FNCE 3P93 Study Guide - Final Guide: Effective Interest Rate, Poutine, Commercial Paper

1. The 2013 balance sheet of Bear Inc., showed long-term debt of $1.45 million, and the 2014 balance sheet showed long-term debt of $1.52 million. The 2014 income statement showed an interest expense of $127,000. What was the firm’s cash flow to creditors during 2014?
2. The 2013 balance sheet of Bear Inc., showed $490,000 in the common stock account and $3.4 million in the capital surplus account. The 2014 balance sheet showed $525,000 and $3.7 million in the same two accounts, respectively. If the company paid out $275,000 in the cash dividends during 2014, what was the cash flow to stockholders for the year?
3. Given the information for Bear Inc. in the previous two questions, suppose you also know that the firm’s net capital spending for 2014 was $945,000 and that the firm reduced its net working capital by $87,000. What was the firm’s 2014 operating cash flow?
4. Brooks Corp. shows the following information on its 2014 income statement: sales=$185,000; costs=$98,000; other expense=$6,700; depreciation=$16,500; interest expense=$9,000; taxes=$19,180; dividends=$9,500. In addition, you are told that the firm issued $7,550 in new equity during 2014 and redeemed $7,100 in outstanding long-term debt. 1) What is the average tax rate? (Hint: Following the income statement in the notes to find the pretax income in order to calculate tax rate) 2) What is the 2014 operating cash flow? 3) What is the 2014 cash flow to creditors?
4) What is the 2014 cash flow to stockholders? 5) If net fixed assets increased by $26,100 during the year, what was the change to net working capital?
5. An investment offers $4,900 per year for 15 years, with the first payment occurring one year from now. If the required return is 8%, what is the present value of the investment? What would be the value if the payments occurred for 40 years? Forever?
6. Find the EAR in each of the following cases:
APR Compounding period EAR 7% Quarterly 16% Monthly 11% Daily (365 days in a year)
7. Joey Has just arranged to purchase a $550,000 home with a 20% down payment. The mortgage has a 6.1% stated annual interest rate, compounded monthly, and calls for equal monthly payments over the next 30 years. After the down payment, his first monthly payment will be due one month from now. However, the mortgage has an eight-year balloon payment, meaning that the balance of the loan must be paid off at the end of year 8. How much is the balloon payment in 8 years?
8. Given an interest rate of 6.1% per year, what is the value at Date t=7 of a perpetual stream of $2,500 annual payments that begins at Date t=15?
9. You want to buy a new car for $73,000. The contract is in the form of a 60month annuity due at a 6.45% APR. What is your monthly payment?

The Stone Meat Corporation is a medium‑sized agricultural products company headquartered in Ogden, Utah. Its primary products are beef, pork and poultry and include packaged deli meats to half animals sold directly to in-store butcher markets in the retail grocery stores. They also supply their own butcher packs to various retail outlets including grocery stores, big box stores, and restaurants. In addition, they have their own factory store. The firm's products are well recognized within the markets in terms of quality and food safety. During the 2000's and the early 2010's sales and earnings had grown rapidly. Sales in 2002 were approximately $60 million, but had reached $180 million by 2012. Per share earnings and dividends more than kept pace. The relevant figures are contained in Exhibit 1. In order to support the firm's expansion, substantial expenditures on plant and equipment were required during the period indicated. The majority of funds came from retained earnings and the private placement of debentures with insurance companies. In 2004, however, the company was forced to sell additional common stock because it felt that the debt level, which would ensue from trying to borrow the money to keep up its expansion program, would be excessive. In particular, possible adverse effects in its stock price were feared since, at the time, the firm's ratio of debt to total capitalization was already somewhat above the industry average of 30 percent. The firm's balance sheet as of December 31, 2012 is shown in Exhibit 1. Originally, the company's Board of Directors had established a policy of paying out half its annual earnings as dividends. The actual percentage varied from year to year because an attempt was made to stabilize the dividends despite fluctuating profit. By the late 2000's, this policy had been revised to set one‑third of earnings as the target pay‑out ratio due to the continuing need for capital. At their last annual meeting, the Directors announced that the 2012 dividend would be 60 cents per share, payable quarterly in 15 cent installments. The company's stock is listed on the AMEX and trades actively. The range of yearly stock prices is included in Exhibit 1. The closing price on June 30, 2012 was $24. Market data indicated that Stone was somewhat less risky than the market as a whole with a beta of .80. Returns on the market were averaging approximately 12% and risk free borrowing was still low following the financial meltdown of 2008. These rates averaged 3.5%. Preferred stock, which had been issued many years ago as a part of a financial deal, was selling at $90 per share. Tax rates had averaged 30% over the last few years. Early in 2012, the treasurer of Stone was reviewing its investment and financing strategies with an eye toward improving both. The question as to an appropriate cut‑off ratio of return on new investments was of special concern. The treasurer was of the opinion that many capital expenditures had been made in the past without proper analysis. He wanted a figure he could justify to the firm's managers as a cost of capital in order to achieve a more accurate capital budgeting procedure throughout the organization. He felt this was an especially timely move in view of an article he had just read in the WSJ and which is reproduced in Exhibit Ill. Stone's own long‑range planning group had earlier forecast a trend not unlike that indicated in the Journal. The treasurer was well aware that financing did not come free and that the costs of issuance of preferred stock would cost 8%, bonds would cost 4% and equity 12%. He thought it important to determine how such costs would inflate the costs of any proposed projects the company might pursue in the futures. Thus he wanted to determine what the total cost of a $1,000,000 investment would be after considering any financing costs

Exhibit 1

Year Sales eps dps Stock Price

Exhibit II

Balance Sheet As of 12/31/2012 (figures in Millions)

Cash 20 Accounts Receivable 10 Inventories 30 Plant and Equipment, net 60 Total Assets 120 Accounts Payable 20 Misc Accruals 10 Preferred Stock (5%) 10 Long term Debt 24 Common Stock (2.5 million shares) 12 Capital Surplus 4 Retained Earnings 40 Total Liabilities and Equity 120 The firm's bonds carried a 6% coupon, a 12/31/2022 maturity and were selling for $960 as of 6/30/2012.

What is the cost of preferred stock?

I need help find the Weighted Average Cost of Capital as well as the Weighted Average Flotation Costs

COST OF CAPITAL EXERCISE

The Stone Meat Corporation is a medium‑sized agricultural products company headquartered in Ogden, Utah. Its primary products are beef, pork and poultry and include packaged deli meats to half animals sold directly to in-store butcher markets in the retail grocery stores. They also supply their own butcher packs to various retail outlets including grocery stores, big box stores, and restaurants. In addition, they have their own factory store. The firm's products are well recognized within the markets in terms of quality and food safety.

During the 2000's and the early 2010's sales and earnings had grown rapidly. Sales in 2002 were approximately $60 million, but had reached $180 million by 2012. Per share earnings and dividends more than kept pace. The relevant figures are contained in Exhibit 1.

In order to support the firm's expansion, substantial expenditures on plant and equipment were required during the period indicated. The majority of funds came from retained earnings and the private placement of debentures with insurance companies. In 2004, however, the company was forced to sell additional common stock because it felt that the debt level, which would ensue from trying to borrow the money to keep up its expansion program, would be excessive. In particular, possible adverse effects in its stock price were feared since, at the time, the firm's ratio of debt to total capitalization was already somewhat above the industry average of 30 percent. The firm's balance sheet as of December 31, 2012 is shown in Exhibit 1.

Originally, the company's Board of Directors had established a policy of paying out half its annual earnings as dividends. The actual percentage varied from year to year because an attempt was made to stabilize the dividends despite fluctuating profit. By the late 2000's, this policy had been revised to set one‑third of earnings as the target pay‑out ratio due to the continuing need for capital. At their last annual meeting, the Directors announced that the 2012 dividend would be 60 cents per share, payable quarterly in 15 cent installments. The company's stock is listed on the AMEX and trades actively. The range of yearly stock prices is included in Exhibit 1. The closing price on June 30, 2012 was $24.

Market data indicated that Stone was somewhat less risky than the market as a whole with a beta of .80. Returns on the market were averaging approximately 12% and risk free borrowing was still low following the financial meltdown of 2008. These rates averaged 3.5%. Preferred stock, which had been issued many years ago as a part of a financial deal, was selling at $90 per share. Tax rates had averaged 30% over the last few years.

Early in 2012, the treasurer of Stone was reviewing its investment and financing strategies with an eye toward improving both. The question as to an appropriate cut‑off ratio of return on new investments was of special concern. The treasurer was of the opinion that many capital expenditures had been made in the past without proper analysis. He wanted a figure he could justify to the firm's managers as a cost of capital in order to achieve a more accurate capital budgeting procedure throughout the organization. He felt this was an especially timely move in view of an article he had just read in the WSJ and which is reproduced in Exhibit Ill. Stone's own long‑range planning group had earlier forecast a trend not unlike that indicated in the Journal.

The treasurer was well aware that financing did not come free and that the costs of issuance of preferred stock would cost 8%, bonds would cost 4% and equity 12%. He thought it important to determine how such costs would inflate the costs of any proposed projects the company might pursue in the futures. Thus he wanted to determine what the total cost of a $1,000,000 investment would be after considering any financing costs.

EXHIBIT III

Article taken form the February 7, 2012 issue of the Wall Street Journal.

Meat Processing Industry To Be Hurt by Increasing Prices?

Decimated Life stock Herds Also Contribute to Price Increases.

Kansas (AP) ‑ The ConAgra Corporation, in a recent annual meeting announcement, forecast a trailing off of sales in its meat processing division. That division, which had been growing at a rate equivalent to three times the CPI growth rate throughout the 2000's and early 2010's, may be hit by decreases in household expenditures as the effects of the most recent financial crisis are still lingering for the decimated middle class. Retail outlets such as restaurants and grocery stores are reporting that sales of beef and pork products are declining in response to price pressures. Disease that swept through beef and pork herds, are also having a telling effect. Other sources close to the industry confirm the ConAgra prognosis. They estimate the best forecasts that their economists can come up with indicate a decline of about five percent in the growth rate which had been experienced in the last 12 to 15 years. ConAgra is curtailing several plant expansions in its meat processing division which were on the drawing board for the mid‑2010's." We are moderately pessimistic," a company spokesman indicated, "and are going to adopt a wait and see attitude for the next year or so."

Hints

Create the Cost of Capital

Number of shares can be determined by taking the book value and dividing by the par value of the securities.

Market value is shares X price.

Average the two possible ways to calculate the cost of equity

Remember the tax rate.

Assume the bonds are semi - annual

The term to maturity is from 6/30/2012 to 12/31/2022 or 10.5 years. This info is in the footnote to Exhibit II

The growth rate should be determined from the EPS data and the adjustment to the growth rate is in Exhibit III

Create the Weighted Average Flotation Cost

What is the cost of equity using the dividend growth model? (Decimal answer to the fourth decimal place)

Given the $1,000,000 cost of the investment, what is the total cost of the investment including flotation costs? (Round to whole numbers)