The Donovan Curd Store has forecast its sales revenues and purchases for the last 5 months of 2009 to be as follows:
65% of sales are on credit. On the basis of past experience, 50% of the accounts receivable are collected the month after the sale and the remainder are collected 2 months after the sale. Purchases are paid 30 days after they are incurred. The firm had a cash balance of $5,000 as of September 30th, and its minimum required cash balance is $4,000. It had no beginning loan balance. Prepare a cash budget for October, November and December.
From the following income statement, calculate:
a) Degree of financial leverage.
b) Degree of operating leverage.
c) Degree of combined leverage.
For The Year Ending 12/31/11
Variable Costs 278,000
Fixed Costs 86,000
Taxes (37%) 30,710
Sara Stevens has invested $100,000 in an account at her local bank. The bank will pay her a constant amount each year for 6 years, starting one year from today, and the account’s balance will be 0 at the end of the sixth year. If the bank has promised Ms. Stevens a 10% return, how much will they have to pay her each year?
Stuandlu, Corp have financing needs for $385,000 in Assets for the new dog treat company they started. The low liquidity return on assets is likely to be 16% and the high liquidity return is likely to be 9%. Their financing options are short-term for 4% and long-term for 7%. They pay 38% in tax. What is the NI projected for the conservative, aggressive and low liquidity hybrid plan?
The Accidental Petroleum Company is trying to determine its weighted average cost of capital for use in making a number of investment decisions. The firm’s bonds were issued 6 years ago and have 14 years left until maturity. They carried an 8% coupon rate, and are currently selling for $910.00.
The firm’s preferred stock carries a $3.10 dividend and is currently selling at $42.50 per share. Accidental’s investment banker has stated that issue costs for new preferred will be 50 cents per share.
The firm has significant retained earnings, but will also need to sell new common stock to finance the projects it is now considering. Accidental Petroleum common stock is expected to pay a $1.75 per share dividend next year, and is expected to maintain an 8% growth rate for the foreseeable future. The stock is currently priced at $50 per share, but new common stock will have flotation costs of 70 cents per share.
Calculate the costs of the various components of Accidental Petroleum’s capital (Kd, Kp, Ke, Kn). The firm’s tax rate is 30%.
The CPA practice of Knape, Knape & Knape is considering investing in a complete small business computer system. The initial investment will be $50,000. The computer is in the 5-year MACRS category, and the firm’s tax rate is 34%. The computer system is expected to provide additional revenue of $32,000 per year for the next six years, and to reduce expenses by $7,000 per year for the same period.
a) Calculate the net after-tax cash flows from this investment.
b) Calculate the net present value of the system, given that the law firm’s weighted average cost of capital is 12%. Compute IRR in Excel using IRR formula.
c) Should they buy the computer system?
Shannon Corporation has two bonds outstanding. Both bonds have coupon rates of 7%. Current yields for bonds of equal risk are 8%. Bond A has a maturity of 20 years, while Bond B has a maturity of 10 years. Interest is paid semiannually. Calculate the following for both bonds using semiannual analysis.
a) If market rates for bonds of equal risk fell to 6%, what would be the maximum price an investor would be willing to pay for these bonds?
b) If market rates for bonds of equal risk remained at 8%, what would be the bonds’ current worth?
c) If market rates for bonds of equal risk rose to 10%, what would be the bonds’ theoretical value?
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