Question 1
Smith Cashwants to estimate the value of his idea for a new company in Lake City. The project is in the Start-up Stage. He began in the spring of 2013 with site selection and purchase/lease payments; contracting build out; equipment procurement and staffing at a total cost of $ 450,000. He expects the company to be opened in 2014, but will not begin to Build Cash through positive Cash Flows until 2017. After tax cash flows during the start-up/growth periods are expected to be: 2014 (-$0.23 MIL); 2015 (-$0.3 MIL); 2016 (-$0.1 MIL); 2017 ($ 1.2 mil) 2018($ 4.5 MIL). After 2018 company Cash Flows are projected to grow at 3% per year. Smith will personally fund all costs through early 2014, when he will need to raise $ 1.5 million in external capital which he expects will get the project to positive cash flow and sustainment in 2015. He expects that 2015 investors will require a 40% return to compensate for the risk of they are taking at that time. He needs to estimate the value of his business before beginning negotiations with investors. What is the value of the DISCREET CASH FLOWS which Smith projects through 2017? What is the Terminal Value of the company after it reaches the sustainment/maturity stage of its life cycle? What percentage ownership interest will Smith have to surrender to raise $1.2 MIL in 2015? If the company sells to an outside buyer to net $13,500,000 in 2017; and the only two owners are Smith and the 2015 investor, how will the Sales proceeds be divided? If the investors? money was tied up for 2.5 years, what return did he get on his investment? What return would be realized if the investor insisted upon (AND HE GOT) 35% participation in company value and a 2X Liquidation Preference in 2015?
Question 2
The following questions involve tax-free reorganizations. A. Brad exchanges 1,000 shares of Goodyear Corporation stock having a $15,000 basis for Atlas Corporation stock having a $25,000 FMV as part of a Type A tax-free reorganization and $6,000 in cash. How much gain must Brad recognize? (See pages 7-19 through 7-22.) _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ B. Carol owns Target Corporation stock having an adjusted basis of $41,000. As part of a Type C tax-free reorganization involving Revbo and Target Corporations, Carol exchanges her Target stock for $42,000 of Revbo stock and Revbo securities having a face amount and FMV of $8,000. (1) What is Carol's basis in the Revbo stock? (2) What is Carol?s realized gain? (3) What is Carol?s recognized gain? (See pages C7-27 and C7-28.) _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ C. Baxter Corporation transfers assets with an adjusted basis of $300,000 and a FMV of $500,000 to Duke Corporation for 90% of Duke?s single class of stock worth $500,000. The Duke stock is then exchanged for Frank?s 50% interest in Baxter Corporation. Frank?s basis in the Baxter stock he surrenders is $120,000. What is Frank?s basis in the Duke stock he receives? (See pages C7-37 and C7-38.) _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ D. As part of a Type B plan of corporate reorganization, Sally exchanged 1,000 shares of Tone Corporation common stock that she had purchased for $85,000, for 3,000 shares of Fade Corporation voting common stock having an $87,000 FMV. What is the amount and character of Sally?s recognized gain? What is her basis in the Tone stock? (See pages C7-24 and C7-25.) _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ E. Paris Corporation has E&P of $200,000. Paris owns all of Slider Corporation's stock, which is worth $80,000. The stock has been held for five years. Paris distributes all of the Slider stock and $20,000 cash to a 50% shareholder in exchange for all of the shareholder's 100 shares of Paris stock. The exchange qualifies as a Sec. 355 split-off transaction. The 50% shareholder's basis in the Paris stock surrendered is $90,000. What is the amount of the gain that the 50% shareholder must recognize (See pages C7-36 through C7-38.) _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________
Question 3
On December 31, 2012, Dow Steel Corporation had 730,000 shares of common stock and 43,000 shares of 9%, noncumulative, nonconvertible preferred stock issued and outstanding. Dow issued a 5% common stock dividend on May 15 and paid cash dividends of $530,000 and $82,000 to common and preferred shareholders, respectively, on December 15, 2013. On February 28, 2013, Dow sold 60,000 common shares. Also, as a part of a 2012 agreement for the acquisition of Merrill Cable Company, another 24,000 shares (already adjusted for the stock dividend) are to be issued to former Merrill shareholders on December 31, 2014, if Merrill?s 2014 net income is at least $630,000. In 2013, Merrill?s net income was $760,000. In keeping with its long-term share repurchase plan, 2,000 shares were retired on July 1. Dow?s net income for the year ended December 31, 2013, was $2,750,000. The income tax rate is 40%. As part of an incentive compensation plan, Dow granted incentive stock options to division managers at December 31 of the current and each of the previous two years. Each option permits its holder to buy one share of common stock at an exercise price equal to market value at the date of grant and can be exercised one year from that date. Information concerning the number of options granted and common share prices follows: Date Granted Options Granted Share Price (adjusted for the stock dividend) December 31, 2011 20,000 $ 32 December 31, 2012 15,000 $ 41 December 31, 2013 18,500 $ 40 -------------------------------------------------------------------------------- The market price of the common stock averaged $40 per share during 2013. On July 12, 2011, Dow issued $500,000 of convertible 10% bonds at face value. Each $1,000 bond is convertible into 50 common shares (adjusted for the stock dividend). Required: Compute Dow's basic and diluted earnings per share for the year ended December 31, 2013. (Do not round intermediate calculations and round your final answers to 2 decimal places.)
Question 4
Westex Products is a wholesale distributor of industrial cleaning products. When the treasurer of Westex Products approached the company's bank late in the current year seeking short-term financing, he was told that money was very tight and that any borrowing over the next year would have to be supported by a detailed statement of cash collections and disbursements. The treasurer also was told that it would be very helpful to the bank if borrowers would indicate the quarters in which they would be needing funds, as well as the amounts that would be needed, and the quarters in which repayments could be made. Because the treasurer is unsure as to the particular quarters in which bank financing will be needed, he has assembled the following information to assist in preparing a detailed cash budget: a. Budgeted sales and merchandise purchases for next year, as well as actual sales and purchases for the last quarter of the current year, are: Sales Merchandise Purchases Current year: Fourth quarter actual $200,000 $126,000 Next year: First quarter estimated $300,000 $186,000 Second quarter estimated $400,000 $246,000 Third quarter estimated $500,000 $305,000 Fourth quarter estimated $200,000 $126,000 -------------------------------------------------------------------------------- b. The company normally collects 65% of a quarter's sales before the quarter ends and another 33% in the following quarter. The remainder is uncollectible. This pattern of collections is now being experienced in the current year's fourth-quarter actual data. c. Eighty percent of a quarter's merchandise purchases are paid for within the quarter. The remainder is paid in the following quarter. d. Selling and administrative expenses for next year are budgeted at $50,000 per quarter plus 15% of sales. Of the fixed amount, $20,000 each quarter is depreciation. e. The company will pay $10,000 in dividends each quarter. f. Land purchases of $75,000 will be made in the second quarter, and purchases of $48,000 will be made in the third quarter. These purchases will be for cash. g. The Cash account contained $10,000 at the end of the current year. The treasurer feels that this represents a minimum balance that must be maintained. h. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each quarter, up to a total loan balance of $100,000. The interest rate on these loans is 2.5% per quarter and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the year. i. At present, the company has no loans outstanding. Requirement 1: (a) Prepare a schedule of expected cash collections by quarter and in total for next year. (b) Prepare a schedule of expected cash disbursements for merchandise purchases, by quarter and in total for next year. Requirement 2: Compute the expected cash disbursements for selling and administrative expenses, by quarter and in total, for next year. Requirement 3: Prepare a cash budget, by quarter and in total, for next year.
Question 5
""2. Van Den Borsh Corp. has annual sales of $50,735,000 an average inventory level of $15,012,000 and average accounts receivable of $10,008,000. The firm?s cost of goods sold is 85% of sales. The company makes all purchases on credit and has always paid on the 30th day. However, it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day. The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,946,000 and accounts receivable by $1,946,000. What will be the net change in the cash conversion cycle, assuming a 365-day year? 3. Buskirk Construction buys on terms of 2/15, net 60 days. It does not take discounts and it typically pays on time, 60 days after the invoice date. Net purchases amount to $450,000 per year. On average, how much ?free? trade credit does the firm receive during the year? (Assume a 365-day year, and note that purchases are net of discounts.) 4. Ingram Office Supplies, Inc. buys on terms of 2/15, net 50 days. It does not take discounts, and it typically pays on time, 50 days after the invoice date. Net purchases amount to $450,000 per year. On average, what is the dollar amount of costly trade credit (total credit-free credit) the firm receives during the year? (Assume a 365-day year and note that purchases are net of discounts.) 5. Affleck Inc.?s business is booming, and it needs to raise more capital. The company purchases supplies on terms of 1/10 net 20 and it currently takes the discount. One way of getting the needed funds would be to forgo the discount, and the firm?s owner believes she could delay payment to 40 days without adverse effects. What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year.) 6. Weiss Inc. arranged a $9,000,000 revolving credit agreement with a group of banks. The firm paid an annual commitment fee of .5% of the unused balance of the loan commitment. On the used portion of the revolver, it paid 1.5% above the prime for the funds actually borrowed on a simple interest basis. The prime rate was 3.25% during the year. If the firm borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year, what was the total dollar annual cost of the revolver? 7. Edwards Enterprises follows a moderate current asset investment policy, but it is now considering a change, perhaps to a restricted or maybe to a relaxed policy. The firm?s annual sales are $400,000; its fixed assets are $100,000; its target capital structure class for 50% debt and 50% equity; its EBIT is $35,000; the interest rate on its debt is 10% and its tax rate is 40%. With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be 25% of sales. What is the difference in the projected ROE?s between the restricted and relaxed policies?,Thank you very much, I appreciate it.,AWESOME!! Thank you so very much.
