Case Recommendation Altoona State Investment Board: December 2008 By Yuwen Chen Question Asked in the Case: Altoona State Investment Board (ASIB) is a limited partner (LP) in Permira’s fund Permira IV. In the third quarter of 2008, ASIB suffered from a substantial loss from the public equity and hedge fund positions and faced to a potential loss on its private equity investments. In December 2008, Permira offered ASIB a chance to reduce its commitment, 100 million Euro, to Permira IV. However, this offer would allow state pension to address its “over-commitment problem”, which appeared to be quite punitive to those investors who accepted the term. As a consequence, the over commitment problem would eventually increase default risks of LPs.
Inversely, when a share repurchase is seen as treasury stock, the cost of the treasury stock is naturally disclosed as a decrease in total shareholders’ equity. Alcoa would report the purchase of the treasury stock by debiting treasury stock and crediting cash for the charge of the purchase. The treasury stock ought to be disclosed independently in the shareholders' equity area of Alcoa’s balance sheet as an unallocated cut of shareholders' equity. These shares are treated as issued although not part of common stock outstanding. If subsequently resold for a sum larger than the cost, Alcoa should report for the sale of the treasury stock by debiting cash for the sale cost, crediting treasury stock for cost, and crediting additional paid-in capital from repurchased stock for the excess of the selling price over the cost.
FBN has made significant investments (property, plant and equipment) on account, thereby getting into financial trouble by owing their creditors quite a bit of money. FBN made too many investments (on account) and their cost of services increased faster than their sales. Yet another indicator of financial woes is the Profitability Analysis. By observing the Return on Assets, we can see that in two years, the ROA declined from 7.5% to 0%. Such a decline (and such a low percentage) indicates that management is not efficient in employing the company’s assets to make a profit.
After the transaction this shareholder no longer has a controlling interest. Given these facts, to induce the shareholder to sell the block of stock Target Inc. was forced to pay an amount in excess of the current market price of the stock. Target Inc. paid the shareholder $40 per share when the market price was $30 per share. Question How should Target Inc. account for the purchase of this treasury stock? Required 1.Provide a brief written description of the proper accounting treatment, including how the extra $10 paid per share is recorded.
We got a cost of equity of 20%. Free cash flows are calculated using the formula EBIT x (1-TAX) + Depreciation – Capex – Change in NWC. The results are presented below: The NPV of the first generation phone project, ignoring both the possibility of investing in the second-generation project and the possibility of selling the equipment after two years is ($3,154). Since the NPV is negative, this would not be a good investment. 2.
b. Most sinking funds require the issuer to provide funds to a trustee, who holds the money so that it will be available to pay off bondholders when the bonds mature. c. A sinking fund provision makes a bond more risky to investors at the time of issuance. d. Sinking fund provisions never require companies to retire their debt; they only establish “targets” for the company to reduce its debt over time. e. If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price.
2. What was your estimate of WACC? What mistakes did Joanna Cohen make in her analysis? Which method is best for calculating the cost of equity? cost of equity =I used the 20 year at 5.74%+Geometric mean=5.9%x most recent beta .69=9.81% Cost of Debt I used Yield to maturity to find cost of debt From Exhibit 4 PV= 95.60 N=40 (20years x 2) since its paid semiannually Pmt=-3.375 (6.75/2) FV=-100 Comp I = 3.58% (semiannual) 7.16% (annual) After tax cost of debt = 7.16%(1-38%) = 4.44% E = market value of the firm's equity To find Market value of Equity you multiply share price by amount of shares $42.09x273.3= 11503.
a. Which loan carries the lower effective rate? Consider fees to be the equivalent of other interest. Loan with a compensating balance. $500,000 at 8.25% = Interest at $41,250 With a $500,000 loan the 20% compensating balance requirement would be $100,000 which leaves $400,000 in available funds.
The company pays cash upon conversion, and the delivers shares based on a conversion price from that day is calculated on a proportionate basis each day of trading in the relevant conversion period. (b) How can small no-name company issue debt at 2.5% when Coca Cola has to pay 4.25%? A small company can issues loans that rank below other debts, such as convertible senior subordinate notes. If the issuer happens to go bankrupt and looses its assets, then as a subordinate debt the convertible subordinate note will be repaid after other debt securities have been paid. As with all debt securities, however, the note will be repaid before stock.
a. How much in cash or securities must you put into your brokerage account if the broker’s initial margin requirement is 50% of the value of the short position? b. How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of