--%>
Assignment Help - homework help

Sinking Fund problem

Berks Corporation is expecting to have EBIT next year of $12 million, with a standard deviation of $6 million. Berks have $30 million in bonds with coupon of 10%, selling at par, which are being retired at the rate of $2 million annually. Berks also have 100,000 shares of preferred stock, which pays annual dividend of $5 per share. The tax rate of Berks is 40%. Calculate the probability that Berks will not be able to pay interest, sinking fund, and favored dividends, out of its current income, next year.

E

Expert

Verified

From the given details,

Sinking fund requirement = $2 million/(1 – 0.4) = $3.33 million
Interest payment requirement = $30*10% = $3 million
Preferred dividend to be paid = 100,000*$5 = $500,000 = $0.5 million
Preferred dividend requirement = $0.5 million/(1 – 0.4) = 0.833 million
Total requirement = $7.167 million

In order to determine the probability,

Z = (7.167 – 12)/6 = -0.8056
P(z) = 78.97%

This is the probability that Berks will be able to make more than its requirements. Hence the probability that Berks will not be able to pay interest, sinking fund and preferred dividends out of its current income next year is 21.03%

   Related Questions in Corporate Finance

  • Q : Who explained the high-peak/fat-tails

    Who explained the high-peak/fat-tails?

    		•
  • Q : Who described option pricing with

    Who described option pricing with deterministic volatility?

    		•
  • Q : Did you see Vueling case Did you notice

    Did you notice the Vueling case? How is this possible that an investment bank sets the objective price of its shares in €2.50 per share upon the 2nd of October, 2007, just after replacing Vueling shares at €31 per share in J

    		•
  • Q : Problem on rules of the International

    RainFlower Trading Limited is a wholesaler of electronic calculators in Hong Kong. It has been importing goods from a Philippine manufacturer for eight years. The Philippine manufacturer had accepted payments in advance in the past. Recently, because of political turm

    		•
  • Q : Does it make sense to apply identical

    The National Company responsible for the company where he work has newly published a document stating as that the levered beta of the sector of energy transportation is as 0.471870073 (it is 9 decimals). They acquired this number by considering the betas into the sect

    		•
  • Q : Define Project Financing Project

    Project Financing: It is the procedure of determining how to go around obtaining the resources needed in managing the costs related with the launch and continuing operation of a project. Whereas this procedure sometimes comprises the re-allocation of

    		•
  • Q : Determining Profitable purchasing ABC

    ABC Corporation is interested in purchasing a machine which will cost $50,000, and it will depreciate it on the straight-line basis over a 5-year period. The machine is predicted to last for 7 years and then Milan will sell it for $5,000. The expected earnings before

    		•
  • Q : Types of agency Types of agency :

    Types of agency: Specific types of Agency include:A) Auctioneers: Are an agent of vendor until the fall of the hammer when they become an agent for the purchaser.B)

    Q : Problem on leasing Johnathan Lewis is

    Johnathan Lewis is looking into the possibility of buying several coin-operated vending machines and put them in local hospitals. Each machine costs $2000, that he will depreciate on a straight-line basis over 8 years. The machine will dispense soft-drink cans at 75 c

    		•
  • Q : Problem on raising new capital AB

    AB Corporation has 3 million shares of common stock selling at $19 each. It also contains $25 million in bonds with coupon rate of 8%, selling at par. AB requires $10 million in new capital that it can raise by selling stock at $18, or bonds at 9% interest. The expect

    		•