FIL 240 Lecture 24 Outline of Last Lecture I Tax Management a Lower cash limit b Sweep c Target cash balance formula d Upper cash limit formula e Problem II Factors a V definition b TC definition c ROI definition d L definition Outline of Current Lecture I Part I MC a Volatility b Bonds II Part II Quantitative a IRR and NPV b DOL DOF DCL c Problem d Problem III Part III Short Answer a Possible Problems Current Lecture Review Format identical to Exam 1 I Part I multiple choice 20 questions 2 pts each a Volatility i What causes volatility b Bonds i Basics debenture order of payment marginal cost of capital ii WACC is the 1st tier These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute II iii Breakpoints iv Preferred equity common equity v Public offerings terms such as tombstone red herring registration statement exemption from registration vi Reg D 504 regular people freely tradable exception up to 1 000 000 w o registering with SEC Reg D 505 Reg D 506 restricted by rule 144 vii 2 classic ways to register common stock Form S1 new common stock and Form 10 had offered non registered stock to private investors viii Shelf registration register a pile of stock and pull some off as you need it ix Prospectus x Red herring preliminary version of prospectus that you can t use to sell with xi Tombstone announcement of a public offering Part II Quantitative 4 questions a IRR and net present value b DOL DOF DCL c Problem where you tell how much money would be used of what kind in different working capital policies i A company has 5mil in fixed assets and 2mil in permanent current assets temp current assets can be as much as 3mil What would be the maximum level of short term financing under each policy Conservative moderate aggressive 1 Conservative anything under 5mil doesn t like short term 2 Moderate short term assets regardless with short term financing 5 mil to 10mil 5mil 3 Aggressive finance a lot of assets short term somewhere between 7 9mil 10 mil 7mil 5mil Fixed assets If you find an IRR any discount rate above the IRR is a negative project d You have a project that will cost upfront 40 000 with a life of 5 years and a salvage value of 2 000 Incremental cash flows as follows year 1 5000 years 2 3 12000 year 4 10000 year 5 6000 i Part A if you discount the cash flows at 6 8 what is the NPV 1 Apps finance npv 2 Npv 6 8 40000 5000 12000 12000 10000 8000 1503 33 3 IRR will be less 4 Irr 40000 5000 12000 12000 10000 8000 5 44 5 Reject the project because the npv is negative ii Part B what is the IRR iii Problem posted tonight WORK IT OUT NOW MCC problem iv 1st level of debt after taxes Kd1AT 1 T d 1 Kd2AT 1 T d2 2 KS D1 D0 1 g P0 price of stock now g 3 KN D1 P0 F g v Breakpoint 1 debt jump debt in capital structure 1 Breakpoint 2 net income total dividends equity in capital structure vi MCC1 weightdebt d1AT weightequity Ks 1 MCC2 wd d2AT weKs 2 MCC3 wd d2AT weKN 3 Only accept project that are ALL above MCC ROIA ROIB MCC3 ROIc MCC2 ROID MCC1 BP1 BP2 4 800 000 8 a 800 000 12 b D0 0 25 on 10 000 000 shares c TR 0 20 d 60 debt 40 equity e G 10 f P0 40 share g NI 7 500 000 h F 10 i Kd1 1 0 20 8 6 4 j Kd2 1 0 20 12 9 6 k Ks 25 1 10 40 10 10 7 l KN 25 1 10 40 4 10 10 76 m n o p q III BP1 800 000 0 40 2 000 000 BP2 7 500 000 25 10 000 000 0 60 8 333 333 MCC1 40 6 4 0 6 10 69 MCC2 40 9 6 0 6 10 69 MCC3 40 9 6 0 6 10 76 Part III Short Answer a Possible Problems i Gains to leverage ii IRR and NPV difference iii Why is selling stock bad Why is it a bad sign when you see a company doing an IPO or something of the sort iv Give 2 reasons companies give dividends even though it doesn t seem logical v What is a Form 8K vi What is a Form 10K vii Why does the cost of capital rise viii What is meant by optimal capital structure ix Relationship between breakeven unit price unit variable cost and fixed cost x As FC increase BE output level increases as price increases BE output level decreases as UVC increases BE output level increases
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