2. a. Critique Ace Repair’s current method of estimating its before-tax cost of debt. b. Is the earnings yield (E/P) an appropriate measure of the firm’s cost of equity? 3. a.
a) What are the consequences of telling the president of your gross miscalculation? In order to determine the sales and income projection, it is useful to forecast the budget based on prior performance of the company. The business performance of the current year will shows how the company is actually performed and this is a good indication to expect the company will perform better in future. As to obtain an accurate sales projection, we collected all the information from the company because each area of business operation might have a separate budget. For example, Fernetti Conductor has a specific budget for advertising, purchasing, sales production and cash budget.
Project the operating assets that will be necessary to support the level of operations projected in steps 1 and 2. 4. Project the financial leverage, financial assets, and common equity capital that will be necessary to finance the net operating assets projected in step 3. 5. Project nonrecurring gains or losses and derive projected income before tax.
Solvency ratios this is one of many ratios used to measure a company’s ability to meet long-term obligations. The solvency ratio measures the size of a company’s after-tax income, excluding non-cash depreciation expenses, as compared to the company’s total debt obligations. It provides a measurement of how likely a company will be to continue meeting its debt obligations. Users who may be interested in each type of ratio? Liquidity ratios are used by suppliers and other trade creditors.
Memorandum To: Kimi Ford From: xxxxx Date: 6 July, 2001 Subject: Nike’s cost of capital The firm’s cost of capital is the opportunity cost of an investment, which provides a benchmark of firm uses of capital against the capital market alternatives. It is important to estimate a firm’s cost of capital because there will be no economic value created for the investors if the firm earn below its cost of capital. In another word, cost of capital is the minimum required rate of return set by the investors. WACC, as a common practice of expressing a firm’s coast of capital, calculates the weighted average of the cost of individual sources of capital employed. My evaluation of Nike’s share price is based on Joanna Cohen’s analysis.
Since debt and equity levels are closely related there is an analysis called the “DuPont model” that systematically breaks ROE into components so that each can be evaluated. ROE = NI x EBT x EBIT x Sales x Total assets EBT EBIT Sales Total assets Common equity EBT = earnings before taxes. The first ratio measures the proportion of earnings before tax that is kept by the company. EBIT = earnings before interest and taxes. The second ratio measures the effect of interest; it indicates the proportion of earnings before interest and tax that is retained after paying interest.
Those financial statements are income statement, retained earnings statement, balance sheet, and cash flow statement (Weygandt, 2008). The income statements show operations results of the revenues, expenses, net profit, or net loss for the accounting period. The information obtained from the retained earnings statement listing the revenue followed by the expenses is used to prepare it. The income statement reflects the organization’s success through its profits. The retained earnings statement reconciles the beginning and ending balances of the retained earnings.
Answers for 11-12-13 11- Each firm has an optimal capital structure, defined as that mix of debt, preferred, and common equity that causes its stock price to be maximized. A value-maximizing firm will determine its optimal capital structure, use it as a target, and then raise new capital in a manner designed to keep the actual capital structure on target over time. The target proportions of debt, preferred stock, and common equity, along with the costs of those components, are used to calculate the firm’s weighted average cost of capital, WACC. The weights could be based either on the accounting values shown on the firm’s balance sheet (book values) or on the market values of the different securities. Theoretically, the weights should be based on market values, but if a firm’s book value weights are reasonably close to its market value weights, book value weights can be used as a proxy for market value weights.
ROI based bonus may rob the future, who want to invest in assets if that reduce the bonus. I recommend this company to use RI or EVA instead of ROI and to control the investments separately using NPV and capital turnover measures. The bonus should be based on the budgeted income level, the RI target. The problem with the inventory level can’t be controlled with ROI management. If the company change to RI/EVA it will be possible to negotiate relevant inventory levels in the budget process.
Estimate the after-tax return on capital for the operating portion of this period (Years 3-12) C. Based upon the after-tax return on capital, would you accept or reject this project? A. Operating Income for Nike Apparel: In years 3 and 4, the project will lose money but Nike will offset these losses against other profits to save taxes. There are a number of allocation mechanisms that can be used to compute operating income, and the return on capital is affected by decisions on allocation. For instance, I allocated the entire investment in the distribution system expansion to this project.