...Barbara Jones FI516 Problem 18-11 & 21-5 October 31, 2010 Problem 18-11 A. Capital Budget = $10,000,000; Capital structure = 60% equity, 40% debt Retained Earnings Needed = $10,000,000 (0.6) = $6,000,000 B. Residual Dividends = Net Income - Retained earnings needed to finance new investment $8,000,000 - $6,000,000 = $2,000,000 DPS = $2,000,000/1,000,000 = $2.00 Payout ratio = $2,000,000/$8,000,000 = 25% C. R/E Available = $8,000,000 - $3.00 (1,000,000) R/E Available = $8,000,000 - $3,000,000 R/E Available = $5,000,000 D. No. I think the company can maintain its $3.00 DPS if $5 million of R/E could be available for capital projects. E. Capital Budget = $10 million; Dividends = $3 million; NI = $8 million R/E Available = $8,000,000 - $3,000,000 = $5,000,000 % of Capital Budget Financed with R/E = 5,000,000/10,000,000 = 50% % of Capital Budget Financed with Debt = 5,000,000/10,000,000 = 50% F. Dividends = $3 million; Capital Budget = $10 million; 60% equity, 40% debt; NI = $8 million Equity Needed = $10,000,000(0.6) = $6,000,000 R/E Available = $8,000,000 - $3.00(1,000,000) = $8,000,000 - $3,000,000 = $5,000,000 External (New) Equity Needed = $6,000,000 - $5,000,000 = $1,000,000 G. Dividends = $3 million;...
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...ASSIGNMENT WEEK 1 14 – 10 A1 . 3,600,000 X (1 + 10%) = 3,960,000 A2. 3,600,000 / 10,800,000 X 14,400,000 = 4,800,000 A3. 14,400,000 “(8,400,000 X 60%) = 9,360,000 A4. Regular: 3,600,000 X (1 + 10% ) = 3,960,000 Extra : 14,400,000 “ (8,400,000 X 60% )~ ~ “ 3,960,000 = 5,400,000 B I prefer the pure residual policy (A3). This dividend policy ensures that the company has enough capital to fund profitable projects and minimize its cost of capital through maintaining its optimal capital structure. C Yes, a dividend of 9 million is reasonable as it is close to my dividend policy choice. 19 – 6 A The amount being raised is $500,000. This would be used to pay off $250,000 of line of credit and so the accounts payable would reduce to 400,000 – 250,000 = $ 150,000. The remaining 250,000 would be added to cash and so the total assets would increase to 550,000 +250,000 = $800,000 Alternative 2 Under alternative 2,convertible bonds are sold and the balance sheet is after conversion.The number of bonds issues is 500,000/1,000 = 50,000.The price per share is $10.Common stock will increase by the par value of $1 = $1X50,000 = 50,000. The remaining amount of 450,000 would...
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...16.3 What are the advantages and disadvantages of LBOs and MBOs? A leveraged buyout or LBO is a type of aggressive business practice whereby investors or a larger corporation utilizes borrowed funds (junk bonds, traditional bank loans, etc.) or debt to finance its acquisition. The assets of the acquiring corporation and acquired company functions as a form of secured collateral in this type of business deal. The advantages of LBO’s are as below: 1. LBO’s helps the poorly managed firms to undergo corporate reformation by changing their corporate structure. This way a company can re-vitalize itself and earn substantial results. 2. Since the leveraged buyout involves high debt to equity ratio, larger firm can acquire smaller firm with very little capital. 3. Stockholders of the company can benefit from the higher financial provided that the returns of the acquired firm are greater than the cost of financing. In such a case the value of the firm would be increased. 4. MBO’s can prevent a company from being acquired by external sources or from being shut down completely. 5. Since the management understand and have been involved in the running of the business to be acquired, the commercial due diligence that is usually undertaken when a company is acquired should be easier and less time-consuming. The disadvantages of LBO’s are as below: 1. Corporate restructure, arising out of LBO can greatly impact the employees of the company. This occurs...
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...LaToya Roberts-Hill FI516 – Advanced Managerial Finance IPO Paper Dollar General Corporation Dollar General Corporation was founded in 1939 by Cal Turner in Scottsville, Kentucky. The initial concept of Dollar General was that no item in the store would cost more than one dollar. Dollar General Stores are normally located in small shopping plazas or strip malls in local neighborhoods. In recent years, Dollar General has started constructing more stand-alone stores, mostly in areas that are not served by other general merchandise retailers. Today, Dollar General Headquarters is located in Goodlettsville, TN. Dollar General offers both name brand and generic products, including off-brand goods and close- outs of name-brand items to its consumers. Dollar General has also begun to offer a greater selection of grocery items including frozen foods similar to that of a grocery store. The Dollar General Stores that carry the grocery and frozen products are similar to Wal-Mart Supercenter, thought they are much smaller, operate under the name of Dollar General Market. Dollar General serves communities that are too small for larger retail chains such as Wal-Mart. Its competitors are national chains such as Family Dollar, Dollar Tree, and Fred’s in the southeast. By 1957, Dollar General had 29 stores and their annual sale for these stores was around $5 million. Dollar General has also been connected with motorsports like NASCAR. It is now sponsoring Turner Motorsports...
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...FI516-Advanced Financial Management Spring 2011 Week 3 Assignment Chap 8-1 Exercise value = $30 (Current stock price) – $25 (strike price) = $5 Time value = $7 (Option price) – $5 (Exercise value) = $2 Chap 8-2 Time Value = Market price of option - Exercise value $5 = V - $22 V = $27. Exercise value = P0 - Strike price $22 = P0 - $15 P0 = $37. Chap 15-8 a. = D + S = 0 + ($15/share)(200,000 # share) = $3,000,000(value) WACC = wd rd(1-T) + wcers = 0 + (1.0)(0.10) = 10% WACC = wd rd(1-T) + wcers = (0.30)(.07)(1-0.40taxes) + (0.70)(.11) = 8.96%. b. Debt = wd V = 0.30($3,000,000) = $900,000 S = V – D = $900,000 P = [S + (D – D0)]/n0 = [$200,000 + ($900,000) – 0)]/200,000 = $5.50 c. X = (D – D0)/P = $200,000 / $5.50 = 36363.636 n = 200,000 – 36363.636 = 163636.364. Initial position EPS = NI/n0 = [(EBIT – Int.)(1-T)] / n0 = [($500,000 – 0)(1-0.40)] / 200,000 = $1.50. Using financial leverage EPS = [($500,000 – 0.07($200,000) (1-0.40)] / 163636.364 = [($500,000 – $14000) (1-0.40)] / 163636.364 = $486,000 / 163636.364 = $1.782 If we add more debt the EPS will increase d. with 30% in debt TIE = = EBIT/I =EBIT/14,000 Probability TIE 0.10 (7.14) 0.20 14.2 0.40 35.71 0.20 57.14 0.10 ...
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...Problem 15-9 Present situation (50% debt): WACC = wd rd(1-T) + wcers = (0.5)(10%)(1-0.15) + (0.5)(14%) = 11.25%. V = = $100 million. 70% debt: WACC = wd rd(1-T) + wcers = (0.7)(12%)(1-0.15) + (0.3)(16%) = 11.94%.V = = $94.255 million. 30% debt: WACC = wd rd(1-T) + wcers = (0.3)(8%)(1-0.15) + (0.7)(13%) = 11.14%. V = = $101.023 million. Problem 15-10 a. BEAs unlevered beta is bU=b/(1+ (1-T)(D/S))=1.0/(1+(1-0.40)(20/80)) = 0.870. b. bU (1 + (1-T)(D/S)). At 40% debt: bL = 0.87 (1 + 0.6(40%/60%)) = 1.218. rS = 6 + 1.218(4) = 10.872% c. WACC = wd rd(1-T) + wcers = (0.4)(9%)(1-0.4) + (0.6)(10.872%) = 8.683%. V = = $103.188 million. Problem 26-8 a. VU = $500,000/(rsU g) = $500,000/(0.13 - 0.09) = 12,500,000. b. D = 5, then S = 16 5 = $11.0 million. = 15.7% c. VL = VU + TD = $12.5 million + (0.40)(5 million) = $14.5 million. S = $14.5- 5 = $9.5 million. rsL = 0.13+(0.13-0.07)(1-.40)(5/9.5) = 14.9% d. VL is greater under the extension that means MM assumes 0 growth. A positive growth rate gives a larger value to the tax field. The value of the tax field under MM is 2.0 million and is $3.5 million if growth is included. The cost of capital is higher because the relative weight of equity is higher and the relative weight of debt is lower than when growth is...
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...Grading Summary | These are the automatically computed results of your exam. Grades for essay questions, and comments from your instructor, are in the "Details" section below. | Date Taken: | 9/25/2011 | Time Spent: | 1 h , 14 min , 19 secs | Points Received: | 90 / 100 (90%) | | Question Type: | # Of Questions: | # Correct: | Short | 6 | N/A | | | Grade Details | 1. | Question : | (TCO C) Pate & Co. has a capital budget of $3,000,000. The company wants to maintain a target capital structure that is 15 percent debt and 85 percent equity. The company forecasts that its net income this year will be $3,500,000. If the company follows a residual dividend policy, what will be its total dividend payment? (a) $205,000 (b) $500,000 (c) $950,000 (d) $2,550,000 (e) $3,050,000 | | | Student Answer: | | Answer: C $950,000 Residual Dividend Model: Capital budget is $3,000,000 % Equity is 85% Net income is $3,500,000 Dividends paid = Net income - (% Equity * Capital budget) Dividends paid = $3,500,000 - (85% * $3,000,000) Dividends paid = $950,000 | | Instructor Explanation: | Answer is: c Text: pp. 570-572 - Residual Dividends, Chapter 14 The amount of new investment which must be financed with equity is: $3,000,000 x 85% = $2,550,000. Since the firm has $3,500,000 of net income, $950,000 = $3,500,000 - $2,550,000 will be left for dividends. | | | | Points Received: | 10 of 10 | | Comments: | | | ...
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...Solutions for Study Guide for Final Exam 1. (TCO B) Which of the following statements concerning the MM extension with growth is NOT CORRECT? (a) The tax shields should be discounted at the unlevered cost of equity. (b) The value of a growing tax shield is greater than the value of a constant tax shield. (c) For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions. (d) For a given D/S, the WACC is greater than the WACC under MM's original (with tax) assumptions. (e) The total value of the firm is independent of the amount of debt it uses. (Points: 20) 2. (TCO D) Which of the following statements is most CORRECT? (a) In a private placement, securities are sold to private (individual) investors rather than to institutions. (b) Private placements occur most frequently with stocks, but bonds can also be sold in a private placement. (c) Private placements are convenient for issuers, but the convenience is offset by higher flotation costs. (d) The SEC requires that all private placements be handled by a registered investment banker. (e) Private placements can generally bring in funds faster than is the case with public offerings. (Points: 20) 3. (TCO E) Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 10%, and the loan...
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...FI516 – WEEK 1 – HOMEWORK ANSWER KEY Problem 14-10 14-10 a. 1. 2011 Dividends = (1.10)(2010 Dividends) = (1.10)($3,600,000) = $3,960,000 2. 2010 Payout = $3,600,000/$10,800,000 = 0.33 = 33% 2011 Dividends = (0.33)(2009 Net income) = (0.33)($14,400,000) = $4,800,000 (Note: If the payout ratio is rounded off to 33%, 2011 dividends are then calculated as $4,752,000.) 3. Equity financing = $8,400,000(0.60) = $5,040,000 2011 Dividends = Net income - Equity financing = $14,400,000 - $5,040,000 = $9,360,000 All of the equity financing is done with retained earnings as long as they are available. 4. The regular dividends would be 10% above the 2010 dividends: Regular dividends = (1.10)($3,600,000) = $3,960,000. The residual policy calls for dividends of $9,360,000. Therefore, the extra dividend, which would be stated as such, would be: Extra dividend = $9,360,000 - $3,960,000 = $5,400,000. An even better use of the surplus funds might be a stock repurchase. b. Policy 4, based on the regular dividend with an extra, seems most logical. Implemented properly, it would lead to the correct capital budget and the correct financing of that budget, and it would give correct signals to investors. ...
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...James Holliday April 3, 2011 FI516 IPO Paper Identify the company and its industry. Pandora Media, Inc. is an internet streaming radio service used by more than 80 million listeners. Pandora, which has a catalog of 800,000 songs from more than 80,000 artists, has roughly half the market for Internet radio in 2010, according to a study published in November by Ando Media. Though the service is wildly popular, it has yet to make a profit. The Internet radio station generates playlists based on a user's favorite artist or song. As part of the company's Music Genome Project, songs are analyzed according to musical features -- including details of instrumentation, harmony, lyrics, melody, rhythm, and vocals. Users enter the name of a song, and Pandora creates a playlist of songs with similar characteristics. Pandora's service, free to its more than 80 million registered users and available only in the US, is supported by local and national advertising. Pandora chief strategy officer Tim Westergren founded the company in 2000 and it filed for an IPO in 2011. Discuss important financial and other facts about the company from its SEC filings. In its papers filed with the Securities and Exchange Commission, Pandora reported a $16.8-million loss on $55.2 million in revenue for its fiscal year ended Jan. 31, 2010. From Feb. 1, 2010 through Oct. 31, Pandora narrowed its losses to $328,000 on $90.1 million in revenue. Because Pandora is largely a free service, only 9% of its...
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...FI516 A. Here are the basic Definitions that relate to capital structure: V= Value of Firm WACC=Weighted average Cost of Capital FCF= Free Cash Flow rs And rd = Costs of stock and debt wce And wd = percentages of the firm that are financed with stock and debt Impact of capital structure is based upon the value of the effect that the debt have on the Weighted Average Cost of Capital and/or the Free Cash Flow. The debt holders, compared to the stockholders, have prior claim on cash flow. The residual claim of stockholders increases the risk when the debt holders fixed claim increases, which in turn causes the stock to go up. Debt also increases the risk of bankruptcy to the company. This causes pre-taxed cost of debt to go up as well. Free Cash flow is also affected by additional debt. This can cause increase in the possibility of bankruptcy as well. An indirect cost would be a loss of customer, as a direct cost of distress would be legal fees. The indirect costs cause NOPAT to decrease. This is caused by the loss of customers, in turn causing the net operating working capital to increase. The effect that the managers have (or their behavior in most cases) is also effected by additional debt to the company. Managers will be come less likely to spend or waste their Free Cash Flow on opportunities that might in fact add value, or not add value and even the lack of risk in involving the company in any NPV projects that could indeed become prosperous for the company...
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...Andre R. Scott (D01495990) Advanced Managerial Finance – Sept 2013 - FI516 IPO Paper – Week 5 – 10/06/2013 Teacher: Miriam Benard COMPANY AND INDUSTRY Company I choose this company for two reasons; the world of information technology is huge and growing steadily. Google, Yahoo, and YouTube are hugely popular sites, and youku is a site that is similar to YouTube and delivers great possibilities for the Asian community. Youku.com, Inc. went public on December 8, 2010. This company is in the business of delivering video content over the internet. Their business model consists primarily of deriving advertising revenue as the result of viewer activity over their system. They license content and provide it for viewer use. There is no viewer fee for the service. Youku bills itself as the “leading internet television company in China.” Their mission is to become the primary source of video content for the Chinese population across any Internet-enabled device. The overall offering is somewhat like what we know as You Tube. According to iResearch, Youku has appx. 40% of the marketshare of total user time spent viewing video content online in China. Its nearest competitors have appx. 23% and 14% respectively. According to the company’s registration filing, their assessment of their strengths and opportunities is as follows: Our Competitive Strengths We believe that the following strengths contribute to our success and differentiate us from our competitors: | | ...
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...Student paper FI516 IPO Paper Vonage, IPO Success or Failure Executive Summary * Vonage Holdings Corporation was incorporated in the year 2000 and is based out of Holmdel, New Jersey. Vonage provides broadband communication both in the U.S and internationally within Canada, and the United Kingdom. Their market share continues to shrink due to competition and loss of customer base. * Vonage profitability is practically non-existent. Since their inception Vonage’s expenses have outdone their revenues and they continue to see a loss in their business even after their IPO. * Their IPO was successful in bringing in $531 million but the closing price of their stock was 12.7% below the asking price of $17 per share, which caused a rift with the new investors who were refusing to pay up. * Today, their stock price is trading at under $3.00 per share but the landline, which is the backbone to their company, is becoming obsolete. Industry Vonage belongs with the industry of Diversified Communication Services, but related industries as well as competition comes from other industries such as Telecom Services, Communication Equipment and Long Distance Carriers to just name a few. As of today, and according to Yahoo Finance, the market cap for Vonage is 572.91 million, compared to American Tower Corporation, which is the industry leader with a market cap at 24.93 billion. AT&T is also a competitor and the leader in the related industry of Telecom Services...
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...Running Header: IPO Assignment: Dunkin’ Brands Group, Inc. Dunkin’ Brands Group, Inc. FI516- Advanced Financial Management August 12, 2012 Introduction The company chosen for this assignment is Dunkin' Brands Group, Inc. (NASDAQ: DNKN). With approximately 16,800 points of distribution in nearly sixty countries worldwide, Dunkin' Brands Group, Inc. is one of the world's leading franchisors of quick service restaurants (QSR) serving hot and cold coffee and baked goods, as well as hard-serve ice cream. Its franchised business model comprises 9,760 Dunkin’ Donuts restaurants and 6,433 Baskin-Robbins restaurants. Dunkin’ Brand’s competitors include: 7-Eleven, Burger King, Cold Stone Creamery, Dairy Queen, McDonald’s, Quick Trip, Starbucks, Subway, Tim Horton’s, WaWa and Wendy’s, among others (Google Finance, 2012). Additionally, Dunkin’ Brands competes with other QSRs, specialty restaurants and other retail concepts for prime restaurant locations and qualified franchisees. As of December 31, 2011, it had 10,083 Dunkin’ Donuts restaurants in 36 states, the District of Columbia, and 31 other countries; and 6,711 Baskin-Robbins restaurants in 44 states, the District of Columbia, and 48 other countries. The company also leases restaurant properties. With approximately 120 years of combined history Dunkin’ Brands Group, Inc. is headquartered in Canton, Massachusetts (Yahoo Finance, 2012). According to...
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...Imperva, Incorporated Steve KinKaid FI516 DeVry University Executive Summary Imperva Incorporated located at 3400 Bridge Parkway, Suite 200, Redwood Shores, California 94065, is an up and coming organization in the world of cloud computing and security they are considered best of breed. Their Initial Public Offering occurred on November 9th, 2011. The IPO price was $24.00 per share. The underwriters were granted options on an additional 750,000 shares at the then market price for 30 days. The Initial Public Offering raised $90,000,000, of which the organization received $85,500,000. The other $4,500,000 was from the sale of private stock held by company executives and was not part of the proceeds of the IPO. Currently Imperva intends to use the net proceeds received from this offering for working capital and general corporate purposes. They will invest $3.5 million of the net proceeds from this offering in Incapsula, their majority owned subsidiary, and will receive in exchange an additional 4,375,000 shares of Incapsula’s Series A-1 Preferred Stock. Business Risks of Imperva are similar to those in this segment of the industry. Some of these are; they have never been profitable, their market is rapidly evolving, competition, and if breaches occur their reputation will be harmed. Their market share is currently less than 1%. Their major competitors include companies such as Citrix , F5,IBM, McAfee, Inc., Oracle ,and Symantec. Imperva has continued to...
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