Part A -
Instructions: Using the company and market information provided below, complete the following two tabs in this MS Excel Workbook:
- Computation of the estimated current fair value of the note issued by the company in 20X3
- Computation of the estimated current fair value of the company's "portfolio" of debt (notes and bonds) outstanding, as reported in its fiscal year end (FYE) 20X4 balance sheet
The background papers, Present Value Concepts and Bond Valuation, and Financial Statement Concepts and Financial Reporting provide useful guidance for completing this assignment.
Based on the results of your computed estimate of the fair value of the company's debt "portfolio" (the second tab following this one) and the additional information provided below, indicate (i) the apparent total fair value ($US) of assets unrecognized or under-valued in the FYE 20X4 balance sheet and (ii) the possible kinds or categories of assets that could be unrecognized or under-valued and the apparent reasons for this. (In formulating your response, it may be helpful to review pages 17 - 18 of the background paper, Present Value Concepts and Bond Valuation, including the illustration on those pages and pages 38 and 41 - 47 of the background paper, Financial Statement Concepts and Financial Reporting.) Limit the length of your response to 150 words.
In January 20X3, the company issued a $30 million note to a syndicate of banks in connection with a seven-year term loan that bears a fixed 4.25 percent interest rate. The loan is secured by the company's assets and subject to financial and other covenants, including a requirement that the company maintain a total debt ratio not exceeding 1.5:1 (or 1.50).
Note 7 - Shareholders' equity
The company's articles of incorporation authorize it to issue up to 25 million shares of the company's common stock, par value $5 per share. At December 31, 20X4, 22.0 million shares of the company's common stock were issued and 2.154 million of those shares were held by the company as treasury stock. The company's articles authorize it to issue up to 2.5 million shares of 8 percent preferred stock, $100 par value, for which dividends shall be cumulative. At December 31, 20X4, the company had issued no shares of preferred stock.
Market information
The company's 6.0 percent serial bonds are currently rated "single A" (Standard & Poors) and "A2" (Moody's Investor Services) Current market yields on "single A" corporate securities, by term to maturity are:
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1 year
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4.625%
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6 years
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6.500%
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2 years
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5.000%
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7 years
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6.875%
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3 years
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5.375%
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8 years
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7.250%
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4 years
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5.750%
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9 years
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7.625%
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5 years
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6.125%
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10 years
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8.000%
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The company's common stock currently trades at $25 per share on the NASDAQ.
Complete, accurate, and clear presentation of calculations of the estimated fair value of:
- The specified individual company bond or note issue
- The company's aggregate debt "portfolio"
Use the information in the first worksheet tab (Instructions and company information) to complete the analysis in this tab. Show all computations in good form and label properly all amounts presented.
Compute the current fair value of the bank note syndicated in 20X3, showing separately to the nearest whole $US dollar (1) the present value of the principal (face) amount of the note and (2) the present value of related interest payments due under the note. (It may be helpful to review pages 15 - 16 of the background paper, Present Value Concepts and Bond Valuation, including the illustration on those pages.)
Part B -
Instructions: Using the company information provided below, complete the following two tabs in this MS Excel Workbook:
- Computation of the company's estimated cost of equity capital, rE, and weighted average cost of capital, rWACC
- NPV (capital budgeting) analysis of the company's proposed investment in a new Product B
The background paper, Capital Budgeting and the Cost of Capital, provides useful guidance for completing this assignment.
Based on the results of your NVP Analysis, summarize your recommendations to management regarding its contemplated introduction of the new product. Limit the length of your response to 75 words.
Company information:
North American Manufacturing Company is a U.S.-based publicly traded company, whose stock is listed on a national securities exchange. Management looked up the stock's historical β (beta) at a popular financial Web search engine and obtained this additional information:
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Historical β (beta) of the company's common stock
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1.20
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Current market interest rate on the company's new borrowings, rD
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0.095
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(9.5 percent)
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Company's combined effective income tax rate, t
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0.400
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(40.0 percent)
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Management's estimate of the expected rate of return on the "market portfolio," rM
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0.125
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(12.5 percent)
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Management's estimate of the risk-free interest rate, rF
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0.040
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(4.0 percent)
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The balance sheet of the company as of its most recent fiscal year end reflects management's targeted capital structure for the company. That balance sheet reports the following liability and shareholders' equity balances:
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Notes payable to banks - current portion
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$10,000,000
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Bonds payable - current portion
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65,000,000
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Notes payable to banks - noncurrent portion
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375,000,000
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Bonds payable - noncurrent portion
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150,000,000
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Common stock, at par
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30,000,000
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Additional paid-in capital
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285,000,000
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Treasury stock
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(45,000,000)
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Retained earnings
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$130,000,000
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Note 1 - The vacant building is fully depreciated; no significant changes in the value of building over Product B investment period expected
As such, the projected net proceeds from the assumed end-of-investment disposal of the building is $1,200,000 [i.e., $2.0 million x (1 - 0.40)]
Note 2 - Projected adverse effects on the profitability of the company's existing Product A, resulting from introduction of new Product B.
Accuracy, completeness, and clear presentation of:
- Business' cost of capital, including related information input and computations
- Incremental cash flows attributable to proposed investment and capital budgeting analysis, including related information input and computations, and investment decision reached.
Instructions: Use the information in the first worksheet tab (Instructions and company/product information) to complete this tab. For each of a. through c., below, show all computations in good form and label properly all amounts presented.
a. Compute American Manufacuring Company's estimated cost of equity capital, rE
b. Compute the company's targeted capital structure (relative proportions of debt and common equity capital).
c. Compute the company's estimated weighted average cost of capital, rWACC
Part C -
FirstRate Company MEMORANDUM
Purpose - The purpose of this memorandum is to evaluate each of the investment opportunities set forth below using present value concepts and present my recommendations based on my financial calculations and other factors that warrant your consideration.
I understand that, based on my recommendations, the company will allocate up to $1,000,000 of available capital to the superior investment opportunities. The required rate of return (discount rate) for new investments by the company is 10.0 percent. For the purposes of this analysis, I have ignored income taxes, as instructed.
Complete, accurate, and clear calculations using present value concepts
Clear, concise, and persuasive summary recommendations, explanation of your present value calculations, and narrative analysis of any other factors affecting your recommendations.
Attachment:- Assignment Files.rar