--%>
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 : Problem on Corp stocking Cheever Corp

    Cheever Corp stock is selling at $40 a share. Its dividend in subsequent year will be $2 a share and its β is 1.25. Crane Company has similar growth rate as Cheever. The current stock price of Crane is $55 a share, and its dividend this year is $3. The riskless r

    		•
  • Q : Porters Secondary activities Porter's

    Porter's Secondary activities: 1. Procurement: • Identification process of raw material.• Identification process of identifying probable suppliers.• Process of purchasing and calling quotes. 2. Human Resource management:

    		•
  • Q : Problem on sales collections The 2010

    The 2010 income statements of Leggett and Platt, inc. reports net sales of $4,076.1 million in 2010 and $4,250 million in 2009. The balance sheet reports accounts and other receivables, net of $550.5 million at December 31, 2010 and $640.2 million at December 31, 2009

    		•
  • Q : Cost of Equity AB Corporation has 16%

    AB Corporation has 16% cost of equity, 35% tax rate, and debt-to-equity ratio of 30%. XY Corporation has 30% tax rate and debt-to-equity ratio of 40%. Both AB and XY are in the same business of selling automotive parts. If the riskless rate is 4% and the expected retu

    		•
  • Q : Applied approaches to theory development

    Discuss and distinguish between the following applied approaches to theory development:  true-income (income statement and balance sheet approaches), efficient markets, and predictive ability.  You may want to include in your discussion any articles or studies that either supported or u

    		•
  • Q : Compute betas against local indexes

    Does it make any sense to compute betas against local indexes while a company has a great part of its operations outside such local market? I have two illustrations: BBVA and Santander.

    		•
  • Q : State Exploitation of favorable market

    Exploitation of favorable market conditions: The firms after estimating WCR are in a position to clearly identify their status of excess current assets. After this realization they can use this knowledge to encash conditions arising in market even for

    		•
  • Q : Company Valuation Project Hello, Need a

    Hello, Need a top-notch finance expert to complete a company valuation assignment for me for a class. Will attach details. Please inform me if you have your graduate level resource who is good with company valuations and executive summary writeup of the analysis please. English writing skills ar

    		•
  • Q : Problem on binomial option pricing model

    The share price of Cheung Kong (Holdings) Limited is currently at $100. Over each of the next two three-month periods, you expect its price will either increase by 10% or fall by 10% in each three-month period. If the Hong Kong interbank offered rate is 8% per annum w

    		•
  • Q : Problem on Zero coupon bonds

    Robertsons, Inc. is planning to enlarge its specialty stores into 5 other states and finance the expansion by issuing 15-year zero coupon bonds with a face value of $1,000. When your opportunity cost is 8 % and similar coupon-bearing bonds will recompense semi-annuall

    		•