Best mix of capital case-background information

Assignment Help Finance Basics
Reference no: EM131077632

Best Mix of Capital Case

Background Information

ACME Corp is a publicly traded firm listed on the NASDAQ.  Its current common stock price is 10 dollars per share.  The company currently has 75 million dollars in sales.  It expects sales to grow at 3 percent a year for the next several years.  The company's current fixed costs are 50 million dollars.  The federal tax rate is 40 percent.  The variable costs are 22.5 million dollars this year.  There are 1,000,000 shares outstanding.

The company has four capital projects that it would like to fund this year.  If funded all four projects would be producing results for the firm one year from now.  Project A has a life of 8 years, an initial investment of 2 million dollars, and an IRR of 12 percent.  Project B has a 5 million dollar initial investment and a five-year life with an annual net cash income expected of 1,318,982 and an IRR of 10 percent.  Project C has a life of 10 years, an IRR of 10 percent and a 4 million dollar initial investment.  Project D is a 7-year project with an initial investment of 3 million dollars and a 9 percent IRR.

If the company uses debt, its investment banker suggests the following structure:  8 year maturity, equal annual principal repayments over the 8 years, and a 12 percent interest rate on outstanding principal.

The company pays no dividends on its common stock.  The investment banker said to assume the firm would be able to issue common stock at the current market price, assuming the earnings per share will not be hurt in the future.

Preferred stock can be issued for a par value of 25 dollars per share and an annual dividend yield of 8 percent per share.  Preferred dividends are not tax deductible to the company.  Instead they are paid out of net income after taxes.  Earnings per share on common stock should be calculated after preferred dividends have been paid.  The numbers of shares of preferred stock are not included in the earnings per share calculation.  This only includes common stock.

For this case, we are not going to require a marginal cost of capital analysis.  Assume that all four projects are going to be done.  The Price Earnings ratio that is calculated in problem number one should also be utilized, as appropriate in each of the five remaining problems to forecast the stock price.

Case Requirements:

1.  Prepare a baseline income statement and forecast for 2 years. (current year and year 1 and year 2) without the impact of the new capital program.

2.  Prepare a current and 2 year forecast which shows the impact of the capital program on the company's income statement, prior to selecting any funding options.

3.  Prepare an income statement forecast (year 1 of forecast in item 2) that shows a 100 percent debt financing option.  Please show the forecasted earnings per share and the forecasted stock price, assuming the current PE multiple remains the same. (just as in the example)

4.  Prepare an income statement forecast as in number 3, using 100 percent common stock as the funding source.

5.  Prepare an income statement forecast for year 1 (as in number 3) using a mix of debt, common stock, and preferred stock.  The goal is to attempt to avoid reducing the current stock price and hopefully increasing the price.  Show your assumptions clearly on your funding mix.

6.  Do the problem in number five, assuming that the 3 percent increase in sales does not occur.  Instead, assume that the sales remain flat from the current year to year 1.  Again, calculate the best mix of debt and equity to maximize stock prices (or at least minimize the damage to the stock price) , assuming the current PE multiple remains unchanged.

Please have a team member post your response to the team assignments section by midnight the last day of the week assigned.

Reference no: EM131077632

Questions Cloud

Function accomplished with the r/w~ control signal : Question 4. 4. In the standard set-up of a keypad, the four rows are connected to 9S12G128 output ports, and the four columns are connected to input ports with internal pull up resistors enabled. In your own words, describe how the scanning progra..
Variable costing unit product cost and income statement : CompuDesk, Inc., makes an oak desk specially designed for personal computers. The desk sells for $200. Data for last year's operations follow:
Question regarding the external environment analysis : This assignment is the first of three assignments.  Students will use the tools and apply concepts learned in this and previous business courses to demonstrate an understanding of how organizations develop and manage strategies to establish
What is the probability that no more than 1 is defective : what is the probability that no more than 1 is defective
Best mix of capital case-background information : ACME Corp is a publicly traded firm listed on the NASDAQ.  Its current common stock price is 10 dollars per share.  The company currently has 75 million dollars in sales.
What is the probability that none of the people : What is the probability that none of the people
Determining the expected starting salary : However, if you don't make the cut then you will work at a fast food outlet for $40,000 per year. What is your expected starting salary?
Cross-exchange rate of the polish zloty : By what percentage did the cross-exchange rate of the Polish zloty in Swedish kronor (that is, the number of kronor that can be purchased with one zloty) change over the last year?
The minimum number of bits required for a dac : 1. (TCO 4) What is the minimum number of bits required for a DAC that can span 12V with a resolution of 20 mV or less?

Reviews

Write a Review

 

Finance Basics Questions & Answers

  What amount are you getting paid each year

You paid $1,000 for an investment today. The investment promises to pay you an equal cash flow every year for 25 years starting next year. If the interest rate is 4% p.a., what amount are you getting paid each year? (ROUND TO THE NEAREST DOLLAR)

  Different forms of business organization

Imagine the government has released funds for creating small businesses. You are interested in establishing a small business, and you must decide which of the four forms of business organization would best suit your unique product or service.

  How much was the mutual fund worth after 9 year

When the CD matured she invested the full amount in a mutual fund that had an annual growth equivalent to 18% compounded annually. How much was the mutual fund worth after 9 year?

  Estimate of the maximum share price for the purchase

After examining your analysis, the CFO of Happy Times is uncomfortable using the perpetual growth rate in cash flows. Instead, she feels that the terminal value should be estimated using the EV / EBITDA multiple. The appropriate EV / EBITDA multip..

  Calculate operating income

Calculate operating income using the following information:

  Using a balance sheet income statement and cash flow sheet

using a balance sheet income statement and cash flow sheet present 3 major categories of financial ratios and describe

  When computing the net present value of the project what is

hasko inc. has provided the following data to be used in evaluating a proposed investment projectinitial

  Determining required rate of return

Tom Phillips has just invested $8,760 for his son (age one). This money will be used for his son's education seventeen years from now. He computes that he will require $60,000 through the time the boy goes to school.

  Assume that two-year interest rates are 52 in the united

suppose that two-year interest rates are 5.2 in the united states and 1.0 in japan. the spot exchange rate is

  Adjusting entry to record depreciation expense

1. Determine if the adjusting entries to record depreciation expense are up to date. If not, complete the adjusting entry to record depreciation expense for the appropriate period of time to be able to determine the current book value.

  Calculate a the current ratio b the debt to total assets

kalbs books amp music inc. reported the following selected information at march 31.2012total current assets262787total

  Demonstrate understanding of the reading assignments

The Reflective Paper should demonstrate understanding of the reading assignments as well as the implications of new knowledge. The eight-page paper should integrate readings and class discussions into work and life experience. It may include expla..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd