Project #161024 - Finance

Business Tutors

Subject Business
Due By (Pacific Time) 12/27/2016 12:00 am

#4)Abe Forrester and three of his friends from college have interested a group  of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in Dallas, Houston, and San Antonio. To finance the new venture two plans have been proposed. Plan A is an all common equity structure in which $2.3 million dollars would be raised by selling 84,000 shares of common stock. Plan B would involve issuring $1.3 millionj in long term bonds with an effective interest rate  of 11.8 % plus another $1.0 million would be raised  by selling 42,000 shares od common stock. The debt funds raised under plan B have no fixed maturity date, in that this amount of financial leverages is considered a permanent  part of the firm's capital structure. Abe and his partners plan to use 38% tax rate in their analysis, and they have hired you on a consulting basis to do the following:(a) Find the EBIT indifference level associated with the two financing plans. (b) Prepare a pro forma income statement for the EBIT level solved for in part (a) that shows that EPS will be the same regardless whether Plan A or B is chosen. (a) EBIT indifference level associated with the two financing  plans is $------------.(round to nearest dollar). (b ) Complete segment of income statement for plan A below. (round income statement amounts to nearest dollar except EPS to the nearest cent).

Stock Plan

EBIT          $-----------------------

Less: interest expense-----------------

earnings before taxes  $--------------------

Less: Taxes @38% --------------------------

net income $------------------

number of common shares-------------------

EPS    $-----------

 Complete segment of income statement for plan B below.(round income statement amounts to nearest dollar except EPS to nearest cent).  

Bond/ Stock Plan

EBIT-             $------------------

Less: interest expense         --------------

earnings before taxes    $--------------  

Less: Taxes @ 38%   -------------------

 net income  $--------------  

number of common shares   -----------------  

EPS     -------------------  

 #7) Big Steve's Makers of swizzle sticks,is considering  the purchase of a new plastic stamping machine. This investment requires an initial outlay of $110,000 and will generate net cash inflows of $16,000 per yr. for 8 yrs. (a) what is the project's NPV using a discount rate of 11%. Should the project be accepted? why or why not? (b) what is the project's NPV using a discount rate of 17%.Should the project be accepted ? why or why not?  (c) what is this project's internal rate of return? Should the project be accepted? why or why not? (a) If the discount rate is 11% then the projecy's NPV is $----------------(round to the nearest dollar.) The project should or should not be accepted because the NPV is positive or negative and therefore does not add or add value to the firm.

(b) If the discount rate is 17% then the project's NPV is $-------------(round to nearent dollar). The project should or should not be  accepted because the NPV is positive or negative and therefore adds or does nt add value to the firm.  (c) This project's internal rate of return is --------% (round to two decimal places). If the project's required discount rate is 11%, then the project should or should not be accepted, because the IRR is higher or lower than the required discount rate. If the project's required discount rate is 17 % then the project should or should not be accepted because the IRR is higher or lower than the required discount rate.  

 #8) Bangers, Inc. is a startup manufacture Australion style frozen veggie pies located in San Antonio, Texas. The company is five yrs old and recently installed the manufacturing capacity to quadruple its unit sales. T jump start the demand for its products, the company foundrs have fired a local  advertising firm to create a series of ads for its new line of meat pies. The ads will cost the firm $400,000 to run for one yr. Bangers management hopes that the advertising will produce annual sales of $2million for its meat pies. Moreover, the firm's management expects that sales of its veggie pies will increase by $200,000 next yr. as a result of the company name recognition derived from the meat pie ad campaign. If Bangers' operating profits per dollar of new sales revenue are 50% and the firm faces a 37% tax  bracket, what is the increment operating profit the firm can expect to earn from the ad campaign?Does the decision to place the ad look good from the perspective of the anticipated profits? The incremental  operating profit the firm can expect to earn from tha ad campaign for year one is $-----------(round to nearest dollar.) the incremental  operating profit the firm can expect to earn fron the ad campaign for year two is $---------.(round to nearest dollar).  The decision to place the ad appears to be an acceptable or unacceptable project since the year one and yr. two cash flows are significantly  greater or less than the $400,000 initial outlay for taking the project.    Solving the problem

 variable                                         value

initial capital expenditure                     400,000  

expected sales next yr.                        2,200,000  expected sales in yr. 2                         2,000,000

marginal tax rate                                   37%  

profit margin on sales                             50%  

                                               year one               year two increased sales                        2,200,000          2,000,000 profit margin on sales                    50%                   50% net operating profit (EBIT)        1,100,000        1,000,000 -taxes (37%)    

= net operating profit after Taxes (NOPAT)  

+ depreciation                              0                         0  

= operating cash flow

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