The following comprehensive assessment is based on a continuing case study of United Corporation Limited. The...
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The following comprehensive assessment is based on a continuing case study of United Corporation Limited. The following financial statements have been provided: ASSETS Current Assets Sales Cost of Sales Selling & Marketing Costs Admin. Expenses United Corporation Limited Income Statement For the years ended December 31, 2018 & 2019 Depreciation Expense Earnings before Interest & Taxes Interest Expense Taxable Income Taxation (35%) Net Income Dividends (40%) Addition to Retained Earnings Additional Information: Ordinary Share Price Ordinary Shares Outstanding ('000s) Inventories Accounts Receivables Cash & Equivalents Non Current Assets, Net TOTAL ASSETS 2018 ('000s) 220,000 245,000 175,750 230,000 275,000 225,000 640,750 730,000 525,500 575,000 1,166,250 2019 ('000s) 2018 ('000s) 1,305,000 750,000 (250,000) (125,000) (45,000) (15,000) 315,000 (2,500) 312,500 (109,375) 203,125 United Corporation Limited Statement of Financial Position As at December 31, 2018 & 2019 81,250 121,875 17.50 100,000 2019 ('000s) 937,500 (255,500) (130,000) (47,500) (17.500) 487,000 (2,500) 484,500 (169,575) 314,925 Accounts Payables Notes Payables Total Liabilities 125,970 188,955 LIABILITIES & EQUITY Current Liabilities 22.75 120,000 Non-current Liabilites Equity Common Stock Retained Earnings Total Equity TOTAL LIAB. & EQUITY 2018 ('000s) 115,000 125,750 240,750 100,000 340,750 220,000 605,500 825,500 1,166,250 2019 ('000s 95,000 110,545 205,545 75,000 280,545 230,000 794,455 1,024,455 1,305,000 Question 1 25 Marks As part of your analysis, you are required to investigate United Corp.'s cash flows and selected ratios. Required: Using the financial statements provided on page 1: (a) Compute the following ratios for United Corp. for 2018 and 2019: i. Return on Equity using Du Pont Identity ii. Earnings Per Share (EPS) iii. Price/Earning (P/E) Ratio iv. Book Value Per Share v. Market-to-Book Ratio (b) Calculate the following for 2019: i. Operating Cash Flow ii. Net Capital Spending iii. Change in Net Working Capital iv. Cash Flow from Assets v. Cash Flow to Creditors vi. Cash Flow to Stockholders (6 Marks) (2 Marks) (2 Marks) (3 Marks) (2 Marks) (1 Mark) (1 Mark) (2 Marks) (2 Marks) (2 Marks) (2 Marks) Question 2 20 Marks Utilize the 2019 financial statements for United Corporation Limited provided on page 1 and assume that the company is currently operating below capacity, at 85%. Required: Prepare Pro-Forma statements for 2020 (rounding all figures to the nearest dollar) assuming: Sales are projected to increase by 12% The tax rate and the dividend payout ratio will remain constant. Interest Expense and Depreciation Expense will remain unchanged. All costs/income/expenses and net working capital vary directly with sales/revenue. No new equity is raised. Clearly state if United Corp. will require external financing or would have excess financing in 2020, and how much. (20 Marks) Question 3 20 Marks (a) United Corp. is considering issuing a $15,000,000 10-year bond in early 2021, with an annual coupon rate of 8%, and quarterly interest payments. Required: If the company anticipates that the yield to maturity on the date of issue is expected to be 10%. given the company's credit ratings and current market conditions, how much would an investor be willing to pay for $1,000 face value of this bond? (7 Marks) (b) United Corp. is also considering a Class B issue of its common stock on the market via an Initial Public Offering (IPO) in early 2021. The company is expected to pay the following dividends over the next 4 years: $1.50, $2.00, $3.00, $3.50. Thereafter, the company is expected to increase dividends by an annual rate of 5%. Required: Assuming investors would require a return of 13% on this riskier type of investment, how much would an investor pay for this share today? (10 Marks) (c) United Corp. is also assiduously finalising the issuance of its preference shares. The company plans to pay an annual dividend of $5.00 on each preferred share and anticipates investors required return to be around 10%. Required: Compute the price at which United Corp. should issue these preferred shares. (3 Marks) Question 4 20 Marks Having successfully issued their preference shares, United Corp. is seeking to determine its Weighted Average Cost of Capital, so that it can be used as the company's required return in evaluating upcoming capital projects. Utilising information from United Corp.'s financial statements, presented on page 1, together with current information, the company has the following capital structure: Debt: Bonds outstanding has a face value of $75,000,000, currently selling at 110% of par. The coupon rate on these bonds is 8% and there is 15 years left to maturity. (Hint: you can use the lowest multiple of $1,000 for the YTM calculation only) Common stock: 120,000,000 shares of common stock outstanding with a market price of $20.00. Preferred stock: 10,000,000 shares of preferred shares outstanding with a market price of $52.63. The annual dividend is $5.00. Additional Information: The Company's tax rate is 35%. The current risk free rate is 3.50%; market return is 10%. ✓ The Company's beta is 1.40. Required: Calculate the Weighted Average Cost of Capital for United Corporation Limited. (20 Marks) Question 5 25 Marks Based on the Weighted Average Cost of Capital calculated in question 4, United Corp. decides to use a rounded minimum required return of 12%; which it has decided to use for the following capital budgeting evaluation scenario: The company is considering whether to purchase the Basic or Premium version of the AR5 machine, a key piece of equipment that is expected to improve efficiency of daily operations. You have been tasked with evaluating the quantitative aspects of the projects, which are mutually exclusive. The projected cash flows of both projects are as follows: Project Years 0 1 2 3 4 Basic AR5 (5,000,000) 1,000,000 1,500,000 2,000,000 2,250,000 Discounted Payback Net Present Value Profitability Index As noted above, the company has a required rate of return of 12%. The following PV factors are provided: Year 1 2 3 4 Premium ARS (7,500,000) 2.500,000 2,500,000 2,500,000 2.500,000 Year 1 2 3 4 PV Factor (12%) Required: (a) Evaluate the projects using each of the following criteria, stating which project(s) United Corp. should choose under each criteria and why: I. Payback ii. iii. iv. 0.8929 0.7972 0.7118 0.6355 (b) Compute the Internal Rate of Return (IRR) for the Premium AR5 machine only, given that it falls between 12% and 13%. The PV Factors for 13% are provided below: (6 Marks) PV Factor (13%) 0.8850 (4 Marks) (8 Marks) (4 Marks) (3 Marks) 0.7831 0.6931 0.6133 Question 6 30 Marks In addition to the projects evaluated above, United Corp. is considering several other savings and financing options in an effort to expand operations and improve overall efficiency of operations, while fully investing idle cash. (a) Based on Statement of Financial Position as at December 31, 2019, the Company had $225,000,000 is Cash & Equivalents. Of this, $5,000,000 was in a fixed deposit that is due to mature on December 15, 2020. The company is considering the following investment options for these funds: Investment A Annual Interest Rate of 6.5%, compounded semi-annually Investment B Annual Interest Rate of 6.25%, compounded monthly Investment C Annual Interest Rate of 6.55%, compounded annually Required: i.. Advise the company on the best investment option for the maturing funds. (Hint: EAR) (6 Marks) ii. Based on your choice from part (i), if United Corp. invests the lump sum on $5,000,000 on December 16, 2020 and leaves it in the account for 2 years, what will be the value of the investment on December 15, 2022? (4 Marks) (b) The company is considering purchasing a new delivery truck for $2,000,000. The intention is to obtain a 5-year loan from their bank, at an interest rate of 9% per annum. Annual payments are expected to be made on the loan. Required: i. ii. Calculate United Corp.'s annual payment on this loan. (5 Marks) Prepare the 5-year Amortization Schedule for this loan, clearly showing the interest and principal payment annually. (5 Marks) (c) As part of being a responsible corporate citizen, United Corp. wants to establish a college fund to assist under-privileged students in pursuing their 4-year under-graduate degree programmes. The tuition fee is estimated to be $75,000 for the first year but is expected to grow/increase by 4% per year thereafter. Required: i. Assuming this college fund will earn 8% interest per annum, calculate the amount required at the start of a student's college journey to fund his/her full tuition. (5 Marks) ii. If United would like to sponsor the first student in two years' time and they currently have $225,000 earmarked for investment, what annual rate of interest is required to accumulate the amount needed as calculated in part (i)? (5 Marks) The following comprehensive assessment is based on a continuing case study of United Corporation Limited. The following financial statements have been provided: ASSETS Current Assets Sales Cost of Sales Selling & Marketing Costs Admin. Expenses United Corporation Limited Income Statement For the years ended December 31, 2018 & 2019 Depreciation Expense Earnings before Interest & Taxes Interest Expense Taxable Income Taxation (35%) Net Income Dividends (40%) Addition to Retained Earnings Additional Information: Ordinary Share Price Ordinary Shares Outstanding ('000s) Inventories Accounts Receivables Cash & Equivalents Non Current Assets, Net TOTAL ASSETS 2018 ('000s) 220,000 245,000 175,750 230,000 275,000 225,000 640,750 730,000 525,500 575,000 1,166,250 2019 ('000s) 2018 ('000s) 1,305,000 750,000 (250,000) (125,000) (45,000) (15,000) 315,000 (2,500) 312,500 (109,375) 203,125 United Corporation Limited Statement of Financial Position As at December 31, 2018 & 2019 81,250 121,875 17.50 100,000 2019 ('000s) 937,500 (255,500) (130,000) (47,500) (17.500) 487,000 (2,500) 484,500 (169,575) 314,925 Accounts Payables Notes Payables Total Liabilities 125,970 188,955 LIABILITIES & EQUITY Current Liabilities 22.75 120,000 Non-current Liabilites Equity Common Stock Retained Earnings Total Equity TOTAL LIAB. & EQUITY 2018 ('000s) 115,000 125,750 240,750 100,000 340,750 220,000 605,500 825,500 1,166,250 2019 ('000s 95,000 110,545 205,545 75,000 280,545 230,000 794,455 1,024,455 1,305,000 Question 1 25 Marks As part of your analysis, you are required to investigate United Corp.'s cash flows and selected ratios. Required: Using the financial statements provided on page 1: (a) Compute the following ratios for United Corp. for 2018 and 2019: i. Return on Equity using Du Pont Identity ii. Earnings Per Share (EPS) iii. Price/Earning (P/E) Ratio iv. Book Value Per Share v. Market-to-Book Ratio (b) Calculate the following for 2019: i. Operating Cash Flow ii. Net Capital Spending iii. Change in Net Working Capital iv. Cash Flow from Assets v. Cash Flow to Creditors vi. Cash Flow to Stockholders (6 Marks) (2 Marks) (2 Marks) (3 Marks) (2 Marks) (1 Mark) (1 Mark) (2 Marks) (2 Marks) (2 Marks) (2 Marks) Question 2 20 Marks Utilize the 2019 financial statements for United Corporation Limited provided on page 1 and assume that the company is currently operating below capacity, at 85%. Required: Prepare Pro-Forma statements for 2020 (rounding all figures to the nearest dollar) assuming: Sales are projected to increase by 12% The tax rate and the dividend payout ratio will remain constant. Interest Expense and Depreciation Expense will remain unchanged. All costs/income/expenses and net working capital vary directly with sales/revenue. No new equity is raised. Clearly state if United Corp. will require external financing or would have excess financing in 2020, and how much. (20 Marks) Question 3 20 Marks (a) United Corp. is considering issuing a $15,000,000 10-year bond in early 2021, with an annual coupon rate of 8%, and quarterly interest payments. Required: If the company anticipates that the yield to maturity on the date of issue is expected to be 10%. given the company's credit ratings and current market conditions, how much would an investor be willing to pay for $1,000 face value of this bond? (7 Marks) (b) United Corp. is also considering a Class B issue of its common stock on the market via an Initial Public Offering (IPO) in early 2021. The company is expected to pay the following dividends over the next 4 years: $1.50, $2.00, $3.00, $3.50. Thereafter, the company is expected to increase dividends by an annual rate of 5%. Required: Assuming investors would require a return of 13% on this riskier type of investment, how much would an investor pay for this share today? (10 Marks) (c) United Corp. is also assiduously finalising the issuance of its preference shares. The company plans to pay an annual dividend of $5.00 on each preferred share and anticipates investors required return to be around 10%. Required: Compute the price at which United Corp. should issue these preferred shares. (3 Marks) Question 4 20 Marks Having successfully issued their preference shares, United Corp. is seeking to determine its Weighted Average Cost of Capital, so that it can be used as the company's required return in evaluating upcoming capital projects. Utilising information from United Corp.'s financial statements, presented on page 1, together with current information, the company has the following capital structure: Debt: Bonds outstanding has a face value of $75,000,000, currently selling at 110% of par. The coupon rate on these bonds is 8% and there is 15 years left to maturity. (Hint: you can use the lowest multiple of $1,000 for the YTM calculation only) Common stock: 120,000,000 shares of common stock outstanding with a market price of $20.00. Preferred stock: 10,000,000 shares of preferred shares outstanding with a market price of $52.63. The annual dividend is $5.00. Additional Information: The Company's tax rate is 35%. The current risk free rate is 3.50%; market return is 10%. ✓ The Company's beta is 1.40. Required: Calculate the Weighted Average Cost of Capital for United Corporation Limited. (20 Marks) Question 5 25 Marks Based on the Weighted Average Cost of Capital calculated in question 4, United Corp. decides to use a rounded minimum required return of 12%; which it has decided to use for the following capital budgeting evaluation scenario: The company is considering whether to purchase the Basic or Premium version of the AR5 machine, a key piece of equipment that is expected to improve efficiency of daily operations. You have been tasked with evaluating the quantitative aspects of the projects, which are mutually exclusive. The projected cash flows of both projects are as follows: Project Years 0 1 2 3 4 Basic AR5 (5,000,000) 1,000,000 1,500,000 2,000,000 2,250,000 Discounted Payback Net Present Value Profitability Index As noted above, the company has a required rate of return of 12%. The following PV factors are provided: Year 1 2 3 4 Premium ARS (7,500,000) 2.500,000 2,500,000 2,500,000 2.500,000 Year 1 2 3 4 PV Factor (12%) Required: (a) Evaluate the projects using each of the following criteria, stating which project(s) United Corp. should choose under each criteria and why: I. Payback ii. iii. iv. 0.8929 0.7972 0.7118 0.6355 (b) Compute the Internal Rate of Return (IRR) for the Premium AR5 machine only, given that it falls between 12% and 13%. The PV Factors for 13% are provided below: (6 Marks) PV Factor (13%) 0.8850 (4 Marks) (8 Marks) (4 Marks) (3 Marks) 0.7831 0.6931 0.6133 Question 6 30 Marks In addition to the projects evaluated above, United Corp. is considering several other savings and financing options in an effort to expand operations and improve overall efficiency of operations, while fully investing idle cash. (a) Based on Statement of Financial Position as at December 31, 2019, the Company had $225,000,000 is Cash & Equivalents. Of this, $5,000,000 was in a fixed deposit that is due to mature on December 15, 2020. The company is considering the following investment options for these funds: Investment A Annual Interest Rate of 6.5%, compounded semi-annually Investment B Annual Interest Rate of 6.25%, compounded monthly Investment C Annual Interest Rate of 6.55%, compounded annually Required: i.. Advise the company on the best investment option for the maturing funds. (Hint: EAR) (6 Marks) ii. Based on your choice from part (i), if United Corp. invests the lump sum on $5,000,000 on December 16, 2020 and leaves it in the account for 2 years, what will be the value of the investment on December 15, 2022? (4 Marks) (b) The company is considering purchasing a new delivery truck for $2,000,000. The intention is to obtain a 5-year loan from their bank, at an interest rate of 9% per annum. Annual payments are expected to be made on the loan. Required: i. ii. Calculate United Corp.'s annual payment on this loan. (5 Marks) Prepare the 5-year Amortization Schedule for this loan, clearly showing the interest and principal payment annually. (5 Marks) (c) As part of being a responsible corporate citizen, United Corp. wants to establish a college fund to assist under-privileged students in pursuing their 4-year under-graduate degree programmes. The tuition fee is estimated to be $75,000 for the first year but is expected to grow/increase by 4% per year thereafter. Required: i. Assuming this college fund will earn 8% interest per annum, calculate the amount required at the start of a student's college journey to fund his/her full tuition. (5 Marks) ii. If United would like to sponsor the first student in two years' time and they currently have $225,000 earmarked for investment, what annual rate of interest is required to accumulate the amount needed as calculated in part (i)? (5 Marks)
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2 Heres what you need to know to put together pro forma financial statements Sales and revenue are the primary drivers of all costs profits and expenses as well as net working capital There is no infu... View the full answer
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Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter
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