A-3 (Coverage ratio) The firm in the two preceding problems also had $6 million of principal repayments during the latest 12 months. Its marginal tax rate is 40%. Calculate the debt service coverage ratio. A-4 (WACC with rebalancing) Nathan’s Catering is a gourmet catering service located in Southampton, New York. It has an unleveraged required return of r = 43%. Nathan’s rebalances its capital structure each year to a target of L = 0.52. T* = 0.20. Nathan’s can borrow currently at a rate of r
of r = 43%. Nathan’s rebalances its capital structure each year to a target of L = 0.52. T* = 0.20. Nathan’s can borrow currently at a rate of rd = 26%. What is Nathan’s WACC?
A-10(Dividend adjustment model) Regional Software has made a bundle selling spreadsheet software and has begun paying cash dividends. The firm’s chief financial officer would like the firm to distribute 25% of its annual earnings (POR = 0.25) and adjust the dividend rate to changes in earnings per share at the rate ADJ = 0.75. Regional paid $1.00 per share in dividends last year. It will earn at least $8.00 per share this year and each year in the foreseeable future. Use the dividend adjustment model, Equation (18.1), to calculate projected dividends per share for this year and the next four.
B-2 (Dividend policy) A firm has 20 million common shares outstanding. It currently pays out $1.50 per share per year in cash dividends on its common stock. Historically, its payout ratio has ranged from 30% to 35%. Over the next five years it expects the earnings and discretionary cash flow shown below in millions.
b. Recommend a reasonable dividend policy for paying out discretionary cash flow in years 1 through 5.
a. Over the five-year period, what is the maximum overall payout ratio the firm could achieve without triggering a securities issue?
A-2 (Comparing borrowing costs) Stephens Security has two financing alternatives: (1) A publicly placed $50 million bond issue. Issuance costs are $1 million, the bond has a 9% coupon paid semiannually, and the bond has a 20-year life. (2) A $50 million private placement with a large pension fund. Issuance costs are $500,000, the bond has a 9.25% annual coupon, and the bond has a 20-year life. Which alternative has the lower cost (annual percentage yield)?
A-1 (Net advantage to leasing) Arkansas Instruments (AI) can purchase a sonic cleaner for $1,000,000. The machine has a five-year life and would be depreciated straight line to a $100,000 salvage value. Hibernia Leasing will lease the same machine to AI for five annual $300,000 lease payments paid in arrears (at the end of each year). AI is in the 40% tax bracket. The before-tax cost of borrowing is 10%, and the after-tax cost of capital for the project would be 12%.
a.What cash flows does AI realize if it leases the
machine instead of buying it?
b.What is the net advantage to leasing (NAL)?
Comments
Post a Comment