Part 2: The Value of Money, Bonds, and Stocks
3. The company you work for is looking to expand. As the CFO, you’re tasked with comparing the cost of buying manufacturing equipment now, at a
$250
,000 discount from its original price of $1,650,000 and storing it for a year, or waiting one year to buy it. The cost of buying the equipment includes the supplier’s bill and the cost to store the item for a total of $1,464,000. What interest rate is implied by a $1,464,000 cash flow today, versus $1,650,000 in a year? When it comes to obtaining the cash for the purchase of the equipment, what is your recommendation on whether the company should purchase the equipment now or wait a year?
4. Worldwide Widget Manufacturing, Inc., is doing so well it decides it’s time to become an international company. As the chief financial officer (CFO), you’re tasked with raising $340 million of new capital to open offices around the world. In researching the matter, you learn that if bonds due in 20 years are used for raising the capital, they’ll be rated AA and will need to offer a yield of 6.5 percent. How many bonds will it be necessary to issue to raise the needed capital? What will Worldwide Widget Manufacturing have to make as a semiannual interest rate payment?
Part 4: Capital Budgeting
8. Worldwide Widget Manufacturing, Inc., is preparing to launch a new manufacturing facility in a new location. The company has a capital structure that consists of debt and common and preferred stock. The company is considering changing this capital structure in conjunction with the launch of the new manufacturing facility. The manufacturing facility project is slated to be funded with 30 percent debt, 30 percent preferred stock, and 40 percent common stock. Worldwide Widget Manufacturing has 15 million shares of common stock outstanding. The shares sell at $24.63 per share. The company expects to pay an annual dividend of $1.50 one year from now, after which future dividends are expected to grow at a constant 7 percent rate. Worldwide Widget Manufacturing’s debt consists of 30-year, 9-percent annual coupon bonds with a face value of $180 million and a market value of $185 million. The company’s capital mix also includes 200,000 shares of 12-percent preferred stock trading at par. If Worldwide Widget Manufacturing has a marginal tax rate of 32 percent, what weighted average cost of capital (WACC) should it use as it evaluates this project?
9. Worldwide Widget Manufacturing, Inc., wants to add two new production lines of widgets. You’re asked to analyze whether to go forward with two mutually exclusive projects. The cash flows of both projects are displayed below. Your company uses a cost of capital of 9 percent to evaluate projects such as the two you’re now analyzing. Show all calculations.
|
Year: |
0 |
1 |
2 |
3 |
4 |
5 |
|
|
Project A Cash Flow |
–$1,000 |
$150 |
$300 |
$500 |
$250 | ||
|
Project B Cash Flow |
–$1,400 |
$470 |
$200 |
$600 |
$350 |
Calculate the payback of Project A:
Calculate the payback of Project B:
Calculate the IRR of Project A:
Calculate the IRR of Project B:
Using the NPV method and assuming a cost of capital of 6 percent, calculate the NPV of these two projects. Which of these mutually exclusive projects should the company accept?
Part 5: Forecasting and Capital Structure
10. You’ve been asked to use the following historical sales information to forecast next year’s sales for Worldwide Widget Manufacturing, Inc. The actual sales for 2020 were $1,950,000.
|
2015 |
2016 |
2017 |
2018 |
2019 |
|
|
Sales |
$1,750,000 |
$2,000,000 |
$1,350,000 |
$2,250,000 |
$1,800,000 |
What would be next year’s forecast using the naïve approach and the average sales approach? What would be the MAPE using the naïve approach and the average sales approach?
11. After adding a new line of widgets, Worldwide Widget Manufacturing, Inc., expects all assets and current liabilities to shrink with sales. The company has sales for the year just ended of $20 million. The company also has a profit margin of 20 percent, a return ratio of 25 percent, and expected sales of $18 million next year. Worldwide Widget Manufacturing, Inc., shows the following on its balance sheet.
|
Assets
|
Liabilities and Equity
|
||
|
Current assets |
$2,500,000 |
Current liabilities |
$1,250,000 |
|
Fixed assets |
$3,500,000 |
Long-term debt |
$1,500,000 |
| Equity |
$3,250,000 |
||
|
Total assets |
$6,000,000 |
Total liabilities and equity |
What amount of additional funds (AFN) will Worldwide Widget Manufacturing, Inc., need from external sources to fund the expected growth? What does the AFN show?
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