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Text Problem Sets
Before deciding whether the target ranges are really appropriate for Bixton in its current financial situation.25x 3. even though the firm has larger-than-average research and development and foreign tax credits when compared to other firms in its industry. Bixton’s objective is to achieve a credit standing that falls.00–5.95–3.30 1. The financial officer should also consider the importance of foreign tax credits.30 Cash Flow / Total Debt = 55 . Her staff prepared the industry comparison shown here. (Choosing financial targets) Bixton Company’s new chief financial officer is evaluating Bixton’s capital structure. The chief financial officer should also consider that the intangible assets and arguments lenders may use to determine loan levels.40 60–80% 45–65 35–55 LONG-TERM DEBT/ CAPITALIZATION 17–23% 22–32 30–41 .” What target range would you recommend for each of the three credit measures? Answer: Being comfortably means to be off the low end of the ratings. 500) B1.00–4. Before settling on these target ranges. what other factors should Bixton’s chief financial officer consider? Answer: Being able to use non-interest tax credits and debt management considerations such as issuance costs. in the words of the chief financial officer.40 .30 b. c. She is concerned that the firm might be underleveraged. additional tax shield from additional debt can have little effects.65 Long-Term Debt / Total Capitalization = 25 . a.4. Fixed Charge Coverage = 3. 17: Problem B1 (p. what key issues specific to Bixton must the chief financial officer resolve? Answer: In some instances. FUNDS FROM RATING FIXED CHARGE OPERATIONS/ CATEGORY COVERAGE TOTAL DEBT Aa A Baa 4.Text Problem Sets 2 Text Problem Sets • Ch. “comfortably within the ‘A’ range.
Over the next five years it expects the earnings and discretionary cash flow shown below in millions.00 per share in dividends last year.1). It currently pays out $1.Text Problem Sets 3 Ch.25 x $8.$1.00 .00 .94 D3 = 0.00 . Equation (18.75.98] + $1. what is the maximum overall payout ratio the firm could achieve without triggering a securities issue? Total discretionary cash flow = $50 + $70 + $60 + $20 + $15 = $215 Total earnings = $100 + $125 + $150 + $120 + $140 = $635 Maximum Payout Ratio = $215 / $635 = 33.00 .98 = $2. (Dividend adjustment model) Regional Software has made a bundle selling spreadsheet software and has begun paying cash dividends.25 x $8.75 [0. Use the dividend adjustment model. D1 = $35 / 20 = $1.00 D5 = 0.86% b.00 B2.00 = $2.75 D2 = 0.75 [0. Historically.$1.00 .94 = $1.15 . Over the five-year period. (Dividend policy) A firm has 20 million common shares outstanding.00] + $1.75 = $1.75 [0. 1 2 3 4 5 THEREAFTER Earnings 100 125 150 120 140 150+ per year Discretionary cash flow 50 70 60 20 15 50+ per year Current dividend = $1.00] + $2.$1.50 x 20 million shares = $30 million The firm could gradually increase the dividend from $30 million to $50 million. 542) A10.25 x $8.$2. to calculate projected dividends per share for this year and the next four. its payout ratio has ranged from 30% to 35%.00 per share this year and each year in the foreseeable future.75 D2 = $39 / 20 = $1.75] + $1.D0] + D0 D1 = 0. Recommend a reasonable dividend policy for paying out discretionary cash flow in years1 through 5.94] + $1. It will earn at least $8. The firm’s chief financial officer would like the firm to distribute 25% of its annual earnings (POR = 0.985 D4 = 0. Regional paid $1.25 x $8. 18: Problems A10 & B2 (p. Answer D1 = ADJ [POR(EPS1) .25 x $8.00 = $1.$1.50 per share per year in cash dividends on its common stock.95 D3 = $43 / 20 = $2.75 [0.25) and adjust the dividend rate to changes in earnings per share at the rate ADJ = 0. a.75 [0.
36% Choice 2 (9. a.250.000 4.4334% 2.Text Problem Sets 4 D4 = $48 / 20 = $2. and each project costs $2.5) = -$49. None of the projects requires or precludes any of the other projects.25 D 270 2.500. Which alternative has the lower cost (annual percentage yield)? Number of Periods (nper) 40(20) = Coupon Payments (pmt) 2. Issuance costs are $1 million. 8: Problem A7 (p. 603) • A2.61% Bond Equivalent Yield 9.40 D5 = $50 / 20 = $2.$0.000.25% annual coupon.25 FV = $50 r = 4. Also assume that all of the projects listed here are perpetuities with annual cash flows (in $) and betas as indicated. n = 20 r = ? PV = -($50 .36 .000 (option 2) Face Value of Bond (FV) 50.50 Note that $35 + $39 + $43 + $48 + $50 = $215. (Comparing borrowing costs) Stephens Security has two financing alternatives: (1) A publicly placed $50 million bond issue.000.000 Net Proceeds of Bond (PV) 49.0461)2 -1 = 0. and the bond has a 20-year life. the bond has a 9. n = 40 r = ? PV = -($50 .000 (both option 1 & 2) Yield to Maturity 4.22% (option 1) 9. Issuance costs are $500.36% (option 2) 1. the total discretionary cash flow and since large discretionary cash flows occur at the beginning. What is the NPV of each project? PROJECT Annual cash flow Beta A 310 B 500 1.09432521 = 9.625 FV = $50 r = 9. (Finding NPVs with differing project risks) Assume the expected return on the market portfolio is 15% and the riskless return is 9%.36%) has the lower Annual Percentage Yield (APY). and the bond has a 20-year life.22 E 385 0.00 C 435 2.5 PMT = 9. 211) A7.37 2. (2) A $50 million private placement with a large pension fund.65 F 450 1. there is never a discretionary cash deficit.61% APY = (1 + 0.25% x $50 = $4.000.625.000 (option 1) 49. the bond has a 9% coupon paid semiannually. 20: Problem A2 (p.$1) = -$49 PMT = 9% / 2 x $50 = $2. • Ch.000. Ch.36% APY = 9.
236) A5. and payback period for the following investment.000 per year. (56.67 A 310 B 500 C 435 D 270 E 385 F 450 1 2.32% 12.94 IRR= (-200000.02 77 235.22% 23. Assuming a 10% cost of capital.Text Problem Sets 5 PROJECT Annual cash flow Beta Market return Riskless return Risk premium CAPM Project cost NPV .22 0.409. 270) B5.150000) = $78.00% 22. What is the net investment? b. Syracuse Roadbuilding is in the 45% income tax bracket. 2. (Investment criteria) Compute the NPV.000 is needed to paint it with the firm logo and install radio equipment. IRR. 99) b. and an additional $5.000 after its five-year life.100000. a.65 1.45% Payback Period: 2 years • Ch.000 NVP= (10%(-200000.000 is required during the life of the investment. YEAR Cash flow 0 -200.100000.100000. An inventory investment of $4. What is the after-tax salvage value? d. The cost of capital is 10%.150000) = 31. 2. 9: Problem A5 (p. what is the NPV of this investment? (See attached spreadsheet for answer) . and E • Ch. The truck will generate no additional revenues. 2.16% 2.37 2.000 1 100.90% 17. 2.36 15% 15% 15% 15% 15% 15% 9% 9% 9% 9% 9% 9% 6% 6% 6% 6% 6% 6% 15.000. B. (Cash flows and NPV for a new project) Syracuse Roadbuilding Company is considering the purchase of a new tandem box dump truck. 10: Problem B5 (p. The truck will be sold for $40. 2.100000. (51. but it will reduce cash operating expenses by $35. What is the after-tax net operating cash flow for each of the five years? c. D. Which projects should the firm undertake? The firm should undertake projects A. Assume the truck falls into the MACRS three-year class.000 3 150.000 2 100. 08) 93 . 000 000 000 000 000 000 66 22 222. The truck costs $95.50% 22.25 2.
leverage and coverage. difficult planning. financially strong. termination of operations). The management team and banks. insurers. activity. higher taxes (less after tax revenues). 12: Question 5 (p. labor unrest. what factors would you consider before investing in the emerging stock market of a developing country? An investor in emerging market stocks needs to be concerned with the depth of the market and the market’s liquidity. Borrowers want money by issuing bonds to investors. political changes may change economic policies. currency inconvertibility (inability to repatriate profits. and appealing and profitable for its shareholders. or use their own capital to acquire the number of borrowers. an investor would be wise to examine the market turnover ratio of the country’s stock market. Financial ratios show market turnover rates. higher interest rates (higher borrowing costs in host country). war or shear macroeconomic mismanagement there can be instances of expropriation (loss of assets. currency depreciation). A high concentration ratio indicates a shallow market.335) As an investor. higher tariffs (higher import costs). will sell bonds to investors and each underwriter receives a percentage depending on the duties they performed. Companies strive from day to day to make their business publicly strong. import). 311) 5. and hard currency shortage. For instances. profitability. 13: Question 2 (p. One measure of the depth of the market is the concentration ratio of a country’s stock market. Ratios help measure a company's liquidity. inflation (higher costs. Discuss the process of bringing a new international bond issue to market. assess market conditions and program management. and the problem. They will get in touch with the bank and ask to increase to act as leader of a group of underwriters in securities. The concentration ratio frequently shows the market value of the top stocks traded. • Ch. Other factors to consider include the country-risk analysis. civil unrest.Text Problem Sets 6 Answer the following questions from your International Financial Management textbook in 100 to 150 words. In terms of liquidity. Depth of the market shows investment opportunities in a country. During political. The leader is most likely to ask others to a management group to form and negotiate an agreement with the borrower. . Most insurers/underwriters. • Ch.
Stowe (2007). Eun & Resnick.). John D.Text Problem Sets 7 References: Douglas R. and John D. International Financial Management (4th ed.Emery.). New Jersey: Pearson-Prentice Hall. .Finnerty.New YorkMcGraw-Hill. (2007). Corporate Financial Management (3rd ed.
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