Fin_571_-_Week_5

FIN 571 Long-Term Financing ….. 11/15/2010 …… Chapter 17 B1. A. Firms should use these scales to follow Fixed Charge Coverage (FCC)  {3.40 - 4.30} Cash Flow/Total Debt  {55 – 65} Long-Term Debt/Total Capitalization  {25 – 30} b. There should be considerations regarding costs that is associated with issuance. Also, lending rates and the capacity to be lent should be calculated also.. c. Bixton’s CFO will need to consider credits when dealing with foreign tax. Chapter 18 A10. Formula: D1 = ADJ {POR {EPS1} - D0}+ D0 D1 = 0.75 {0.25 x $8.00 - $1.00} + $1.00  $1.75 D2 = 0.75 {0.25 x $8.00 - $1.75} + $1.75  $1.94 D3 = 0.75 {0.25 x $8.00 - $1.94} + $1.94  $1.985 D4 = 0.75 {0.25 x $8.00 - $1.98} + $1.98  $2.00 D5 = 0.75 {0.25 x $8.00 - $2.00} + $2.00  $2.00 B2. a. Over a five-year period, the firm could achieve maximum overall payout ratio without triggering any securities issue. Discretionary Cash Flow = {$50.00 + $70.00 + $60.00 + $20.00 + $15.00}  $215.00 Earnings = {$100.00 + $125.00 + $150.00 + $120.00 + $140.00}  $635.00 Maximum Payout Ratio = ({$215.00 / $635.00}  33.9% b. Discretionary cash flow for years 1 through 5 would be: D1 = $35.00 / 20  $1.75 D2 = $39.00 / 20  $1.95 D3 = $43.00 / 20  $2.15 D4 = $48.00 / 20  $2.40 D5 = $50.00 / 20  $2.50 Chapter 20 A2. 1. N = 40 R = PV = -{$50.00 - $1.00} = -$49.00 PMT = 9% / 2 x $50.00 = $2.25 FV = $50.00 R = 4.61% APY = {1 + 0.0461}2 -1 = 9.43% 2. N = 20 R = PV = -{$50.00 - $0.50} = -$49.50 PMT = 9.25% x $50 = $4.625 FV = $50.00 R = 9.36% APY = 9.36% Second choice has a lower APY. Chapter 21 C2. a. Debt that is secured is an lease, also interest is attached to the debt. Any payment has the ability to be taxed as regular income in regards to the lender, this represents a form of taxable debt. b. For a financial lease transaction to stimulate positive net-present-value, tax benefits for the lessor and lessee, the lessee's; lease payment tax shields + present value of the lessor's depreciation tax shields + tax credits has to be more than the present value of the lessor's lease payment tax liabilities) + the present value of the lessee's (depreciation tax and tax credits). c. After-tax lease payment: $1,047,000 {1,745,000 - 698,000}. This is calculates such as: $10,000,000.00 – $7,810,789.00 - $2,644,460.00 – $123, 592.00 -> $578,841.00. This amount is greater than the net advantage - $500,000. ------------------------------------------------- d.NAL = $10,000,000 - $1,745,000.00/1.12t – $500,000.00/1.17510  $1,142,472.00 NPVL = $10,000,000 - $1,047,000.00/1.072t + $380,000/1.072t + $500,000.00/1.1510  $578,841.00 NAL ($1,142,472.00) > NPVL ($578,841.00) e. No lease rate will be able to give the financial lease a net advantage. NAL  < $1,564,465.00 NPVL  > $1,615,681.00