnings before and after the recapitalization? Enter your answers in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.
    The required pre-tax earnings before recapitalization $    million
    The required pre-tax earnings after recapitalization $    million


  4. How is the debt ratio affected by the reorganization?
    The debt ratio before reorganization  %
    The debt ratio after reorganization  %


    If you were a holder of Verbrugge's common stock, would you vote in favor of the reorganization?
     
  5.  

6) 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 $200,000, sold off the assets and received the following proceeds (in thousands of dollars):

Asset Proceeds
Plant $1,200
Equipment 2,500
Receivables 66
Inventories 330
Total $4,096

In addition, the firm had $10,000 in cash available for distribution. No single wage earner had over $2,000 in claims, and there were no unfunded pension plan liabilities.

 

  1. What is the total amount available for distribution to all claimants? Round your answer to the nearest dollar. Enter your answer in dollars.
    $    

    What is the total of creditor and trustee claims? Enter your answer in millions. Enter your answer in dollars. Round your answer to the nearest dollar.
    $    

    Will the preferred and common stockholders receive any distributions?
      

  2. Determine the dollar distribution to each creditor and to the trustee. What percentage of each claim is satisfied? Enter dollar amounts in thousands. For example, an answer of $1.2 thousand should be entered as 1.2, not 1,200. Round your answers to two decimal places. Do not round intermediate steps.
    The liquidation distribution (in thousands of dollars):
    Claimant Dollar Distribution Percentage
    Accounts payable $     %
    Notes payable $     %
    Wages payable $     %
    Taxes payable $     %
    Mortgage bonds $     %
    Subordinated Debentures $     %
    Trustee $     %
     

7)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 7.6%. Assume that the risk-free rate of interest is 5% and the market risk premium is 6%. Both Vandell and Hastings face a 30% tax rate.

Vandell's free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 4% a year; its beta is 1.50. 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 $8.70 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 

 

8) 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 7.8%. Assume that the risk-free rate of interest is 4% and the market risk premium is 8%. Both Vandell and Hastings face a 30% tax rate.

Hastings estimates that if it acquires Vandell, interest payments will be $1,600,000 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 $1.424 million after which interest and the tax shield will grow at 4%. Synergies will cause the free cash flows to be $2.5 million, $3.2 million, $3.5 million, and then $3.72 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 4% 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 $9.77 million in debt. Round your answer to the nearest cent. Do not round intermediate steps.
$   per share 

 

9) 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 3% and the market risk premium is 7%. 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. Suppose Hastings will increase Vandell's level of debt at the end of Year 3 to $29.2 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, $2.7 million, $3.5 million, and then $3.77 million, after which the free cash flows and tax shields will grow at a 5% rate. Assume Vandell now has $9.23 million in debt. It's beta is 1.40.

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  

 

10) Merger Analysis

Marston Marble Corporation is considering a merger with the Conroy Concrete Company. Conroy is a publicly traded company, and its beta is 1.15. Conroy has been barely profitable, so it has paid an average of only 20% in taxes during the last several years. In addition, it uses little debt, its target ratio is just 30%, 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 35%. Marston also would increase the debt capitalization in the Conroy subsidiary to wd = 40%, for a total of $28.51 million in debt by the end of Year 4, and pay 11.0% 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 5%.

These cash flows include all acquisition effects. Marston's cost of equity is 9.8%, its beta is 0.8, and its cost of debt is 9.0%. The risk-free rate is 5%, and the market risk premium is 6.0%.

 

  1. What is the value of Conroy's unlevered operations? Do not round intermediate steps. 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.
    $   million

    What is the value of Conroy's tax shields under the proposed merger and financing arrangements? Do not round intermediate steps. 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.
    $   million

  2. What is the dollar value of Conroy's operations? 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.
    $   million

    If Conroy has $10 million in debt outstanding, how much would Marston be willing to pay for Conroy? 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.
    $   million

Subject Business
Due By (Pacific Time) 04/27/2013 12:00 am
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