--%>
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 : Investors are irrational or naive

    Explain how companies with substandard financial history can draw the attention of investors. Are investors irrational or naive?

    		•
  • Q : Explain Financial Management Financial

    Financial Management: It means organizing, planning, directing and controlling the financial activities like procurement and use of funds of enterprise. This means exerting general management principles to the financial resources of enterprise. <

    		•
  • Q : Explain Indenture Explain the term

    Explain the term Indenture and also describe their provisions?

    		•
  • Q : When the dividend shows real money The

    The dividend is the part of the net income which the company distributes to shareholders. When the dividend shows real money, the net income is also real money. Is it true?

    		•
  • Q : What is the sales of the firm The

    The financial ratios of a firm are as follows. Current ratio = 1.33 Acid-test ratio = 0.80 Current liabilities = 40,000 Inventory turnover ratio = 6  What is the sales of the firm?

    		•
  • Q : Problem on Bond Price Kevin is

    Kevin is interested in buying a 5-year bond which pays a coupon of 10 % on a semi-annual basis. The present market rate for similar bonds is 8.8 %. What must be the present price of this bond? (Round to the closest dollar.) (a) $1,048  (b) $965  (c) $1,099&n

    		•
  • Q : Overview of capital market efficiency

    Provide a brief overview of Capital Market Efficiency?

    		•
  • Q : Structure of Interest rates Which

    Which determines the shape of the term structure of Interest rates?

    		•
  • Q : Commercial bank problems For an

    For an enhanced understanding of banking industry, it is significant to look at the atmosphere in which commercial banks operate. Production growth and globalization are two main forces reshaping the banking industry nowadays. The following two questions are associate

    		•
  • Q : Leverage ratio problem Handy Inc has

    Handy Inc has debt-to-assets ratio of 40%, tax rate of 35%, and total value of $100 million. W. C. Handy, the CFO, would like to increase the leverage ratio to 42%, and he believes that there will be no change in the bankruptcy cost of the company. How many dollars wo

    		•