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%.
Explain. c. Should the nominal cost of debt or the effective annual rate be used? Explain. d. How valid is an estimate of the cost of debt based on the yield to maturity of Ace’s debt (ignore the call provision in 3 years) if the firm plans to issue 20-year long-term debt? e. What other methods could be used to estimate the cost of debt if, for example, Ace’s outstanding debt had not been traded recently?
The elimination of short-term debt shows that Home Depot, Incorporated is not using such debt to meet short-term cash requirements. The cause of the elimination of short term debt may be caused by the improved cash position and the economy. Home Depot, Incorporated’s financial position and ratios look good. In fiscal year 2008, the long-term debt-to-equity ratio was 54.4% compared to fiscal year 2007’s 64.3%. In fiscal year 2008, the return on invested capital of continuing operations was 9.5% compared to fiscal year 2007’s 13.9%.
Verizon Communications averages fairly close to the industry average in most areas of financial ratios. The biggest discrepancy is in its debt to equity ratio. Debt to equity ratio indicates the feasibility that a company will be able to pay off its’ debts in “the event of a liquidation” (investinganswers.com, 2014). According to investinganswers.com, “a high debt to equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations” (2014). With a debt to equity ratio as above average as Verizon Communications’, the probability that the company will be able to pay off its’ debts if a liquidation was to occur is unlikely.
“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
The constant hurdle rate results in a flat line and doesn’t correlate risk with return. With nearly $2 billion being invested in upcoming capital projects, the discount rate to be used within the firm needs to be more accurate, account for risk, and not destroy shareholder’s value. Currently the firm is not accurately assessing their future. Telecommunications Services is returning capital below the corporate hurdle rate and Products & Systems is above the rate, but the firm is not factoring in riskiness of the segments individually. Question 2 [pic] Use CAPM model to estimate their cost of equity.
In 2011 the current ratio was 1.86. By 2012, it decreased to 1.77 rating in the lower second quartile group in the industry. That said, Company G’s ability to repay its debt is consistent with showing a weakness from year to year based on the industry’s quartiles of 3.1 with a strong ability to cover liabilities 2.1 at the median to 1.4 stating a weakness. As such, this is an area of concern. 2.
Although the bonds have the lowest cost of issuance among the choices, its Net Present Value (NPV) of $219 million is lower than the HUD 242. The Business Dictionary defines NPV as “the difference between the present value of the future cash flows from an investment and the amount of investment” (Business Dictionary, p. 1, 2012). The collateral requirement for the bonds is also much higher than the HUD 242. Because the collateral includes escrow on ECH’s gross receivables, ECH possibly may have less control over its future revenue stream. The simulator also took note of the four-year time frame of the expansion project versus the three-year spending limit on the bonds.
Using product offered by Continental Bank would require a higher cost for J&L, and illiquid compared with NYMEX. However, they won’t need to post a margin at the beginning of the contract. The use of a monthly average price a net would be an advantage to J&L. 3. Using the estimate of 4.5 million gallons per month, how would you construct a futures hedge for the next 12 months?
FM421 – Applied Corporate Finance Case Study: Tottenham Hotspur plc 25th January 2013 201128545 201125438 201121479 201119785 201130179 201129057 1) Valuation based on Discounted Cash Flow In order to perform a DCF approach we first calculated the WACC and then the FCF. WACC WACC= rd(1-t)*[D/(D+E)] + re*[E/(D+E)] t = 35% (from the case, exhibit 1) rd= rf= 4.57% (exhibit 1, assuming β of debt = 0) Net Debt/EV=0.11 (EV = Market Value of Equity + Net Debt) re= rf+βe*(rm-rf)= 4.57%+ 1.29*5%=11.02 (under CAPM assumptions) [E/(D+E)]= 1-0.12=0.88 WACC= (0.0457)*(1-0.35)*0.11 + (0.1102)*0.89= 10.12% Free Cash Flow FCF= EBIT(1-t) – CAPEX – ΔNWC + Depreciation As EBIT and tax rate are given we have to calculate the ΔNWC. ΔNWC=Inventory + A/R – A/P As accounts receivable and payable are sensitive to sales changes, we assume that A/P and A/R change but their ratio to sales remains constant over time. We assume the same for the ratio of inventory/merchandise sales. (A/P)/Sales= 19.99/74.1 = 0.26977058 (A/R)/Sales= 64.4/74.1 = 0.869095816 Inventory/Merchandise sales= 1.17/5.2=0.225 We then multiplied the ratios for the equivalent factors (sales and merchandise sales) on the pro-forma balance sheet for the years between 2008 and 2020 and found the ΔNWC for every year.