CAREM INDUSTRIES (courtesy of and adapted from Anoop Rai, Copyright 2007) Michelle Raymar, VP of Finance...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
CAREM INDUSTRIES (courtesy of and adapted from Anoop Rai, Copyright 2007) Michelle Raymar, VP of Finance at Carem Industries, was about to head to a meeting with her junior colleagues to discuss Carem's long-term capital requirements. She was feeling good because revenues and net profits of the company have been steadily increasing over the last few years. This scenario was much different from 10 years ago when the company was at the brink of bankruptcy. Requesting bank loans in those days was not pleasant. The company's positive growth prospects today meant that bankers were calling Ms.Raymar to offer stock and bond underwriting services. Michelle was a meticulous planner and believed in performing as much of the analysis in-house as possible. She planned to study all of the financing options very carefully before committing to any long-term funding. Carem Industries was formed in 1985 producing specialized valves and pumps. Their major clients are industrial firms that specialize in the manufacture of high pressure equipment requiring reliable and quick shut-off process controls. Carem employed approximately 100 employees in two plants and generated sales of $35.83 million in 2020 (Exhibit 2A). Mr.Carem. CEO, started the firm with 12 employees by manufacturing one specialized valve for the military, and Carem grew as more military contracts were awarded. However, reductions in military spending forced a change in strategy. It was Ms.Raymar. Mr.Carem's likely successor, who encouraged revamping the product line for civilian use and helped diversify the company's client base. The turnaround was successful and the company has seen revenues grow steadily since, averaging 16.5% during the last two years. Ms.Raymar has long recognized that a crucial element in maintaining the steady growth of the company is the availability of sufficient long-term funding. Ms.Raymar wants Carem to raise an additional $5 million through a combination of debt and equity(stock) issues. Of the $5 million raised, $1 million will be used to retire short-term debt, $1 million to support Carem's growing working capital requirements and $3 million for strategic acquisitions. Mr. Carem has approved the plan. Ms.Raxmar is meeting with her junior staff to discuss the pricing of the proposed debt and equity issues. She first relayed some information given to her by Carem's bankers over the past week. (Exhibit 1). Based on that information and the company's financial information, she wanted them to answer several questions, which are listed below: 1. What face value of zero-coupon bonds would have to be issued in order to receive proceeds of $2 million? (Assume semi-annual compounding.) (NOTE: Not all information provided in the exhibits will be necessary to answer Ms.Raymar's questions: You will have to select the pertinent information from that which is provided! This is how it is in actual business settings as well.) EXHIBIT 1 Report prepared by Mr.Marty Reynolds of Western Bank for Ms.Michelle Raymar of Carem Industries on March 15, 2021, summarizing major points discussed over the past week. 1. Carem could issue new bonds for proceeds up to $2 million without any risk of losing its current BBB credit rating. 2. Current YTM on BBB bonds is 10.5% for 5-year bonds and 11% for 10-year bonds. 3. A yield premium of 2% must be offered to issue zero coupon bonds. 4. Carem could issue up to 3 million of new shares without any risk of a drop in credit ratings or dilution of its shares. 5. If Carem increases its annual dividends it could fetch a higher price for new shares, but the exact trade-off is not clear. 6. The current interest rate on 3-month Treasury bills is 2%, the market risk premium (MRP) is 10%, and the beta on Carem stock is 1.5. Revenues EBIT Taxes Net Income Preferred Dividends Earnings Available to Shareholders Earnings Per Share (EPS) Dividends Per Share Stock Price Shares Outstanding (in millions) 2018 $0.12 $4.57 $9.14 $4.11 Case Exhibit 2A CONDENSED INCOME STATEMENT - 3-YEAR HISTORICAL AND 5-YEAR PROJECTED (All figures in millions except per share) $37.25 0.5 2019 $26.40 $30.62 $35.83 $41.56 $6.80 $8.65 $10.79 $2.11 $2.68 $3.34 $5.97 $7.45 $4.69 $0.12 $0.12 $5.85 $7.33 2020 2021 $45.50 $52.25 0.5 0.5 Note: Projections do not reflect any proposed changes to capital structure $11.70 $14.66 $17.82 $21.28 $4.53 $4.98 $5.48 $6.02 2022 0.5 Forecast 0.5 2023 $24.34 $7.54 $47.80 $54.49 $61.57 $69.58 $13.09 $15.59 $18.28 $21.12 $4.06 $4.83 $5.67 $9.03 $10.76 $12.61 $0.12 $0.12 $0.12 $8.91 $10.64 $12.49 $14.45 $6.55 $14.57 $0.12 $16.80 $0.12 $16.68 2024 $24.98 $28.90 $6.63 $7.29 0.5 2025 0.5 $33.36 $8.02 0.5 Cash Short-Term Investments Accounts Receivable Inventory Fixed Assets (net of depreciation) TOTAL ASSETS Case Exhibit 2B BALANCE SHEET - DECEMBER 31, 2020 $213,000 $936,000 $1,424,675 $2,346,777 $21,600,000 $26,520,452 Accounts Payable Short-Term Notes Long Term Debt Preferred Stock Retained Earnings Paid-In Capital Common Shares (Par = $1) TOTAL LIABILITIES AND NET WORTH $1,405,000 $3,200,000 $11,000,000 $800,000 $4,800,000 $4,815,452 $500,000 $26,520,452 CAREM INDUSTRIES (courtesy of and adapted from Anoop Rai, Copyright 2007) Michelle Raymar, VP of Finance at Carem Industries, was about to head to a meeting with her junior colleagues to discuss Carem's long-term capital requirements. She was feeling good because revenues and net profits of the company have been steadily increasing over the last few years. This scenario was much different from 10 years ago when the company was at the brink of bankruptcy. Requesting bank loans in those days was not pleasant. The company's positive growth prospects today meant that bankers were calling Ms.Raymar to offer stock and bond underwriting services. Michelle was a meticulous planner and believed in performing as much of the analysis in-house as possible. She planned to study all of the financing options very carefully before committing to any long-term funding. Carem Industries was formed in 1985 producing specialized valves and pumps. Their major clients are industrial firms that specialize in the manufacture of high pressure equipment requiring reliable and quick shut-off process controls. Carem employed approximately 100 employees in two plants and generated sales of $35.83 million in 2020 (Exhibit 2A). Mr.Carem. CEO, started the firm with 12 employees by manufacturing one specialized valve for the military, and Carem grew as more military contracts were awarded. However, reductions in military spending forced a change in strategy. It was Ms.Raymar. Mr.Carem's likely successor, who encouraged revamping the product line for civilian use and helped diversify the company's client base. The turnaround was successful and the company has seen revenues grow steadily since, averaging 16.5% during the last two years. Ms.Raymar has long recognized that a crucial element in maintaining the steady growth of the company is the availability of sufficient long-term funding. Ms.Raymar wants Carem to raise an additional $5 million through a combination of debt and equity(stock) issues. Of the $5 million raised, $1 million will be used to retire short-term debt, $1 million to support Carem's growing working capital requirements and $3 million for strategic acquisitions. Mr. Carem has approved the plan. Ms.Raxmar is meeting with her junior staff to discuss the pricing of the proposed debt and equity issues. She first relayed some information given to her by Carem's bankers over the past week. (Exhibit 1). Based on that information and the company's financial information, she wanted them to answer several questions, which are listed below: 1. What face value of zero-coupon bonds would have to be issued in order to receive proceeds of $2 million? (Assume semi-annual compounding.) (NOTE: Not all information provided in the exhibits will be necessary to answer Ms.Raymar's questions: You will have to select the pertinent information from that which is provided! This is how it is in actual business settings as well.) EXHIBIT 1 Report prepared by Mr.Marty Reynolds of Western Bank for Ms.Michelle Raymar of Carem Industries on March 15, 2021, summarizing major points discussed over the past week. 1. Carem could issue new bonds for proceeds up to $2 million without any risk of losing its current BBB credit rating. 2. Current YTM on BBB bonds is 10.5% for 5-year bonds and 11% for 10-year bonds. 3. A yield premium of 2% must be offered to issue zero coupon bonds. 4. Carem could issue up to 3 million of new shares without any risk of a drop in credit ratings or dilution of its shares. 5. If Carem increases its annual dividends it could fetch a higher price for new shares, but the exact trade-off is not clear. 6. The current interest rate on 3-month Treasury bills is 2%, the market risk premium (MRP) is 10%, and the beta on Carem stock is 1.5. Revenues EBIT Taxes Net Income Preferred Dividends Earnings Available to Shareholders Earnings Per Share (EPS) Dividends Per Share Stock Price Shares Outstanding (in millions) 2018 $0.12 $4.57 $9.14 $4.11 Case Exhibit 2A CONDENSED INCOME STATEMENT - 3-YEAR HISTORICAL AND 5-YEAR PROJECTED (All figures in millions except per share) $37.25 0.5 2019 $26.40 $30.62 $35.83 $41.56 $6.80 $8.65 $10.79 $2.11 $2.68 $3.34 $5.97 $7.45 $4.69 $0.12 $0.12 $5.85 $7.33 2020 2021 $45.50 $52.25 0.5 0.5 Note: Projections do not reflect any proposed changes to capital structure $11.70 $14.66 $17.82 $21.28 $4.53 $4.98 $5.48 $6.02 2022 0.5 Forecast 0.5 2023 $24.34 $7.54 $47.80 $54.49 $61.57 $69.58 $13.09 $15.59 $18.28 $21.12 $4.06 $4.83 $5.67 $9.03 $10.76 $12.61 $0.12 $0.12 $0.12 $8.91 $10.64 $12.49 $14.45 $6.55 $14.57 $0.12 $16.80 $0.12 $16.68 2024 $24.98 $28.90 $6.63 $7.29 0.5 2025 0.5 $33.36 $8.02 0.5 Cash Short-Term Investments Accounts Receivable Inventory Fixed Assets (net of depreciation) TOTAL ASSETS Case Exhibit 2B BALANCE SHEET - DECEMBER 31, 2020 $213,000 $936,000 $1,424,675 $2,346,777 $21,600,000 $26,520,452 Accounts Payable Short-Term Notes Long Term Debt Preferred Stock Retained Earnings Paid-In Capital Common Shares (Par = $1) TOTAL LIABILITIES AND NET WORTH $1,405,000 $3,200,000 $11,000,000 $800,000 $4,800,000 $4,815,452 $500,000 $26,520,452
Expert Answer:
Answer rating: 100% (QA)
To determine the face value of zerocoupon bonds that would have to be issued in order to receive pro... View the full answer
Related Book For
Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young
Posted Date:
Students also viewed these finance questions
-
In a reservoir a gate 1 m long and 2 m wide is hinged at the top and is supported by the wall at the lower end. The lower end is 4 m below the water level. The gate is at 60 to the horizontal. A...
-
Carem Industries was formed in 1985 producing specialized valves and pumps. Carem employed approximately 100 employees in two plants and generated sales of $35.83 million in 2019 (Exhibit 2A)....
-
Kaelyn Gish is preparing for a meeting with her banker. Her business is finishing its fourth year of operations. In the first year, it had negative cash flows from operations. In the second and third...
-
Explain what quality management knowledge and skills an auditor should possess when auditing
-
An investor takes as large a position as possible when an equilibrium price relationship is violated. This is an example of: a. A dominance argument. b. The mean-variance efficient frontier. c....
-
How many different ways can an instructor select 2 textbooks from a possible 17?
-
Assume that the weekly payroll of IDT, Inc., is $3,500. December 31, the end of the year, falls on Tuesday, but the company wont pay employees for the full week until its usual payday, Friday. What...
-
Activity based budget; kaizen improvements. Korna Company manufactures a product, gizmo that uses the following direct inputs: Korna has no direct materials inventory. All manufacturing overhead...
-
A company is adding an additional machine to increase its operating capacity. The installed cost of this machine is $1,200,000. As utilization of the new machine ramps up, the company will see...
-
Jason Kidwell is considering whether to acquire a local toy manufacturing company, Toys 'n' Things Inc. The company's annual income statements for three years are as follows: 2014 2013 2012 Revenues...
-
Evergreen Corporation manufactures circuit boards and is in the process of preparing next year's budget. The pro forma income statement for the current year is presented below. Sales ps 3,500,000...
-
The variance of stock A is 0.005 and the return is 0.115, while B has the same return but 0.15 as standard deviation of what is the coefficient of variation for stock A what is the coefficient of...
-
Amidst the ever-evolving landscape of global finance, how do central banks strategically employ unconventional monetary policy tools such as quantitative easing to modulate the intricate interplay...
-
A payment process that reimburses members for out-of-network health expenses is to be controlled through use of a fraction nonconforming chart. Initially, one sample of size 200 is taken each day for...
-
This is Matt Garcia's first week at Lebowski Capital (LBC). Matt just graduated from the University of Miami with a Finance major. LBC is a South Florida firm with $1 billion in assets under...
-
You just got an offer for a bond issued by Coala Corporation. The bond pays annual coupons with a coupon rate of 0.035, while its yield to maturity is 0.1, the bond has 12 years to maturity what is...
-
You have an empty glass jar and another equal massed jar filled with yummy Dutchway peanut butter. They are started to roll down an incline at the same time.Which one reached the botom of the incline...
-
You are a Loan Officer with an Investment Bank. Today you need to set your lending parameters. They are: LTV: 55% 10 Year T-Bill: TBD Rate Markup: 300 Basis Points Term: 30 Years Amortization: 30...
-
What-if analysis Jeren Company is considering replacing its existing cutting machine with a new machine that will help reduce its defect rate. Relevant information for the two machines includes the...
-
Cycle time efficiency and JIT Walker Brothers Company is considering the installation of a JIT manufacturing system in the hope that it will improve the company??s overall processing cycle...
-
Financial budgets: cash inflows Worthington Company makes cash (20% of total sales), credit card (50% of total sales), and account (30% of total sales) sales. Credit card sales are collected in the...
-
How do you find the inverse of an upper triangular matrix?
-
What is the role of Choleski decomposition in deriving a standard eigenvalue problem?
-
A two-story shear building is shown in Fig. 7.14 in which the floors are assumed to be rigid. Using Rayleigh's method, compute the first natural frequency of the building for \(m_{1}=2 m, m_{2}=m,...
Study smarter with the SolutionInn App