Note also that the interest rate we must use is a simple discount rate. The data can be displayed on a time line. | | | | | $800,000 | | | | 0 | 39 | 123 | | $P | | | | | P | = | Price | = | unknown | | S | = | Face value | = | $800,000 | | d | = | Simple discount rate (decimal) | = | 4.7 | 100 | | = | 0.047 | | t | = | Time period (years) | = | 84 | 365 | | = | 0.23013699... years | | The step-by-step calculation is: P | = | S(1 - dt) | | | = | 800,000(1 - 0.047 x 0.23013699...) | | | = | 800,000 x 0.98918356... | | | = | $791,346.85 | Rounded as last step | c)This is not
“We intend to retain our earnings to finance the expansion of our business and do not anticipate paying cash dividends in the foreseeable future……Dividend Payments are restricted by our bank credit facilities to 50% of our net income for the immediately preceding fiscal year.”i Cash Flow Statement Analysis: Krispy Kreme uses the Indirect Method of reporting Operating Cash Flows. In 2001 the cash provided by operating activities was $32,112 (Thousand), while the Cash dividends was $7,005 (Thousand). Cash provided by operating activities exceeded the cash paid for dividends. The company did not
Table A Use of fixed overhead resources by product line Productionruns(not$) Numberofsalesreps(not$) Total 100 25 ProdA 65 15 ProdB 35 10 Profitability will be reviewed in two parts, first we will analyze the contribution margin, and then product line profitability overall, including fixed costs. Contribution margin is the sales price less the variable costs, that is, the costs that go up with each extra unit produced ("Contribution margin", n.d.). In this case, there are four variable costs as shown in Table B below: direct material, direct labor, variable overhead, and variable selling and administrative costs. Contribution margin is important because it reveals how much profit is generated because of the sales price and incremental costs of making the units. That is, the profit at the unit level.
Debt Breakpoint Debt Breakpoint= $ amount of senior Debt available% common Long term debt in capital structure+D&A Expense $ amount of senior debt=$41,000,000 in this case Note that long term debt in capital structure is wLtd in wstd+wLtd+wp+we=1. In our example, Debt Breakpoint= 41,000,000.27+8,249,000=160,100,852 3. Determining the capital budget (Please note that the WACC below will differ slightly from those done in class but the results are the same as far as the budget goes) Project | IRR | Value of Project (mil $) | Cumulative Value (mil $) | Breakpoint(mil $) | WACC % | A | 18.3% | $3 | $3 | | 11.49% | B | 17.6% | $3 | Choose A since A and B are mutually exclusive | GP 1 | 17.3% | $40 | $43 | | 11.49% | FL | 15.7% | $65 | $108 | $69 | 12.38% | GP2 | 14.0% | $50 | $158 | | 12.38% | LA | 13.5% | $32 | $190 | $160 | 12.75% | TX | 12.5% | $47 | $237 | | 12.75% | GP3 | 11.5% | $20 | $257 | | 12.75% | Note that TX and GP3 have IRR’s less than the WACC of 12.75% and therefore should not be accepted as project in the capital budget. Note that A and B are mutually exclusive so we choose the one with the higher IRR. Choose A, GP1, FL, GP2 and LA as part of the Capital Budget since all have IRRs greater than 12.75%.
Problem #6, p. 221 in text. (You do not need to “derive” the Cournot equilibrium. Just solve for the values using the appropriate formulas.) Market demand: P = 400 – 2Q Unit cost production = 40 a. Firm’s quantity in equilibrium is : q1 = (a-c)/3b = (400-40)/(3*2)= 60 unit = q2 Firm’s revenue: P= 400 – 2 * (2*60) = $160 Firm’s profit = (60*160) – (60*40) = $7200 b. Monopoly output: MR=400-4q MC=40 MR=MC 400 – 4q = 40 then q=90 unit The reason that producing on half the monopoly output (90*1.5 = 135) a Nash equilibrium outcome is that it will exceed the market demand of Nash equilibrium ($160).
The Corporate Value Model, also known as Free Cash Flow model also has it´s limitation regarding to the spending today and not in the past. Lisa´s price: $18.36 Joe´s price: $ 44.98 Dan´s average price: $ 47.12 Average of al 3 models: $36.78 Recent Price of Company A:
Problem 3.2 A – How does the income statement differ from the one presented in Exhibit 3.1 The largest difference between income statement for this question in compared to Exhibit 3.1 B – Did Best Care spend $367,000 on new fixed assets during the fiscal year 2011? If not, what is the economic rationale behind its reported depreciation expense? No, they were not new fixed assets for 2011. In accordance with GAAP, Best Care would derive by taking the historical cost, less the salvage value and dividing by the life expectancy in years. In addition it is considered a non-cash expense since the actual payment could have occurred many years before the expense is calculated.
Both these should be in percentage. The costs taken into consideration in the formula should be the costs after the tax. We already calculated this cost at the second question, but only for the long term debt. So now we will calculate it for the short term interest bearing debt, $76,132,000, the formula used in the calculation is the same as in question 2. The result is this one: 0.082 (1-0.3879) = 0.05019.
CanGo is not considering the major benefit of an IPO, which is increased capital that comes from investors. If CanGo does not take this form of increased capital into account it will limit their growth. Recommendation 3 Offer an IPO CanGo should offer an IPO, allowing for increased capital. By offering an IPO CanGo will able to take a big step in the right direction of expanding their new ventures. Investors investing in an IPO are aware that it takes time to see a solid return/profit when a company is expanding into new ventures and that risks are involved.
Should Mr. Jones merge Johnson Services with Smithon? What type of merger or acquisition would be best (i.e., A type, etc.)? Yes, a Type A reorganization which is a merger would be best for this acquisition. A merger can be accomplished without the use of cash. A type A merger would increase market power which would increase market share.