Thus, Alliance needs to focus on improving operating efficiencies by investing in capital improvement. Capital Improvement • Spend $2 million on expenditures before the start of the year so the risk of break down is less than 50%. • Since forecasting the balance sheet for 2006 shows Alliance EFN’s is about $14 million, the company can borrow an additional $14 million from the bank to make the balance sheet balance. • With the $2 million on expenditures spent in 2005 plus the additional $14 million borrow from the bank for 2006, the company can be able to fulfill the $16 million planned on capital expenditure. Capital improvement can save the company on unexpected cost and long-term shut down.
These ratios will be calculated from the income statement, balance sheet and statement of cash flows Liquidity Liquidity Ratios measure a company’s ability to meet its short-term debt obligations without disrupting normal operation. The higher the ratio the better a company will be at meeting its short-term obligations as well as have extra cash to cover any unforeseen cash requirements. The liquidity measures we will use are the current ratio, current cash debt ratio, inventory turnover, average days in inventory, receivable turnover ratio and average collection period. The current ratio measures the company’s ability to pay its short-term liabilities (payables and debt) with short-term assets (cash, receivables and inventory). Tootsie Roll exceeds its ability to meet short-term debt obligations with $3.45 in current assets for every $1 in current liabilities.
5. Suppose the proposed terms of the bank credit included a covenant (a contractual obligation that bids a borrower to specific actions or outcomes as a condition for extending a loan) that read as follows: “The company must maintain net working capital (defined for purposes of this loan as accounts receivable plus inventories minus accounts payable) of at least $4 million. For purposes of this covenant, net working capital will be measured at the end of each fiscal year.” Is TCI likely to be able to satisfy this covenant in both 1996 and 1997? 6. As a lender, would you be willing to loan TCI the funds needed to expand its warehouse facilities and finance its growth?
Case study: Another example “Explain how a two-year bill facility that uses 90-day bills poses interest rate risk for the borrower. Describe FRAs, BAB futures and interest rate swaps and explain how they can be used to hedge the interest rate risk involved in a planned issue of BABs. Demonstrate how each hedge instrument establishes the company’s cost of funds.” Businesses often require funds for a longer term than the usual 90-day term of a bill and so will be provided with a bill facility. This is an agreement to rollover bills on their maturity date by issuing a replacement set of bills, however there is potential that borrowers will be exposed to interest rate risk. Interest rate risk is basically the threat posed by unexpected changes in interest rates, in other words, it can be defined as the uncertainty surrounding expected returns on security, brought about by changes in interest rates.
To stay within the limits, Govan Moodley has to rely heavily on trade credit. In his search for larger loan possibility, Govan Moodley received a Loan proposal of the Investec bank with a maximum of R3.25m. In that respect are various matters to conceive in the advice to Govan Moodley: Option 1: Business as usual: First of all is the question at hand, if Mr. Moodley should progress his business as usual and therefore anticipate for a growth of sales for which he has to extend his loan. In this the actual interest rate of the Capitec bank is 14%. When it’s decided to step over to the Investec bank the interest rate will become 16,5% of the total amount of the loan.
1.4 Compare and contrast debt and equity as a source of funds for financial claims. Financial claims: written promises to pay a specific sum of money (the principal) plus interest for the privilege of borrowing money over a period of time. Financial claims are issued by DSUs (liabilities) and purchased by SSUs (assets). Debt Funds: Equity Funds: Funds supplied in the form of a loan. Classified into short-term or long-term facilities Short-term = money Long-term = capital Suppliers of loans or debt funds face credit risk Credit risk: the risk the borrower won’t pay back loan Funds supplied in the form of the acquisition of an ownership share of a business.
UBS regarded currency risk as a separate investment decision. Investment analysis was done on an excess return basis and as such, currency-hedging was a decision made after the investment analysis, based on the client's needs. What was the investment objective of UBS's global equity portfolio in terms of outperformance vs. the MSCI World Equity Index? How many stocks did this entail? The investment objective to UBS's global equity portfolio was to outperform the MSCI World Equity index by 225 basis points annually over the market cycle.
Accrual basis accounting records the transaction immediately in a type of account, such as accounts payable, money owed to other companies for services; or accounts receivable “money owed by its debtors” ("Google.com", 2012). Later when the business pays out or is paid; they perform a balance by debiting one account and balancing by credit the corresponding and opposite account. Tracking the relationship between purchase and sale easier, something cash basis accounting fails at. In general, accrual basis accounting is preferred at tax time and for medium to large business. The classic example is expense.
APV vs. WACC Problem Given the following information, answer questions 1 and 2 below. Company and market data: Rf = 4% Rm = 10% βu = 0.9 D/V (target) = 40% RD = 4% Tc = 30% Project CFs: I0 = 1000, CF1 = 300, CF2 = 400, CF3 = 500 1) Calculate the project’s value using WACC 2) Calculate the project’s value using APV -Oops, we can’t until we know the financing (debt) pattern over time. (a) OK, assume the project is financed with 60% debt which is paid off in three equal, annual installments. (b) Now assume instead of (a) that the debt is rebalanced to be consistent with the firm’s target debt ratio (i.e. D/V = 40%).
| Case I, Case Studies in Finance case 14 | Cost of Capital | | | | # 8 | 1/1/2013 | | #8 Portfolio Manager Assistant 3321 Napoleon Avenue New Orleans, 70125 504-6718031 March 18, 2013 Kimi Ford Portfolio Manager at NorthPoint Group New York City Re: Case I, Case 14,Cost of Capital calculation using GAAP. As you requested I have calculated Nike’s cost of capital to then discount your forecasted free cash flows to Equity and calculate the value of Equity at time zero and then calculate the current price per share and determine whether Nike’s stock is undervalued. The current cost of capital is Nike’s Cost of Capital is 9.32%. Current Value of Equity is $15,643millions. Nike’s current Equity Value per share or current price per share is $57.62, which is 36% higher than the current price ($42.90).