--%>
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 : Is the given affirmation of an

    Is the given affirmation of an accountancy expert true? “There valuation criterion that reflects the value of the shares of a company in the most accurate way is based on the amount of the equity of shareholder of its balance sheet. Stating that the value of sha

    		•
  • Q : How can auditor spot acts of creative

    How can auditor spot acts of creative accounting? Means let an illustration, the excess of provisions or the non-elimination of intra group transactions along with value added.

    		•
  • Q : How companies accuse investors make

    Sometimes, companies accuse investors of performing credit sales which they make their quotations fall. Is it true?

    		•
  • Q : Is net income of a year is doubtful for

    Is the net income of a year money the company made that given year or is this a number whose importance is quite doubtful?

    		•
  • Q : Who explained put–call parity Who

    Who explained put–call parity?

    		•
  • Q : Regarding WACC Regarding the WACC which

    Regarding the WACC which has to be applied to a project, must it be an expected return, the average historical return or an opportunity cost on similar projects?

    		•
  • Q : Is Capital Cash Flow identical with

    Is Capital Cash Flow identical with Free Cash Flow?

    		•
  • Q : Problem about commercial and fiscal

    A court assigned to me (as an auditor and economist) a valuation of a market butcher’s. The butcher’s did not give any simple income statements or any valuable information that I could use in my valuation. This is a small business with just two workers, th

    		•
  • Q : Define Effective Utilization of Funds

    Effective Utilization of Funds: It is just the decision to maximize the return on investment of funds. When finance manager is not capable to raise the return by investing fund in profitable assets or other profitable projects, company’s busines

    		•
  • Q : Define the term Commercial Paper

    Commercial Paper: It is an unsecured obligation issued by the corporation or bank to finance its short-term credit requirements, like accounts inventory and receivable. Maturities usually range from 2 to 270 days. The commercial paper is accessible in

    		•