Which of the following statements is CORRECT? Answer: e. If the interest rate the companies pay on their debt is less than their earning power. (BEP), then Company HD will have the higher ROE. 4. Muscarella Inc. has the following balance sheet and income statement data: Cash $ 14,000 Accounts payable $ 42,000 Receivables 70,000 Other current liabilities 28,000 Inventories 210,000 Total CL $ 70,000 Total CA $294,000 Long-term debt 70,000 Net fixed assets 126,000 Common equity $280,000 Total Assets $420,000 Total liab.
Fin 517 Ch. 15 Notes Debt and Taxes 15.1 The Interest Tax Deduction 1. interest tax shield – additional amount that a firm would have paid in taxes if it did not have leverage. Interest tax shield = corporate tax return X interest payments 2. because interest expense is tax deductible, leverage increases the total amount of income available to all investors 15.2 Valuing the Interest Tax Shield 1. when a firm uses debt, the interest tax shield provides a corporate tax benefit each year. 2. Because the cash flows of the levered firm are equal to the sum of the cash flows from the unlevered firm plus the interest tax shield, by the Law of One Price the same must be true for the present values of these cash flows.
C. Points paid in the form of prepaid interest on a refinance are deductible over the life of the loan. D. None of the above statements is correct. 71. Which of the following statements regarding the break-even point for paying discount points in order to get a lower interest rate on the loan is correct? A All else equal, the break-even point for paying points on an original mortgage is longer than the break.
Net working capital | Year 1 | Year 2 | Year 3 | Year 4 | | Inventory | 1,5 | 1,5 | 1,5 | | All in millions | receivables | 16,5 | 12,45 | 8,25 | | | payables | 1,6 | 1,6 | 1 | | | NWC(=Inventory+receivables-payables) | 16,4 | 12,35 | 8,75 | | | Change in NWC | 16,4 | -4,05 | -3,6 | -8,75 | | Q6. FCF = (Revenue – Costs – Depreciation) x (1 – tax rate) + Depreciation – Capital Expenditure – change in working capital. Free cash flows | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | | Unl Net income | -59,3439 | 70,1337 | 49,3248 | 30,828 | 0 | All in millions | Depreciation | 0 | 8 | 8 | 8 | 0 | | Capital expenditures | 24 | 0 | 0 | 0 | 0 | | Change in NWC | 0 | 16,4 | -4,05 | -3,6 | -8,75 | | Free cash flows | -83,34 | 61,73 | 61,37 | 42,43 | 8,75 | | Q7. | | Year 1 | Year 2 | Year 3 | Year 4 | | NPV per year | -83,34 | 55,12 | 48,93 | 30,20 | 5,56 | All in millions | Total NPV | 56,46 | | | | | | Q8. Rate | NPV(million) | 5% | 74,97 | 10% | 61,35 | 15% | 49,65 | 20% | 39,5 | 25% | 30,63 | 30% | 22,84 | 35% | 15,94 | 40% | 9,81 | 45% | 4,32 | 50% | -0,61 | 55% | -2,89 | 60% | -5,06
The ROE for Sepracor is 33.07%, which means that 33.07 cents of assets are created for each dollar that was originally invested. It measures how Sepracor is using its money. The higher the return on equity, the more funds available to be invested in improving business operations without having to invest more capital. Debt to asset ratio measures the company’s solvency, and the higher the ratio, the lower the borrowing capacity for the company. I would make an investment in the company’s 5% convertible bonds.
Week 5 Problem 3 Carri Gradisca FIN/370 – Finance for Business August 6, 2012 Professor Shadi Sifain Week 5 Problem 3 A firm’s current balance sheet is as follows: Assets: $100 Debt: $10 Equity: 90 a. What is the firm’s weighted-average cost of capital at various combinations of debt and equity, given the following information? Debt/Assets | After-Tax Cost of Debt | Cost of Equity | Cost of Capital | 0% | 8% | 12% | 12.00% | 10 | 8 | 12 | 11.60% | 20 | 8 | 12 | 11.20% | 30 | 8 | 13 | 11.50% | 40 | 9 | 14 | 12.00% | 50 | 10 | 15 | 12.50% | 60 | 12 | 16 | 13.60% | b. Construct a pro forma balance sheet that indicates the firm’s optimal capital structure. Compare this balance sheet with the firm’s current balance sheet. What course of action should the firm take?
Premier Investments Ltd dropped its current ratios sharply from 4.27 to 1.74. That indicates Premier Investments Ltd transferred its current assets to noncurrent assets or it got more current liabilities. However, it is still has less current liabilities covered it assets compared with David Jones Ltd. So David Jones Ltd needs to make a financial plan to meet the coming current liabilities, or they may get a financial crisis. Quick ratio Current ratio measures the current assets to be turned into cash to meet its debts in one year.
This moderate policy approach for investing uses more than about one-half of the short-term debt that is left but also uses more working capital when having to finance the policy. The moderate policy approach also only uses about half the debt and only about half the assets when it comes to funding the investment. It makes somewhat of a moderate risk of not having to risk to much or for that matter to little since not that much can be lost as opposed to an aggressive policy type approach. Moderate EBIT-$6,000,000 Minus Interest-1,460,000 EBT-$4,540,000 Minus Tax Rate of 40%-1,816,000 EAT-$2,724,000 Return on Equity-6.81.00% Conservative investment policy type uses a majority of working capital and also uses little if any short-term debt. Taking about $2,691,000 and dividing it by $40,000,000 dollars would result in a return of equity of some 6.73.00%.
Payday loans can be defined as short term loans that are given usually in small amounts but the interest rates charged on them are substantially high. In this case, the APR advertised by the lender was 5.98 per cent that was indeed, the loan’s APR’s accurate calculation by law (McGingley, 2013). Although this was a low rate and was reasonable, the company added an additional monthly participation fee to the rate worth $149.50 on monthly basis. Although this fee of participation does not have to be included in the APR’s calculation, yet the usury law of Pennsylvania’s Section 3A prohibits such forms from charging fees that sum up to over 6 per cent. Nevertheless, the true borrowing cost in this case was nearly 368 per
The terms of the tax relief and how it can be applied varies by jurisdiction but usually the NOL can be applied to the past few years (two to three) and much more to the future (seven to 10) years. Read more: http://www.investopedia.com/terms/n/netoperatingloss.asp#ixzz1qqEnh3fW Definition of 'Financial Risk' http://www.investopedia.com/terms/f/financialrisk.asp#axzz1qqCU1Xth Retrieved 04/01/012 The risk that a company will not have adequate cash flow to meet financial obligations.