Problem 6-1: (Future value of an ordinary annuity). What is the future value of each of the following streams of payments?
1. $500 a year for 10 years compounded annually at 5 percent
2. $100 a year for 5 years compounded annually at 10 percent
3. $35 a year for 7 years compounded annually at 7 percent
4. $25 a year for 3 years compounded annually at 2 percent
Problem 13-4: (Forecasting revenues using scenario analysis) Floating Homes, Inc. is a manufacturer of luxury pontoon and house boats that sell for $40,000 to $100,000. To estimate its revenues for the following year, Floating Homes divides its boat sales into three categories based on selling price (high, medium, and low) and estimates the number of units it expects to sell under three different economic scenarios. These scenarios include a recession (Scenario I), a continuation of current conditions in which the economy is level (Scenario II), and a strong economy (Scenario III). These estimates are given below:
Scenario I (Recession)
Scenario II (Level Economy)
Scenario III (Strong Economy)
Probability
25%
50%
25%
High-Priced Boats Category
Unit sales
50
400
1,000
Average price per unit
$90,000
$90,000
$90,000
Medium-Priced Boats Category
Unit sales
100
800
3,000
Average price per unit
$70,000
$70,000
$70,000
Low-Priced Boats Category
Unit sales
200
1,500
5,000
Average price per unit
$50,000
$50,000
$50,000
Using these estimates, calculate the expected revenue for Floating Homes, Inc. for the following year.
Problem 14-1: (Defining capital structure weights) Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $400 million. Since the primary asset of this business is real estate, Templetons management has determined that they will be able to borrow the majority of the money needed to buy the business. The current owners have no debt financing but Templeton plans to borrow $300 million and invest only $100 million in equity in the acquisition. What weights should Templeton use in computing the WACC for this acquisition?
The appropriate wd weight is __ %. (Round to one decimal place)
Problem 14-3: (Individual or component costs of capital) Compute the cost of capital for the firm for the following: Compute each in % (Round to two decimal places)..
1. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11%. The bonds have a current market value of $1,125 and will mature in 10 years. The firms marginal tax rate is 34%.
2. A new common stock issue that paid a $1.80 dividend last year. The firms dividends are expected to continue to grow at 7% per year forever. The price of the firms common stock is now $27.50.
3. A preferred stock that sells for $125, pays a 9% dividend and has a $100 par value that is selling at par.
4. A bond selling to yield 12% where the firms tax rate is 34%.
Problem 14-4: (Individual or component costs of capital) Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following: Compute each in % (Round to two decimal places)
1. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 12%. The bond is currently selling for a price of $1,125 and will mature in 10 years. The firms tax rate is 34%.
2. If the firms bonds are not frequently traded, how would you go about determining a cost of debt for this company?
3. A new common stock issue that paid a $1.75 dividend last year. The par value of the stock is $15, and the firms dividends per share have grown at a rate of 8% per year. This growth rate is expected to continue into the foreseeable future. The price of this stock is now $28.
4. A preferred stock paying a 10% dividend on a $125 par value. The preferred shares are currently selling for $150.
A bond selling to yield 13% for the purchaser of the bond. The borrowing firm faces a tax rate of 34%.
Problem 12-1: (Determining relevant cash flows) Captains Cereal is considering introducing a variation of its current breakfast cereal, Crunch Stuff. This new cereal will be similar to the old, with the exception that it will contain sugar-coated marshmallows shaped in the form of stars. The new cereal will be called Crunch Stuff n Stars. It is estimated that the sales for the new cereal will be $25 million; however, 20% of those sales will draw from former Crunch Stuff customers who have switched to Crunch Stuff n Stars and who would not have switched if the new product had not been introduced. What is the relevant sales level to consider when deciding whether or not to introduce Crunch Stuff n Stars?
Problem 18-1: (Measuring firm liquidity) The following table contains current asset and current liability balances for Deere and Company (DE):
($ thousands)
2008
2007
2006
Current assets
Cash and cash equivalents
2,211,400
2,278,600
1,687,500
Short-term investments
0
1,623,300
0
Net receivables
3,944,200
3,680,900
3,508,100
Inventory
3,041,800
2,337,300
1,957,300
Total current assets
9,197,400
9,920,100
7,152,900
Current liabilities
Accounts payable
6,562,800
3,186,100
4,666,300
Short/current long-term debt
8,520,500
9,969,400
8,121,200
Other current liabilities
0
2,766,000
0
Total current liabilities
15,083,300
15,921,500
12,787,500
1. Measure the liquidity of Deere & Co. for each year using the companys net working capital and current ratio.
2. Is the trend in
Deeres liquidity improving over this period? Why or why not?
Problem 18-2: (Measuring firm liquidity) The following table contains current asset and current liability balances for Microsoft Corporation (MSFT):
2008
2007
2006
Cash and cash equivalents
10,339,000
6,111,000
6,714,000
Short term investments
13,323,000
17,300,000
27,447,000
Net receivables
15,606,000
13,237,000
11,256,000
Inventory
985,000
1,127,000
1,478,000
Other current assets
2,989,000
2,393,000
2,115,000
Total current assets
43,242,000
40,168,000
49,010,000
Accounts payable
12,830,000
6,612,000
9,521,000
Short/current long-term debt
0
2,741,000
0
Other current liabilities
17,056,000
14,401,000
12,921,000
Total current liabilities
29,886,000
23,754,000
22,442,000
1. Assume that you are the lead banker for the syndicate of banks that manage Microsoft Corporations line of credit. Your boss has asked that you report to him on the current state of Microsofts liquidity. How would you describe the liquidity of Microsoft in 2008?
Have there been recent changes in Microsofts liquidity? If so, have the changes been to improve the firms liquidity? Explain your observations.
Problem 15-4: (Adjusting a firms capital structure) Curleys Fried Chicken Kitchen operates two southern cooking restaurants in St. Louis, MO, and has the following financial structure:
Accounts payable
$ 100,000
Short-term debt
400,000
Current liabilities
$ 500,000
Long-term debt
$2,000,000
Owners equity
1,500,000
Total
$4,000,000
The firm is considering an expansion that would involve raising an additional $2 million.
What is the firms debt ratio and interest-bearing debt ratio in its present capital structure?
2. If the firm wants to have a debt ratio of 50%, how much equity does the firm need to raise in order to finance the expansion?
Problem 15-5: (Describing a firms capital structure) The Home Depot, Inc. (HD) operates as a home improvement retailer primarily in the United States, Canada, and Mexico. The balance sheet for Home Depot, Inc. (HD) for February 3, 2008, included the following liabilities and owners equity:
In Thousands of Dollars
Financial Structure
Liabilities
Current liabilities
Accounts payable
$ 9,185,000
Short/current debt
2,047,000
Other current liabilities
1,474,000
Total current liabilities
$12,706,000
Long-term debt
11,383,000
Other long-term liabilities
2,521,000
Long-term liabilities
$13,904,000
Stockholder equity
$17,714,000
Total
$44,324,000
1. What is Home Depots debt ratio and interest-bearing debt ratio?
2. If the market value of Home Depots common equity is $44.90 billion, what is the firms debt to value ratio? (Hint: assume that the market value of the firms interest-bearing debt equals its book value.)