ringotts’s Investments has decided to diversify its assets by purchasing equity in Muggle Technology. They have filtered the options down between Google and Facebook. They are hoping for a stable return without exerting any control. You have been tasked with reviewing the most recent financial statements prepared to provide a final recommendation for capital decision allocation
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Gringotts’s Investments has decided to diversify its assets by purchasing equity in Muggle Technology. They have filtered the options down between Google and Facebook. They are hoping for a stable return without exerting any control. You have been tasked with reviewing the most recent financial statements prepared to provide a final recommendation for capital decision allocation
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- Al Hansen, the newly appointed vice president of finance of Berkshire Instruments, was eager to talk to his investment banker about future financing for the firm. One of Al’s first assignments was to determine the firm’s cost of capital. In assessing the weights to use in computing the cost of capital, he examined the current balance sheet, presented in Figure 1. In their discussion, Al and his investment banker determined that the current mix in the capital structure was very close to optimal and that Berkshire Instruments should continue with it in the future. Of some concern was the appropriate cost to assign to each of the elements in the capital structure. Al Hansen requested that his administrative assistant provide data on what the cost to issue debt and preferred stock had been in the past. The information is provided in Figure 2. When Al got the data, he felt he was making real progress toward determining the cost of capital for the firm. However, his investment banker…Comet Company plans to build a new corporate headquarter facility in Plano, Texas. Accordingly, the company must consider various ways to finance this capital expansion. The Board of Directors believes that there are many advantages to issuing both debt and equity securities to obtain capital. The Board must consider the impact of issuing debt or equity securities on the company’s financial results as well as its profitability ratios and other metrics. The Board should also consider the expectations of investors related to the type of financing the company chooses. Options for financing the company’s expansion include issuing preferred stock, common stock, or bonds. Prepare a memo (in no more than 2 pages) discussing the advantages and disadvantages of debt and equity financing and recommend which option you believe is best to Comet Company’s Board of Directors. Include an analysis of your recommendation whereby you specifically address the effect of the financing choice on the…Your supervisor is on the companys capital investment decision team that is to decide on alternatives for the acquisition of a new computer system for the company. The supervisor says, The book value of the existing computer system for the firm that we are considering replacing is nothing but an accounting amount and as such is irrelevant in the capital expenditure analysis. Does this reasoning make sense? Why or why not?
- During the last few years, Jana Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Jana’s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task: The firm’s tax rate is 40%. The current price of Jana’s 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Jana does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $116.95. Jana would incur flotation costs equal to 5% of the proceeds on a new issue. Jana’s common stock is currently selling at $50 per share. Its last dividend (D0) was $3.12, and dividends are expected to grow at a constant rate of 5.8% in the foreseeable future. Jana’s beta is 1.2, the yield on T-bonds is 5.6%, and the market risk premium is estimated to be 6%. For the own-bond-yield-plus-judgmental-risk-premium approach, the firm uses a 3.2% risk premium. Jana’s target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity. To help you structure the task, Leigh Jones has asked you to answer the following questions: (1) What sources of capital should be included when you estimate Jana’s weighted average cost of capital? (2) Should the component costs be figured on a before-tax or an after-tax basis? (3) Should the costs be historical (embedded) costs or new (marginal) costs?The Findlay Computer Company has the following selected financial results. The company is considering a capital restructuring to increase leverage from its present level of 10% of capital.Show all of your calculation work and label all of your work so I can follow your calculation process. 1. Calculate Findlay’s ROE and EPS under its current capital structure. 2. Restate the financial statement line items shown, the number of shares outstanding, ROE, and EPS if Findlay borrows money and uses it to retire stock until its capital structure is 40% debt assuming EBIT remains unchanged and the stock continues to sell at its book value. (Develop the second column of the chart shown.)Recalculate same figures assuming Findlay continues to restructure until its capital structure is 75% debt. (Develop the third column of the chart.) Current Capital Structure 10% Debt 40% Debt 75% DebtDebt $10,000 $40,000 $75,000 Equity 90,000…To support growth strategies and combat competition with rivals, businesses seek external capital to further develop products and services in hopes to create new sales opportunities. Since capital investment often involves a huge money investment, longer time engagement and risks of uncertainties, any decision shall not be taken lightly and shall be carefully evaluated before putting money to start a long-term project. The goal is to ultimately make the right accept/reject decision. Respond to the following in a minimum of 175 words: Discuss criteria and techniques used to evaluate a capital project. Which criteria and techniques do you consider the most useful? As a financial manager, would you use the same criteria or evaluation techniques for any capital project? Why or why not?
- Your manager is on the company’s capital investment decision team that is to decide on alternatives for the acquisition of a new accounting system for the company. The manager says, “the book value of the existing accounting system for the company that we are considering replacing is nothing but an accounting amount and as such is irrelevant in the capital expenditure analysis.” Does this reasoning make sense? Why or why not?Barnes plans to use the preceding ratios as the starting point for discussions with SKI’s operating executives. He wants everyone to think about the pros and cons of changing each type of current asset and how changes would interact to affect profits and EVA. Based on the data, does SKI seem to be following a relaxed, moderate, or restricted working capital policy?he CFO of Baldwin Corporation, Jeff Warren has decided to invest some money in the financial market to diversify the risks of business operations and increase rate of return. He has been reading corporate finance books and journal articles to enhance his knowledge on risk/return relationships, capital asset pricing model (CAPM), cost of capital and valuation. On risk/return relationship, Jeff has learnt that there is a positive relationship between risk and return. This implies that the higher the risk, the greater the expected return on an investment. This relationship is clearly explained by the capital asset pricing model in this equation: RE = RF + β x (RM – RF) where RE = expected return of the security, RF = the risk-free rate, β = Beta of the security, RM = the expected return on the market, and (RM – RF) represents the difference between the expected return on the market and the risk-free rate. According to the CAPM, the expected return of any security depends on its risk…
- he CFO of Baldwin Corporation, Jeff Warren has decided to invest some money in the financial market to diversify the risks of business operations and increase rate of return. He has been reading corporate finance books and journal articles to enhance his knowledge on risk/return relationships, capital asset pricing model (CAPM), cost of capital and valuation. On risk/return relationship, Jeff has learnt that there is a positive relationship between risk and return. This implies that the higher the risk, the greater the expected return on an investment. This relationship is clearly explained by the capital asset pricing model in this equation: RE = RF + β x (RM – RF) where RE = expected return of the security, RF = the risk-free rate, β = Beta of the security, RM = the expected return on the market, and (RM – RF) represents the difference between the expected return on the market and the risk-free rate. According to the CAPM, the expected return of any security depends on its risk…Your supervisor is on the company’s capital investment decision team that is to decide on alternatives for the acquisition of a new computer system for the company. The supervisor says, “The book value of the existing computer system for the firm that we are considering replacing is nothing but an accounting amount and as such is irrelevant in the capital expenditure analysis.” Does this reasoning make senseExploring the Capital Structures for Four Restaurant Companies Use online resources to work on this chapter's questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions. This chapter provides an overview of the effects of leverage and describes the process that firms use to determine their optimal capital structure. The chapter also indicates that capital structures tend to vary across industries and across countries. If you are interested in explonng these differences in more detail, the Momingstar website provides information about the capital structures of each of the companies it follows. The following discussion questions demonstrate how we can use this information to evaluate the capital structures for four restaurant companies: Cheesecake Factory (CAKE), Chipotle Mexican Grill (CMG), Ruby Tuesday (RT), and Darden Restaurants Inc. (DR1). 2. Repeat this procedure for the other three companies. Do you find similar capital structures for each of the four companies? Do you find that the capital structures have moved in the same direction over the past 5 years, or have the different companies changed their capital structures in different ways over the past 5 years?