--%>
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 : Explain breakthroughs on

    Explain breakthroughs on low-discrepancy sequences.

    		•
  • Q : Is it possible to use a constant WACC

    Is this possible to use a constant WACC in the valuation of a company along with a changing debt?

    		•
  • Q : How present value of tax shields be

    I have two valuations of the company that we set as an objective. Within one of them, the present value of tax shields (D Kd T) computed using Ku (required return to unlevered equity) and, in one, by using Kd (required return to debt). The second valuation is too high

    		•
  • Q : Data Case Please assist with the

    Please assist with the attached Data Case assignment

    		•
  • Q : Efficient Market Hypotheses Write

    Write Efficient Market Hypotheses in brief?

    		•
  • Q : Calculate the risk-free rate You have

    You have been given the following information on two corporations; you are to assume that thesecurities are correctly priced. My Corp, Inc. has a Beta of 1.25 and an Expected Return of .145;Your Corp, Inc. has a Beta of .75 and an Expected Return of .095. Based on the

    		•
  • Q : Problem on Stock per share value ABC

    ABC Company plans to buy back 1 million shares of its own stock from its cash reserves at $50 a share. This will raise the bankruptcy costs by $10 million, and the debt/assets ratio from 35% to 40%. The income tax rate of the company is 30%. Determine the value of the

    		•
  • Q : Financing EBIT problem Rusk Inc needs

    Rusk Inc needs $50 million in new capital that it might obtain by selling bonds at par with coupon of 12% or by selling stock at $40 (net) per share. The current capital structure of Rusk consists of $300 million (face value) of 10% coupon bonds selling at 90 and 10 m

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

    Who explained the high-peak/fat-tails?

    		•
  • Q : Why classical option pricing required

    Why classical option pricing with constant volatility required?

    		•