This assignment will familiarize you with various terms used in finance and financial management. After completing this assignment, you will understand:

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This assignment will familiarize you with various terms used in finance and financial management. After completing this assignment, you will understand:

The role of a finance manager in an organization.

The finance manager’s goals and objectives.

The challenges faced by a finance manager on a daily basis.

Why ethical behavior is so important in this field.

Instructions

Complete the following problems and answer the following questions, as applicable:

Define the terms finance and financial management, and identify the major sub-areas of finance.

“What are the three basic forms of business ownership? What are the advantages and disadvantages to each” (Cornett, Adair, & Nofsinger, 2014, p. 21)?

Define the terms agency relationship and agency problem, and list the three approaches to minimize the conflict of interest resulting from the agency problem.

“Why is ethical behavior so important in the field of finance” (Cornett, Adair, & Nofsinger, 2014, p. 21)?

“Does the goal of shareholder wealth maximization conflict with behaving ethically? Explain” (Cornett, Adair, & Nofsinger, 2014, p. 21).

Write your responses in a Microsoft Word document and submit it as an attachment in the assignment area. Prior to submitting your assignment, review the Introduction to Financial Management Scoring Guide to ensure you have met all of the requirements and as a self-assessment of your work.

Reference

Cornett, M. M., Adair, T. A., & Nofsinger J. (2014). M: Finance (2nd ed.). New York, NY: McGraw-Hill.

Scoring Guide

https://courserooma.capella.edu/bbcswebdav/institution/BUS/BUS3062/Version1013/Scoring_Guides/u01a1_scoring_guide.htm

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If you use Excel to calculate some portions of this assignment (which is fine), be sure the final report is printable and readable in standard format (i.e., on an 8.5 x 11 page)

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If you use Excel to calculate some portions of this assignment (which is fine), be sure the final report is printable and readable in standard format (i.e., on an 8.5 x 11 page). Please print out your Excel file (in its exact form) prior to sending it to be sure it is well organized, formatted properly, and doesn’t print out with multiple blank pages or separated columns .

 

 

1. At the current time Warren Industries can issue 15-year, $1,000 par-value bonds paying annual interest at a 12% coupon rate. As a result of current interest rates, the bonds can be sold for $1,010 each. Flotation costs of $30 per bond will be incurred in the process (which implies that f = 2.97%, or 0.0297 in decimal form) and the firm is in a 40% tax bracket.

(a) Find the net proceeds from the sale of each bond for Warren Industries.

(b) Calculate the before-tax and the after-tax cost of debt for Warren Industries.

 

2. Drywall Systems, Inc., is presently in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the company that different maturities will carry different coupon rates and sell at different prices. Drywall Systems must choose among several alternatives. In each case, the bonds will have a $1,000 par value and flotation costs will be $30 per bond. This implies that the firm will net $970 per bond, before the adjustment for the premium (+) or discount (-). The company is taxed at a rate of 40%. Calculate the after-tax costs of financing with each of the following alternatives.

Alternative Coupon Rate Time to Maturity Premium (+) or Discount (-)
A 9% 16 years + $250
B 7% 5 years + $50
C 6% 7 years Par
D 5% 10 years – $75

 

 

3. Gem Systems has recently issued preferred stock. The stock has a 12% annual dividend based on a par value of $100 per share. The stock is currently selling for $97.50 per share in the secondary market (so that Po = $97.50). Finally, flotation costs of $2.50 must be paid for each new share Gem Systems issues.

(a) Calculate the cost of preferred stock based on the outstanding issue, given the current market price.

(b) If Gem Systems sells a new issue of preferred stock carrying a par value of $100 but with an annual dividend of 10% of par, what is the cost of this newly issued preferred stock if the firm nets $90.00 per share after flotation costs?

 

4. Calculate the cost of preferred stock (rPS) for each of the following:

Preferred Stock Par Value Current Price (Po) Flotation Cost Annual Dividend

(% of Par)
A $100 $101 $9.00 11%
B $40 $38 $3.50 8%
C $35 $37 $4.00 $5.00
D $30 $26 5% of par $3.00
E $20 $20 $2.50 9%

 

5. JPM Corporation common stock has a beta of 1.2. The risk-free rate is 6%, and the market return is 11%.

(a) Derive the risk premium on JPM common stock.

(b) Determine JPM’s cost of common equity using the CAPM.

 

6. Reynolds Textiles wants to measure its cost of common equity. The firm’s stock is currently selling for $57.50 per share. The firm expects to pay a $3.40 dividend at the end of 2011 (so assume that

D1 = $3.40 for purposes of calculation). The dividends for the last 5 years are as follows:

Year Dividend

 

2010 $3.10

2009 $2.92

2008 $2.60

2007 $2.30

2006 $2.12

After incurring flotation costs, Reynolds Textiles expects to net $52 per share on a new issue.

(a) Determine the growth rate of dividends (g).

(b) By applying the constant-growth valuation model, determine the cost of retained earnings common equity (rs).

(c) By applying the constant-growth valuation model, determine the cost of newly-issued common equity (re).

 

7. Brite Lighting Corporation wants to investigate the effect on its cost of capital based on the rate at which the company is taxed. The firm wishes to maintain a capital structure of 30% debt, 10% preferred stock, and 60% common stock. The cost of financing with retained earnings is 14% (i.e., rs = 14%), the cost of preferred stock financing is 9% (rps = 9%), and the before-tax cost of debt is 11% (rd = 11%). Calculate the weighted average cost of capital (WACC) given the tax rate assumptions in parts (a) to (c) below.

(a) Tax rate = 40%.

(b) Tax rate = 35%.

(c) Tax rate = 25%.

 

8. Westerly Manufacturing has compiled the information shown in the following table:

Source of Capital Book Value Market Value After-tax Cost
Long-Term Debt $4,000,000 $3,840,000 6.0%
Preferred Stock $40,000 $60,000 13.0%
Common Stock Equity $1,060,000 $3,000,000 17.0%
Totals $5,100,000 $6,900,000

(a) Calculate the firm’s weighted average cost of capital (WACC) using book value weights.

(b) Calculate the firm’s weighted average cost of capital (WACC) using market value weights.

(c) Compare your answers found in parts (a) and (b) and briefly explain the differences. Other things equal, would you recommend that Westerly Manufacturing rely on its book value weights or market value weights in determining its WACC?

9. To help finance a major expansion, Delano Development Company sold a noncallable bond several years ago that now has 15 years to maturity. This bond has a 10.25% annual coupon, paid semiannually, it sells at a price of $1,025, and it has a par value of $1,000. If Delano’s tax rate is 40%, what component cost of debt should be used in the WACC calculation?
 

10. Roxie Epoxy’s balance sheet shows a total of $50 million long-term debt with a coupon rate of 8.00% and a yield to maturity of 7.00%. This debt currently has a market value of $55 million. The balance sheet also shows that that the company has 20 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million. The current stock price is $8.25 per share; stockholders’ required return, rs, is 10.00%; and the firm’s tax rate is 40%. Based on market value weights, and assuming the firm is currently at its target capital structure, what WACC should Roxie use to evaluate capital budgeting projects?

 

11. Bruner Breakfast Foods’ (BBF) balance sheet shows a total of $20 million long-term debt with a coupon rate of 8.00% (assume each bond to have a maturity value, M, of $1,000). The yield to maturity on this debt is 10.00%, and the debt has a total current market value of $18 million. The balance sheet also shows that that the company has 10 million shares of stock, and total of common equity (common stock plus retained earnings) is $30 million. The current stock price is $4.50 per share, and stockholders’ required rate of return, rs, is 12.25%. The company recently decided that its target capital structure should have 50% debt, with the balance being common equity. The tax rate is 40%. Calculate WACCs based on target, book, and market value capital structures (Note: I am asking for three (3) separate WACC values here).

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Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pre-tax income of $430,000 this year

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Week 5 – Assignment Problems

P1. MACRS depreciation expense and accounting cash flow

Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pre-tax income of $430,000 this year. The company’s financial manager is considering the timing of a purchase of new computerized lens grinders. The grinders will have an installed cost of $80,000 and a cost recovery period of 5 years. They will be depreciated using the MACRS schedule.

a. If the firm purchases the grinders before year end, what depreciation expenses will it be able to claim this year? (Use Table 10.4 on page 308 of the Brooks text, and you can round the percentages to the nearest, e.g., 33.33% to 33%).

b. If the firm reduces its reported income by the amount of the depreciation expense calculated in part a, what tax savings will result?

c. Assuming that Pavlovich does purchase the grinders this year and that they are its only depreciable asset, use the accounting definition given by the Equation:

FCF = OCF – Net fixed asset investment (NFAI) – Net current asset investment (NCAI)

to find the firm’s cash flow from operations for the year.

Where: OCF = [EBIT x (1-T)] + Depreciation

NFAI = change in net fixed assets + Depreciation

NCAI = change in current assets – change in (accounts payable + accruals)

P2. Finding operating and free cash flows

Consider the following balance sheets and selected data from the income statement of Keith Corporation, then prepare answers for the accompanying questions:

Keith Corporation Balance Sheets

Assets 12/31/2009 12/31/2008
Cash $ 1,500 $ 1,000
Marketable securities 1,800 1,200
Accounts receivable 2,000 1,899
Inventories 2,900 2,800
Total current assets $ 8,200 $ 6,800
Gross fixed assets $ 29,500 $ 28,100
Less: Accumulated depreciation 14,700 13,100
Net fixed assets $ 14,800 $ 15,100
Total assets $ 23,000 $ 21,800

Liabilities and Stockholder’s Equity

Accounts payable $ 1,600 $ 1,500
Notes payable 2,800 2,200
Accruals 200 300
Total current liabilities $ 4,600 $ 4,000
Long-term debt 5,000 5,000
Total liabilities $ 9,600 $ 9,000
Common stock $ 10,000 $ 10,000
Retained earnings 3,400 2,800
Total stockholder’s equity $ 13,400 $ 12,800
Total liabilities and owners equity $ 23,000 $ 21,800

Keith Corporation Income Statement Data (2109)

Depreciation expense $ 1,600
Earnings before interest and taxes 2,700
Interest expense 367
Net profits after taxes 1,400
Tax rate 40%

a. Calculate the firm’s accounting cash flow from operations for the year ended December 31, 2009, using: Cash flow from operations = net profits after tax + depreciation

b. Calculate the firm’s net operating profit after taxes (NOPAT) for the year ended December 31, 2009, using Equation: NOPAT = EBIT x (1 – T)

c. Calculate the firm’s operating cash flow (OCF) for the year ended December 31, 2009, using Equation: OCF = NOPAT + Depreciation

d. Calculate the firm’s free cash flow (FCF) for the year ended December 31, 2009, using the Equation in P1, above.

e. Interpret, compare, and contrast your cash flow estimates in parts a, c, and d.

P3. Cash budget – Basic

Grenoble Enterprises had sales of $50,000 in March and $60,000 in April. Forecast sales for May, June, and July are $70,000, $80,000, and $100,000, respectively. The firm has a cash balance of $5,000 on May 1 and wishes to maintain a minimum cash balance of $5,000. Given the following data, prepare and interpret a cash budget for the months of May, June, and July.

1) The firm makes 20% of sales for cash, 60% are collected in the next month, and the remaining 20% are collected in the second month following sale.

2) The firm receives other income of $2,000 per month.

3) The firm’s actual or expected purchases, all made for cash, are $50,000, $70,000, and $80,000 for the months of May through July, respectively.

4) Rent is $3,000 per month.

5) Wages and salaries are 10% of the previous month’s sales.

6) Cash dividends of $3,000 will be paid in June.

7) Payment of principal and interest of $4,000 is due in June.

8) A cash purchase of equipment costing $6,000 is scheduled in July.

9) Taxes of $6,000 are due in June.

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Looking for someone familiar with “MyStatLab” and can go and log-in and take my last 2 quizzes and boost up my homework assignments to get them up to 100’s.  Willing to negotiate price.

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Looking for someone familiar with “MyStatLab” and can go and log-in and take my last 2 quizzes and boost up my homework assignments to get them up to 100’s.  Willing to negotiate price.  Thanks.

The post Looking for someone familiar with “MyStatLab” and can go and log-in and take my last 2 quizzes and boost up my homework assignments to get them up to 100’s.  Willing to negotiate price. appeared first on Infinitessays.org.