Fin_Week_5_Problem_Set

Chapter 17: B1. (Choosing financial targets) Bixton Company’s new chief financial officer is evaluating Bixton’s capital structure. She is concerned that the firm might be underleveraged, even though the firm has larger-than-average research and development and foreign tax credits when compared to other firms in its industry. Her staff prepared the industry comparison shown here. 1. Bixton’s objective is to achieve a credit standing that falls, in the words of the chief financial officer, “comfortably within the ‘A’ range.” What target range would you recommend for each of the three credit measures' B. Before settling on these target ranges, what other factors should Bixton’s chief financial officer consider' C. Before deciding whether the target ranges are really appropriate for Bixton in its current financial situation, what key issues specific to Bixton must the chief financial officer resolve' Rating Category Fixed Charge Coverage Funds From Operations/Total Debt Long-Term Debt/Capitalization Aa 4.00–5.25x 60–80% 17–23% A 3.00–4.30 45–65 22–32 Baa 1.95–3.40 35–55 30–41 A. Bixton’s objective is to achieve a credit standing that falls, in the words of the chief financial officer, “comfortably within the ‘A’ range.” What target range would you recommend for each of the three credit measures' The A range: Fixed Charge Coverage 3.00–4.30 Funds From Operations/Total Debt 45%–65% Long-Term Debt/Capitalization 22%-32% The company can attempt to sustain increased fixed coverage ratio, higher from operation/total debt ratio -near 65% - and to sustain lower long term debt to capitalization ratio -near to 22% B. Before settling on these target ranges, what other factors should Bixton’s chief financial officer consider' Company to completely apply non interest tax credits (foreign) Cost of issuance to debt and expense (futuristic) in form of interest of the income level Company can raise debt from the market Effect of the company to raising debt C. Before deciding whether the target ranges are really appropriate for Bixton in its current financial situation, what key issues specific to Bixton must the chief financial officer resolve' Prior to deciding whether goal ranges are appropriate for Bixton, the CFO of Bixton Corporation should consider R&D expenditure and foreign Tax credit. It is possible company may not be able to utilize the additional tax saving- R&D and foreign tax credit is a consideration Chapter 18 A10. (Dividend adjustment model) Regional Software has made a bundle selling spreadsheet software and has begun paying cash dividends. The firm’s chief financial officer would like the firm to distribute 25% of its annual earnings (POR = 0.25) and adjust the dividend rate to changes in earnings per share at the rate ADJ = 0.75. Regional paid $1.00 per share in dividends last year. It will earn at least $8.00 per share this year and each year in the foreseeable future. Use the dividend adjustment model, Equation (18.1), to calculate projected dividends per share for this year and the next four. Per the table and figure 18.1: D1 = ADj [POR (EPSi) – D0] + D0 D1= .75 {.25 x $8.00 - $1.00} + $1.00 = $1.75 D2= .75 {.25 x $8.00 - $1.75} + $1.75 = $1.94 D3= .75 {.25 x $8.00 - $1.94} + $1.94 = $1.99 D4= .75 {.25 x $8.00 - $1.98} + $1.98 = $2.00 D5= .75 {.25 x $8.00 - $2.00} + $2.00 = $2.00 B2. (Dividend policy) A firm has 20 million common shares outstanding. It currently pays out $1.50 per share per year in cash dividends on its common stock. Historically, its payout ratio has ranged from 30% to 35%. Over the next five years it expects the earnings and discretionary cash flow shown below in millions. a. Over the five-year period, what is the maximum overall payout ratio the firm could achieve without triggering a securities issue' Total discretionary cash = 50 + 70 + 60 + 20 + 15 = $215 Total = 100 + 125 + 150 + 120 + 140 = $635 Maximum : = 215 divided by 636 = 33.87% b. Recommend a reasonable dividend policy for paying out discretionary cash flow in years 1 through 5. 1 2 3 4 5 THEREAFTER Earnings 100,125,150,120,140,150 plus annually. Discretionary cash flow 50, 70, 60, 20, 15, 50 plus annually dividend = 1.50 x 20 m shares = $30 million Will eventually increase the dividend from 30 million to 50 million. D1 =35 / 20 = $1.75 D2 =39 / 20 = $1.95 D3 = 4 3 / 20 = $2.15 D4 = 48 / 20 = $2.40 D5 = 50 / 20 = $2.50 35 + 39 + 43 + 48 + 50 = 215 Total discr. cash flow and large discr. cash flows initially=not a discr. shortage. Chapter 20 A2. (Comparing borrowing costs) Stephens Security has two financing alternatives: (a) A publicly placed $50 million bond issue. Issuance costs are $1 million, the bond has a 9% coupon paid semiannually, and the bond has a 20-year life. (b) A $50 million private placement with a large pension fund. Issuance costs are $500,000, the bond has a 9.25% annual coupon, and the bond has a 20-year life. Which alternative has the lower cost (annual percentage yield)' I used excel function =rate and typed in the Nper as 40, PMT as -2,250,000 the PV as 510,00,000 and the FV as 500,00,000 I got a 4% This would be the semi annual 4% Then, the annula would be 8% B: annual coupon is 9.25% = value X annual coupon ('') So 50,000,000 (9.25%) = 4,625,000 20 year maturity. Again using excel I used the rate function and entered: Nper 20, PMT -4625000 PV as 50,500,000 FV as -500,00,000 and I got 9% as the yield to maturity. The first has a lower cost or APY. Chapter 21 C2. (Leasing, taxes, and the time value of money) The less or can claim the tax deductions associated with asset ownership and realize the leased asset’s residual value. In return, the less or must pay tax on the rental income. a. Explain why a financial lease represents a secured loan in which the lender’s entire debt service stream is taxable as ordinary income to the lessor/lender. a. leases represents secure debt. The lease payments separately include interest parts and principal payback the lease payment is taxable to the lessr, all of the debt service or the interest and principal is taxable as income b. In view of this tax cost, what tax condition must hold in order for a financial lease tra nsaction to generate positive net-present-value tax benefits for both the lessor and lessee' Per text: PV(lessee's lease payment tax shields) + PV(lessor's depreciation tax shields plus other tax credits) So, not too sure, but…. PValue lessor lease payment liability plus PValue(lessee depreciation tax shield plus misc. tax credits) becausse a lease transaction should generate positive PValue benefits for lessors and lessees together c. Suppose the lease payments in Table 21-2 must be made in advance, not arrears. (Assume that the timing of the lease payment tax deductions/obligations changes accordingly but the timing of the depreciation tax deductions does not change). Show that the net advantage to leasing for NACCO must decrease as a result. Explain why this reduction occurs. = 1,745,000 - 698,000 So, post-tax payment is 1,047,000 advantage to leasing for NACCO must –because they are increased by a single year'''' =10M - 1,047,000 - 380,000 - 500,000 1+(1-.4) .12^1 1+(1-.4) .12^2 1+.15^10… 10M – 7,810,790 – 2,644,460, - 578, 842 This is lower more than the initial lease of 54,237 (unsure if I did this correctly) d. Show that if NACCO is nontaxable, the net advantage to leasing is negative and greater in absolute value than the net advantage of the lease to the lessor. NACCO is: 10,000,000 - 1,745,000 - 500,000 1.12^1 1.175^10 = 1,142,473 net is: 10,000,000 - 1047,000 + 380,000 + 500,000 1.072^1 1.072^1 1.15^10 = 581, 741 e. Either find a lease rate that will give the financial lease a positive net advantage for both lesser and lessee, or show that no such lease rate exists. I do not believe it exists because they are not satisfied at the same time NAL = 10,000,000 – L 500,000 L < 1,564,465 (1.12)^1 - (1.175)^10 NPVL= -10,000,000 + .6 L + 380,000 + 500,000 (1.072^1 (1.072)^1 (1.15)^1 L > 1,615,681