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Corporate Financial Management-Long-Term Running head: CORPORATE FIANANCIAL MANAGEMENT-LONG-TERM FINANCING


Corporate Financial Management-Long-Term Financing

Carmen Booker University of Phoenix

Corporate Finance 571 Professor John R. Dewey July 12, 2010

35 – 4.30 FFO/Total Debt = 55-65% Long-Term Debt / Total Capitalization = 25 . What target range would you recommend for each of the three credit measures? For the company to have a comfortable range-placing them in the mid range will be the target rating and not close to the low end. Before settling on these target ranges. what other factors should Bixton’s chief financial officer consider? Ability to use fully non-interest tax credit and debt management considerations such as issuance costs. Her staff prepared the industry comparison shown here. c. Fixed Charge Coverage = 3.Corporate Financial Management-Long-Term Financing Chapter 17 Problems Sets B1) (Choosing financial targets) Bixton Company’s new chief financial officer is evaluating Bixton’s capital structure. She is concerned that the firm might be underleveraged. even though the firm has larger-than-average research and development and foreign tax credits when compared to other firms in its industry.30 b. Before deciding whether the target ranges are really appropriate for Bixton in its current financial situation. what key issues specific to Bixton must the chief financial resolve? . The CFO should also consider that the firm’s R & D is an intangible asset and that lenders may not be willing to loan the same percentage of debt to Bixton as to its competitors. a.

75 [0.75 D² = $39÷ 20 = $1.25 x $8.25 X $8.25 x $8.00 B2) (Dividend policy) A firm has 20 million common shares outstanding.75 [0.$1.00 = $1.00 per share this year and each year in the foreseeable future.00 .75 [0. It will earn at least $8.75 = $1.86% b.00 .95 D³ = $43÷ 20 = $2.94 D³= 0.50 per share per year in cash dividends on its common stock.75 [0.50 x 20 million shares = $30 million The firm could gradually increase the dividend from $30 million to $50 million.$1. The additional tax shield from additional debt may not be valuable when R&D and foreign tax credits are taken into consideration.00] + $1. Current dividend = $1.1).00 . Chapter 18 A10) (Dividend adjustments model) Regional Software has made a bundle selling would like the firm to distribute 25% of its annual earnings (POR = .75 [0. a.$1. Over the next five years its expects the earning and discretionary cash flow shown below in millions.75] + $1.$2. It currently pays out $1. its payout ratio has ranged from 30% to 35%.75.00] + $2.75 D²=0. Regional paid $1.00 per share in dividends last year.15 .25) and adjust the dividend rate to changes in earnings per share at the rate ADJ = 0.94] + $1.$1. Historically.25 x $8. what is the maximum overall payout ratio the firm could achieve without triggering securities in millions? Total earnings = $100 + $125 + $150 + $120 + $140 = $635 Total discretionary cash flow = $50 + $70 + $60 +$20 + $15 = $215 Maximum Payout Ratio = $215÷$635 = 33.The CFO needs to consider R & D and foreign tax credits. D¹ = $35÷ 20 = $1.00 D5=0. Equation (18.25 X $8. Use the dividend adjustment model.00 . to calculate projected dividends per share for this year and the next four.00 .98 = $2. D1=ADJ [POR(ESP1) – D0] + D0 D1= 0. Over 5 years.94 = $1.985 D4=0.00 = $2.98] + $1.

the bond has a 9% paid semiannually.25 FV $50 . R=4. PV=-($50 -$1) = -$49 Pmt=9%÷2x50=$2.0461)² -1 = 9. n=20.5)=-$49. Chapter 20 A2) (Comparing borrowing costs) Stephens Security has two financing alternatives: (1) A publicly placed $50 million bond issue.5 PMT=9. A lease represents a form of secured debt.000 n=40. The lease payment is taxable as ordinary income to the lessor. which affects the entire debt service stream (i. Chapter 21 C2) (Leasing.. Each lease payment includes an interest segment and a principal repayment segment.36 APR=9. there is never a discretionary cash deficit. a.50 The total discretionary cash flows $35 + $39 + $43 + $48 + $50 = $215-the large discretionary cash flows occurs at the beginning. and the bond has a 20-year life. the lessor must pay on the rental income.25% annual coupon.$0. Which alternative has the lower cost (annual percentage yield)? 1.000.4334% 2. Issuance costs are $1 million. the bond has a 9.40 D5 =$50÷ 20 = $2.D4= $48÷ 20 = $2. Bond Value =$5000000 Interest Rate = 95 Life = 20 Issue Cost = $1.36% Choice 2 has the lower APY. .e. and the time value of money) The lessor can claim the tax deductions associated with asset ownership and realize the leased asset’s residual value.25% x 50 = $4.61% APR = (1=0. Issuance cost is $500. the interest component and the principal component) is also taxable as ordinary income. Explain why a financial lease represents a secured loan in which the lender’s entire debt service stream is taxable as ordinary income to the lessor/lender. PV= -($50 . taxes. In return.625 FV=$50 R=9.000. (2) A $50 million private placement with a large pension fund. and the bond has a 20-year life.

what tax condition must hold in order for a financial lease transaction to generate positive net-present-value tax benefits for both the lessor and lessee? This is the criteria which must hold: PV(lessee’s lease payment tax shields) + PV(lessor’s depreciation tax shields + Other tax credits) <is greater than> PV(lessor’s lease payment tax liability) + PV(lessee’s depreciation tax shields + other tax credits) in order for a financial lease transaction to generate positive net value benefits for lessor and lessee combined. In view of this tax cost.b. .