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Number 1 (Choosing financial targets) Simplicity Company is

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Number 1
(Choosing financial targets) Simplicity Company is evaluating their capital structure. The CFO is concerned that the firm might be underleveraged, even though the firm has larger-than-average research and development and foreign tax credits when compared to other firms in its industry. The finance staff prepared the industry comparison shown here.
a. Simplicity’s objective is to achieve a credit standing that falls, in the words of the chief financial officer, “comfortably within the ‘A’ range.” What target range would you recommend or each of the three credit measures?
b. Before settling on these target ranges, what other factors should Simplicity’s chief financial officer consider?
c. Before deciding whether the target ranges are really appropriate for Symplicity in its current financial situation, what key issues specific to Symplicity must the chief financial officer resolve?
FUNDS FROM
RATING FIXED CHARGE OPERATIONS/ LONG-TERM DEBT/
CATEGORY COVERAG E TOTAL DEBT CAPITALIZATION
Aa 4.00–5.25x 60–80% 17–23%
A 3.00–4.30 45–65 22–32
Baa 1.95–3.40 35–55 30–41
(001700B01001)
Number 2
A10. (Dividend adjustment model) Spreadsheet Solutions Inc. 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. The firm 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.

(180a1010)

Number 3

(Dividend policy) The Dexter Company 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.
a. Over the five-year period, what is the maximum overall payout ratio the firm could
achieve without triggering a securities issue?
b. Recommend a reasonable dividend policy for paying out discretionary cash flow in years
(180b02002)
1 through 5.
1 2 3 4 5 THEREAFTER
Earnings 100 125 150 120 140 150??per year
Discretionary cash flow 50 70 60 20 15 50??per year


Number 4
(Comparing borrowing costs) Roadways Inc. 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)?
(0200a200)

Number 5
(Net advantage to leasing) Carrion Luggage, Ltd. is considering leasing $50 million worth of warehousing equipment under a lease that would require annual lease payments in arrears for five years. The net cash flows to the lessee over the term of the lease (with zero residual value) are given here. Carrion’s cost of secured debt is 11%, and its cost of capital is 14%. Carrion pays taxes at a 40% marginal rate.

a. Calculate the net advantage to leasing.

b. Calculate the IRR for the lease.

c. Should Carrion lease, or borrow and buy?

Year 0 1 2 3 4 5
Net cash flow ($ millions) 50 -15 -15 -15 -15 -15
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