Purchase Solution

Times-interest ratio;time burden ratio;net present value

Not what you're looking for?

Ask Custom Question

1

ABC Waterhouse's free cash flow next year will be $250 million and it is widely expected to grow at a 5 percent annual rate indefinitely.
The company's weighted average cost of capital is 11 percent, the market value of its liabilities is $2.5 billion, and it has 32 million shares outstanding.
a. Estimate the price per share of ABC's common stock.
b. A private equity firm believes that by selling the company 200 water towers, increasing the work day to eight hours, and instituting other cost savings, it can increase ABC's free cash flow next year to $260 billion and can add a full percentage point to ABC's growth rate without affecting its cost of capital. What is the maximum price per share the private equity firm can justify bidding for control of ABC?

2

As the Financial vice president for Bear Enterprises, you have the following information:

Expected net income after tax next year before new financing $60,000,000
Sinking Fund payments due next year on existing debt 20,000,000
Interest due next year on existing debt 18,000,000
Conpany Tax rate 25%
Common Stock Price, per share 17
Common Shares outstanding 22,000,000

a. Calculate Bear's times-interest earned ratio for next year assuming the firm raises $60 Million of new debt at an
interest rate of 9 percent.

b. Calculate Bears times-burden covered ratio for the next year assuming annual sinking-fund payments on the new
debt will equal $5 Million

c. Calculate next years earnings per share assuming Bear raises the $60 Million of new debt.

d. Calculate next years times-interest earned ratio, times-burden-covered ratio, and earnings per share if Bear sells
$2 Million new shares at $17.00 per share instead of raising new debt.

3

yyep
An investment costing $70,000 promises an after tax cash flow of $28,000 per year for 7 years.

a. Find the investment's accounting rate of return and its payback period.

b. Find the investment's net present value at 20 percent discount rate.

c. Find the investment's profitability index at a 20 percent discount rate.

d. Find the investment's internal rate of return.

4

A Company is considering two alternative methods of producing a new product. The relevant data concerning the
alterrnatives are presented below.

Alternative Alternative
I II
Initial Investment 50,000 110,000
Annual receipts 36,000 50,000
Annual disbursements 16,000 10,000
Annual depreciation 12,000 16,000
Expected Life 5 years 7 years
Salvage Value 0 0

At the end of the useful life of whatever equipment is chosen the product will be discontinued. The company's tax
rate is 50 percent, and its cost of capital is 11 percent.

a. Calculate the Net Present Value of each alternative

b. Calculate the internal rate of return for each alternative.

d. If the company is not under capital rationing, which alternative should be chosen? Why?

Purchase this Solution

Solution Summary

This post shows how to calculate times-interest ratio, time burden ratio, next year earning, investment's accounting rate of return, pay back period, net present value and profitability index

Solution Preview

Please find the attached file. Thanks

1
ABC Waterhouse's free cash flow next year will be $250 million and it is widely expected to grow at a 5 percent annual rate indefinitely.

The company's weighted average cost of capital is 11 percent, the market value of its liabilities is $2.5 billion, and it has 32 million shares outstanding.
a. Estimate the price per share of ABC's common stock.
FCF1 $250 million
g 5%
r 11%
Market value of firm =FCF1/(r-g) $4,166.67 million
Market value of liabilities $2,500.00 million
Market value of equity $1,666.67 million
No. of shares outstanding 32.00 million
Price per share $52.08

b. A private equity firm believes that by selling the company 200 water towers, increasing the work day to eight hours, and instituting other cost savings, it can increase ABC's free cash flow next year to $260 million and can add a full percentage point to ABC's growth rate without affecting its cost of capital.  What is the maximum price per share the private equity firm can justify bidding for control of ABC?
FCF1 $260 million
g 6%
r 11%
Market value of firm =FCF1/(r-g) $5,200.00 million
Market value of liabilities $2,500.00 million
Market value of equity $2,700.00 million
No. of shares outstanding 32.00 million
Price per share $84.38
The PE firm can justify upto $84.38 for the equity of ABC

2
As the Financial vice president for Bear Enterprises, you have the following information:
Expected net income after tax next year before new financing $60,000,000
Sinking Fund payments due next year on existing ...

Purchase this Solution


Free BrainMass Quizzes
Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.

Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.