Question 1
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 10% preferred stock, and 50% common stock equity (retained earnings, new common stock, or both). The firm?s tax rate is 40%. Debt The firm can sell for $980 a 10-year, $1,000-par-value bond paying annual interest at a 10% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of $20 per bond. Preferred stock Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Common stock The firm?s common stock is currently selling for $50 per share. The dividend expected to be paid at the end of the coming year (2013) is $4. Its dividend payments, which have been approximately 60% of earnings per share in each of the past 5 years, were as shown in the following table. Year Dividend 2012 $3.75 2011 3.50 2010 3.30 2009 3.15 2008 2.85 It is expected that to attract buyers, new common stock must be underpriced $5 per share, and the firm must also pay $3 per share in flotation costs. Dividend payments are expected to continue at 60% of earnings. (Assume that Rr=Rs.) a. Calculate the after-tax cost of debt. b. Calculate the cost of preferred stock. c. Calculate the cost of common stock. d. Calculate the WACC for Dillon Labs.
Question 2
Let me clarify, one-two paragraphs for each question. Enough to be detailed. Will increase deposit when you confirm. TO DO a. Discuss the pros and cons of option 1, and prioritize your thoughts. What are the most positive aspects of this option, and what are the biggest drawbacks? b. Do the same for option 2. c. Which option do you think Sara should recommend to the board and why? Problem: Sara Lehn, chief financial officer of Merit Enterprise Corp., was reviewing her presentation one last time before her upcoming meeting with the board of directors. Merit?s business had been brisk for the last two years, and the company?s CEO was pushing for a dramatic expansion of Merit?s production capacity. Executing the CEO?s plans would require $4 billion in capital in addition to $2 billion in excess cash that the firm had built up. Sara?s immediate task was to brief the board on options for raising the needed $4 billion. Unlike most companies its size, Merit had maintained its status as a private company, financing its growth by reinvesting profits and, when necessary, borrowing from banks. Whether Merit could follow that same strategy to raise the $4 billion necessary to expand at the pace envisioned by the firm?s CEO was uncertain, though it seemed unlikely to Sara. She had identified two options for the board to consider: Option 1: Merit could approach JPMorgan Chase, a bank that had served Merit well for many years with seasonal credit lines as well as medium-term loans. Lehn believed that JPMorgan was unlikely to make a $4 billion loan to Merit on its own, but it could probably gather a group of banks together to make a loan of this magnitude. However, the banks would undoubtedly demand that Merit limit further borrowing and provide JPMorgan with periodic financial disclosures so that they could monitor Merit?s financial condition as it expanded its operations. Option 2: Merit could convert to public ownership, issuing stock to the public in the primary market. With Merit?s excellent financial performance in recent years, Sara thought that its stock could command a high price in the market and that many investors would want to participate in any stock offering that Merit conducted. Becoming a public company would also allow Merit, for the first time, to offer employees compensation in the form of stock or stock options, thereby creating stronger incentives for employees to help the firm succeed. On the other hand, Sara knew that public companies faced extensive disclosure requirements and other regulations that Merit had never had to confront as a private firm. Furthermore, with stock trading in the secondary market, who knew what kind of individuals or institutions might wind up holding a large chunk of Merit stock?
Question 3
Sales, production, purchases, and cash budgets - Rolen, Inc., is in the process of preparing the fourth quarter budget for 2010, and the following data have been assembled: The company sells a single product at a price of $25 per unit. The estimated sales volume for the next six months is as follows: _____________________________________________________________ September........................................13,000 units October..........................................12,000 units November.........................................14,000 units December.........................................20,000 units January...........................................9,000 units February.........................................10,000 units _____________________________________________________________ All sales are on account. The company's collection experience has been that 30% of a month's sales are collected in the month of sale, 68% are collected in the month following the sale, and 2% are uncollectible. It is expected that the net realizable value of accounts receivable (i.e. accounts receivable less allowance for uncollectible accounts) will $211,000 on September 30, 2010. Management's policy is to maintain ending finished goods inventory each month at a level equal to 30% of the next month's budgeted sales. The finished goods inventory on September 30, 2010, is expected to be 3,600 units. To make one unit of finished product, 5 pounds of materials are required. Management's policy is to have enough materials on hand at the end of each month to equal 40% of the next month's estimated usage. The raw materials inventory is expected to be 25,200 pounds on September 30, 2010. The cost per pound of raw material is $2, and 70% of all purchases are paid for in the month of purpose; the remainder is paid in the following month. The accounts payable for raw material purchases is expected to be $37,980 on September 30, 2010. Required (Show all work): a. Prepare a sales budget in units and dollars, by month and in total, for the fourth quarter (October, November, and December) of 2010. b. Prepare a schedule of cash collections from sales, by month and in total, for the fourth quarter of 2010. c. Prepare a production budget in units, by month and in total, for the fourth quarter of 2010. d. Prepare a materials purchases budget in pounds, by month and in total, for the fourth quarter of 2010. e. Prepare a schedule of cash payments for materials, by month and in total, for the fourth quarter of 2010.
Question 4
CR Oil is an integrated oil company. The following information is taken from its income statements for 2009 and 2010 (all dollar figures are in millions): 2009 Sales: $15,000; cost of goods sold: 50% of sales, depreciation: $500, CAPEX: $400, additional investment in net working capital: $150 2010 Sales: $16,000, cost of goods sold: 55% of sales, depreciation: $580, CAPEX: $250, additional investment in net working capital: $50 Applicable tax rate for the company is 35%. Calculate company?s free cash flows (FCF) for 2009 and 2010 Estimate company?s FCF for 2010-2014 using the following assumptions: Company?s sales will grow at 6% per year over the next five years; Cost of goods sold as a percentage of sales is expected to increase by 1% each year, i.e., the gross margin ratio will be decreasing by 1% every year; Total CAPEX each year is expected to be equal to 25% of additional sales that year (compared to the previous year); Increase in net working capital in a given year will be equal to 5% of additional sales that year (compared to the previous year); Total depreciation each year will be equal to the total depreciation in a prior year plus 20 % of CAPEX incurred in a prior year (for example, depreciation in 2010 was 500 + 20% x 400 = 580). Since the company is a going concern we need not be concerned about the liquidation value of the firm?s assets at the end of 2015. Please put in excel so I can see calulatation to check myself thx
Question 5
The following information is available to reconcile Branch Company's book balance of cash with its bank statement cash balance as of July 31, 2010. a. After all posting is complete on July 31, the company's Cash account has a $27,497 debit balance, but its July bank statement shows a $27,233 cash balance. b. Check No. 3031 for $1,482 and Check No. 3040 for $558 were outstanding on the June 30 bank reconciliation. Check No. 3040 is listed with the July canceled checks, but Check No. 3031 is not. Also, Check No. 3065 for $382 and Check No. 3069 for $2,281, both written in July, are not among the canceled checks on the July 31 statement. c. In comparing the canceled checks on the bank statement with the entries in the accounting records, it is found that Check No. 3056 for July rent was correctly written and drawn for $1,270 but was erroneously entered in the accounting records as $1,250. d. A credit memorandum enclosed with the July bank statement indicates the bank collected $8,000 cash on a noninterest-bearing note for Branch, deducted a $45 collection fee, and credited the remainder to its account. Branch had not recorded this event before receiving the statement. e. A debit memorandum for $805 lists a $795 NSF check plus a $10 NSF charge. The check had been received from a customer, Evan Shaw. Branch has not yet recorded this check as NSF. f. Enclosed with the July statement is a $25 debit memorandum for bank services. It has not yet been recorded because no previous notification had been received. g. Branch's July 31 daily cash receipts of $11,514 were placed in the bank's night depository on that date, but do not appear on the July 31 bank statement. **(Please see attached document for the guidelines.)**
