# Week 5 Problem Set Fin/571

Only available on StudyMode
• Published : March 18, 2012

Text Preview
Complete the problem sets and show all steps in your work:

Ch. 17: Problem B1
Ch. 18: Problems A10 & B2
Ch. 20: Problem A2
Ch. 21: Problem C2

Chapter 17 (p. 500)

B1:

A. The goal is for Bixton to remain comfortably in the “A” range. For this to work properly, the firm must avoid ratings on the low end of the scale. Fixed Charge Coverage = 3.40 – 4.30
Total Debt = 55 – 65
Long-Term Debt = 25 – 30
B. Other considerable factors before settling on the target range includes: net present value (NPV), foreign tax credits, and the price of stock. In addition, the firm has a larger-than-average research and development department. Meaning if Bixton could show control over the spending in this area (funds from operations), any rating above 45% and below 65% would increase the lenders’ willingness to loan. C. Again, the key specific issues Bixton must resolve are the R&D and foreign tax credits. The target ranges listed in this case are only appropriate as a debt shield. More importantly, lenders will monitor for long-term debt to determine if R&D spending increase, and foreign tax credits remain balanced. That means any increase or decrease outside of the “A” range (22 – 32) indicates the capital structure is losing leverage. Chapter 18 (p. 542)

A10. DPS1 – DPS0 = ADJ[POR(EPS1) – DPS0]
YR1 = 0.75 [0.25 X \$8.00 - \$1.00] + \$1.00 = \$1.75
YR2 = 0.75 [0.25 X \$8.00 - \$1.75] + \$1.75 = \$1.94
YR3 = 0.75 [0.25 X \$8.00 - \$1.94] + \$1.94 = \$1.985
YR4 = 0.75 [0.25 X \$8.00 - \$1.98] + \$1.98 = \$2.00
YR5 = 0.75 [0.25 X \$8.00 - \$2.00] + \$2.00 = \$2.00
B2.
A.Total Discretionary Cash Flow = \$50 + \$70 + \$60 + \$20 + \$15 = \$215 Total Earnings = \$100 + \$125 + \$150 + \$120 + \$140 = \$635
Maximum Payout Ratio = \$215/\$635 = 33.86%
B.Current Dividend = \$1.50 X 20 Million Shares = \$30 Million Chapter 20 (p. 603)
A2. (Comparing borrowing cost)
Bond number 2 has the lower annual percentage cost at 4.61%

Chapter 21

C2)

a.A lease...