# Cash flow; TVM, PV of Hartson liability, FV of Kim's annuities

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Jamison Inc. shows the following information on its 2009 income statement: sales= $196,000, costs=$104,000, other expenses= $6,800, depreciation expense = $9,100, interest expense = $14,800, taxes= $21,455, dividends = $10,400. In addition, you are told that the firm issued $5,700 in new equity during 2009 and redeemed $7,300 in outstanding long-term debt

Net Income = ___________________-

a. What is the 2009 operating cash flow? OCF = EBIT + Depreciation - Taxes

b. What is the 2009 cash flow to creditors? CFC= Interest - Net new LTD

c. What is the 2009 cash flow to stockholders? CFS = Dividends - Net new equity

d. If net fixed assets increased by $27,000 during the year, what was the addition to NWC?

Step 1. CFA = CFC + CFS;

Step 2: Net Captial Spending = Increase in NFA + Depreciation

Step 3: CFA = OCF - Net Captial spending - Change in NWC

Step 4: Now solve for the changes in NWC

2. At 7% interest, how long does it take to double you money? To quadruple it?

FV=PV(1 =r)t

3. Hartson Corp. has an unfunded pension liability of $650 million that must be paid in 20 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 7.4 percent, what is the present value of this liability?

PV=FV/(1+r)t

4. You are scheduled to receive $20,000 in two years. When you receive it, you will invest it for six more years at 8.4 % per year. How much will you have in 8 years?

FV=PV(1+r)t

5. Kym Casner wishes to select the better of two 10 year annuities, C and D. Annuity C is an ordinary annuity of $2500 per year for 10 years. Annuity D is an annuity due of $2200 per year for 10 years.

a. Find the future value of both annuities at the end of year 10, assuming that Kym can earn (1) 10% annual interest and (2) 20% annual interest.

Annuity C Annuity D

FVAi%n= PMT x (FVIFAi%n) FVAdue= PMT x [FVIFAi%n x (1+i)]

(1) (1)

(2) (2)

b. Use your finding in part a to indicate which annuity has the greater future value at the end of year 10 for both (1) and (2)

(1) 10% interest rates

(2) 20% interest rates

c. Find the present value of both annuities, assuming that Kym can earn (1) 10%annual interest and (2) 20% annual interest.

Annuity C Annuity D

FVAi%n= PMT x (FVIFAi%n) FVAdue= PMT x [FVIFAi%n x (1+i)]

(1) (1)

(2) (2)

d. Use your finding in part c to indicate which annuity has the greater present value for both (1) 10% and (2) 20% interest rates

(1) 10% interest rates

(2) 20% interest rates

e. Briefly compare, contrast, and explain any differences between your findings using 10% and 20% interest rates in parts b and d

Part A. Why is it that for a given firm, the required rate of return on equity is always greater then the required rate of return on its debt?

Part B. Henderson has common stock outstanding that has a market price of $48 per share. Last year's dividend was $2.25 and is expected to grow at a rate of 4% per year, forever. The expected risk-free rate of interest is 2%, and the expected market premium is 5.5%. The company's beta is 1.2.

a. What is the cost of equity for Henderson using the dividend valuation model?

b. What is the cost of equity for Henderson using the capital asset pricing model (CAPM?

Part C. Henderson is expecting to issue new debt at par with a coupon rate of 6%, and to issue new preferred stock with a $2.00 per share dividend at $20 a share. Common stock is currently selling for $25 a share. Henderson expects to pay a dividend of $2.50 per share next year, and market analysis indicates dividends will grow at a rate of 3% per year. The marginal tax rate is 40%

a. If Henderson raises capital using a capital structure of 40% debt, 10% preferred stock and 50% common stock, what is the cost of capital for Henderson?

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##### Solution Summary

The expert examines cash flows, TVM, PV of Hartson liability and FV of Kim's annuities.

###### Education

- B. Sc., University of Nigeria
- M. Sc., London South Bank University

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