Spreadsheet Exercise Assume Assume that Monsant Monsanto o Corporaon Corporaon is consid considering ering the the renovaon renovaon and/or and/or replace replacement ment of some some of its older a outdated carpet-manufacturing carpet-manufacturing equipment. Its objecve is to improve the ecienc of operaons in terms both speed and reducon in the number of defects. !he compan"s #nance department has compiled pernent data that $ill allo$ it to conduct a marginal cost%bene#t analsis for the proposed equipment rep !he cash outla for ne$ equipment $ould be appro&imatel appro&imatel '())*))). !he net boo+ value of the old equipment and its potenal net selling price add up to ',)*))). !he total bene#ts from the ne$ equipment measured in toda"s dollars dollars $ould be '0))*))). !he bene#ts of the t he old equipment over a similar period of me measured in toda"s toda"s dollars $ould be '1)) !o do Create a spreadsheet to conduct a marginal cost%bene#t analsisfor analsisfor Monsanto Corporaon* and determine a. !he margi argin nal adde added d bene bene#t #tss of the the prop propo osed sed ne$ equ equipme ipmen nt. b. !he ma marginal a added co cost of of th the pr proposed ne$ eq equipment. c. !he net bene#t of the proposed ne$ equipment. d. 3hat $ould ou recommend that the #rm do4 3h4 5ene#ts $ith the ne$ equipment '0))*))) 6ess2 5ene#ts $ith the old equipment 1))*))) 7 Marginal Marginal added added bene#ts bene#ts of the 8e$ 9quipme 9quipme '())*))) '())*))) Cost of ne$ equipment '())*))) 6ess 6ess22 :roc :roceed eedss from from the the sale sale of the the old old equi equipm pmen entt ,)*) ,)*))) )) , Marginal Marginal added added costs costs of the 8e$ 9quipmen 9quipmentt '1)*))) '1)*))) 8 tb
#t 7 ,
',) )))
nd f lacement.
*))). the follo$ing2
nd f lacement.
*))). the follo$ing2
Spreadsheet Exercise ;eming$a Corporaon is considering e&panding its operaons to boost its income* but before ma+ing a #nal decision* it has as+ed ou to calculate the corporate ta& consequences of its decision. Currentl* Currentl* ;eming$a generates before-ta& earl income of ',))*))) and has no debt outstanding. 9&panding operaons operaons $ould allo$ ;eming$a to increase before-ta& before-ta& earl income to '1)*))). '1 )*))). ;eming$a can use either cash reserves or debt to #nance its e&pansion. If ;eming$a uses debt* it $ill have earl interest interest e&pense of '<)*))). != >= Create a spreadsheet to conduct a ta& analsis for ;eming$a Corporaon and determine the follo$ing2 a. 3hat is ;eming$a"s ;eming$a"s current annual corporate corporate ta& liabilit4 b. 3hat is ;eming$a"s current average ta& rate4 c. If ;eming$a #nances its e&pansion using cash reserves* $hat $ill be its ne$ corporate ta& liabilit and average ta& rate4 d. If ;eming$a #nances its e&pansion using debt* $hat $ill be its ne$ corporate ta& liabilit and average ta& rate4 e. 3hat $ould ou recommend that the #rm do4 3h4
Hemingway Corporaon Tax Analysis Corporate Tax Rate Schedule
'c%( Esing the cash reserves* the ne$ ta& liabilit and average ta& rate is found belo$ using th schedule2 5efore ta& income2 '1)*))) !a& liabilit $11*### Average ta& rate2 +%##& 'd%( 3ith debt* the ne$ ta& liabilit and average ta& rate is found belo$ using the corporate t 5efore ta& income2 6ess2 Interest e&pense2 !a&able income2 !a& liabilit Average ta& rate2
'1)*))) '<)*))) ',)*))) $*!+"# %#!&
'e%( Fou should consider the aDer ta& income from each possibilit sho$n belo$* and ou sho choice $ith the highest aDer ta& income. Current aDer ta& income2 9&pansion $ith Cash ?eserve aDer ta& income2 9&pansion $ith debt aDer ta& income2
$1,-"# $!1### $!"-""#
corporate ta& rate
& rate schedule2
uld recommend
Spreadsheet Exercise !he income statement and balance sheet are the primar reports that a #rm constructs for use b management and for distribuon to stoc+holders* regulator bodies* and the general public. !he are the primar sources of historical #nancial informaon about the #rm. >aton :roducts* Inc.* is a moderate-siGed manufacturer. !he compan"s management has as+ed ou to perform a detailed #nancial statement analsis of the #rm. !he income statements for the ears ending >ecember 17* ,)7 and ,)7B* respecvel* are presented in the follo$ing table. Annual Income Htatements alues in Millions Jor the >ecember 17* ,)7 Hales '7<*0)0 Cost of goods sold 7)0*<)7 Helling* general* and administrave e&penses 7,*1( =ther ta& e&pense 11*<, >epreciaon and amorGaon 7,*7)1 =ther income add to 95I! to arrive at 95! 1*7B< Interest e&pense 10 Income ta& rate average 1.1, >ividends paid per share '7.71 5asic 9:H from total operaons '7.1B
>eferred income ta&es =ther noncurrent liabilies ?etained earnings !otal common shares outstanding
7(*BB ,7*<11
T. /. a. Create a spreadsheet similar to !able 1.7 to model the follo$ing2 7 A mulple-step comparave income statement for >aton* Inc.* for the pe ending >ecember 17* ,)7 and ,)7B. Fou must calculate the cost of goods sold for the ear ,)7. , A common-siGe income statement for >aton* Inc.* covering the ears ,)7 and ,)7B. b. Create a spreadsheet similar to !able 1., to model the follo$ing2 7 A detailed* comparave balance sheet for >aton* Inc.* for the ears ende >ecember 17* ,)7 and ,)7B. , A common-siGe balance sheet for >aton* Inc.* covering the ears ,)7 an ,)7B. c. Create a spreadsheet similar to !able 1. to perform the follo$ing analsis2 7 Create a table that reKects both ,)7 and ,)7B operang raos for >ato Inc.* segmented into a liquidit* b acvit* c debt* d pro#tabilit* and e mar+et. Assume that the current mar+et price for the stoc+ is '0). , Compare the ,)7 raos to the ,)7B raos. Indicate $hether the results Loutperformed the prior ear or Lunderperformed relave to the prior ear.
>ividends per share 9:H Computaon of ,)7 Cost of Hales2 5eginning Inventor :urchases Noods Available Cost of Hales 9nding Inventor
').0, '7.(0
').07 ',.,)
'<*0)B 7)0*( '77<*<(0 1#*-#1 '*)(
b. Annual 3alance Sheet 'alues in 2illions( !#1" Assets Current Assets Cash and 9quivalents ?eceivables Inventories =ther Current Assets Total Current Assets 4on5Current Assets :ropert* :lant O 9quipment* Nross Accum. >epreciaon O >epleon
!#1+
'<*,,0 ,7*7(1 *)( 7*17 $,!*1
'(*B< 70*B0 <*0)B 7*(7 $"6,1
',)B*0() 77)*),)
'7<*70 0<*07<
Total ia)ilies
$-,#+-
$-##1
?etained 9arnings Total E9uity
'
'<1*7(7 $-161
$1"!6++
$1+1-+
Total ia)ilies 7 Stoc: E9uity Total Common Shares .utstanding !reasur Hhares
(.< 5il 7.1 5il
(. 5il 7., 5il
c. .perang Raos !#1" i9uidity Current Rao ;uic: Rao Ac
R Turno
!#1+
7.7 ).07
7.7 ).0,
71.() ,(.B .B B1.7 7. 7.7<
7B.7, ,.B0 0.0 1<.1 ,.)0 7.17
ar ended >ecember 17* ,)7B '7<*7) 777*(17 7,*0)) 11*1<< <*0BB 1*1,1 ,01 1<.0 ').07 ',.,
7(*10 7(*BB7 <1*7(7 (. billion
iods
*
Common Sie !#1" !#1+
+%-+& 1%,6& "%!*& 1%!#& !"%#*&
+%"-& 1%6"& "%"!& 1%1-& !+%*!&
1+%!-& -!%#,&
1#%*-& 6,%*&
6,%,&
",%1&
"!%"& "!%"&
-+%!& -+%!&
-!1%&
-!%+&
AnalysisD Compare !#1" to !#1+ 3orse than last ear 3orse than last ear
3orse than last ear 3orse than last ear 3orse than last ear 3orse than last ear 3orse than last ear 3orse than last ear
Spreadsheet Exercise Fou have been assigned the tas+ of puQng together a statement for the ACM9 Compan that sho$s its e&pected inKo$s and ouRlo$s of cash over the months of Sul ,)7( through >ecember ,)7(. Fou have been given the follo$ing data for ACM9 Compan2 9&pected gross sales for Ma through >ecember* respecvel* are '1))*)))* ',0)*)))* 'B,*)))* '))*)))* '())*)))* '(,*)))* '()*)))* and 7, of the sales in an given month are collected during that month. ;o$ever* the #rm has a credit polic of 1/7) net 1)* so factor a 1 discou < of the sales in an given month are collected during the follo$ing month aDer the sale. 71 of the sales in an given month are collected during the second month follo$ing the sale. !he e&pected purchases of ra$ materials in an given month are based on () of the e&pected sales during the follo$ing month. !he #rm pas 7)) of its current month"s ra$ materials purchases in the follo$ing month. 3ages and salaries are paid on a monthl basis and are based on ( of the current month"s e&pected sales. Monthl lease paments are , of the current month"s e&pected sales. !he monthl adversing e&pense amounts to 1 of sales. ?O> e&penditures are e&pected to be allocated to August* Heptember* and =ctober at the rate of 7, of sales in those months. >uring >ecember a prepament of insurance for the follo$ing ear $ill be made in the amount of ',B*))). >uring the months of Sul through >ecember* the #rm e&pects to have miscellaneous e&penditures of '7*)))* ',)*)))* ',*)))* '1)*)))* '1* !a&es $ill be paid in He ptember in the amount of 'B)*))) and in >ecembe r in the amount of 'B*))). !he beginning cash balance in Sul is '7*))). !he target cash balance is '7*))). != >= a. :repare a cash budget for Sul ,)7( through >ecember ,)7( b creang a combined spreadsheet that incorporates spreadsheets similar to those in !ables B.* B.0* and B.7). >ivide our spreadsheet into three secons2 7 !otal cash receipts , !otal cash disbursements 1 Cash budget covering the period of Sul through >ecember !he cash budget should reKect the follo$ing2 7 5eginning and ending monthl cash balances , !he required total #nancing in each month required 1 !he e&cess cash balance in each month $ith e&cess b. 5ased on our analsis* brieK describe the outloo+ for this compan over the ne&t ( months.
>iscuss its speci#c obligaons and the funds available to meet them. 3hat could the #rm do in the case of a cash de#cit4 3here could it get the mone4 3hat should the #rm do if it has a cash surplus4
Sales @orcasts '###8s( Cash Hales 6ess2 >iscount Collecons of A/? 6agged one month 6agged t$o months Total Cash Receipts ?urchases '& o= Sales( Cash :urchases :ament of A/: 6agged one month 3ages 6ease paments Adversing 9&pense ?O> 9&penditures :repaid Insurance =ther e&penses !a&es Total Cash /is)ursement Cash 3udgetD !otal Cash ?eceipts 6ess2 !otal Cash >isbursements 8e$ Cash Jlo$ Add2 5eginning 5alance 9nding 5alance
7, 1
AC2E Company Cash 3udget uly through /ecem)er !#16 2ay une uly August Septem)er 1)) ,0) B, )) ()) 1( 1B. 7 () <, 7.) 7.)BB 7.1 7. ,.7(
< 71
,,
.cto)er 4o
+%*!
!",%-"6
,7<. 10 #"%*-
()
7
,
1))
1()
1<
10)
B,)
)
7)) ( , 1 7,
7 ( 0
7
, ,. . 7,.<
1)) 1) 7) 7 ()
1() 1( 7, 7 <,
1< 1<. 7,. 7.< <
10) 10 71 70.
B,) B, 7B ,7
7
,)
1)
1
16%-"
+"
, B) "6
"+,%-"
+*6%"
,B B) B 6#6
1).0< 17(.< -7).< 7 B.,,
B7B.( B1 -,).1 B.,, -7(.71
)).)0 (1 -(,.07 -7(.71 -<0.)B
<.< B.< 10 -<0.)B -B).)B
(,,.B7 B0(. 7,.07 -B).)B .<
().,1 ()( BB.,1 .< 71).7
!#"%*
17.< 1<.< +1+%6"
1< ., "##%#*
B) ( ",-%-"
B(.< < 6!!%+1
B<. 7., 6"#%!
6ess2 Minimum Cash 5alance Re9uired total nancing 'notes paya)le( Excess Cash )alance 'mar:eta)le securies(
7 51#%-, #
7 51%1 #
7 5*+%#+ #
7 5""%#+ #
7 # -#%,-
7 # 11"%1
'<))*))). t into the current month"s sales collecon.
)))* and 'B)*)))* respecvel.
Spreadsheet Exercise At the end of ,)7* Ema Corporaon is considering underta+ing a major long-term project in an eTort to remain compeve in its industr. !he producon and sales departments have determined the potenal annual cash Ko$ savings that could ac crue to the #rm if it acts soon. Hpeci#call* the esmate that a mi&ed stream of future cash Ko$ savings $ill occur at the end of the ears ,)7( through ,),7. !he ears ,),, through ,),( $ill see consecuve and equal cash Ko$ savings at the end of each ear. !he #rm esmates that its discount rate over the #rst ( ears $ill be <. !he e&pected discount rate over the ears ,),, through ,),( $ill be 77. !he project managers $ill #nd the project acceptable if it results in present cash Ko$ savings of at least '()*))). !he follo$ing cash Ko$ savings data are supplied to the #nance department for analsis. 9nd of ear Cash Ko$ savings ,)7( ' 77)*))).)) ,)7< 7,)*))).)) ,)7 71)*))).)) ,)70 7)*))).)) ,),) 7()*))).)) ,),7 7)*))).)) ,),, 0)*))).)) ,),1 0)*))).)) ,),B 0)*))).)) ,), 0)*))).)) ,),( 0) ))) ))
,)7( ,)7< ,)7 ,)70 ,),) ,),7 ,),, ,),1 ,),B ,), ,),(
7 , 1 B ( < 0 7) 77
'
77)*))) 7,)*))) 71)*))) 7)*))) 7()*))) 7)*))) 0)*))) 0)*))) 0)*))) 0)*))) 0)*)))
'
7),*)1.
$
,6,++%+!
7*)7.) <1*)B(.), (*)<.,, 0*,.<0 1*B7).(,
'a( Jirst* $e $ill discount the cash Ko$s at the end of ears ,),, through ,),( at 77 bac+ to the end of ear ,),7. 8e&t* $e $ill discount the cash Ko$s at the end of ears ,)7( through ,),7 donUt forget the present values found in the #rst step are no$ at the end of ear ,),7 at < bac+ to the end of ear ,)7. !he end of ear ,)7 is the beginning of ear ,)7(* $hich is $hen $e $ant the present value of the cash Ko$ savings. 5 discounng cash Ko$s for at the end of ears ,)7( through ,),7 at <* $e get : of '(1*BB.B,. ')( 5ased solel on the criteria set b management* the #rm should underta+e this project as the present value of the e&pected future saving total '(1*BB.B, $hich e&ceeds the '()*))) hurdle.
Spreadsheet Exercise CHM Corporaon has a bond issue outstanding at the end of ,)7. !he bond has 7 ears remaining to maturit and carries a coupon interest rate of (. Interest on the bond is compounded on a semiannual basis. !he par value of the CH M bond is '7*)))* and it is currentl selling for 'o Create a spreadsheet similar to the 9&cel spreadsheet e&les located in the chapter for ield to maturit and semiannual interest to model the follo$ing2 a. Create a spreadsheet similar to the 9&cel spreadsheet e&les located in the chapter to solve for the ield to maturit. b. Create a spreadsheet similar to the 9&cel spreadsheet e&les located in the chapter to solve for the price of the bond if the ield to maturit is , higher. c. Create a spreadsheet similar to the 9&cel spreadsheet e&les located in the chapter to solve for the price of the bond if the ield to maturit is , lo$er. d. 3hat can ou summariGe about the relaonship bet$een the price of the bond* the par value* the ield to maturit* and the coupon rate4
CS2 Corporaon Sol
F0E/ T. 2ATGR0TF SE20 A44GA 04TEREST
:ar value Hemi annual interest :ament 8umber of ears to maturit 8umber of periods to maturit Field to Maturit Current bond price 'd%(
'7*))) '1) 7 1) .B) 51#61%1"
hen the yield to maturity is greater than the coupon rateI the price o= the )ond is )elow the par
Spreadsheet Exercise You are interested in purchasing the common stock of Azure Corporation. The firm recently paid a dividend of $3 per share. It expects its earningsand hence its dividends to gro! at a rate of "# for the foreseeale future. Currently% similar&risk stocks have re'uired returns of ()#. To *o a. +iven the data aove% calculate the present value of this security. ,se the constant& gro!th model -'uation "./0 to find the stock value. . 1ne year later% your roker offers to sell you additional shares of Azure at $"3. The most recent dividend paid !as $3.2(% and the expected gro!th rate for earnings remains at "#. If you determine that the appropriate risk premium is ."/# and you oserve that the risk&free rate% 45% is currently 6.26#% !hat is the firm7s current re'uired return% rAzure8 c. Applying 'uation "./% determine the value of the stock using the ne! dividend and re'uired return from part . d. +iven your calculation in part c% !ould you uy the additional shares from your roker at $"3 per share8 xplain. e. +iven your calculation in part c% !ould you sell your old shares for $"38 xplain.
Common Stock of Azure Corporation #a.
constant gro!th% g ".))# re'uired return% r ().))# model: = #& #1 + ' ( #r ) '
Spreadsheet Exercise Sane is considering invesng in three diTerent stoc+s or creang three disnct t$ostoc+ porRolios. Sane considers herself to be a rather conservave investor. Hhe is able to obtain forecasted returns for the three securies for the ears ,)7 through ,),7. !he data are given in the follo$ing table.
Fear
Htoc+ A ,)7 ,)7( ,)7< ,)7 ,)70 ,),) ,),7
).7 ).71 ).7 ).7B ).7( ).7B ).7,
Htoc+ 5 ).7 ).77 ).) ).7, ).7 ).7 ).7
Htoc+ C ).7, ).7B ).7 ).77 ).)0 ).)0 ).7
In an of the possible t$o-stoc+ porRolios* the $eight of each stoc+ in the porRolio $ill be ). !he three possible porRolio combinaons are A5* AC* and 5C. S.GT0.4 a. Calculate the e&pected return for each individual stoc+. Fear
Htoc+ A
Htoc+ 5
Htoc+ C
,)7 ,)70 ,),) ,),7
7B 7( 7B 7,
Htandard deviaon W
71.B1 71.B1 71.B1 71.B1
).< ,.< ).< -7.B1
).))))1,( ).)))((7,, ).))))1,( ).))),)B) #%##!-1+
1%**&
ST.CJ 3 9&pected return deviaon deviaon V , 77.< -7.< ).))),B(0B 77.< -).< ).))))1,( 77.< -1.< ).))7,<7 77.< ).B1 ).))))71< 77.< -7.< ).))),B(0B 77.< 1.B1 ).))77<7 77.< 1.B1 ).))77<7 #%##+1-1+ Htandard deviaon W !%6+& Fear
?eturn ,)7 7) ,)7( 77 ,)7< ,)7 7, ,)70 7) ,),) 7 ,),7 7
ST.CJ C Fear
?eturn ,)7 7, ,)7( 7B ,)7< 7) ,)7 77
9&pected return deviaon deviaon V , 7).<7 7.,0 ).)))7(17 7).<7 1.,0 ).))7)<00 7).<7 -).<7 ).))))7), 7) <7 ) ,0 ) )))))7(
,),7
7,.))
7.))
).
).
9&pected return
Fear
?eturn ,)7 ,)7( ,)7< ,)7 ,)70 ,),) ,),7
7) 7, 7, 71 71 7 7B
71. <. 1!%"&
9&pected return >eviaon >eviaon V , 7,. 7,. 7,. 7,. 7,. 7,. 7,.
Htandard >eviaon
-,.)) -).)) -7.))) ).)) ).)) ,.))) 7.)))
).)(,)) ).)),)) ).)7)))) ).)),)) ).)),)) ).)B)))) ).)7)))) ).71))))
1%+-&
?.RT@.0. AC Fear ?9!E?8 39IN;! Htoc+ A Htoc+ C Htoc+ A Htoc+ C ,)7 7).)) 7, ). ,)7( 71.)) 7B ). ,)7< 7.)) 7) ). ,)7 7B.)) 77 ). ,)70 7(.)) 0 ). ,),) 7B )) 0 )
9&pected return ). ). ). ). ). )
77.) 71. 7,. 7,. 7,. 77
?.RT@.0. 3C Fear ?9!E?8 39IN;! Htoc+ 5 Htoc+ C Htoc+ 5 Htoc+ C ,)7 7).)) 7, ). ,)7( 77.)) 7B ). ,)7< .)) 7) ). ,)7 7,.)) 77 ). ,)70 7).)) 0 ). ,),) 7.)) 0 ). ,),7 7.)) 7) ).
9&pected return ). ). ). ). ). ). ).
9&pected return
Fear
?eturn ,)7 ,)7( ,)7< ,)7 ,)70 ,),) ,),7
77 71 0 7, 7) 7, 71
9&pected return >eviaon >eviaon V , 77.7 77.7 77.7 77.7 77.7 77.7 77.7
Htandard >eviaon
-).7B1 7.1< -,.7B1 ).1< -7.(B1 ).< 7.1<
1%+1&
).))),)B ).)7B7 ).)B07 ).))7,<( ).),(00) ).))<1B< ).)7B7 ).77<7
77.) 7,. 0.) 77. 0. 7,.) 7,. <.) 11%1+&
Htoc+ 5 :orRolio 5C
?eturn ?is+ C 77.< ,.(B 77.7B 7.B7
,,.<0 7,.(,
Htoc+ 5* b itself* has an e&pected return of 77.< $ith a standard deviaon of ,.(B. Invesng in the porRolio comprised of stoc+s 5 and C delivers a lo$er return of 77.7B and is associated $ith a standard deviaon of 7.B7. Ho once again both the return and ris+ of the porRolio are lo Considering the C* ho$ever* Sane* can determine that the porRolio 5C is preferable to stoc+ 5 alone because the C of is lo$er for the porRolio.
er.
Spreadsheet Exercise 8ova Corporaon is interested in measuring the cost of each speci#c tpe of capital as $ell as the $eighted average cost of capital. ;istoricall* the #rm has raised capital in the follo$ing manner2 Hource of capital 3eight 6ong-term debt ).1 :referred stoc+ ).7, Common stoc+ equit ).1
!he ta& rate of the #rm is currentl B). !he needed #nancial informaon and data are as follo$s2 >ebt 8ova can raise debt b selling '7*)))-par-value* (. coupon interest rate* 7)-ear bonds on $hich annual interest paments $ill be made. !o sell the issue* an average discount of ',) per bond needs to be given. !here is an associated Kotaon cost of , of par value. :referred stoc+ :referred stoc+ can be sold under the follo$ing terms2 !he securit has a par value of '7)) per share* the annual dividend rate is ( of the par value* and the Kotaon cost is e&pected to be 'B per share. !he preferred stoc+ is e&pected to sell for '7), before cost consideraons. Common stoc+ !he current price of 8ova"s common stoc+ is '1 per share.
e. Calculate the #rm"s $eighted average cost of capital using retained earnings and the capital structure $eights sho$n in the table above. f. Calculate the #rm"s $eighted average cost of capital using ne$ common stoc+ and the capital structure $eights sho$n in the table above. Answer 4o
:ar value Coupon rate Maturit rs >iscount Jloataon cost !a& ?ate
'7*))) (.) 7) ',) ,.)) B)
b. :ar alue Annual >ividend ?ate Jloataon Cost
'7)).)) (.)) 'B
Hales :rice 5efore Cost Consideraon
'7),.))
c. and d. Current :rice 9 t h di id
d
'1.)) '1 ,
Annual Coupon :ament 8et :roceeds 5efore Cost of >ebt ADer-ta& Cost of >ebt
'(.)) 0() <.)< +%!+&
?re=erred Stoc: Annual >ividend :ament 8et :roceeds Cost of :referred Htoc+
'(.)) '0.)) 6%1!&
Common Stoc: Cost of ?etained 9arnings C t f8 C Ht +
1+%!*& 1+%,"&
1#%#*&
Spreadsheet Exercise !he >rillago Compan is involved in searching for locaons in $hich to drill for oil. !he #rm"s current project requires an inial investment of '7 mill ion and has an esmated life of 7) ears. !he e&pected future cash inKo$s for the project are as sho$n in the follo$ing table. F9A?
CAH; I8J6=3 7.)) ,.)) 1.)) B.)) .)) (.)) <.)) .)) 0.)) 7).))
())*))).)) 7*)))*))).)) 7*)))*))).)) ,*)))*))).)) 1*)))*))).)) 1*))*))).)) B*)))*))).)) (*)))*))).)) *)))*))).)) 7,*)))*))).))
!he #rm"s current cost of capital is 71. T. /. Create a spreadsheet to ans$er the follo$ing quesons. a. Calculate the project"s net present value 8:. Is the project acceptable under the 8: technique4 9&plain. b. Calculate the project"s internal rate of return I??. Is the project acceptable under the I?? technique4 9&plain. c. In this case* did the t$o methods produce the same results4 Nenerall* is there a
preference bet$een the 8: and I?? techniques4 9&plain. d. Calculate the pabac+ period for the project. If the #rm usuall accepts projects that have pabac+ periods bet$een 7 and < ears* is this project acceptable4
The /rillago Company Calculaon o= the 4? 0RR and the ?ay)ac: ?eriod Bi
Fear # 1 ! + " 6 , *
'
7) ears 71 7*)))*)))
Esmated Cash .uKlows>0nLows ' 7*)))*))) ())*))) 7*)))*))) 7*)))*))) ,*)))*))) 1*)))*))) 1*))*))) B*)))*))) (*)))*))) *)))*)))
0n
7,*)))*)))
,(*7))*)))
1#
8: W
16*,"+%##
I?? W :abac+ period W
'a%( ')%(
1+%-6& 6%*-" years
Accept the project as the 8: X ). Accept the project as the I?? 7B.<( X Cost of Capital 71
'c%(
3hen the decision is simpl accept or reject then the 8: and I?? method $ill al$as produce the same results. ;o$ever* $hen ran+ing several projects the 8: method is preferred over the I?? method because the I?? method assumes the cashKo$s are reinvested at the I?? not the required cost of capital.
'd%(
Hince the pabac+ period is less than < ears the project is acceptable.
Spreadsheet Exercise >amon Corporaon* a sports equipment manufacturer* has a machine currentl in use that $as originall pu ago for '7,)*))). !he #rm depreciates the machine under MAC?H using a -ear recover period. =nce removal and cleanup costs are ta+en into consideraon* the e&pected net selling price for the present $ill be '<)*))). >amon can bu a ne$ machine for a net price of '7()*))) including installaon costs of '7 !he proposed machine $ill be depreciated under MAC?H using a -ear recover period. If the #rm acquires machine its $or+ing capital needs $ill change2 Accounts receivable $ill increase '7*)))* inventor $ill incr and accounts paable $ill increase '7(*))). 9arnings before depreciaon* interest* and ta&es 95>I! for the present machine are e&pected to be '0*))) the successive ears.Jor the proposed machine* the e&pected 95>I! for each of the ne&t ears are '7)*) '77)*)))* '7,)*)))* '7,)*)))* and '7,)*)))* respecvel. !he corporate ta& rate ! for the #rm is B). !able B., on page 7,) contains the applicable MAC?H depreciaon percentages. >amon e&pects to be able to liquidate the proposed machine at the end of its -ear usable life for ',B*))) aDer paing removal and cleanup costs. !he present machine is e&pected to net '*))) upon liquidaon at period. >amon e&pects to recover its net $or+ing capital investment upon terminaon of the project. !he #r ta& rate of B). T. /. Create a spreadsheet similar to !ables 77.7* 77.* 77.<* and 77.0 to ans$er the follo$ing2 a. Create a spreadsheet to calculate the inial investment.
Changes to $or+ing capital2 Increase in accounts receivable '7*))) Increase in inventor '70*))) Increase in acounts paable '7(*))) 95>I! for the present machine ne&t ears '0*))) 95>I! for the proposed machine for ne&t #ve ears2 7 '7)*))) , '77)*))) 1 '7,)*))) B '7,)*))) '7,)*))) !a& B) >epreciaon MAC?H -ear recover MAC?H -ear !able ?ecover ear :ercentage recover 7 ,) , 1, 1 70 B 7, 7, (
/amon Corporaon a% Calculaon o= the 0nial 0n
Z >epreciaon for ear 7 Z >epreciaon for ear , Z >epreciaon for ear 1
',B*))) '1*B)) ',,*))
!otal accumulated depreciaon
'*,))
5oo+ value of of machine at end of ear 1 Helling price of old machine ?ecaptured depreciaon
'1B*)) '<)*))) '1*,))
!a& on recaptured depreciaon
$1+#,#
Change in net $or+ing capital 7 Change in current assets Increase in accounts receivable Increase in inventor
'7*))) '70*)))
'1B*)))
, Change in current liabilies Increase in acounts paable
'7(*)))
'7(*)))
Change in $or+ing capital [7 Z ,\
$1,###
)% /epreciaon schedule Fear
Cost
MAC?H rate >preciaon
Fear 1
Fear !
Fear
Fear +
Fear "
ith proposed machine 9arnings before depr. and int. and ta&es '7)*))) '77)*))) Z>epreciaon '1,*))) '7*,)) 9arnings before interest and ta&es '<1*))) '*)) Z !a&es ',0*,)) ',1*,) 8et operang pro#ts aDer ta&es 'B1*)) '1*,) @ >epreciaon '1,*))) '7*,)) .perang cash Lows $-",## $,6+,#
'7,)*))) '7,)*))) '7,)*))) '1)*B)) '70*,)) '70*,)) '0*()) '7))*)) '7))*)) '1*B) 'B)*1,) 'B)*1,) '1*<() '()*B) '()*B) '1)*B)) '70*,)) '70*,)) $,+16# $-*6,# $-*6,#
ith present machine 9arnings before depr. and int. and ta&es Z>epreciaon 9arnings before interest and ta&es Z !a&es 8et operang pro#ts aDer ta&es @ >epreciaon .perang cash Lows
'0*))) '7B*B)) ')*()) '1,*,B) 'B*1() '7B*B)) $6!-6#
d% Calculaon o= the Terminal Cash @low o= the ?roMect
'0*))) '7B*B)) ')*()) '1,*,B) 'B*1() '7B*B)) $6!-6#
'0*))) '(*))) '0*))) '1*()) '1*B)) '(*))) $"*+##
'0*))) ) '0*))) '1*))) '<*))) ') $"-###
'0*))) ) '0*))) '1*))) '<*))) ') $"-###
Z >epreciaon for ear , Z >epreciaon for ear 1 Z >epreciaon for ear B Z >epreciaon for ear !otal accumulated depreciaon
'7*,)) '1)*B)) '70*,)) '70*,)) '7,*)))
5oo+ value of of asset at end of ear Helling price of old asset ?ecaptured depreciaon !a& on recaptured depreciaon
!a& on sale of old asset :urchase price of the old asset Accumulated depreciaon Z >epreciaon for ear 7 Z >epreciaon for ear , Z >epreciaon for ear 1 Z >epreciaon for ear B Z >epreciaon for ear Z >epreciaon for ear ( !otal accumulated depreciaon 5oo+ value of of asset at end of ear 1 Helling price of old asset ?ecaptured depreciaon !a& on recaptured depreciaon
'*))) ',B*))) '7(*))) $6+##
'7,)*))) ',B*))) '1*B)) ',,*)) '7B*B)) '7B*B)) '(*))) '7,)*))) ') '*))) '*))) $!##
chased 1 ears
achine *))). the ne$ ase '70*)))* for each of ))*
the end of same is subject to a
Fear 6
') '*))) '*))) '1*,)) 'B*)) '*))) $!##
') ) ') ') ') ') $#
Spreadsheet Exercise Isis Corporaon has t$o projects that it $ould li+e to underta+e. ;o$ever* due to capital restraints* the t$o projectsYAlpha and 5etaYmust be treated as mutuall e&clusive. 5oth projects are equall ris+*and the #rm plans to use a 7) cost of capital to evaluate each. :roject Alpha has an esmated life of 7, ears* and project 5eta has an esmated life of 0 ears. !he cash Ko$ data have been prepared as sho$n in the follo$ing table. Cash Ko$s ?roMect Aplha ?roMect 3eta CJ) CJ7 CJ, CJ1 CJB CJ CJ( CJ< CJ CJ0 CJ7) CJ77 CJ7, T. /.
*))*))) 1))*))) ))*))) ))*))) )*))) <))*))) ))*))) 0)*))) 7*)))*))) 7*,)*))) 7*))*))) ,*)))*))) ,*))*)))
(*))*))) B))*))) ())*))) ))*))) 7*7))*))) 7*B))*))) ,*)))*))) ,*))*))) ,*)))*))) 7*)))*)))
Soluon Cost of capital 9smated life -Alpha -5eta
7) 7,.)) 0.))
Cash Jlo$s CJ) CJ7 CJ, CJ1 CJB CJ CJ( CJ< CJ CJ0 CJ7) CJ77 CJ7,
:roject Aplha :roject 5eta *))*))) (*))*))) 1))*))) B))*))) ))*))) ())*))) ))*))) ))*))) )*))) 7*7))*))) <))*))) 7*B))*))) ))*))) ,*)))*))) 0)*))) ,*))*))) 7*)))*))) ,*)))*))) 7*,)*))) 7*)))*))) 7*))*))) ,*)))*))) ,*))*)))
a% 4et ?resent alue o= each proMect 8:
:roject Aplha :roject 5eta $,+*,%6, $"#116%16
Spreadseet ,-ercise
Htarstruc+ Compan $ould li+e to determine its opmal capital structure. Heveral of i managers believe that the best method is to rel on the esmated earnings per shar 9:H of the #rm because the believe that pro#ts and stoc+ price are closel related. !he #nancial managers have suggested another method that uses esmated require returns to esmate the share value of the #rm. !he follo$ing #nancial data are avail Capital structure debt rao ) 7) ,) 1) B) ) ()
9smated 9:H 7.< 7.0 ,., ,. 1.7 1.)( 1.7
9smated required return 77.B) 77.) 7,.) 71., 7.)) 70.)) ,.))
T. /. a. 5ased on the given #nancial data* create a spreadsheet to calculate the esmated share values associated $ith the seven alternave capital structures. ?efer to !able 71.7. b. Ese 9&cel to graph the relaonship bet$een capital structure and the esmated 9:H of the #rm. 3hat is the opmal debt rao4 ?efer to Jigure 71.<.
()
1.7
,.))
Capital structure debt rao
9smated 9:H
a% Esmated Share alues
) 7) ,) 1) B) ) () )% .pmal /e)t Rao Capital structure ) 7) ,) 1) B) ) ()
9smated 9:H 7.< 7.0 ,., ,. 1.7 1.)( 1.7
7.< 7.0 ,., ,. 1.7 1.)( 1.7
9smated 9smated required return Hhare alue 77.B) 77.) 7,.) 71., 7.)) 70.)) ,.))
1"%" 16%1# 1,%## 1*%!" 1-%616%11 1!%+#
c% Capital structure 9smated Hhare alue ) 7.1 7) 7(.7) ,) 7.)) 1) 70., B) 7<.(< ) 7(.77 () 7,.B)
Esmated Share alue ,.)) ,).)) 7.)) 7).)) .)) ).)) )
7)
,)
1)
B)
)
()
<)
9smated Hhare alue
!he opmal debt rao is 1) as the share value is ma&imum $hen the debt rao is
ts
d ble.
).
Spreadseet ,-ercise
=ne $a to lo$er lo$er the mar+et price of a #rm"s #rm"s stoc+ is via a stoc+ stoc+ split. ?oc+-= ?oc+-= Corporaon #nd diTeren diTerentt situaon2 situaon2 Its stoc+ stoc+ has been selling selling at relavel relavel lo$ prices. !o !o increase increase the mar+et pri the compan chooses to use a reverse stoc+ split of ,-for-1. !he !he com compa pan n curr curren entl tl has has <))* <))*))) ))) comm common on shar shares es outs outsta tand ndin ing g and and no no pre prefe ferr rred ed stoc stoc+. +. !he !he c a par value of '7. At this me* the paid-in capital in e&cess of par is '<*)))*)))* and the #rmUs are '1*))*))). T. /. Create a spreadsheet to determine the follo$ing2 follo$ing2 a. !he stoc+holders" equit secon of the balance sheet before the reverse stoc+ split. b. !he stoc+holders" equit secon of the balance sheet aDer the reverse stoc+ split.
8o. of common shares outstanding :ar value of each share :aid-in capital in e&cess of par ?etained 9arnings of the #rm ?everse stoc+ split
<))*))).)) 7.)) <*)))*))).)) 1*))*))).)) , for 1
a% Stoc:holder8s e9uity secon o= the )alance sheet )e=ore the re
itself in a e of the stoc+*
ommon stoc+ carries etained earnings
Spreadseet ,-ercise
!he current balance in accounts receivable for 9bo Corporaon is 'BB1*))). !his level $as achieved $ith annual 1( das credit sales of '1*BB*))). !he #rm oTers its customers credit terms of net 1). ;o$ever* in an eTort to help its cash Ko$ posion and to follo$ the acons of its rivals* the #rm is considering changing its credit terms from net 1) to ,/7) net 1). !he objecve is to speed up the receivable collecons and thereb improve the #rm"s cash Ko$s. 9bo $ould li+e to increase its accounts receivable turnover to 7,.). !he #rm $or+s $ith a ra$ material $hose current annual usage is 7*B) units. 9ach #nished product requires one unit of this ra$ material at a variable cost of ',*()) per unit and sells for 'B*,)) on terms of net 1). It is esmated that <) of the #rm"s customers $ill ta+e the , cash discount and that* $ith the discount* sales of the #nished product $ill increase b ) units per ear. !he #rm"s opportunit cost of funds invested in accounts receivable is 7,. In analGing the investment in accounts receivable* use the variable cost of the product sold instead of the sale price because the variable cost is a bePer indicator of the #rm"s investment. T. /. Create a spreadsheet similar to !able 7.1 to analGe $hether the #rm should iniate the proposed cash discount. 3hat is our advice4 Ma+e sure that ou calculate the follo$ing2
c.
$
2%)) (/6) $ //3%))) $3%6//%))) 36 /6.26 ?
A2era'e in2estment presentl #4itout discount
$ 57160
A
2%)) (6)) (2
A2era'e in2estment presentl #4it cas discounts
$ "6000
d.
3eduction in accounts recei2a*le in2estment
$ 1560
e.
1pportunity cost of funds Cost Sa2in's from reduced in2estment in A3
(2.6#
Cash *iscount term ;ercentage of customers to take discount 4a! Baterial annual usage -ne!0 @elling price per unit Cost of Cas &iscount
2.))# ")# (6)) /%2))
f.
'.
8et rofit #loss from initiation of proposed cas discount
$ 1!6!1
$
$ !!600 $ 100!1
Spreadsheet Exercise Four compan is considering manufacturing protecve cases for a popular ne$ smartphone. Management decides to borro$ ',))*))) from each of t$o ban+s* Jirst American and Jirst CiGen. =n the da that ou visit both ban+s* the quoted prime interest rate is <. 9ach loan is similar in that each involves a ()-da note* $ith interest to be paid at the end of () das. !he interest rate $as set at , above the prime rate on Jirst American"s #&ed-rate note. =ver the ()-da period* the rate of interest on this note $ill remain at the , premium over the prime rate regardless of Kuctuaons in the prime rate. Jirst CiGen sets its interest rate at 7. above the prime rate on its Koang-rate note. !he rate charged over the () das $ill var directl $ith the prime rate. T. /. Create a spreadsheet to calculate and analGe the follo$ing for the Jirst American loan2 a. Calculate the total dollar interest cost on the loan. Assume a 1(-da ear. b. Calculate the ()-da rate on the loan. c. Assume that the loan is rolled over each () das throughout the ear under idencal condions and terms. Calculate the eTecve annual rate of interest on the #&ed-rate* ()-da Jirst American note. 8e&t* create a spreadsheet to calculate the follo$ing for the Jirst CiGen loan2
Maturit Jirst American :remium Jirst CiGen :remium
() das ,.)) 7.)
@irst American oan 5 @ixed Rate a% The total dollar interest cost on the @irst American oan 6oan Amount :rime@:rem Maturit ' ,))*))).)) )% The 6#5day rate on the loan !otal >ollar Inter '
0.)) ).7(B11(,
6oan
,*0.0) ' ,))*))).))
c% EOec
Total /ollar 0nterest $ !*",%*#
6#5day Rate 1%+-*"&
EOec
@irst Cien oan 5 @loang Rate oan d% The 0nial Rate :rime ?ate
:remium
<.))
7.)
e% 0nterest Rate =or rst and last #5day periods Inal ?ate @ :re Maturit .)
).),707<)
0nial Rate51st # day r ,%"#&
@irst # /ay Rate #%6*,6&
te
Spreadsheet Exercise Morris Compan* a small manufacturing #rm* $ants to acquire a ne$ machine that costs '1)*))). Arrangements can be made to lease or purchase the machine. !he #rm is in the B) ta& brac+et. !he #rm has gathered the follo$ing informaon about the t$o alternaves2 easeD Morris $ould obtain a -ear lease requiring annual end-of-ear lease paments of '7)*))). !he lessor $ould pa all maintenance costs^ insurance and other costs $ould be borne b the lessee. Morris $ould be given the right to e&ercise its opon to purchase for '1*))) at the end of the lease term. ?urchaseD Morris can #nance the purchase of the machine $ith an .* -ear loan requiring annual end-of-ear installment paments. !he machine $ould be depreciated under MAC?H using a -ear recover period. !he e&act depreciaon rates over the ne&t si& periods $ould be ,)* 1,* 70* 7,* 7,* and * respecvel. Morris $ould pa '7*,)) per ear for a service contract that covers all mai ntenance costs. !he #rm plans to +eep the machine and use it beond its -ear recover period. T. /. Create a spreadsheet similar to !ables 7<.7* 7<.,* and 7<.1 to ans$er the follo$ing2 a. Calculate the aDer-ta& cash ouRlo$ from the lease for Morris Compan. b. Calculate the annual loan pament. c. >etermine the interest and principal components of the loan paments. d. Calculate the aDer-ta& cash ouRlo$s associated $ith the purchasing opon. e. Calculate and compare the present values of the cash ouRlo$s associated $ith both the leasing and purchasing opons. f. 3hich alternave is preferable4 9&plain. orris Compan ) easin' &ecision Cost of 8e4 acine
$3)%)))
/)# $()%)))
a- 3ate ease ament ption to purcase at end of lease oan 3ate erm of loan(lease Annual cost of maintenance
$3%))) ?.6)# 6 years $(%2))
a. After)ta- cas outflo4 from ease efore tax payment
'
Tax rate After&tax cash outflo! for year ( to / Cash outflo! for year 6
$ $
*. oan ament oan aturit '1)*))) 6
&iscount 3ate .)
7)*))) B) 000 9000
ament "(2.:"
c. &eterminin' te /nterest and rincipal Components of oan ament ?.6)# ;ear
ament
rincipal
/nterest
,nd
3)%)))
$ $
6%)3 $ 6%/:3 $
2%66) $ 2%(2) $
2/%:3" (:%///
$
6%:) $
(%63 $
(3%/?3
$
%/" $
(%(/ $
"%)("
$
"%)("
0 1 6 1 5
$
3)%))) ' 2/%:3" ' (:%/// ' (3%/?3 '
$
"%)(" '
$ $ $
<*(71 <*(71 <*(71 <*(71 <*(71
$
6:
$
&
d. After)a- Cas utflo4s associated 4it urcasin' ,nd of oan aintenance ;ear ament Costs AC3S &epreciation /nterest 7*,)) ,).) $ ( $ "%(3 ' %))) $ 2%66) 7*,)) 1,.) $ 2 $ "%(3 ' :%)) $ 2%(2) 7*,)) 70.) $ 3 $ "%(3 ' 6%")) $ (%63
50% otal a&eductions Sields $ :%"6) $ 3%:)) $ (2%:2) $ 6%(? $
?%663 $
3%/2(
After)taCas utflo4s $ /%:(3 $ 3%/6 $
6%3:2
/ 6
$ $
"%(3 ' "%(3 '
7*,)) 7*,))
7,.) $ 7,.) $
3%)) $ 3%)) $
(%(/ $ 6: $
6%:/ $ 6%3: $
2%3"? $ 2%(6: $
e. A Comparison of te resent >alue of Cas utflo4s Associated 4it easin' 2. urcasin' After)ta- Cost of &e*t 6.()# easin' ucasin' After)aAfter)ta ;ear Cas utflo4s > Cas utflo4s > ( $ %))) $6%")?.?6 $ /%:(3 $/%"/.6" 2 $ %))) $6%/3(.?3 $ 3%/6 $3%2::.:/ 3 $ %))) $6%(?.26 $ 6%3:2 $/%//./3 / $ %))) $/%:("./6 $ %/36 $6%2"3.6:
6
'
0*)))
$"%)(?.26 $2?%2//.3 > of Cas utflo4
$
%6/
$6%(?:.(6 $23%)?(." > of Cas utflo4
f. Since te present 2alue of ca s outflo4s for purcasin' #$6"17 is lo4er tan for leasin' #$6!65 te purcasin' alternati2e is preferred.
%/36 %6/
Spreadsheet Exercise ?am 9lectric Compan is being considered for acquision b Cavalier 9lectric. Cavalier e&pects the combinaon to increase its cash Ko$s b '7))*))) for each of the ne&t ears and b '7,*))) for each of the follo$ing ears. ?am 9lectric has relavel high #nancial leverage^ Cavalier e&pects its cost of capital to be 7, for the #rst ears and esmates that it $ill increase to 7( for the follo$ing ears if the merger is underta+en. !he cash price of ?am 9lectric is '1,*))). T. /. a. >etermine the present value of the e&pected future cash inKo$s over the ne&t 7) ears. b. Calculate the net present value 8: for the ?am 9lectric acquision. c. All else being equal* $ould ou recommend the acquision of ?am 9lectric b Cavalier 9lectric4 9&plain.
4et ?resent alue o= the Ram Electric Company Ac9uision
Fears 7 , 1 B
Expected Cash 0nLows ' 7))*))) 7))*))) 7))*))) 7))*))) 7)) )))
?resent alue 0,.<7 <0<70.10 <77<.), (17.7 (
( through 7) and discounted at 7, percent over the ears 7 through .
Spreadsheet Exercise As the #nancial manager for a large mulnaonal corporaon M8C* ou have been as+ed to assess the #rm"s economic e&posure. !he t$o major currencies* other than the E.H. dollar* that aTect the compan are the Me&ican peso M: and the 5rish pound `. Fou have been given the projected future cash Ko$s for ne&t ear2 Currenc 5rish pounds Me&ican pesos
!otal inKo$ `7<*)))*))) M: 7))*)))*)))
!otal ouRlo$ `77*)))*))) M: ,*)))*)))
!he current e&pected e&change rate in E.H. dollars $ith respect to the t$o currencies is as follo$s2 Currenc 5rish pounds Me&ican pesos
9&change rate '7.(( ').7)
To /o Assume that the movements in the Me&ican peso and the 5rish pound are highl correlated. Create a spreadsheet to ans$er the follo$ing quesons. a. >etermine the net cash Ko$s for both the Me&ican peso and the 5rish pound. b. >etermine the net cash Ko$ as measured in E.H. doll ars. It $ill represent the value of the economic e&posure. c. :rovide our assessment as to the compan"s degree of economic e&posure. In other $ords* is it high or lo$ based on our #ndings in part b4
Calculang the 4et exposure to Each Currency in GS /ollars @oreign
Total
Total
'a( 4et
Current Exchange
')( alue o=
