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    FM 312 Semi Finals Seatwork 1

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    Jaycie Escuadro
    Flavortech Inc. expects $2 million in EBIT for the coming year with 40% debt and 60% equity. It has $5 million in long-term debt at 10% interest and 1 million shares outstanding. If it funds a $1.2 million NPV project according to its target capital structure, its expected dividend payout ratio is 17.4%.

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    FM 312 Semi Finals Seatwork 1

    Uploaded by

    Jaycie Escuadro
    47 views1 page
    Flavortech Inc. expects $2 million in EBIT for the coming year with 40% debt and 60% equity. It has $5 million in long-term debt at 10% interest and 1 million shares outstanding. If it funds a $1.2 million NPV project according to its target capital structure, its expected dividend payout ratio is 17.4%.

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    FM-312-SEMI-FINALS-SEATWORK-1

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    Flavortech Inc. expects $2 million in EBIT for the coming year with 40% debt and 60% equity. It has $5 million in long-term debt at 10% interest and 1 million shares outstanding. If it funds a $1.2 million NPV project according to its target capital structure, its expected dividend payout ratio is 17.4%.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    47 views1 page

    FM 312 Semi Finals Seatwork 1

    Uploaded by

    Jaycie Escuadro
    Flavortech Inc. expects $2 million in EBIT for the coming year with 40% debt and 60% equity. It has $5 million in long-term debt at 10% interest and 1 million shares outstanding. If it funds a $1.2 million NPV project according to its target capital structure, its expected dividend payout ratio is 17.4%.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
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    1. Flavortech Inc. expects EBIT of $2,000,000 for the coming year.

    The firm’s capital structure consists of 40


    percent debt and 60 percent equity, and its marginal tax rate is 40 percent. The cost of equity is 14
    percent, and the company pays a 10 percent interest rate on its $5,000,000 of long-term debt. One million
    shares of common stock are outstanding. In its next capital budgeting cycle, the firm expects to fund one
    large positive NPV project costing $1,200,000, and it will fund this project in accordance with its target
    capital structure. Assume that new debt will also have an interest rate of 10 percent. If the firm follows a
    residual dividend policy and has no other projects, what is its expected dividend payout ratio?
    17.4%
    2. Bell Brothers has $3,000,000 in sales. Its fixed costs are estimated to be $100,000, and its variable costs
    are equal to fifty cents for every dollar of sales. The company has $1,000,000 in debt outstanding at a
    before-tax cost of 10 percent. If Bell Brothers' sales were to increase by 20 percent, how much of a
    percentage increase would you expect in the company's net income?
    23.08%
    S−V
    DTV =
    S−V −F−I
    $ 3,000,000−0.5($ 3,000,000)
    ¿
    $ 3,000,000−0.5 ( $ 3,000,000 ) −$ 1,000,000−0.1( $ 1,000,000)
    = 1.1538

    %? NI = (0.20) (DTL) = (0.20) (1.1538) = 0.2308 = 23.08%.

    3. Flood Motors is an all-equity firm with 200,000 shares outstanding. The company’s EBIT is $2,000,000,
    and EBIT is expected to remain constant over time. The company pays out all of its earnings each year, so
    its earnings per share equals its dividends per share. The company’s tax rate is 40 percent. The company is
    considering issuing $2 million worth of bonds (at par) and using the proceeds for a stock repurchase. If
    issued, the bonds would have an estimated yield to maturity of 10 percent. The risk-free rate in the
    economy is 6.6 percent, and the market risk premium is 6 percent. The company’s beta is currently 0.9, but
    its investment bankers estimate that the company’s beta would rise to 1.1 if it proceeds with the
    recapitalization. Assume that the shares are repurchased at a price equal to the stock market price prior to
    the recapitalization. What would be the company’s stock price following the recapitalization?
    $51.14
    4. Allensworth Motors forecasts that its earnings per share will be $3.00 this year. The company has 500
    million shares of stock outstanding. Allensworth estimates that its capital budget for the upcoming year
    will be $800 million, and it is committed to funding the entire capital budget. The company is also
    committed to maintaining its dividend of $2.00 per share, and it wants to avoid issuing new common stock.
    The company’s capital structure consists of debt and common stock. Given the above constraints, what
    portion of the $800 million capital budget will be funded with debt?
    37.50%
    5. Elephant Books sells paperback books for $7 each. The variable cost per book is $5. At current annual
    sales of 200,000 books, the publisher is just breaking even. It is estimated that if the authors’ royalties are
    reduced, the variable cost per book will drop by $1. Assume authors’ royalties are reduced and sales
    remain constant; how much more money can the publisher put into advertising (a fixed cost) and still break
    even?
    $200,000

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