Problem: 1
WACC Calculations
Willerton Industries Inc. has the following balances in its capital accounts as of 12/31/X3:
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Long-term debt
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$65,000,000
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Preferred stock
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$15,000,000
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Common Stock
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$40,000,000
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Paid in excess
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$15,000,000
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Retained earnings
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$37,500,000
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Calculate Willertons capital structure based on book values.
Problem:2
Market Value- Based Capital Structure
A relatively young firm has capital components valued at book and market and market component costs as follows. No new securities have been issued since the firm originally capitalized.
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Value
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|
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Component
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Market
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Book
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Cost
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debt
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$428,320
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$40,000
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8.50%
|
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preferred stock
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$10,650
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$10,000
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10.60%
|
|
common equity
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$65,740
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$32,000
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25.30%
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a. Calculate the firm's capital structures and WACCs based on both book and market values, and compare the two.
b. What appears to have happened to interest rates since the company was started?
c. Does the firm seem to be successful? Why?
d. What would be the implication of using a WACC based on book as opposed to market values? In other words, what kind of mistakes might management make by using the book values?
Problem:3
Managing EPS Through Leverage
The Tanenbaum Tea Company wants to show the stock market an EPS of $3 per share but doesn't expect to be able to improve profitability over what is reflected in the financial plan for next year. The plan is partially reproduced below.
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Tanenbaum Tea Company Financial Projection 20X1 ($000)
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|
|
|
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EBIT
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$18,750
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debt
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$13,000
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Interest (@12%)
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$1,560
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equity
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$97,000
|
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EBT
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$17,190
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capital
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$110,000
|
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Tax (@40%)
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$6,876
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|
|
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EAT
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$10,314
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Number of Shares =
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3700000
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Tanenbaums stock sells at book value. Will trading equity for debt help the firm achieve its EPS goal, and if so, what debt level will produce the desired EPS?
Problem:4
Forecasting Results through the DFL
Balfour Corp. has the following operating results and capital structure ($000).
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Revenue
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6000
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Debt
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$ 1,200.00
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Cost/expense
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4500
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Equity
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$ 8,800.00
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EBIT
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1500
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Total
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$ 10,000.00
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The firm is contemplating a capital restructuring to 60% debt. Its stock is currently selling for book value at $25 per share. The interest rate is 9% and combined state and federal taxes are 42%.
a. Calculate EPS under the current and proposed capital structures.
b. Calculate the DFL under both structures
c. Use the DFLs to forecast the resulting EPS under each structure if operating profits falls off by 5%, 10%, or 25%