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You are analyzing Skates Inc., a firm that manufactures skateboards. The firm is currently unlevered and has a cost of equity of 12%. You estimate that Skates would have a cost of capital of 11% at its optimal debt ratio of 40%. The management, however, insists that it will not borrow the money because of the value of maintaining financial flexibility and has provided you with the following information:
Over the past 10 years, reinvestment (net capital expenditures + working capital investments) has amounted to 10% of firm value, on an annual basis. The standard deviation in this reinvestment has been 0.30. The firm has traditionally used only internal funding (net income + depreciation) to meet these needs, and these have amounted to 6% of firm value.In the most recent year, the firm earned $180 million in net income on a book value of equity of $1 billion, and it expects to earn these excess returns on new investments in the future. The riskless rate is 5%.
a. Calculate the alternative estimating esteem (and show the formula)
b. Estimate the value of financial flexibility as a percent of firm value on an annual basis.
c. Based on (b), would you recommend that Skates use its excess debt capacity?
Assume Colgate-Palmolive Company has just paid an annual dividend of $0.95. Analysts are predicting an 11.4% per year growth rate in earnings over the next five years. After that, Colgate's earnings are expected to grow at the current industry averag..
Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $212,000, has a four-year life, and requires $68,000 in pretax annual operating costs. Calculate the EAC for both conveyor belt sys..
Company X has a $ 100 million, 2 year, 6% fixed rate semi-annual pay debt. Payments are actual count over a 360-day year. The company expects interest rates to fall and would prefer to have a floating rate debt. A $100 million, two year 5.5% semi-ann..
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Heginbotham Corp. issued 20-year bonds two years ago at a coupon rate of 8.3 percent. The bonds make semiannual payments. If these bonds currently sell for 104 percent of par value, what is the YTM?
The Central Clinic, a local not for profit health center, is considering investing $5,000 today in a new piece of screening equipment. The annual profits from this new piece of equipment will be $800 for each of the seven years of its useful life. Wh..
Fool Proof Software is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4.
The Wall Street Journal reports that the current rate on 5-year Treasury bonds is 2.70 percent and on 10-year Treasury bonds is 5.05 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 5-year Treasury bond purchas..
Chris’s Outdoor Furniture, Inc., has net cash flows from operating activities for the last year of $450 million. The income statement shows that net income is $425 million and depreciation expense is $55 million. At the beginning of the year, the bal..
Among the assets in a decedent’s gross estate is stock in a closely held corporation that was left to a nephew. The interest passing to the nephew is required to bear the burden of all estate taxes and expenses. What amount of closely held corporate ..
1.b suppose unique motors company sold an issue of bonds on january 1 2001. the bonds were sold for 980 per unit i.e.
“A currency appreciation is good for a country, and currency depreciation is bad”. Please comment on this statement. Does this require a particular exchange rate regime? A level of International Reserves?
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