I asked this question this morning...no answer. I dont think
I asked this question this...
I asked this question this morning...no answer. I don't think the whole thing pasted.Submitted: 6 years ago.Category: Homework
(Choosing financial targets) Thompson Manufacturing Company’s new chief financial officer is evaluating Thompson’s capital structure. Concerned that the firm might be underleveraged, Thompson’s Board of Directors has asked the CFO to explain how Thompson compares to other firms in its industry. Perhaps unlike other firms, Thompson has prior year tax-loss credits and has a large manufacturing plant under construction. The finance department staff prepared the industry comparison shown here for the CFO to use in the Board presentation.
Rating Category Fixed Charge Coverage Funds From Operations/Total Debt Long-Term 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
1. Thompson’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 for each of the three credit measures?
2. Before settling on these target ranges, what other factors should Thompson’s chief financial officer consider?
3. When setting target debt range for a company, what are the important issues to analyze? To address Thompson’s specific issues, what questions must Thompson’s CFO ask and answer?
(Dividend adjustment model) Fleximax Haircare has marketed a new spray-on hair straightener and due to initial success began paying dividends last year and it believes that it can again pay cash dividends this year. Fleximax’s CFO’s target is a 22% distribution of annual earnings (POR = 0.22) and adjust the dividend rate to changes in earnings per share at the rate ADJ = 0.78. Fleximax paid $1.25 per share in dividends last year. The company projects earnings of at least $10.00 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. Equation is:
DPS1 - DPS0 = ADJ[POR(EPS1) - DPS0]
NOTE: Don’t forget year 5…many folks do.
(Dividend Policy) Bob’s Bacon has 25 million shares of common stock outstanding. Historically, Bob’s has returned $2.00 per share to its shareholders annually as dividends on common stock. The range of payout has been between 30% and 35%. The following table shows expected earnings and cash flow after debt service (shown below in millions).
1) What is total discretionary cash flow for years 1-5?
2) What are total earnings for years 1-5?
3) Based on these, what is the maximum payout ratio for the next five years?
4) What is the current aggregate dividend charge based on the current dividend percentage payout?
5) Based on the discretionary cash flow that Bob’s expects to produce, what would a reasonable dividend per share projection for each of the years 1-5 look like?
1 2 3 4 5 Thereafter
Earnings 225 250 275 245 265 270+ per year
Discretionary Cash Flow 75 100 85 80 65 50+ per year
(Comparing borrowing costs) A-Plus, a regional real estate investment company, is trying to raise capital and has two distinct alternatives: (1) A publicly placed $100 million bond issue. Issuance costs are $2 million, the bond has a 6% coupon paid semiannually, and the bond has a 20-year life. (2) A $100 million private placement with a large pension fund. Issuance costs are $1,000,000, the bond has a 5.75% annual coupon, and the bond has a 20-year life. Based on the lower cost (annual percentage yield), which would you recommend the company choose? You must show your calculations to receive full credit. (HINT: Do not just calculate “r”. You must complete the calculation to obtain APY.)
(Leasing, taxes, and the time value of money) As the true legal owner, an equipment lessor is able to deduct the costs associated with the asset of income tax purposes and at the end of the lease term, the lessor will be able to take advantage of the remaining asset value, known as a residual value. (This is called a true lease or a financial lease.) And as owner, any associated income tax will be paid by the owner/lessor.
A. In this case, explain how the income is treated for income tax purposes. Is this income treated as ordinary income?
B. Explain how the lease will generate positive net-present-value tax benefits for both the lessor/owner and the lessee. What tax condition must hold in order for a financial lease transaction to generate positive net-present-value tax benefits for both the lessor and lessee?
C. Suppose the lease payments in Table 21-2 must be made in advance, not arrears. (Assume that the timing of the lease payment tax deductions/obligations changes accordingly but the timing of the depreciation tax deductions does not change). Show that the net advantage to leasing for NACCO must decrease as a result: The text calculates the net advantage of leasing as a negative $54,236 on page 619. Explain why this reduction occurs. If you cannot calculate this in a formula, explain in words what will happen for partial credit.
D. Show that if NACCO is nontaxable, the net advantage to leasing is negative and greater in absolute value than the net advantage of the lease to the lessor.
E. Either find a lease rate that will give the financial lease a positive net advantage for both lessor and lessee, or show that no such lease rate exists.
F. Explain what your answer to part E implies about the tax costs and tax benefits of the financial lease when lease payments are made in advance.
Note: Problem #5 answers C, D and E call for you to calculate the numerical result.