Fundamentals of Corporate Finance Minicase
Essay by Billy Ling • March 3, 2016 • Term Paper • 807 Words (4 Pages) • 1,260 Views
Chapter 7
2. The coupon rate will be lower the more senior the bond is, which is an advantage of having a senior bond. One disadvantage is that by senior bonds being priority, companies many have a hard time when trying to get permission to off more bonds.
3. A sinking fund reduces the coupon rate of a bond. One advantage of a sinking fund is that some of it is guaranteed to bondholders. A disadvantage is that the company is obligated to pay a certain portion to bondholders which makes the company liable for these funds each period.
7. There are not any positive covenants listed directly in this case. A positive covenant would lower the coupon rate of the bond. Bondholders are protected by positive covenants because they require companies to provide them with certain information that makes the company transparent. Positive covenants mat push a company to provide information they might not like to. This could stop them from making some moves that could be best for the company.
8. there are not any negative covenants listed in this particular case. Negative covenants limits action the company might take, which protects bondholders. Examples of negative covenants would be the firm can’t pledge any assets to other lenders, the firm can’t issue additional long-term debt, and the firm can’t merge with another firm. Negative convents prevent some company actions.
9. a conversion feature would allow bondholders to continue to benefit from the company if it decides to become publically traded. This factor alone would usually be enough to lower the coupon rate of the bond. The problem with a conversion feature is that when a firm becomes publically traded it could allow the voting control to be shifted from the firm’s original owners to a company that may have bought a large portion of the bonds.
Chapter 8
Question 1
- Total dividends = $90,000
- EPS = $3.15
- Total Earnings = 100,000 shar41.45es x $3.15 = $315,000
- Payout ratio = $90,000 / $315,000 = 0.2857
- Retention ratio = 1- 0.2857 = 0.7143
- Growth; g=ROE x b = 0.17 x 0.7143 = 0.1214 = 12.14%
- = $45,000/ 50,000 = $0.90[pic 1]
- Price of stock, = / (R-g) = ($0.90 x 0.1214) / (0.14-0.1214) = $54.35[pic 2][pic 3]
Question 2
- Industry EPS : ($1.30 + $1.95 + $1.10)/3 = $1.45
- Industry Payout Ratio: $0.18/ $1.45 = 0.1241
- Retention Ratio: 1-0.1241 = 0.8759
- Industry growth rate: 0.1241 x 0.8759 = 0.1087 = 10.87%
- [pic 4]
- Stock value in Year 5 = $1.7899 / (0.1167-0.1087) = $220
- Stock value today = 1.0093/1.1167 + 1.1318/(1.1167^2) + 1.2692/(1.1167^3) + 1.4233/(1.1167^2) + (1.5961+220)/(1.1167^2) = $132.54
Question 3
- Industry PE ratio: $25.77/$1.45 = 17.77
- Ragan’s PE ratio: $54.35/$3.15 = 17.25
- Revised Ragan’s PE ratio: $132.54/$3.15 = 42.076
Question 5
- g = ROE x b
- 0.1087 = ROE x 0.7143
- ROE = 0.1522 = 15.22%
Question 6
Retain more of company’s earnings and invests them in more profitable opportunities. This strategy would not work if the return on investment is lower than the required return on the company’s stocks.
Chapter 9
Question 1
Year | Cash Flow | Payback Period | |
0 | -450,000,000 | -450,000,000 | |
1 | 63,000,000 | -387,000,000 | |
2 | 85,000,000 | -302,000,000 | |
3 | 120,000,000 | -182,000,000 | |
4 | 145,000,000 | -37,000,000 | 0.211 |
5 | 175,000,000 | 138,000,000 | =37000000/C53' |
6 | 120,000,000 | ||
7 | 95,000,000 | ||
8 | 75,000,000 | ||
9 | -70,000,000 | ||
Required Return | 12% |
Payback period | 4.21 | 4+0.21 | ||
IRR | 16% | =IRR(E48:E57)' | ||
| -56% | =IRR(E48:E57,-0.99)' | ||
MIRR | 13% | =MIRR(E48:E57,F59,F59)' | ||
Profitability Index | 1 | =NPV(F59,E49:E57)/-E48' | ||
NPV | 59,692,380.80 | =NPV(F59,E49:E57)+E48' |
Question 2
Since the NPV of the mine is greater than zero, the NPV analysis supports the acceptance of the project.
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