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%

...a rating that is “comfortably within the A range”, the company should try to maintain a fixed ratio of 4-4.3%, funds from operations/total debt between 60-65% and a lower long-term debt/capitalization ratio between 22-24%.
B. Before settling on these target ranges, what other factors should Bixton’s chief financial officer consider?
1. Does the company have the ability to fully utilize non-interest tax credits?
2. Does the company have the ability to raise debt from the markets?
3. Does the company have the appropriate level of income to absorb the cost associated with the issuance of the debt?
4. Does the company have the appropriate level of income to absorb the cost associated with the future fixed expense of interest payments?
5. What effect will raising debt have on consumer outlook?
C. Before deciding whether the target ranges are really appropriate for Bixton in its current financial situation, what key issues specific to Bixton must the chief financial officer resolve?
Even though the firm has larger-than-average research and development and foreign tax credits when compared to other firms in its industry, the chief financial officer should evaluate the current levels before deciding whether the suggested target ranges would be beneficial. For the target ranges to be effective, the company would need to be able to take full advantage of the additional tax savings generated by the additional debt and this may not be possible after evaluating...

...ProblemSets
Chapter 5
A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond?
Calculating PV factor:
i= required return = 9% = 0.09
n= 10 years
Using Cash Flow of $1000 to calculate present value,
Cash flow= $1000
PV factor = 1/(1+i)^n = 0.42241
PV = $1000*0.42241= 422.41
Using Coupon Rate to calculate present value of Annuity
Cash flow= $1000 * 7.4/100 = $74
PV factor = (1/i)*(1- 1/(1+i)^n) = 6.4176
So, PV = $74*6.4176 = 474.90|
So the fair value of bond = 474.90+422.41 = $897.31
A10. (Dividend discount model) Assume RHM is expected to pay a total cash dividend of $5.60 next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming annual dividend payments, what is the current market value of a share of RHM stock if the required return on RHM common stock is 10%?
Current market value = D1/(Required return – growth rate)
= 5.60/(10%-6%) = $140
A12. (Required return for a preferred stock) James River $3.38 preferred is selling for $45.25. The preferred dividends is now growing. What is the required return on James River preferred stock?
Required Return = Dividend/Market Price
Dividend = $3.38
Market Price = $45.25
Required Return = $3.38 / $45.25
Required Return = 7.47%
A14.(Stock Valuation) Suppose Toyota has...

...Question 1
Your finance text book sold 53,250 copies in its first year. The publishing company expects the sales to grow at a rate of 20 percent for the next three years, and by 10 percent in the fourth year. Calculate the total number of copies that the publisher expects to sell in year 3 and 4. (If you solve this problem with algebra round intermediate calculations to 6 decimal places, in all cases round your final answers to the nearest whole number.)
Number of copies sold after 3 years
Number of copies sold in the fourth year
Link to Text
Question 2
Find the present value of $3,500 under each of the following rates and periods.
(If you solve this problem with algebra round intermediate calculations to 6 decimal places, in all cases round your final answer to the nearest penny.)
a. 8.9 percent compounded monthly for five years.
Present value
$
b. 6.6 percent compounded quarterly for eight years.
Present value
$
c. 4.3 percent compounded daily for four years.
Present value
$
d. 5.7 percent compounded continuously for three years.
Present value
$
2949.88
Question 3
Trigen Corp. management will invest cash flows of $331,000, $616,450, $212,775, $818,400, $1,239,644, and $1,617,848 in research and development over the next six years. If the appropriate interest rate is 6.75 percent, what is the future value of these investment cash flows six years from today? (Round answer to 2 decimal places, e.g. 15.25.)
Future value
$...

...Guillermo Furniture Analysis Paper
University of Phoenix
Corporate Finance
FIN/571
Guillermo Furniture Analysis Paper
. Guillermo Navallez is the owner and operator of the Guillermo Furniture Company. Mr. Navallez has operated this store for year in the Sonora, Mexico area and had built a positive rapport with that community. Recently, Mr. Navallez has two issues he is facing. One issue is an overseas competitor and the other is the high cost of labor. The overseas competitor is making furniture using new and innovative technologies. Because Guillermo furniture specializes in one-of-a-kind hand crafted furniture, his cost of labor is extremely high because of the time that is needed to create each piece. Because of this, Guillermo is losing profit as well as customers; Mr. Navallez has been trying different ideas to help improve his business. . At this point in time, the only option for the Guillermo furniture store is simple. This company must join the ranks of its competitors in order to stay in business. Guillermo needs to transition from handcrafted pieces into using the high tech technology like its competitors. This technology will cut costs on materials as well as labor, and still supply quality furniture.
Guillermo Furniture has an option to be taken over by its competitor. This option is not received well by Mr. Navallez. He has no intention of being bought out. Because he does not want to lose everything that he...

...High-Tech ranked higher as compared to the others (Brigham, 2004).
Payback Vs Discounted Payback:
We can also says, that a payback is a type of “breakeven” calculation in the sense that if cash flows come in at the expected rate until the payback year, then the project will break even for that year. Here the simple payback period doesn’t consider the cost of capital whereas the discounted payback does consider capital costs it shows the breakeven year after covering debt and equity costs.
The biggest drawback of both the payback and discounted payback methods is that they ignore cash flows that are paid or received after the payback period of the project. For example, suppose Project High-Tech had an additional cash flow at Year 5 then the discounted and simple payback period will ignore these values. In real live project with more cash flow after the pay back period would be more valuable than Project with no cash flow, yet its payback and discounted payback make it look worse. This is the reason, the shorter the payback period, other things held constant, the greater the project’s liquidity. Apart from this, since cash flows expected in the distant future are generally riskier than near-term cash flows, the payback is often used as an indicator of a project’s riskiness because the longer the payback period the higher is the risk associated with the project (Brigham, 2004) (Fabuzzi, 2003).
Overall there is only one major demerit of...

...FIN571Week 2 Individual Study Guide: Text ProblemSets
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FIN571Week Two
Individual Assignment: Text ProblemSets
Top of Form
Bottom of Form
CHAPTER 5
A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond?
A10. (Dividend discount model) Assume RHM is expected to pay a total cash dividend of $5.60 next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming annual dividend payments, what is the current market value of a share of RHM stock if the required return on RHM common stock is 10%?
A12. (Required return for a preferred stock) James River $3.38 preferred is selling for $45.25. The preferred dividend is non-growing. What is the required return on James River preferred stock?
B16. (Interest-rate risk) Philadelphia Electric has many bonds trading on the New York Stock Exchange. Suppose PhilEl’s bonds have identical coupon rates...

...FIN/571: Corporate Finance
Text ProblemSets - Week Two
Chapter Five
Question # 4
Define the following terms: bond indenture, par value, principal, maturity, call provision, and sinking fund.
Bond indenture. Bond indenture is a legal contract for a publicly traded bond. The structure of this contract outline incentives explicitly by detailing responsibilities, constraints, penalties, and oversight required. For example, contracts may specify interest and principal payment timing and amounts.
Par value. Par value denotes face value or designated value of a bond or stock. Par value of a bond is typically $1,000 and the sum investors pay upon issue. It is also the sum received when they redeem the bond matures. Conversely, stock par value is frequently set at $1. In this case, par value is an accounting tool that shows no connection to the stocks’ market value.
Principal. The term “principal” refers to a sum of money one borrows or invests. The face amount of a bond - the value printed on a stock or bond, or a debt balance. Principal does not encompass finance charges. Principal also describes an investor represented by a broker who executes trades on that investor’s behalf or an investor who trades for his or her own benefit. Principal also refers to a party affected by an agent’s decisions in a principal-agent relationship.
Maturity. Maturity is the end of a bond’s life. In finance,...

...$215
Total earnings = $100 + $125 + $150 + $120 + $140 = $635
Maximum Payout Ratio = $215 / $635 = 33.86%
b. Recommend a reasonable dividend policy for paying out discretionary cash flow in years 1 through 5.
Current dividend = $1.50 x 20 million shares = $30 million
The firm could increase the dividend from $30 million to $50 million.
D1 = $35 / 20 = $1.75
D2 = $39 / 20 = $1.95
D3 = $43 / 20 = $2.15
D4 = $48 / 20 = $2.40
D5 = $50 / 20 = $2.50
$35 + $39 + $43 + $48 + $50 = $215, is the total discretionary cash flow and not a discretionary cash deficit.
Chap 20 problem A1.
1. Interest Coverage Ratio = EBIT / Interest Expense = $70 million / $14 million = 55 > 4, Dallas Instruments is in compliance.
2. Tangible Assets / Long-Term Debt = $400 million / $175 million = 2.29
2.29 > 1.5, Dallas Instruments is in compliance.
3. Cumulative Dividends and Share Repurchases = $40 million + $40 million = $80 million
$80 million < $200 million x 60%, Dallas Instruments is in compliance.
Dallas Instruments meets all of the covenants and is therefore in compliance.
Chap 21 Prob. A2.
a. After-tax cost of secured debt = (1 - 0.34) x 12% = 7.92%
NAL = $1,000 - $300 / 1.0792^1 - $275 / 1.0792^2 - $250 / 1.0792^3 - $225 / 1.0792^4 - $200 / 1.0792^5
NAL = $1,000 - $277.98 - $236.12 - $198.90 - $165.87 - $136.62 = -$15.49
b. Allied Metals should borrow and buy....

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