Corporate Exam

Submit one Excel spreadsheet per week, on one tab (no multiple tabs). Number each problem and leave a color highlighted space in between each problem. 

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Chapter 13 Problems: 
•EP 13-2 (p. 431)
• EP 13-3 (p. 431)
• CP 13-11 (p. 433)

Chapter 14 Problems: 
•EP 14-1 (p. 465)
• EP 14-2 (p. 465)
• EP 14-3 (p. 465)

Chapter 15 Problems: 
•EP 15-1 (p. 503)
• EP 15-2 (p. 503)
• EP 15-6 (p. 504)

Chapter 16 Problems: 
•EP 16-1 (p. 527)
• EP 16-2 (p. 527)
• EP 16-3 (p. 527)
Submit one Excel spreadsheet per week, on one tab (no multiple tabs). Number each problem and leave a color highlighted space in between each problem. 

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Chapter 13 Problems: 
•EP 13-2 (p. 431)

13-2 OPTIMAL CAPITAL STRUCTURE Jackson Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels:

Debt/Capital Ratio         Projected EPS                        Projected Stock Price

20%                                        $3.20                                        $35.00

30                                              3.45                                         36.50

40                                              3.75                                          36.25

50                                             3.50                                            35.50

Assuming that the firm uses only debt and common equity, what is Jackson's optimal capital structure? At what debt-to-capital ratio is the company's WACC minimized?




• EP 13-3 (p. 431)
13-3 RISK ANALYSIS

a. Given the following information, calculate the expected value for Firm C's EPS. Data for Firms A and B are as follows: E(EPSA) = $5.10, and σA = $3.61; E(EPSB) = $4.20, and σB = $2.96.

 

Probability

 

0.1

0.2

0.4

0.2

0.1

Firm A: EPSA

($1.50)

$1.80

$5.10

$8.40

$11.70

Firm B: EPSB

(1.20)

1.50

4.20

6.90

9.60

Firm C: EPSC

(2.40)

1.35

5.10    

8.85

12.60

b. You are given that σC = $4.11. Discuss the relative riskiness of the three firms’ earnings.


• CP 13-11 (p. 433)

 13-11 RECAPITALIZATION Currently, Bloom Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Bloom's debt currently has an 8% yield to maturity. The risk-free rate (rRF) is 5%, and the market risk premium (rM - rRF) is 6%. Using the CAPM, Bloom estimates that its cost of equity is currently 12.5%. The company has a 40% tax rate.

a. What is Bloom's current WACC?

b. What is the current beta on Bloom's common stock?

c. What would Bloom's beta be if the company had no debt in its capital structure? (That is, what is Bloom's unlevered beta, bU?)

Bloom's financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 9.5%. The proposed change will have no effect on the company's tax rate.

d. What would be the company's new cost of equity if it adopted the proposed change in capital structure?

e. What would be the company's new WACC if it adopted the proposed change in capital structure?

f. Based on your answer to Part e, would you advise Bloom to adopt the proposed change in capital structure? Explain.



Chapter 14 Problems: 
•EP 14-1 (p. 465)

14-1 RESIDUAL DIVIDEND MODEL Axel Telecommunications has a target capital structure that consists of 70% debt and 30% equity. The company anticipates that its capital budget for the upcoming year will be $3,000,000. If Axel reports net income of $2,000,000 and it follows a residual dividend payout policy, what will be its dividend payout ratio?





• EP 14-2 (p. 465)

14-2 STOCK SPLIT Gamma Medical's stock trades at $90 a share. The company is contemplating a 3-for-2 stock split. Assuming that the stock split will have no effect on the market value of its equity, what will be the company's stock price following the stock split?




• EP 14-3 (p. 465)

14-3 STOCK REPURCHASES Beta Industries has net income of $2,000,000, and it has 1,000,000 shares of common stock outstanding. The company's stock currently trades at $32 a share. Beta is considering a plan in which it will use available cash to repurchase 20% of its shares in the open market. The repurchase is expected to have no effect on net income or the company's P/E ratio. What will be Beta's stock price following the stock repurchase?





Chapter 15 Problems: 
•EP 15-1 (p. 503)

15-1 CASH CONVERSION CYCLE Primrose Corp has $15 million of sales, $2 million of inventories, $3 million of receivables, and $1 million of payables. Its cost of goods sold is 80% of sales, and it finances working capital with bank loans at an 8% rate. What is Primrose's cash conversion cycle (CCC)? If Primrose could lower its inventories and receivables by 10% each and increase its payables by 10%, all without affecting sales or cost of goods sold, what would be the new CCC, how much cash would be freed up, and how would that affect pretax profits?

• EP 15-2 (p. 503)
15-2 RECEIVABLES INVESTMENT Lamar Lumber Company has sales of $10 million per year, all on credit terms calling for payment within 30 days; and its accounts receivable are $2 million. What is Lamar's DSO, what would it be if all customers paid on time, and how much capital would be released if Lamar could take action that led to on-time payments?

• EP 15-6 (p. 504)

15-6 WORKING CAPITAL INVESTMENT Prestopino Corporation produces motorcycle batteries. Prestopino turns out 1,500 batteries a day at a cost of $6 per battery for materials and labor. It takes the firm 22 days to convert raw materials into a battery. Prestopino allows its customers 40 days in which to pay for the batteries, and the firm generally pays its suppliers in 30 days.

a. What is the length of Prestopino's cash conversion cycle?

b. At a steady state in which Prestopino produces 1,500 batteries a day, what amount of working capital must it finance?

c. By what amount could Prestopino reduce its working capital financing needs if it was able to stretch its payables deferral period to 35 days?

d. Prestopino's management is trying to analyze the effect of a proposed new production process on its working capital investment. The new production process would allow Prestopino to decrease its inventory conversion period to 20 days and to increase its daily production to 1,800 batteries. However, the new process would cause the cost of materials and labor to increase to $7. Assuming the change does not affect the average collection period (40 days) or the payables deferral period (30 days), what will be the length of its cash conversion cycle and its working capital financing requirement if the new production process is implemented?


Chapter 16 Problems: 
•EP 16-1 (p. 527)

16-1 AFN EQUATION Carter Corporation's sales are expected to increase from $5 million in 2011 to $6 million in 2012, or by 20%. Its assets totaled $3 million at the end of 2011. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2011, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 5%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast the additional funds Carter will need for the coming year.

• EP 16-2 (p. 527)
Easy Problems 1-6

16-2 AFN EQUATION Refer to Problem 16-1. What additional funds would be needed if the company's year-end 2011 assets had been $4 million? Assume that all other numbers are the same. Why is this AFN different from the one you found in Problem 16-1? Is the company's “capital intensity” the same or different? Explain.


• EP 16-3 (p. 527)
16-3 AFN EQUATION Refer to Problem 16-1 and assume that the company had $3 million in assets at the end of 2011. However, now assume that the company pays no dividends. Under these assumptions, what additional funds would be needed for the coming year? Why is this AFN different from the one you found in Problem 16-1?