Fins3635 Final

Since the business does not have enough funds to continue paying its long-term financial obligations, as repayment of debt Angela has decided to exchange Wheeler’s accounts receivable for an $80,000 corporate note payable by the corporation. The remaining assets will be distributed to Angela and she will assume personal liability for the other accounts payable. Furthermore, Wheeler will distribute the real property to Angela who will assume personal liability for the repayment of the mortgage.

3. Suppose TECO has a second bond with 25 years left to maturity (in addition to the one listed in Table 1),

When the debt and the warrants are separable, the proceeds of their sale are allocated between them. The basis of allocation is their relative fair values. As a practical matter, these relative values are usually determined by reference to the price in the open market. The portion of the proceeds assigned to the warrants are accounted for as paid-in capital. The result may be that the debt is issued at a reduced premium or at a

Research Problem 1) New Gate corporation desires to acquire Old Post in a non-taxable transaction. Prior to entering into this transaction with New Gate, Old Post issues $800,000 worth of 15-year bonds paying 6% annually. The bonds are purchased by most of Old Post’s shareholders and also by many individuals who have no affiliation with Old Post. New Gate makes an offer to the shareholders to exchange two shares of its common voting class A stock for each common share of Old Post and 20 of common voting class B stock for each preferred share of Old Post.

d) Calculate the new value per share after the capital structure change. (Hint: use your answers to parts b and c.)

- The Bet-r-Bilt Company has a 5-year bond outstanding with a 4.30 percent coupon. Interest payments are paid semi-annually. The face amount of the bond is $1,000. This bond is currently selling for 93 percent of its face value. What is the company's pre-tax cost of debt?

= 299.629. Notice, that the value of the firm with debt overhang is lower than the same problem without debt overhang in part (e). (h) Suppose the firm were to hedge. Would equity holders take the gamble and what would be the value of the firm? (10 points) Answer: If the firm were to hedge by selling gold in a forward contract, it would get a sure cash flow of $350. Then it would not not take the gamble, because even if it lost, it could still make the debt payment of 250 · (1.05) = 262.5 and taxes of .4(50 − 250 · .05) = 15 (we assume the debt is safe, and therefore has a yield of 0.05, and verify that it can make the payment).

d. How valid in an estimate of the cost of debt based on 15 year bonds if the corporation normally issue 30 year long term debt? The estimate is not exactly valid because coupon rates differ for 15- and 30-year bonds. Generally, the cost of debt is higher for bonds with longer time to maturity. It has to do with risk. The longer

1. All of the following are the general principles underlying the valuation of liabilities e xcept:

2. Forecast the firm’s financial statements for 2002 and 2003. What will be the external financing requirements of the firm in those years? Can the firm repay its loan within a reasonable period? In order to forecast the financial statements of 2002 and 2003, the following assumptions need to be made. The growth of sales is 15%, same as 2001, which is estimated by managers. The rate of production costs and expenses per sales is constant to 50%. Administration and selling expenses is the average of last 4 years. The depreciation is $7.8 million per year, which is calculated by $54.6 million divided by 7 years. Tax rate is 24.5%, which is provided. The dividend is $2 million per year only when the company makes profits. Therefore, we assume that there will be no dividend in 2003. Gross PPE will be $27.3 million (54.6/2) per year. We also assume there is no more long term debt, because any funds need in the case are short term debt, it keeps at $18.2 million. According to the forecast, Star River needs external financing approximately $94 million and $107 million in 2002 and 2003, respectively. In order to analysis if the company can repay the debt, we need to know the interest coverage ratio, current ratio and D/E ratio. The interest coverage ratios through the forecast were 1.23 and 0.87 respectively, which is the danger signal to the managers, because in 2003, the profits even not

Calculate the after tax cost of debt using the following information (hint: see page 285 in text).

OCC and OCP together invested $750,000 into Dogloo in the form of subordinated debenture with 13% interest rate, which guarantees them stable interest cash inflows each year (Exhibit 4). The two investors’ combined ownership interest will be 0.5% of the Dogloo’s equity value because the company’s equity valuation is $213 million, exceeding $80 million; this will be the cash inflow at exit for the investors. Through calculation, the required equity value at exit is $238 million if the investors have an estimated IRR of 25% (Exhibit 4).

2. What were the yields on the two representative outstanding Heinz-debt issues as of the end of April 2010? What were they one year earlier?

The company has observed their yearly business cycle can be better described by two discreet sets of demand equations. The weekly demand based on price between November and April is described in Figure 2. Figure 3 explains the price the firm is able to set and obtain based on the number of coats they wish to sell in a given week. These

The market value of debt was calculated using the existing yield of maturity on a 5 yar bond issued on a private placement basis on July 1, 2000. With the coupon of 5.75% and the discount price of 97, YTM for this bond is 6.62%. With a discount price being 97, the market value of debt is 17,654M.