Fin571 Week 5 Problem Sets
Chapter 17, Problem B1
A. To remain comfortably within the ‘A’ range, the firm should avoid the lower of each scale.
Fixed Charge Coverage = 3.40 – 4.30 (Scale 3.00 – 4.30)
Total Debt = 55 – 65 (45 - 65)
Long-Term Debt = 25 – 32 (22 – 32)
B. Other factors to consider include net present value (NPV), foreign tax credits, and the price of stock.
C. Bixton must resolve the research and development, and foreign tax credits. The target ranges listed are suitable only for a debt shield. Lenders monitor long-term debt. If R&D spending increases and foreign tax credits remain balanced, then this may fall out of the 22-32 range which indicates the capital structure is losing leverage.
Chapter 18, A10
DPS1 – DPS0 = ADJ [POR(EPS1) – DPS0]
YEAR 1 = 0.75 [0.25 X $8.00 - $1.00] + $1.00 = $1.75
YEAR 2 = 0.75 [0.25 X $8.00 - $1.75] + $1.75 = $1.94
YEAR 3 = 0.75 [0.25 X $8.00 - $1.94] + $1.94 = $1.985
YEAR 4 = 0.75 [0.25 X $8.00 - $1.98] + $1.98 = $2.00
YEAR 5 = 0.75 [0.25 X $8.00 - $2.00] + $2.00 = $2.00
Chapter 18, B2
A.
(A) TOTAL DISCRETIONARY CASH FLOW (B) TOTAL EARNINGS $ 50.00 $ 100.00 $ 70.00 $ 125.00 $ 60.00 $ 150.00 $ 20.00 $ 120.00 $ 15.00 $ 140.00 $ 215.00 $ 635.00
Maximum Payout Ratio = $215/$635 = 33.86%
B. Current Dividend = $1.50 X 20 Million Shares = $30 Million
Chapter 20, A2
Alternate 01 n 20 * 2 = 40
PV =-(50-1)=49
PMT 9% / 2 * 50 = 2.25
FV 50 r 4.61
APY = (1 + 0.0461)2 -1 = 9.43% Alternate 02 - LOWER APY n 20 * 1 = 20
PV =-(50-.5)=49.5
PMT 9.25% * 50 = 4.625
FV 50 r 9.36
APY = 9.36 %
Chapter 21, C2
a. A lease is a form of secured debt where each lease payment includes an interest and principal repayment. Since the lease payment is taxable as ordinary income to the lessor, the entire debt
A. To remain comfortably within the ‘A’ range, the firm should avoid the lower of each scale.
Fixed Charge Coverage = 3.40 – 4.30 (Scale 3.00 – 4.30)
Total Debt = 55 – 65 (45 - 65)
Long-Term Debt = 25 – 32 (22 – 32)
B. Other factors to consider include net present value (NPV), foreign tax credits, and the price of stock.
C. Bixton must resolve the research and development, and foreign tax credits. The target ranges listed are suitable only for a debt shield. Lenders monitor long-term debt. If R&D spending increases and foreign tax credits remain balanced, then this may fall out of the 22-32 range which indicates the capital structure is losing leverage.
Chapter 18, A10
DPS1 – DPS0 = ADJ [POR(EPS1) – DPS0]
YEAR 1 = 0.75 [0.25 X $8.00 - $1.00] + $1.00 = $1.75
YEAR 2 = 0.75 [0.25 X $8.00 - $1.75] + $1.75 = $1.94
YEAR 3 = 0.75 [0.25 X $8.00 - $1.94] + $1.94 = $1.985
YEAR 4 = 0.75 [0.25 X $8.00 - $1.98] + $1.98 = $2.00
YEAR 5 = 0.75 [0.25 X $8.00 - $2.00] + $2.00 = $2.00
Chapter 18, B2
A.
(A) TOTAL DISCRETIONARY CASH FLOW (B) TOTAL EARNINGS $ 50.00 $ 100.00 $ 70.00 $ 125.00 $ 60.00 $ 150.00 $ 20.00 $ 120.00 $ 15.00 $ 140.00 $ 215.00 $ 635.00
Maximum Payout Ratio = $215/$635 = 33.86%
B. Current Dividend = $1.50 X 20 Million Shares = $30 Million
Chapter 20, A2
Alternate 01 n 20 * 2 = 40
PV =-(50-1)=49
PMT 9% / 2 * 50 = 2.25
FV 50 r 4.61
APY = (1 + 0.0461)2 -1 = 9.43% Alternate 02 - LOWER APY n 20 * 1 = 20
PV =-(50-.5)=49.5
PMT 9.25% * 50 = 4.625
FV 50 r 9.36
APY = 9.36 %
Chapter 21, C2
a. A lease is a form of secured debt where each lease payment includes an interest and principal repayment. Since the lease payment is taxable as ordinary income to the lessor, the entire debt