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F - M Exercises: Requirements

Rollins Corporation is considering financing a $4 million capital structure with either 80% debt or 50% equity. The cost of debt is 12% and new common stock costs $50 per share. The firm's tax rate is 40% and expected EBIT is $500,000. To choose the best alternative, the assistant calculates the break-even EBIT and sales levels between the two options and determines which is better if the debt interest rate increases to 15% for debt ratios over 60%. The assistant provides requirements and calculations to help evaluate two capital budgeting projects with different cash flows and risks, and analyzes the financial position and capacity of XYZ Corporation based on its balance sheet, income statement and expectations for

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43 views4 pages

F - M Exercises: Requirements

Rollins Corporation is considering financing a $4 million capital structure with either 80% debt or 50% equity. The cost of debt is 12% and new common stock costs $50 per share. The firm's tax rate is 40% and expected EBIT is $500,000. To choose the best alternative, the assistant calculates the break-even EBIT and sales levels between the two options and determines which is better if the debt interest rate increases to 15% for debt ratios over 60%. The assistant provides requirements and calculations to help evaluate two capital budgeting projects with different cash flows and risks, and analyzes the financial position and capacity of XYZ Corporation based on its balance sheet, income statement and expectations for

Uploaded by

AA BB MM
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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F .

M Exercises
1- Rollins Corporation has a target capital structure consisting of 20 percent
debt, 20 percent preferred stock, 30 percent common stock and 30 percent
retained earnings. Its bonds have a 6 percent coupon, paid semiannually
and sell for $940. The firm could sell $100 preferred stock that pays a 12
percent annual dividend, but flotation costs of 5 percent would be incurred.
Rollins’ beta is 1.2, the risk-free rate is 5 percent, and the market return is
10 percent. Rollins is a constant growth firm that just paid a dividend of
$2.00, sells common stock for $27.00 per share, and has a growth rate of 8
percent. The firm’s policy is to use a risk premium of 4 percentage points
when using the bond-yield-plus-risk-premium method to find k co. Flotation
costs on new common stock is 10 percent, and the firm’s marginal tax rate
is 40 percent.
What is the cost of capital WACC?

2- The Jackson Company has just paid a dividend of $3 per share on its
common stock, and it expects this dividend to grow by 10 percent per year,
indefinitely. The firm has a beta of 1.50; the risk-free rate is 10 percent;
and the expected return on the market is 14 percent. The firm’s investment
bankers believe that new issues of common stock would have a flotation
cost equal to 5 percent of the current market price.
What is the cost of common stock Kco?

3- Longstreet Corporation has a target capital structure that consists of


$30,000 debt, $30,000 common stock, $20,000 retained earnings, and
$20,000 preferred stock. The tax rate is 30 percent. The last dividend was
$5, the current common stock price is $75, and the growth rate of the
company is 10 percent. If the company raises capital through a new equity
issuance, the flotation costs are 10 percent. The return on preferred stock is
9 percent and the interest on debt is 7 percent, the market price of preferred
stock is $80. (Assume debt and preferred stock have 6% flotation costs.)
What is the weighted average cost of capital at the firm’s optimal capital
budget?

4- Rollins Corporation is targeting a new capital structure with $4000,000 the


firm has two alternatives to finance its capital structure, the first alternative
depend on 80% debt, but the second alternative depend on 50% equity. The
market price of a new common stock is $50/share, the interest rate on debt is
12% . The firm's marginal tax rate is 40% and the expected earnings before
interest and tax is $500,000.
Requirements:
1- Choose the right alternative.
2- What is the EBIT break point between the two alternatives?

~1~
3- If the selling cost is $500,000, administration cost $400,000 , depreciation
$100,000 and cost of goods sold is 80% What is the sales break point between
the two alternatives?
4- If the lenders increase the interest rate to 15% if the firm increases its debt
ratio more than 60% which alternative is better now?

5- Your company is considering a new project in this year's capital budget. The
financial manger introduce two projects A & B, The cash outflow for project
A is $7,600 and the cash outflow for project B is $15,000. The firm has
two discount rate 10% and 12%. The risk free rate is 5%, the market return is
10%, and the cash inflows for the two projects according to the economy
conditions are as follows:
Economy Probabilities CFin (A) CFin (B)
Booming 40% $5,000 $8,000
Normal 20% $2,000 $5,000
Reduction 40% (1,000) (3,000)
Project Life 5 years 5 years
Requirements:
1- Choose the right project using the C.V.
2- Choose the right project using the suitable discount rate.
3- Choose the right project using the adjusted discount rate.
4- Choose the right project using the adjusted factor.

6- XYZ corporation is considering a new capital budgeting decision but it has


irregular cash flow for the two projects, the firm WACC is 8% and the cash
flows for the projects are as follows:
Time (years) (1) (2) (3) (4) (5)
Project L 20,000 - 50,000 - 40,000 80,000 30,000
Project S - 30,000 - 40,000 50,000 20,000 20,000
Choose the right project.

7- IBM Corporation is planning to have a new capital structure with $2000,000


the firm has two alternatives to finance its new capital structure, the first
alternative depend on 70% debt, but the second alternative depend on 60%
equity. The market price of a new common stock is $100/share, the interest
rate on debt is 10% . The firm's marginal tax rate is 20% and the expected
earnings before interest and tax according to the economy condition is
$240,000.

~2~
8- Assume you have the following data about XYZ corporation at 31/12/2013:
Long .T. Debt (10%) $ 500m Sales $ 8000m
Land $ 350m COGS 80%
Depreciation $ 200m Tax rate 35%
Accounts Receivable $ 600m Inventories $1200m
Short .T. Investments $ 50m Accruals $ 800m
Accounts Payable $ 700m Retained Earnings $ 400m
Notes Payable (10%) $ 200m Cash $ 800m
Machines $ 400m Equipment $ 600m
Capital ( common stock) ????? Selling Cost $ 500m
Administration Cost $ 300m Dividends $ 137.8m
Interest on L. T. debt & Notes payable 10%. Requirements:
1- What is the TFN and What is the expected total assets for 2013 if sales will
increase by 40% during 2014?( Assume the firm works at full capacity level)
( use the formula).
2- What is the firm new CL, Long T. D, and Equity?
3- What is the AFN in 2014 use the last assumption? (Use the formula).
4- If the firm currently uses only 80% of its capacity, What is the AFN?.
5- If the firm can’t get any money from outside by how much the firm can
increase its sales?
6- What is the AFN in 2014 use the last assumption? (Use Pro forma financial
statements).

9- Assume that you have the following information about the Balance sheet & Income
statement of XYZ Corporation :
B.S of XYZ CO at 31/12/ 2012
Assets Liabilities & Equity
Cash 300,000 Accounts Payable 500,000
Accounts Receivable 600,000 Accruals 300,000
Inventories 500,000 Notes Payable (10%) 400,000
Short .T. Investments 300,000
Long .T. Debt (12%) 450,000
Capital ( common stock) 800,000
Fixed Assets 1,300,000 Retained Earnings ??????
======= =======
Total Assets 3,000,000 Total Claims ??????
======= ======
The firm expect that sales will increase by 40% during 2013, The current sales is $ 6m
, its earnings before interest & taxes is $ 394,000 , The payout ratio 60% and the tax
rate is 50%. Requirements:
1- What is the TFN and What is the expected total assets for 2013?( Assume
the firm works at full capacity level)( use the formula).
2- What is the AFN in 2013? ( use the formula).What is the expected
financial structure?
3- What is the AFN in 2013? ( use the Pro forma financial statements)
4- If the firm currently uses only 75% of its capacity, What is the AFN?.
5- If the firm can’t get any money from outside by how much the firm can
increase its sales?.

~3~
~4~

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