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TO BUSINESS TUTOR:QUESTION 1:You work for a major

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TO BUSINESS TUTOR: QUESTION 1...
TO BUSINESS TUTOR: QUESTION 1: You work for a major consultancy firms in corporate finance. Your firm has been approached by one of its major clients to assist them in solving a problem that they have. You have been assigned the task to solve the client’s problem. A shareholder of a firm is wondering what to do in the following situation. The firm is considering an investment that will have one of three EBIT next year: $2,000,000; $3,000,000 or $4,000,000. The issue that the shareholder wants your help with is concerning how to finance the investment. The firm has two possible ways of financing the investment; either by issuing new shares or by a combination of issuing shares and issuing bonds. If fully equity funded the firm will issue 200,000 shares and sell them at $100 a share. If the firm chooses to use debt as part of the financing it will only issue 100,000 shares at $100 and raise $10,000,000 by selling bonds at a yield of 12%. You are asked to do the following by the shareholder using a spreadsheet program: • Analyze the two capital structures for the three different EBIT-scenarios for the shareholder by calculating the EPS for the six possible outcomes. • Use the above to create a graph showing EBIT on the x-axis and EPS on the y-axis for the two capital structure alternatives so the shareholder can see how they relate to each other. • Solve for the break-even EBIT so the shareholder knows above what EBIT leverage is preferable. N.B. Since the client wants to be able to use this spreadsheet in the future for other projects as well you need to use cell references in the formulas.   QUESTION 2: You have also been approached by a friend who is evaluating an investment problem. Knowing that you have studied finance, you are asked to help him answering the below questions. Assume the following expected data on two assets: Return State Probability state Bond Stock Recession 30% 15% -10% Normal 40% 10% 0% Boom 30% 5% 20% The stated probabilities shall be changeable as well as the returns in the different states. Build a spreadsheet model to answer the following question: • What is the expected return of the assets? • What is the risk (variance and volatility) for the assets? • What is the correlation between the two asset’s returns? • Assume a portfolio of the two assets. What is the expected return on this portfolio (the user shall be able to change the percentage weight of the assets in the portfolio)? Use a 50%/50% weights to answer this question. • What is the variance and volatility for this 50%/50%-portfolio? • What is the efficient frontier for the two assets given the information in the table above? (Create a suitable graph depicting this.) • What is the minimum variance portfolio and what is the return of this portfolio, i.e. what fraction of the stock and the bond is it made up of? Use the information in the table above for this question. Hint: Use the solver in excel (include solver results) if you cannot solve this algebraically. N.B. Since the client wants to be able to use this spreadsheet in the future for other projects as well you need to use cell references in the formulas
Submitted: 5 years ago.Category: Homework
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Answered in 16 minutes by:
2/7/2012
Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago
Manal Elkhoshkhany
Category: Homework
Satisfied Customers: 9,914
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Hello

 

Please advise your deadline

 

Thank you

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Customer reply replied 5 years ago

Hello,

 

The deadline is feb. 14th 2012,

 

This is the table for question 2

 

 

 

Return

State

Probability state

Bond

Stock

Recession

30%

15%

-10%

Normal

40%

10%

0%

Boom

30%

5%

20%

 

 

It did not show properly in the questions I sent.

Customer reply replied 5 years ago
Please let me know if you need more information.
Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago

Nope :)

 

But I am helping someone with a timed assignment now, so please check tomorrow, if I need anything, I will tell you

 

Thanks a million

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Customer reply replied 5 years ago
sounds great. Thanks
Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago

You are welcome :)

 

 

Please do not respond to this message as this would lock me out of replying
to other posts .

 

Thank you for understanding :)

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Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago

Hello again

 

Sorry I did not get back to you earlier, but Please double check Case 1, the tax rate is not provided and that is a very important factor in the analysis. Please check with the instructor and advise me of his response

 

Thank you

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Customer reply replied 5 years ago

ok, I will check and get back to you.

Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago

Thank you :)

 

 

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Customer reply replied 5 years ago
It is weekend so if I dont get the teacher online, It have to be on Monday. However am trying to see if I can get him . I hope that is fine.
Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago

Sure. It is not due until the 14th and I have the excel sheet all filled out waiting for the tax rate only and it will be ready, so no problem :)

 

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Customer reply replied 5 years ago
That sounds good. I did check last week and I was told that we can submit it on th 15th so that is fine.
Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago

Great :) I will wait for your reply then :)

 

 

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Customer reply replied 5 years ago

Hi,

 

Am wondering if you could let me know about the formula where the tax rate is required. I may then be able to compare it with the textbook's method and explain this to the instructor as well :).

Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago

hello

 

You do not need the formulaCustomer and the instructor does not need you to explain why do you need the tax rate, but in any case, in case 1 you need to calculate the EBIT indifference level, here is the formula:

 

graphic

 

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Customer reply replied 5 years ago

 

Thanks for your prompt response. I looked in my textbook and it states that EPS( Earning Per Share) is calculated as follows:

 

EPS = NET INCOME / SHARES OUTSTANDING

 

Can you look at this formula and see if it corresponds to the one you stated?

Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago

I told you we need to calculate the EBIT indifference level not the EPS.

 

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Customer reply replied 5 years ago
Ok, I'll consult the instructor and ask for the tax rate. I hope I can get him tomorrow and then I'll get back to you.
Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago
Have you checked the formula I sent you? :) we need to calculate the EPS for the "All Equity" plan, and the EPS for "the Bond Plan" :)
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Customer reply replied 5 years ago

Hi Sure,

 

I did check it. You are right. I will try and get the tax rate from the instructor tomorrow. I think they might have forgotten to include it in the question.

Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago
Cool
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Customer reply replied 5 years ago

Hi,

 

It wasn't me alone that was wondering about the tax rate issue. Other students had the same issue.

 

Well, the instructor responded that he deliberately left out the tax rate to simplify the analysis. That is to say, 'we should imagine a world without taxes.' This means that we should not take the tax rate in consideration when doing the analysis.

Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago
Very strange !! Ok :)
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Customer reply replied 5 years ago

I agree it sounds weird. What we can do is use the formula you wrote and then in place of 'tax rate' we put zero. so the (1-tax rate) in the formula will replaced by ( 1-0) and

then continue from there. This will make him realize that we used zero tax rate as he suggested.

Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago

Yes :) That is correct :)

 

 

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Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago

I am done :)

 

Please click on the following link for the solutions:

 

http://www.box.com/s/phislzy49kf4byjejpvs

 

 

P.S. If you like my services, please feel free to direct your future posts to me specifically by typing "For BusinessTutor" at the beginning of your post. Should you choose to do this, please try to allow me 48 hours before the deadline. If you need to meet me online for a timed assignment, please advise me of the date and time (EST) you want me to meet you here and I will. Please make sure you take the length (and number) of the questions into consideration when making your offer to avoid delays in providing solutions.

 

Thank you




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Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago
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Customer reply replied 5 years ago

Hi,

I just got it. Would you mind for me to look at it for before I click accept?

They look great with nice graph as well.

I hope all goes well this time :)

 

Thanks a lot

Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago

Of course not :)

 

Please go ahead, do not click accept unless you are 100% convinced :)

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Customer reply replied 5 years ago
Great. I will definitely click on accept today :)
Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago
Ok :)
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Customer reply replied 5 years ago

Hi,

 

I am accepting the answer in few minutes time. I hope I'll be able to get back to you if there is something that I need a further explanation on the answers.

Is that ok?

Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago
sure :)
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Customer reply replied 5 years ago

Hi,

 

I noticed a slight error in the graph of case one. I see that in calculating the EPS for plan 2, you found the EPS for when EBIT is $4000 000 to be 28 and also EPS to be 28 fro EBIT 5000 000) . When I worked it out the EPS should be 38 when EBIT is 5000 000) could you please confirm this urgently? I chaged it in the graph and I had a straight line graph. Please confirm.

 

Regards

Customer reply replied 5 years ago

 

Hi, Please check this chat you sent, I think there is either a slight error or a typing error.

 

 

EBITEPS Under Plan 1EPS Under Plan 2
$1 000 000 $5 ($2)
$2 000 000 $10 $8
$3 000 000 $15 $18
$4 000 000 $20 $28
$5 000 000 $25 $28 not 38 instead?
$6 000 000 $30 $48

 

the EPS should be 38, when EBIT is $5 000 000

 

EPS = (5000000- 1 200 000) / 100 000 = 38 and not 28 as written.

Am I correct?

I will appreciate it if you could confirm this right now.

Tutor: Manal Elkhoshkhany, Tutor replied 5 years ago
will check and get back to you :)
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