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Complete the following problem sets and show all steps in your

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Complete the following problem sets and show all steps in your work:

Ch. 17: Problem B2
B2. (Choosing financial targets) Sanderson Manufacturing Company would like to achieve a
capital structure consistent with a Baa2/BBB senior debt rating. Sanderson has identified
six comparable firms and calculated the credit statistics shown here.
a. Sanderson’s return on assets is 5.3%. It has a total capitalization of $600 million. What
are reasonable targets for long-term debt/cap, funds from operations/LT debt, and fixed
charge coverage?
b. Are there any firms among the six who are particularly good or bad comparables?
c. Suppose Sanderson’s current ratio of long-term debt to total cap is 60% but its fixed
charge coverage is 3.00. What would you recommend?

Senior debt rating Baa2/BBB Baa3/BBB− Baa2/BBB Baa1/A− Baa1/BBB− Baa2/BBB+
Return on assets 5.2% 5.0% 5.4% 5.7% 5.2% 5.3%
Long-term debt/cap 38% 41% 45% 40% 25% 43%
Total cap ($MM) 425 575 525 650 210 375
Funds from
operations/LT debt 39% 43% 28% 46% 57% 43%
Fixed charge cov 2.57 2.83 2.75 2.38 3.59 2.15

Ch. 18: Problems A8 & B1
A8. (Accounting for stock dividends and stock splits) Shore Electronics Corporation’s common
stock is selling for $44 per share, and its common stockholders’ equity is shown here.
a. Show the impact of a 50% stock dividend. (Hint: This is a large stock dividend, not a
small one.)
b. Show the impact of a 3-for-2 stock split.
c. Describe how the stock market would react to each event. How would you explain the
difference in reaction?
Paid-in capital ($4 par value; 5,000,000 shares) $ 20,000,000
Capital contributed in excess of par value 30,000,000
Retained earnings 50,000,000
Common stockholders’ equity $100,000,000

B1. (Cash versus homemade dividends) Refer to Figures 18-4 and 18-5. A firm currently has
8,000 shares outstanding that are worth $100 each. The firm’s shareholders desire a dividend
of $20 per share. Assume a perfect capital market.
a. Suppose the firm pays a dividend of $20 per share and sells new shares to raise
$160,000 to replace the cash it paid out. Show that these steps do not alter the wealth
of the original shareholders. What percentage of the firm do the original shareholders
end up owning?
b. Suppose instead the shareholders raise $160,000 by selling some of their own shares.
How many shares must they sell? Show that the two dividend alternatives leave them
equally well-off.

Ch. 20: Problem A1
A1. (Bond covenants) Dallas Instruments has a large bond issue whose covenants require: (1)
that DI’s interest coverage ratio exceeds 4.0; (2) that DI’s ratio of tangible assets to longterm
debt exceeds 1.50; and (3) that cumulative dividends and share repurchases not
exceed 60% of cumulative earnings since the date of the issuance of the bonds. DI has earnings
before interest and taxes of $70 million and interest expense of $14 million. Tangible
assets are $400 million and long-term debt is $175 million. Since the bonds were issued,
DI has earned $200 million, paid dividends of $40 million, and repurchased $40 million
of common stock. Is DI in compliance with its bond covenants?

Ch. 21: Problem A2
A2. (Net advantage to leasing) Allied Metals, Inc., is considering leasing $1 million worth of manufacturing equipment under a lease that would require annual lease payments in arrears for five years. The net cash flows to lessee over the term of the lease (with zero residual value) are given here. Allied’s cost of secured debt is 12%, and its cost of capital is 16%. Allied pays taxes at a 34% marginal rate.

a. Calculate the net advantage to leasing.

b. Should Allied lease, or borrow and buy?

Year 0 1 2 3 4 5
Net cash flow ($000) 1,000 −300 −275 −250 −225 −200
Submitted: 5 years ago.
Category: Homework
Expert:  Manal Elkhoshkhany replied 5 years ago.

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