FIN 370 final exam

The firm has decided to increase the debt finance component portion from 20% to 30% which is a good decision since the interest payments are 100% tax deductible. The appropriate capital structure would be to

9. What is the Cost of Debt, before and after taxes? Using the interest rate for the largest debt…cannot use the weighted interest rate for the debt since it includes capital lease obligations with no stated rate and could not find in the notes to the financials. 5.4% After tax cost is .054 x (1-.36) = 3.5%

vi. At 52.2% they have lower leverage than the lowest quartile and this decreased from the year before which is evident on the balance sheet because their LTD decreased by 13 million

Based on the suggestion that the focus should be on market values, compute the weights of debt, preferred stock, and common stock.

The decline of inventory turnover presents the incresed possibility of inventory obsolescence which is likely to be assessed as higher business risk. In debts to equity part, the ratio in current year is much higher than that of preceeding year, which means the extent of use of debt in financing company is much higher than before. Pinnacle has used most of its borrowing capacity and has little cushion for addional debt.This action brought high business risk to Pinnacle. In addition, Pinnacle puchase more inventory in current year that that of preceeding year, and net sales are increasing also compared previous year. However, the net income is decreased significantly. These changes show expenses (maybe direct or indirect) have increased dramaticly. The company uses more expensive materials and labors to manufacure and sell products.

9. You want to purchase a business with the following cash flows. How much would you pay for this business today assuming you needed a 14% return to make this deal?

c) What will be the required return on equity (rE) after the change in capital structure from part b?

-Jensen's Travel Agency has 9 percent preferred stock outstanding that is currently selling for $49 a share. The market rate of return is 15 percent and the firm's tax rate is 34 percent. What is Jensen's cost of

24) A firm has assets of $250 million, of which $25 million is cash. It has debt of $100 million. If the firm were to repurchase $10 million of its stock, what would its new debt-to-equity ratio be?

Based upon the firm’s low target leverage of 5%, low degree of operating leverage, and favorable credit history and financial outlook, the model assumes a cost of debt in line with AAA corporate debt at 7.02%. This estimate seems reasonable and sensitivity analysis shows a 1% decrease in the forecasted share price requires at least a 2.4% increase in the cost of debt.

Solutions to Valuation Questions 1. Assume you expect a company’s net income to remain stable at $1,100 for all future years, and you expect all earnings to be distributed to stockholders at the end of each year, so that common equity also remains stable for all future years (assumes clean surplus). Also, assume the company’s β = 1.5, the market risk premium is 4% and the 20-30 year yield on risk free treasury bonds is 5%. Finally, assume the company has 1,000 shares of common stock outstanding. a. Use the CAPM to estimate the company’s equity cost of capital. • re = RF + β * (RM – RF) = 0.05 + 1.5 * 0.04 = 11% b. Compute the expected net distributions to stockholders for each future year. • D = NI – ΔCE = $1,100 – 0 = $1,100 c. Use the

The company’s debt ratios are 54.5% in 1988, 58.69% in 1989, 62.7% in 1990, and 67.37% in 1991. What this means is that the company is increasing its financial risk by taking on more leverage. The company has been taking an extensive amount of purchasing over the past couple of years, which could be the reason as to why net income has not grown much beyond several thousands of dollars. One could argue that the company is trying to expand its inventory to help accumulate future sales. But another problem is that the company’s

Corporate Finance ADM 3350 M & P (Winter 2015) Assignment 1 Due Date: February 23, 2015 Question 1 (5 Marks) Varta Inc. has just issued a dividend of $1.50 per share on its common stock. The company paid dividends of $1.10, $1.15, $1.25, and $1.37 per share in the last four years. The stock currently sells for $48. a. What is your best estimate of the company's cost of equity capital using the arithmetic average growth rate in dividends? b. What if you use the geometric average growth rate? Solution: (3 + 2 = 5 Marks)

(Note: This document includes practice examples from chapters covered only after the mid term. Your term final exam will be a comprehensive one and will include all chapters both before and after mid term exam.)

c. Is your estimate of Lex’s cost of equity appropriate as a discount rate for Lex’s total operating cash flows? Why or why not?