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Clayton Industries is planning its operations for next year, and Ronnie Clayton, the CEO, wants you to forecast the firm's additional funds needed (AFN). The firm is operating at full capacity. Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions.
Last year’s sales = S0 $350 Last year’s accounts payable $40
Sales growth rate = g 30% Last year’s notes payable $50
Last year’s total assets = A0* $500 Last year’s accruals $30
Last year’s profit margin = PM 5% Target payout ratio 60%
Suppose Yon Sun Corporation’s free cash flow during the just-ended year (t = 0) was $100 million, and FCF is expected to grow at a constant rate of 5% in the future. If the weighted average cost of capital is 15%, what is the firm’s value of operations, in millions?
You were hired as a consultant to Quigley Company, whose target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of common from retained earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new common stock. What is Quigley's WACC?
Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
The longer a project’s payback period, the more desirable the project is normally considered to be by this criterion.
One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money.
If a project’s payback is positive, then the project should be rejected because it must have a negative NPV.
The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.
If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time.
Harry's Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV?
Year 0 1 2 3 4 5
Cash flows -$1,000 $300 $300 $300 $300 $300
The term “additional funds needed (AFN)” is generally defined as follows:
Funds that are obtained automatically from routine business transactions.
Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations.
The amount of assets required per dollar of sales.
The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.
A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.
Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's MIRR can be less than the WACC (and even negative), in which case it will be rejected.
Year 0 1 2 3 4
Cash flows -$850 $300 $320 $340 $360
As a member of UA Corporation’s financial staff, you must estimate the Year 1 cash flow for a proposed project with the following data. What is the Year 1 cash flow?
Sales revenues, each year $42,500
Other operating costs $17,000
Interest expense $4,000
Tax rate 35.0%
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