Spring 2, 2013
(20 pts) 1. As a financial analyst, you have been asked to analyze certain aspects of working capital management for The Wendys Company (WEN); McDonalds Corporation (MCD); and Chipotle Mexican Grill, Inc. (CMG). In your analysis you should consider the following:
· Cash conversation cycle.
· Liquidity.
· Net working capital.
· Short-term financing versus long-term financing.
Provide analysis for the computations.
(15 pts) 2. Explain what you believe is the dividend policy for The Wendys Company (WEN); McDonalds Corporation (MCD); and Chipotle Mexican Grill, Inc. (CMG) In answering this question, discuss the concepts that were examined in class. The points earned depend on the depth of the discussion along with the supporting computations.
(10 pts) 3. You are considering a radical change to your life after winning $10,000,000 after taxes in the Florida State Lottery. You have decided to move to China and you are considering the purchase of a Chipotle Mexican Grill, Inc. franchise. Explain how you would decide whether or not you should open the franchise. Your discussion should be in the context of this course. No computations are necessary.
(7 pts) 4. Rho Corporation has 200,000 shares outstanding and plans to pay $1.50 in
dividends next year. Rho has a capital budget of $1,000,000 for next year and plans
to maintain its present debt ratio of 40 percent. If earnings are expected to be $4.50
per share, how much external equity must Rho raise?
(15 pts) 5. Sigma Corporation is considering whether to pursue an aggressive or conservative current asset policy, as well as an aggressive or conservative financing policy. The following information is available:
· Annual sales are $800,000.
· Fixed assets are $300,000.
· The debt ratio is 50 percent.
· EBIT is $80,000.
· Tax rate is 40 percent.
· With an aggressive policy, current assets will be 20 percent of sales; with a conservative policy, current assets will be 35 percent of sales.
· With an aggressive financing policy, short-term debt will be 75 percent of the total debt; with a conservative financing policy, short-term debt will be 30 percent of the total debt.
· Interest rate for short-term debt is 6 percent. Interest rate for long-term debt is 11 percent.
Determine the return on equity for the aggressive approach and for the conservative approach. Discuss which approach you would choose.
(20 pts) 6. Gamma Corporation currently processes seafood with a machine it purchased several years ago. The machine, which originally cost $750,000, currently has a book value of $250,000. Gamma is considering replacing the machine with a newer, more efficient one. The new machine will cost $900,000 and will require an additional $100,000 for delivery and installation. The new machine will also require Gamma to increase its investment in receivables and inventory by $100,000. The new machine will be depreciated on a straight-line basis over five years to a zero balance. Gamma expects to sell the existing machine for $300,000. Gammas marginal tax rate is 40 percent and the required rate of return for Gamma is 10 percent.
If Gamma purchases the new machine, annual revenues are expected to increase by $125,000 and annual operating costs (exclusive of depreciation) are expected to decrease by $30,000. Annual revenue and operating costs are expected to remain constant at this new level over the five-year life of the project. After five years, the new machine will be completely depreciated and is expected to be sold for $50,000. (Assume that the existing unit is being depreciated at a rate of $50,000 per year.)
Required:
a) Determine the payback period for this project.
b) Using net present value recommend whether or not Gamma should purchase the new machine.
c) Explain what the net present value represents.
d) Explain whether the internal rate of return is more, less or the same as the required rate of return. No computations are necessary.
(10 pts) 7. The Kappa Company is in the volatile garment business. The firm has annual revenues of $250 million and operates with a 30% gross margin on sales. Bad debt losses average 3% of revenues. Kappa is contemplating an easing of its credit policy in an attempt to increase sales. The loosening would involve accepting a lower-quality customer for credit sales. It is estimated that sales could be increased by $20 million a year in this manner with an increase in inventory investment of $2,000,000. Opportunity costs for inventory is 15%; however, the collections department estimates that bad debt losses on the new business would run four times the normal level, and that internal collection efforts would cost an additional $1 million a year.
Show computations to explain if the change in policy should be made.
(18 pts) 8. The Zeta Manufacturing Company is considering investing in a factory in Vietnam. The CEO is concerned about making such a large commitment of money for this factory. This investment will require $70 million, which is roughly two-thirds the size of the company today.
The CEO has launched the firms first-ever cost of capital estimation, as an integral part of this analysis Zetas current balance sheet reflects the following:
Bonds (9%, $1,000 par, 20-year maturity) 27% of capital structure
Preferred stock ($50 par, $2.00 dividend) 9% of capital structure
Common stock 64% of capital structure
The firm paid dividends to its common stockholders of $1.28 per share last year, and the projected growth rate is 9% per year for the indefinite future. Zetas current common stock price is $25 per share. In addition, the firms bonds have an Baa rating. These bonds are currently yielding 11%. The current market price for the preferred stock is $15 per share. The plant is expected to have an IRR of 16 percent. Zetas tax rate is 38 percent.
Required:
a) Show computationsto determine the weighted average cost of capital.
b) Explainif they should purchase the plant.
(10 pts) 9. The Delta Company is evaluating whether a lockbox it is currently using is worth keeping. Management estimates that the lockbox reduces the mail float by 1.8 days and the processing by half a day. The remittances average $50,000 per day, with the average check amount being $500. The bank charges 34 cents per check processed. Assume that there are 270 business days in a year and that the firms opportunity cost for these funds is 6 percent. Should the firm continue to use the lockbox? Show computations.