FIL 240 Lecture24Outline of Last Lecture I. Tax Managementa. Lower cash limitb. Sweepc. Target cash balance formulad. Upper cash limit formulae. ProblemII. Factorsa. V definitionb. TC definitionc. ROI definitiond. L definitionOutline of Current Lecture I. Part I – MCa. Volatilityb. BondsII. Part II – Quantitativea. IRR and NPVb. DOL, DOF, DCLc. Problemd. ProblemIII. Part III – Short Answera. Possible ProblemsCurrent LectureReviewFormat identical to Exam #1I. Part I – multiple choice (20 questions, 2 pts each)a. Volatilityi. What causes volatilityb. Bondsi. Basics, debenture, order of payment, marginal cost of capitalii. WACC is the 1st tierThese 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.iii. Breakpointsiv. Preferred equity – common equityv. 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 144vii. 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 itix. Prospectus – x. Red herring – preliminary version of prospectus that you can’t use to sell withxi. Tombstone – announcement of a public offeringII. Part II – Quantitative (4 questions)a. IRR and net present valueb. DOL, DOF, DCLc. Problem where you tell how much money would be used of what kind in different working capital policiesi. 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-term2. Moderate – short-term assets regardless with short-term financing- 5 mil to 10mil = $5mil3. Aggressive – finance a lot of assets short-term, somewhere between $7-$9mil$10 mil$7mil$5milFixed assetsIf you find an IRR, any discount rate above the IRR is a negative projectd. 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 - $6000i. 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}) = -1503.333. IRR will be less4. Irr (-40000,{5000,12000,12000,10000,8000}] = 5.445. Reject the project because the npv is negativeii. Part B – what is the IRR?iii. Problem posted tonight – WORK IT OUT NOW – MCC problemiv. 1st level of debt after taxes – Kd1AT = (1-T)d1. Kd2AT = (1-T)d22. KS = (D1 (D0 (1+g))/P0 (price of stock now)) + g 3. KN = D1/(P0 – F) + gv. Breakpoint 1 = debt jump/%debt in capital structure1. Breakpoint 2 = (net income – total dividends) / % equity in capital structurevi. MCC1 - weightdebt * d1AT + weightequity * Ks1. MCC2 = wd * d2AT + weKs2. MCC3 = wd * d2AT + weKN3. Only accept project that are ALL above MCC ROIA ROIBMCC3 ROIcMCC2 ROIDMCC1BP1BP24. <800,000 @ 8%a. >800,000 @ 12%b. D0 = 0.25 on 10,000,000 sharesc. TR = 0.20d. 60% debt, 40% equitye. G = 10%f. P0 = $40/shareg. NI = $7,500,000h. 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. BP1 = 800,000/0.40 = 2,000,000n. BP2 = (7,500,000 – (.25*10,000,000))/0.60 = 8,333,333o. MCC1 = .40(6.4%) + 0.6(10.69%)p. MCC2 = .40(9.6%) + 0.6(10.69%)q. MCC3 = .40(9.6%) + 0.6(10.76%)III. Part III – Short Answera. Possible Problemsi. Gains to leverageii. IRR and NPV differenceiii. 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
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