Minute Ltd. is a retailer of luxury watches, but the luxury watch market has been doing...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Minute Ltd. is a retailer of luxury watches, but the luxury watch market has been doing poorly of late. So Minute Ltd. is considering setting up a separate division to venture into the pastry retailing market, the stronghold of PastryChat Ltd., which has a weighted average cost of capital of 6%. Minute Ltd. issued 600,000 20-year, 12% semi-annual coupon bonds five years ago and these are currently trading at a premium of 10% to their $1,000 face value. Further, Minute Ltd.'s 425 million shares that are currently trading at $0.80 each have a beta of 0.75. The risk-free rate is 1.5% and the expected return on the market is 14.5%. The marginal corporate tax rate is 20%. (a) Calculate Minute Ltd.'s cost of equity. (b) (c) Calculate Minute Ltd.'s cost of debt. (e) Calculate Minute, Ltd.'s weighted average cost of capital and decide on a discount rate to be used by Minute Ltd. to assess its pastry retailing venture. Specify two (2) important considerations in making your decision. (d) A credible newspaper reports that a Minute Ltd.'s store manager has stolen luxury watches amounting to half a million dollars. How will this affect its cost of equity? Minute Ltd. plans to issue some convertible bonds and use the proceeds to pay off some of its straight bonds. How will this affect its WACC? Question 3 FlybyNight Inc. is a budget airline that is evaluating whether to lease an aircraft from Boing Inc. If FlybyNight does not lease the aircraft, its competitor will lease it today. If FlybyNight, Inc. does lease the aircraft, it will incur annual leasing cash outflows of $20 million for the next twelve years. There is currently a pandemic and a potential vaccine has been developed for the deadly virus. If the vaccine is effective, future cash inflows net of other non-leasing cash outflows is expected to be $25 million per year. Otherwise, the net cash inflows will be $18 million per year. As of today, both scenarios seem equally likely. Initial capital outlay associated with introducing a new route is $12 million and the discount rate is 10%. (a) Calculate the NPV to determine whether FlybyNight Inc. should lease the aircraft. (b) (c) Suppose the efficacy of the vaccine will be known in a year's time. At that time, Boing Inc. will give FlybyNight Inc. the right to lease an additional aircraft, provided that it leases an aircraft today. (i) What is the present value of the option to lease an additional aircraft? (ii) Given this option, should FlybyNight lease an aircraft today? Suppose the efficacy of the vaccine will be known in a little over a year's time. If it is ineffective, the pandemic would have become widespread to the point where no additional vaccine is worth developing. FlybyNight Inc. is negotiating with Boing Inc. for the right to terminate the lease once the efficacy of the vaccine is known. (i) (ii) If Boing Inc. agrees to the early termination option, should FlybyNight Inc. lease an aircraft today? If Boing Inc. requires payment in return for the early termination option, what is the maximum amount FlybyNight Inc. would be willing to pay for this option? Question 2 OCK, Ltd. is a manufacturer and retailer of popular snacks. The company is expecting $80,000 in sales for the coming year, along with $30,000 in variable costs, $15,000 in fixed costs and $10,000 in interest expenses. The marginal corporate tax rate is 20%. (a) (b) (c) Calculate the degree of operating leverage (DOL), the degree of financial leverage (DFL), and the degree of total leverage (DTL) for OCK, Ltd. Suppose EBIT is 20% less than expected. Using a suitable result from part (a), find the percentage change in net income from expected. Use your result in part (b) to discuss the meaning of leverage. Question 4 For the most recent financial year, Company W had annual sales and cost of sales of $530 million and $400 million, respectively. In addition, the company ended the year with $52 million in inventory, $6 million in accounts receivables, and $54 million in accounts payables. Assume 365 days in a year. (a) Calculate the cash cycle for Company W. (b) (c) (d) (e) Under what circumstances will the cash cycle be negative? What does it mean? The CFO of Company W says that it is always in the best interest of the company to reduce its cash cycle. True or false? Explain. Suppose the median firm in Company W's industry has inventory, receivables, and payables periods of 100, 15, and 30 days, respectively. Is Company W likely to have a flexible or restrictive short-term financial policy? Justify your answer. Company W is either one of the largest retailers in the world or an automobile manufacturer using a just-in-time system. Which is Company W more likely to be? Justify your answer. Minute Ltd. is a retailer of luxury watches, but the luxury watch market has been doing poorly of late. So Minute Ltd. is considering setting up a separate division to venture into the pastry retailing market, the stronghold of PastryChat Ltd., which has a weighted average cost of capital of 6%. Minute Ltd. issued 600,000 20-year, 12% semi-annual coupon bonds five years ago and these are currently trading at a premium of 10% to their $1,000 face value. Further, Minute Ltd.'s 425 million shares that are currently trading at $0.80 each have a beta of 0.75. The risk-free rate is 1.5% and the expected return on the market is 14.5%. The marginal corporate tax rate is 20%. (a) Calculate Minute Ltd.'s cost of equity. (b) (c) Calculate Minute Ltd.'s cost of debt. (e) Calculate Minute, Ltd.'s weighted average cost of capital and decide on a discount rate to be used by Minute Ltd. to assess its pastry retailing venture. Specify two (2) important considerations in making your decision. (d) A credible newspaper reports that a Minute Ltd.'s store manager has stolen luxury watches amounting to half a million dollars. How will this affect its cost of equity? Minute Ltd. plans to issue some convertible bonds and use the proceeds to pay off some of its straight bonds. How will this affect its WACC? Question 3 FlybyNight Inc. is a budget airline that is evaluating whether to lease an aircraft from Boing Inc. If FlybyNight does not lease the aircraft, its competitor will lease it today. If FlybyNight, Inc. does lease the aircraft, it will incur annual leasing cash outflows of $20 million for the next twelve years. There is currently a pandemic and a potential vaccine has been developed for the deadly virus. If the vaccine is effective, future cash inflows net of other non-leasing cash outflows is expected to be $25 million per year. Otherwise, the net cash inflows will be $18 million per year. As of today, both scenarios seem equally likely. Initial capital outlay associated with introducing a new route is $12 million and the discount rate is 10%. (a) Calculate the NPV to determine whether FlybyNight Inc. should lease the aircraft. (b) (c) Suppose the efficacy of the vaccine will be known in a year's time. At that time, Boing Inc. will give FlybyNight Inc. the right to lease an additional aircraft, provided that it leases an aircraft today. (i) What is the present value of the option to lease an additional aircraft? (ii) Given this option, should FlybyNight lease an aircraft today? Suppose the efficacy of the vaccine will be known in a little over a year's time. If it is ineffective, the pandemic would have become widespread to the point where no additional vaccine is worth developing. FlybyNight Inc. is negotiating with Boing Inc. for the right to terminate the lease once the efficacy of the vaccine is known. (i) (ii) If Boing Inc. agrees to the early termination option, should FlybyNight Inc. lease an aircraft today? If Boing Inc. requires payment in return for the early termination option, what is the maximum amount FlybyNight Inc. would be willing to pay for this option? Question 2 OCK, Ltd. is a manufacturer and retailer of popular snacks. The company is expecting $80,000 in sales for the coming year, along with $30,000 in variable costs, $15,000 in fixed costs and $10,000 in interest expenses. The marginal corporate tax rate is 20%. (a) (b) (c) Calculate the degree of operating leverage (DOL), the degree of financial leverage (DFL), and the degree of total leverage (DTL) for OCK, Ltd. Suppose EBIT is 20% less than expected. Using a suitable result from part (a), find the percentage change in net income from expected. Use your result in part (b) to discuss the meaning of leverage. Question 4 For the most recent financial year, Company W had annual sales and cost of sales of $530 million and $400 million, respectively. In addition, the company ended the year with $52 million in inventory, $6 million in accounts receivables, and $54 million in accounts payables. Assume 365 days in a year. (a) Calculate the cash cycle for Company W. (b) (c) (d) (e) Under what circumstances will the cash cycle be negative? What does it mean? The CFO of Company W says that it is always in the best interest of the company to reduce its cash cycle. True or false? Explain. Suppose the median firm in Company W's industry has inventory, receivables, and payables periods of 100, 15, and 30 days, respectively. Is Company W likely to have a flexible or restrictive short-term financial policy? Justify your answer. Company W is either one of the largest retailers in the world or an automobile manufacturer using a just-in-time system. Which is Company W more likely to be? Justify your answer.
Expert Answer:
Answer rating: 100% (QA)
Qestion 1 Answer a Cost of equity The cost of equity is calculated as Re Rf Rm Rf Where Rf Risk free rate Beta of the company Rm Market return Given Rf 145 not provided Rm 145 Lets assume 1 Then Re 14... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-0071339476
Volume 1, 6th Edition
Authors: Beechy Thomas, Conrod Joan, Farrell Elizabeth, McLeod Dick I
Posted Date:
Students also viewed these finance questions
-
You are required to study the information provided below concerning a Namibian listed company called Deep Yellow Limited, that operates in the mining industry. You should compile a report based on...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Question Description RangeFilterTester.java import java.util.ArrayList; class RangeFilterTester { public static void main( String[] args) { ArrayList accounts = new ArrayList(); accounts.add(new...
-
Why might China want to keep the price of the Yuan low? Who suffers from this policy?
-
Find each of the following exactly in both radians and degrees. -1 COS 3 2
-
Show that during the early part of the electron-positron annihilation era, the ratio of the electron number density to the photon number density scaled with temperature as \[\frac{n_{-}}{n_{\gamma}}...
-
Depletion and DepreciationMining Khamsah Mining Company has purchased a tract of mineral land for $900,000. It is estimated that this tract will yield 120,000 tons of ore with sufficient mineral...
-
Nicole wants to show the management in her organization real-time data about attacks from around the world via multiple service providers in a visual way. What type of threat intelligence tool is...
-
Jennifer Lee, an engineering major in her junior year, has received in the mail two guaranteed lineofcredit applications from two different banks. Each bank offers a different annual fee and finance...
-
Question 5 a) A semi-batch reactor is charged with a fixed volume of substrate which is then reacted with a continuous feed of propylene oxide. The reaction rate is controlled by the feed rate of...
-
What are the fundamental distinctions between the processes of meiosis and mitosis?
-
9. What does the following method do? (You may assume that the elements in q are ref- erences to the objects of the class IntElement.) public static void mystery (Queueclass q) { StackClass s= new...
-
9. 0) or yes Two people, A and B, are deciding whether to put effort into producing a public good or not. Each person, i, can either choose no effort ( S; = effort (S = 1). The total public good...
-
Why should a buyer be concerned with monitoring and managing supplier quality performance? Why is it important for a buyer to be a good customer? How can a buyer become a good customer to a supplier?...
-
Give a discussion on the following: Why is the current focus of the encryption debate on end-to-end encryption, meaning encrypted data securely transmitted from one user's device that can only be...
-
Calculate the Upper limit of b3 ? X1 X2 X3 $2 53 RHS Basis CB 10 9. 12 1 -1 -1 X2 X1 6. 10 -1 X3 12 1 -1 1 10 6. 12 C-Z
-
The manager for retail customers, Katie White, wants to hear your opinion regarding one business offer she has received from an entrepreneur who is starting a mobile phone app called Easy Money. The...
-
Oleander Corporation had total assets of $ 1,200,000 on 31 December 20X3. At 31 December 20X4, total assets had increased to $ 1,400,000. Oleander's statement of changes in equity disclosed the...
-
The August bank reconciliation for C& C Limited: Balance per bank..................... $ 151,570 Plus: outstanding deposits 17,900 Less: Outstanding cheques ($ 11,245, $ 650, $ 1,570, $ 890, $ 120).....
-
Why is a note receivable sometimes preferred to an account receivable?
-
Role of controller, role of chief financial officer. George Jimenez is the controller at Balkin Electronics, a manufacturer of devices for the computer industry. The company may promote him to chief...
-
In the following, assume that all growth and discount rates are stated in real terms. 1. Assume the Eurozone inflation-adjusted average growth in capital stock is 3.0 percent per annum into...
-
Which conclusion presented by Ryan about the top-down approach and the bottom-up approach is most likely correct? A. Conclusion 1. B. Conclusion 2. C. Conclusion 3. Use the following information to...
Study smarter with the SolutionInn App