The financial statements of Inland Engineering are provided below. The firm has 100 million sharesoutstanding at the end of 2020 and the stock price was $10.The firm plans to increase its fixed assets by 26% in 2021 (from the 2020 level) from an increase inequity alone. What level of stock price would allow the firm to execute its plan while maintaining itsreturn-on-equity and P/E ratio? Assume that the firm will not raise additional capital by increase thenumber of shares in the stock market (i.e., the outstanding shares at the end of 2021 will remain at100 million).(provide your answer in the nearest dollar, i.e., no decimal places)Balance Sheet Statement, 2020 (in $million)Income Statement, 2020 (in $million)Current assets836Gross sales2,295Fixed assets1,161Cost of goods sold(771)Current debt210Operating expenses(404)Long-term debt(170)283Income taxes

Firm wants to increase the fixed assets by increasing income because do not want to increase…

100 million). (provide your answer in the nearest dollar, i.e., no decimal places) Balance Sheet Statement, 2020 (in $million) Income Statement, 2020 Current assets 836 Gross sales Fixed assets 1,161 Cost of goods sold Current debt 210 Operating expenses Long-term debt 283 Income taxes

100 million). (provide your answer in the nearest dollar, i.e., no decimal places) Balance Sheet Statement, 2020 (in $million) Income Statement, 2020 Current assets 836 Gross sales Fixed assets 1,161 Cost of goods sold Current debt 210 Operating expenses Long-term debt 283 Income taxes

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 5P

See similar textbooks

Similar questions

CALCULATING THE WACC Here is the condensed 2019 balance sheet for Skye Computer Company (in thousands of dollars): Skyes earnings per share last year were 3.20. The common stock sells for 55.00. last years dividend (D0) was 2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skyes preferred stock pays a dividend of 3.30 per share, and its preferred stock sells for 30.00 per share. The firms before-lax cost of debt is 10%, and its marginal tax rate is 25%. The firms currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Skyes beta is 1.516. The firms total debt, which is the sum of the companys short-term debt and long-term debt, equals 1.2 million. a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. b. Now calculate the cost of common equity from retained earnings, using the CAPM method. c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r1 and rs as determined by the DCF method, and add that differential to the CAPM value for rs.) d. If Skye continues to use the same market-value capital structure, what is the firms WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock?
The HP Corporation has reported the BV of common equity of $9 billion at the end of 2020, with 450 million shares outstanding. The required rate of return is 12%. The company trades in the stock market for $15. The firm is a. overvalued b. undervalued c. not enough informationd. trading at par value
The following are earnings and dividend forecasts made at the end of 2020 for the IBM Corporation with a $40 BV per common share at that time. In 2021, EPS will be $7 and DPS $1. In 2022, EPS will be $8 and DPS $1.50. In 2023, EPS will be $9 and DPS $2. The firm has a required equity return of 15% per year. Calculate the book value per share for the company for each year from 2021 to 2023, accordingly.
Morrissey Technologies Inc.'s 2019 financial statements are shown here. Suppose that in 2020, sales increase by 10% over 2019 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2019 dividend payout ratio and believes that its assets should grow at the same rate as sales. The firm has no excess capacity. However, the firm would like to reduce its operating costs/sales ratio to 87.5% and increase its total liabilities-to-assets ratio to 30%. (It believes its liabilities- to-assets ratio currently is too low relative to the industry average.) The firm will raise 30% of the 2020 forecasted interest-bearing debt as notes payable, and it will issue long-term bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 12.5%. Assume that any common stock issuances or repurchases can be made at the firm's current stock price of $45.a. Construct the forecasted financial…
On January 1, 2019, the total assets of the Dexter Company were $270 million. The firm'spresent capital structure, which follows, is considered to be optimal. Assume that there is noshort-term debt.Long-term Debt=$135,000,000 Common Stock=$135,000,000New bonds will have a 10 percent coupon rate and will be sold at par. Common stock, currently,selling at $60 a share, can be sold to net the company $54 a share. Stockholders' required rate ofreturn is estimated to be 12 percent., consisting of a dividend yield of 4 percent and an expectedgrowth rate of 8 percent. (The next expected dividend is $2.40, so $2.40/$60 = 4%.) Retained earnings are estimated to be $13.50 million. The marginal tax rate is 40 percent.Assuming that all asset expansion (gross expenditures for fixed assets plus related workingcapital) is included in the capital budget, the dollar amount of the capital budget, ignoringdepreciation is $135 million. The marginal tax rate is 40 percent. Assuming that all assetexpansion…
On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $25 million in new projects. The firm's present market value capital structure, shown below, is considered to be optimal. Assume that there is no short-term debt. Debt $30,000,000 Common equity 30,000,000 Total capital $60,000,000 New bonds will have an 9% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so $1.20/$30 = 4%.) The marginal corporate tax rate is 35%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Open spreadsheet In order to maintain the present capital structure, how much of the…
The Dell Corporation has reported the BV of common equity of $10 billion at the end of 2020, with 400 million shares outstanding. The required rate of return is 5%. The company trades in the stock market for $30. calculate the price-to-book ratio.
For 2020 the free cash flow to the firm (FCFF) of ABC Co. was ₱30,000. The firm has total debt of ₱20,000, and there were 12,000 shares outstanding. The required rate of return is 9% and the estimated growth rate in FCFF is 6.5%. How much is the intrinsic value per share of ABC Co.? ₱80.45 ₱94.92 ₱104.83 ₱112.50 answer not given
Is my answer correct? I feel as if I am missing a few steps. AFW Industries has 201 million shares outstanding and expects earnings at the end of this year of $673 million. AFW plans to pay out 61% of its earnings in total, paying 34% as a dividend and using 27% to repurchase shares. If AFW's earnings are expected to grow by 8.9% per year and these payout rates remain constant, determine AFW's share price assuming an equity cost of capital of 12.1%. Formula is g = ROE x b Do the opposite of the formula G = 8.9%; payout is 61% (1 - .61 = .39) 9% - .39 = .89 -.39 = .5
Milton Inc. is an all-equity firm and investors expect it to remain an all-equity firm in the future. It has 100 million shares outstanding and is subject to a 40% corporate tax rate. It has no excess cash. The cost of equity is 20%. The firm is expected to generate free cash flows of $100 million per year forever, with the first free cash flow coming exactly one year from now (in December 2020). (a) What is the current stock price of Milton Inc.? Suppose that today, Milton Inc. makes a surprise announcement that it will issue $200 million worth of perpetual debt (i.e., it will maintain a constant debt level of $200 million forever) with coupon rate 8%, which coincides with its cost of debt. Milton will use the proceeds from the issuance of debt to repurchase stocks. Assume that the recapitalization will take place very soon, within a few days. (b) What will be the total value of the firm after the recapitalization described above? (c) What will be the total value of equity (i.e., the…
A company needs $35,943,750 to finance a major project in the company. The company expects that next year’s earnings from current operations and the additional earnings from the new project will be a total of $45,650,000. The company currently has 5,075,000 shares outstanding, with a price of $17.75 per share. The company’s management is assuming that any the additional shares issued to finance the project will not affect the market price of the company’s common stock. Calculate the following: If the $35,943,750 needed for the project is raised by selling new shares, what will the forecast for next year’s earnings per share (EPS) be? If the $35,943,750 needed for the project is raised by selling new shares, what will the firm’s price earnings ratio (PE ratio) be? If the $35,943,750 needed for the project is raised by issuing new debt, what will the forecast for next year’s earnings per share be? (Assume that there is no “tax shield effect” with issuing corporate debt.) If the…
On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $30 million in new projects. The firm’s present market value capital structure, shown below, is considered to be optimal. There is no short-term debt. Debt $30,000,000 Common equity 30,000,000 Total capital $60,000,000 New bonds will have an 8% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders’ required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4 %.) The marginal tax rate is 40%. a. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? b. Assuming there is sufficient cash flow for Tysseland to maintain its target capital structure without issuing additional shares of…