Fin 571 Week 5 Problem Set Essays

Fin 571 Week 5 Problem Set Essays Fin 571 Week 5 Problem Set Essay Fin 571 Week 5 Problem Set Essay Chap 17, Prob B1 A. Bixton’s objective is to achieve a credit standing that falls, in the words of the chief financial officer, â€Å"comfortably within the ‘A’ range. † What target range would you recommend for each of the three credit measures? To remain within the A range the following is recommended Fixed Charge Coverage 3. 00–4. 30 Funds From Operations/Total Debt 45%–65% Long-Term Debt/Capitalization 22%-32% So to be comfortably within the range A the company should try to maintain higher fixed coverage ratio (near to 4. ), higher Fund from operation/total debt ratio (near to 65%) and maintain a lower long-term debt to capitalization ratio (near to 22%). B. Before settling on these target ranges, what other factors should Bixton’s chief financial officer consider? Bixton CFO should take following into consideration Company ability to fully use non-interest tax credits (foreign tax credits) Issuance cost r elated to Debt and future fixed expense in form of interest payment irrespective of the level of income Company ability to raise debt from the market. Effect on Brand image or goodwill of the company on raising debt C. Before deciding whether the target ranges are really appropriate for Bixton in its current financial situation, what key issues specific to Bixton must the chief financial officer resolve? Before deciding whether the target ranges are really appropriate for Bixton in its current financial situation the CFO of Bixton Corporation should consider the existing amount of RD expenditure and foreign Tax credit. It is possible company may not be able to fully utilize the additional tax saving generated by taking additional debt when RD expenditure and foreign tax credit is taken into consideration. Chap 18, Prob A10 D1 = ADJ [POR(EPS1) – D0] + D0 D1 = 0. 75 [0. 25 x $8. 00 $1. 00] + $1. 00 = $1. 75 D2 = 0. 75 [0. 25 x $8. 00 $1. 75] + $1. 75 = $1. 94 D3 = 0. 75 [0. 25 x $8. 00 $1. 94] + $1. 94 = $1. 985 D4 = 0. 75 [0. 25 x $8. 00 $1. 98] + $1. 98 = $2. 00 D5 = 0. 75 [0. 25 x $8. 00 $2. 00] + $2. 00 = $2. 00 Chap 18, Prob B2 . Over the five-year period, what is the maximum overall payout ratio the firm could achieve without triggering a securities issue? Total discretionary cash flow = $50 + $70 + $60 + $20 + $15 = $215 Total earnings = $100 + $125 + $150 + $120 + $140 = $635 Maximum Payout Ratio = $215 / $635 = 33. 86% b. Recommend a reasonable dividend policy for paying out discretionary cash flow in years 1 through 5. Current dividend = $1. 50 x 20 million shares = $30 million The firm could increase the dividend from $30 million to $50 million. : D1 = $35 / 20 = $1. 75 D2 = $39 / 20 = $1. 95 D3 = $43 / 20 = $2. 15 D4 = $48 / 20 = $2. 40 D5 = $50 / 20 = $2. 50 $35 + $39 + $43 + $48 + $50 = $215, is the total discretionary cash flow and not a discretionary cash deficit. Chap 20 problem A1. 1. Interest Coverage Ratio = EBIT / Interest Expense = $70 million / $14 million = 5 5 4, Dallas Instruments is in compliance. 2. Tangible Assets / Long-Term Debt = $400 million / $175 million = 2. 29 2. 29 1. 5, Dallas Instruments is in compliance. 3. Cumulative Dividends and Share Repurchases = $40 million + $40 million = $80 million $80 million $200 million x 60%, Dallas Instruments is in compliance. Dallas Instruments meets all of the covenants and is therefore in compliance. Chap 21 Prob. A2. a. After-tax cost of secured debt = (1 0. 34) x 12% = 7. 92% NAL = $1,000 $300 / 1. 0792^1 $275 / 1. 0792^2 $250 / 1. 0792^3 $225 / 1. 0792^4 $200 / 1. 0792^5 NAL = $1,000 $277. 98 $236. 12 $198. 90 $165. 87 $136. 62 = -$15. 49 b. Allied Metals should borrow and buy.