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[answered] 1. Sims Computing has $1,625,000 in current assets and $636


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1. Sims Computing has $1,625,000 in current assets and $636,000 in current liabilities. They wish to

 

increase their inventory levels from the current level of $400,000. They will borrow on a short term note

 

payable to acquire the additional inventory. A covenant in an existing bond indenture agreement

 

requires that the firm maintain a current ratio of at least 2. How much can their notes payable increase

 

while still maintaining a current ratio of 2? In other words, what is the maximum additional note payable

 

they can undertake in order to buy additional inventory. Hint: Think of what will change. 2. You are contributing to your 401k each year with a goal of having enough in retirement to provide

 

$4,000 per month in today?s dollars. You plan to work 20 more years making monthly contributions to

 

your 401k. Once you retire, you anticipate living another 25 years. Assume you wish to have nothing lef

 

when you pass away, Assume you can earn an average of 7% over your time period.

 

a. If inflation is expected to remain low, what would the $4,000 per month in today?s dollars be once you

 

retire in 20 years. Use the 20 year period to determine that inflation adjusted amount. In other words, if

 

inflation continues at a 3% rate what will it take in 20 years to have the same purchasing power as your

 

$4,000 today? For ease, use annual periods to determine this.

 

b. Now, using the number you found in part a and assuming that number remains constant for the 25

 

years of retirement, how much must you have in your retirement fund upon retirement in 20 years?

 

c. Given the results in part b, how much must you save MONTHLY for the next 20 years to meet that

 

goal? 3. A bond matures in 12 years and pays an 8 percent coupon rate paid semi-annually. The bond has a

 

face value of $1,000, and currently sells for $$1310.

 

a. What is the bond?s current yield and yield to maturity?

 

b. If rates on bonds of similar risk and maturity fall to 5 %, what will be the price of the bond? 4. Young & Liu Inc.'s free cash flow during the just-ended year (t = 0) was $100 million, and FCF is

 

expected to grow at a constant rate of 5% in the future. If the weighted average cost of capital is 15%,

 

what is the firm's value of operations, in millions? 5. Assume NetWonders is operating in a new industry that has recently caught on with the public. The

 

latest annual dividend D0, paid yesterday, was $1. Due to high growth in sales, a 25% growth rate in cash

 

dividends is expected over the next two years. Thereafer, the growth rate is expected to be 5% forever.

 

The required rate of return on the stock is 22%. What is a share of NetWonders common stock worth? 6. A company is expected to have free cash flows of $0.75 million next year. The weighted average cost

 

of capital is WACC = 10.5%, and the expected constant growth rate is g = 6.4%. The company has $2 million in short-term investments, $2 million in debt, and 1 million shares. What is the stock's current

 

intrinsic stock price? 7. Bartlett Company's target capital structure is 40% debt, 15% preferred, and 45% common equity. The

 

afer-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of common using

 

reinvested earnings is 12.75%. The firm will not be issuing any new stock. You were hired as a

 

consultant to help determine their cost of capital. What is its WACC? Explain what this means and

 

how a firm uses the WACC in practice. 8. What are the three drivers of value for financial assets? Explain each. 9. Explain why some firms issue convertible bonds. Explain what they are and then discuss the

 

advantages and disadvantages from both the viewpoint of the issuing firm and also from the investor. 10. In today?s environment, if your firm needed additional funding from debt, what would you

 

recommend, long term debt or short term and why? 11. Listed below are some provisions that are ofen contained in bond indentures: 1. Fixed assets may be used as security.

 

2. The bond may be subordinated to other classes of debt.

 

3. The bond may be made convertible.

 

4. The bond may have a sinking fund.

 

5. The bond may have a call provision.

 

6. The bond may have restrictive covenants in its indenture. Which of the above provisions, each viewed alone, would tend to reduce the yield to maturity investors

 

would otherwise require on a newly issued bond? Think in terms of whether each provision would add

 

to risk or mitigate risk to investors. Explain. 12. Explain the difference between NOPAT and net income. Which is a better measure of the

 

performance of a company?s operations and why? Explain. 13. During the course of any trading day, widely traded stocks see their value fluctuation all day long.

 

Why are prices so volatile and not stable from day to day? Include a discuss of equilibrium and explain

 

what that term means in relation to stock prices.

 


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