Question 1
"On January 1, the total market value of Bravo Company was $60 million. During the upcoming year, Bravo plans to raise and invest $30 million in new projects. The firm's present market value capital structure, shown below, is considered to be optimal. Assume that there is no short-term debt Debt $30,000,000 Common equity 30,000,000 Total capital $60,000,000 New bonds will have an 8 percent coupon rate, and they will be sold at par. New common stock, currently selling at $30 a share, can be sold to net the company $27 a share. Stockholders' required rate of return is estimated to be 12 percent, consisting of a dividend yield of 4 percent and an expected growth rate of 8 percent. The next expected dividend is $1.20. Retained earnings for the year are estimated to be $3 million. The marginal corporate tax rate is 40 percent. Assume no depreciation cash flows are present. a. In order to maintain the present capital structure, how much (in dollars) of the new investment must be financed by common equity? b. How much (in dollars) of the needed new common equity funds must be generated externally? c. Calculate the cost of each of the common equity components. d. Calculate the firm's WACC using only retained earnings. e. At what level of capital expenditures will the firm's WACC increase?
Question 2
16-16. ADK Delivery is a small company that transports business packages between San Francisco and Los Angeles. It operates a fleet of small vans that moves packages to and from a central depot within each city and uses a common carrier to deliver the packages between the depots in the two cities. ADK recently acquired approximately $3 million of cash capital from its owners, and its president, Frank Hobb, is trying to identify the most profitable way to invest these funds. Travis Lard, the company?s operations manager, believes that the money should be used to expand the fleet of city vans at a cost of $540,000. He argues that more vans would enable the company to expand its services into new markets, thereby increasing the revenue base. More specifically, he expects cash inflows to increase by $210,000 per year. The additional vans are expected to have an average useful life of four years and a combined salvage value of $75,000. Operating the vans will require additional working capital of $30,000, which will be recovered at the end of the fourth year. In contrast, Katy Osmond, the company?s chief accountant, believed that the funds should be used to purchase large trucks to delivery the packages between the depots in the two cities. The conversion process would produce continuing improvement in operation savings with reductions in cash outflows as the following. Year 1 Year 2 Year 3 Year 4 $120k $240k $300k $330k The Large trucks are expected to cost $600,000 and to have a four-year useful life and a $60,000 salvage value. In addition to the purchase price of the trucks, up front training cost are expected to amount to $12,000. ADK Delivery?s management has established a 16% desired rate of return. a. Determine the net present value of the two investment alternatives b. Calculate the present value index for each alternative c. Indicate which investment alternative you recommend. Explain you choice. 16-17. Quentin Giordano owns a small retain ice cream parlor. He is considered expanding the business and has identified two attractive, Once involves purchasing a machine that would enable Mr. Giordano to offer frozen yogurt to customers. The machine would cost $4,050 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be $2,970 and $450, respectively. Alternatively, Mr. Gioridano could purchase for $5,040 the equipment necessary to serve cappuccino. That equipment has an expected useful life of four years and no salvage value. Addition annual cash revenues and cash operating expenses associated with selling a cappuccino are expected to be $4,140, and $1,215, respectively. Income before taxes earned by the ice crema parlor is taxed at an effective rate of 20 percent. a. Determine the payback period and unadjusted rate of return (use average investment) for each alternative. b. Indicate which investment alternative you would recommend. Explain your choice. 16-18. Sophia Seeny, the president of Sweeny Enterprises, is considering two investment opportunities. Because of limited resources, she will be able to invest in only one of them. Project A is to purchase a machine that will factory automation; the machine in expected to have a useful life of four years and no salvage value. Project B supports a training program that will improve the skills of employees operating the current equipment. Initial cash expenditures for Project A are $300k and for Project B are $120K. The annual expected cash inflows are $94,641 for Project A and $39,507 for project B. Both investment are expected to provide cash flow benefits for the next four years. Sweeny Enterprises cost of capital 8 percent. a. compute the net preset value of each project. Which project should be adopted based on the net preset value approach? b. Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return approach? c. Compare the net preset value approach with the internal rate of return approach. Which method is better in the given circumstances? Why?
Question 3
1065 Tax Return Marty Blaze (258-13-7946), Ron Barnett (915-46-7382), Dwayne Seller (753-82-4691), and Laura Mouse (465-28-1397) are equal members in Champs Equipment, LLC. Champs serves as agents and managers for prominent athletes in the Detroit area. The LLC?s Federal ID number is 63-9875421. It uses the cash basis and a calendar tax year, and it began operations on January 1, 2001. Its current address is 1397 Townsend Avenue, Suite 6500, Detroit, MI 56007. Champs was the force behind such athletic icons as Harry Berd and Mike Jarden., and it has had a very profitable year. The following information was taken from the LLC?s income statement for the current year. Revenues Fees and commissions $4,800,000 Taxable interest income from bank deposits 1,600 Tax-exempt interest 3,200 Net gains on stock sales 4,000 Total revenues $4,808,800 Expenses Advertising and public relations $380,000 Charitable contributions 28,000 Section 179 expense 20,000 Employee salaries and wages 1,000,000 Guaranteed payment, Marty Blaze, office manager 800,000 Guaranteed payment, other members 600,000 Entertainment, subject to 50% disallowance 200,000 Travel 320,000 Legal accounting fees 132,000 Office rentals paid 80,000 Interest expense on line of credit for operations 10,000 Insurance premiums 52,000 Office expense 200,000 Payroll taxes 92,000 Utilities 54,800 Total expenses $3,968,800 During the past few years, Champs has taken advantage of bonus depreciation and ?179 deductions and fully remodeled the premises and upgraded its leasehold improvements. This year, Champs wrapped ups its remodeling with the purchase of $20,000 of office furniture, for which it will claim a ?179 deduction. Champs uses the same cost recovery methods for both tax and financial purposes. There is no depreciation adjustment for alternative minimum tax purposes. Champs invests much of its excess cash in non-dividend-paying growth stocks and tax-exempt securities. During the year, the LLC sold two securities. On June 15, 2012, Champs purchased 1,000 shares of Mark, Inc. stock for $100,000; it sold those shares on December 15, 2012 for $80,000. On March 14, 2006, Champs purchased 2,000 shares of Lure, Inc. stock for $136,000; it sold those shares for $160,000 on December 15, 2012. Net income per books is $840,000. The firm?s activities do no constitute ?qualified production activities? for purposes of the ?199 deduction. On January 1, 2012, the members? capital accounts equalled $200,000 each. No additional capital contributions were made in 2012. In addition to their guaranteed payments, each member withdrew $250,000 cash during the year. Champ?s book balance sheet as of December 31, 2012 is as follows. Beginning Ending Cash $360,000 $ ?? Tax-exempt securities 120,000 120,000 Marketable securities 520,000 300,000 Leasehold improvements, furniture, and equipment 960,000 980,000 Accumulated depreciation (960,000) (980,000) Total assets $1,000,000 $ ?? Line of credit for operations $200,000 160,000 Capital, Blaze 200,000 ?? Capital, Barnett 200,000 ?? Capital, Seller 200,000 ?? Capital, Mouse 200,000 ?? Total liabilities and capital $1,000,000 $ ?? All debt is shared equally by the members. Each member has personally guaranteed the debt of the LLC. The business code for ?Agents and Managers for Artists, Athletes, Entertainers, and Other Public Figures? is 711410. The LLC?s Form 1065 was prepared by Marty Blaze and sent to the Wichita, KS IRS Service Center. All of the owners are active in Champ?s operations. Prepare Schedule K-1 for Marty Blaze, 67920 Hammond Road, Conway, MI 56008.
