闪电代写 -代写CS作业_CS代写_Finance代写_Economic代写_Statistics代写_代码代做_IT代写_加急帮助

Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit

BFF5956 CORPORATE FINANCING DECISIONS

Week 02 Tutorial Questions – BFF5954 Recap

CAPITAL BUDGETING DECISION

1. You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant’s report on your desk, and complains, “We owe these consultants $1.7 million for this report, and I am not sure their analysis makes sense. Before we spend the $28 million on new equipment needed for this project, look it over and give me your opinion.” You open the report and find the following estimates (in millions of dollars):

All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the new equipment that will be purchased today (year 0), which is what the accounting department recommended. The report concludes that because the project will increase earnings by $3.484 million per year for 10 years, the project is worth $34.84 million. You think back to your halcyon days in finance class and realize there is more work to be done! First, you note that the consultants have not factored in the fact that the project will require $14 million in working capital upfront (year 0), which will be fully recovered in year 10. Next, you see they have attributed $2.24 million of general, sales, and administrative expenses to the project, but you know that $0.64 million of this amount is overhead that will be incurred even if the project is not accepted. Finally, you know that accounting earnings are not the right thing to focus on!

a. Given the available information, what are the free cash flows in years 0 through 10 that should be used to evaluate the proposed project?

b. If the cost of capital for this project is 12%, what is your estimate of the value of the new project?

FINANCING DECISION

2. Company WACC: Flyworld Ltd currently has $300 million of market value debt outstanding. The 9 per cent coupon bonds (semi-annual pay) have a maturity of 15 years and are currently priced at $1,440.03 per bond. The company also has an issue of 2 million preference shares outstanding with a market price of $12.00. The preference shares offer an annual dividend of $1.20. The company also has 14 million ordinary shares outstanding with a price of $20.00 per share. The company is expected to pay a $2.20 ordinary dividend one year from today, and that dividend is expected to increase by 5 per cent per year forever. If the corporate tax rate is 30 per cent, then what is the company’s weighted average cost of capital?

3. MM Theory: Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume perfect capital markets.

a) Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 6%. What will the expected return of equity be after this transaction?

b) Suppose instead Hardmon borrows to the point that its debt-equity ratio is 1.50. With this amount of debt, Hardmon’s debt will be much riskier. As a result, the debt cost of capital will be 8%. What will the expected return of equity be in this case?

c) A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected return for the stock. How would you respond to this argument?

4. MM Theory: XYZ Ltd has $250 million of debt outstanding at an interest rate of 11 per cent. What is the present value of the debt tax shield if the debt has no maturity and if the company is subject to a 30 per cent company tax rate?

PAYOUT DECISION

5. ABC Co. has a current period cash flow of $1.2 million and pays no dividends. The current stock price is $16.2. The company is entirely financed with equity and has 600,000 shares outstanding. Assume the dividend tax rate is zero.

Suppose the board of directors of ABC Co. announces its plan to pay out 50 percent of its current cash flow as cash dividends to its shareholders. What will be the stock price on ex- dividend date if the dividend is declared?