Project #7940 - finance

 

 
 
 
 
 
 
I need these questions answered correctly please. Thank you.
BA325,
 
Homework 3
 
 
This homework is worth 5% of your grade. Type your answer in the box provided in the homework link or
upload a Word or PDF file. You must show the computational steps, not just the final answer.
Once
graded, you can find the correct answer in the feedback box.
 
 
There are 10 problems.
 
1
.
 
 
Compute the cost for the following sources of financing:
 
 
a.
 
A bond selling to yield 9% after flotation costs, but
prior
 
to adjusting for the marginal
corporate tax rate of 34%. In other words, 9% is the rate that equates the net proceeds
from the bond with the present value of the future flows (principal and interest).
 
 
b.
 
A new common stock issue that paid a $1.25 dividen
d last year. The par value of the
stock is $2, and the earnings per share have grown at a rate of 6% per year. This growth
rate is expected to continue into the foreseeable future. The company maintains a
constant dividend/earnings ratio of 40%. The price
of this stock is now $30, but 9%
flotation costs are anticipated.
 
 
c.
 
A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of
13%. A new issue would net the company 90% of the $1,125 market value. The bonds
mature in 20 ye
ars, and the firm’s average tax rate is 30% and its marginal tax rate is
34%.
 
 
d.
 
A preferred stock paying a 7% dividend on a $125 par value. If a new issue is offered, the
company can expect to net $90 per share.
 
 
e.
 
Internal common equity where the curre
nt market price of the common stock is $38.
The expected dividend this coming year should be $4, increasing thereafter at a 5%
annual growth rate. This corporation’s tax rate is 34%.
 
2
.
 
The capital structure for the Bias Corporation is provided below. The company plans to maintain
its debt structure in the future. If the firm has a 6% after
-
tax cost of debt, a 13.5% cost of
preferred stock, and a 1
9% cost of common stock, what is the firm’s weighted cost of capital?
 
Capital Structure ($000)
 
Bonds
 
$1,100
 
Preferred stock
 
250
 
Common stock
 
3,700
 
 
$5,050
 
2
 
 
3
.
 
Gecewich, Inc. is considering a major expansion of its
product line and has estimated the
following cash flows associated with such an expansion. The initial outlay associated with the
expansion would be $2,500,000, and the project would generate incremental after
-
tax cash
flows of $750,000 per year for 6 year
s. The appropriate required rate of return is 11%.
 
 
a.
 
Calculate the net present value.
 
 
b.
 
Calculate the profitability index.
 
 
c.
 
Calculate the internal rate of return.
 
 
d.
 
Should this project be accepted?
 
4
.
 
B
ert’s, makers of gourmet corn dogs, is considering the purchase of a new plastic stamping
machine. This investment requires an initial outlay of $150,000 and will generate after
-
tax cash
inflows of $25,000 per year for 10 years. For each of the listed requ
ired rates of return,
determine the project’s net present value.
 
 
a.
 
The required rate of return is 9%.
 
b.
 
The required rate of return is 15%.
 
c.
 
Would the project be accepted under part a or b?
 
d.
 
What is the project’s internal rate of return?
 
5
.
 
The Unk’s Farms Corporaton is considering purchasing one of two fertilizer
-
herbicides for the
upcoming year. The more expensive of the two is the better and will produce a higher yield.
Assume these projects are mutually ex
clusive and that the required rate of return is 10%. Given
the following after
-
tax net cash flows:
 
Year
 
Project A
 
Project B
 
 
0
 
$650
 
$4,000
 
 
1
 
800
 
5,500
 
a.
 
Calculate the net present value.
 
b.
 
Calculate the profitability index.
 
c.
 
Calculate the internal ra
te of return.
 
d.
 
If there is no capital
-
rationing constraint, which project should be selected? If there is a
capital
-
rationing constraint, how should the decision be made?
 
6
.
 
A recent business graduate of Dewey University is planning to open a new wholesaling
operation. His target operating profit margin is 25%. His unit contribution margin will be 40% of
sales. Average annual sales a
re forecast to be $4,250,000.
 
a.
 
How large can fixed costs be for the wholesaling operation and still allow the 25%
operating profit margin to be achieved?
 
b.
 
What is the break
-
even point in dollars for the firm?
 
7
.
 
The common stock for Oxford, Inc. is curr
ently selling for $22.50. Dividends last year were $.80.
Flotation costs on issuing stock will be 10% of market price. The dividends and earnings per
share are projected to have an annual growth rate of 16%. What is the cost of internal common
equity for O
xford?
 
 
 
The common stock for Oxford, Inc. is curr
ently selling for $22.50. Dividends last year were $.80.
Flotation costs on issuing stock will be 10% of market price. The dividends and earnings per
share are projected to have an annual growth rate of 16%. What is the cost of internal common
equity for O
xford?
 
3
 
 
 
8
.
 
The R. T. Kleinman
 
Corporation is considering selling one of its old assembly machines. The
machine, purchased for $40,000 five years ago, had an expected life of 10 years and an expected
salvage value of zero. Assume Kleinman uses simple straight
-
line depreciation, creatin
g
depreciation of $4,000 per year, and could sell this old machine for $45,000. Also assume a 34%
marginal tax rate.
 
 
a.
 
What would be the taxes associated with this sale?
 
b.
 
If the old machine were sold for $40,000, what would be the taxes associated with
this
sale?
 
c.
 
If the old machine were sold for $20,000, what would be the taxes associated with this
sale?
 
d.
 
If the old machine were sold for $17,000, what would be the taxes associated with this
sale?
 
9
.
 
You have developed the following analytical income statement for your corporation. It
represents the most recent year’s operations, which ended yesterday.
 
Sales
 
$40,000,000
 
Variable costs
 
16,000,000
 
Revenue before fixed costs
 
$24,000,000
 
Fixed costs
 
10,000,000
 
EBIT
 
$14,000,000
 
Interest expense
 
1,150,000
 
Earnings before taxes
 
$12,850,000
 
Taxes
 
3,750,000
 
Net income
 
$9,100,000
 
Your supervisor in the controller’s office has just handed you a memorandum asking for written
responses to the following questions:
 
a.
 
At
 
this level of output, what is the degree of operating leverage?
 
b.
 
What is the degree of financial leverage?
 
c.
 
What is the degree of combined leverage?
 
d.
 
What is the firm’s break
-
even point in sales dollars?
 
e.
 
If sales should increase by 20%, by what p
ercent would earnings before taxes (and net
income) increase?
 
10
.
 
Heritage Chain Company will produce 175,000 units next year. All of this production will be sold
as finished goods. Fixed costs will total $335,000. Variable costs for this firm are relatively
predictable at 80% of sales.
 
a.
 
If Heritage Chain wants to ach
ieve an earnings before interest and taxes level of
$270,000 next year, at what price per unit must it sell its product?
 
b.
 
Based on your answer to part a, set up an analytical income statement that will verify
your solution.
 
 

Subject Business
Due By (Pacific Time) 06/24/2013 12:00 am
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