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Fin Week 5 Problem Set Essay

1486 words - 6 pages

Chapter 17:
B1.

(Choosing financial targets) Bixton Company’s new chief financial officer is evaluating Bixton’s capital structure. She is concerned that the firm might be underleveraged, even though the firm has larger-than-average research and development and foreign tax credits when compared to other firms in its industry. Her staff prepared the industry comparison shown here. 1. Bixton’s objective is to achieve a credit standing that falls, in the words of the chief financial officer, “comfortably within the ‘A’ range.” What target range would you recommend for each of the three credit measures? B. Before settling on these target ranges, what other factors should Bixton’s chief ...view middle of the document...

Before deciding whether the target ranges are really appropriate for Bixton in its current financial situation, what key issues specific to Bixton must the chief financial officer resolve?

Prior to deciding whether goal ranges are appropriate for Bixton, the CFO of Bixton Corporation should consider R&D expenditure and foreign Tax credit. It is possible company may not be able to utilize the additional tax saving- R&D and foreign tax credit is a consideration

Chapter 18
A10.

(Dividend adjustment model) Regional Software has made a bundle selling spreadsheet software and has begun paying cash dividends. The firm’s chief financial officer would like the firm to distribute 25% of its annual earnings (POR = 0.25) and adjust the dividend rate to changes in earnings per share at the rate ADJ = 0.75. Regional paid $1.00 per share in dividends last year. It will earn at least $8.00 per share this year and each year in the foreseeable future. Use the dividend adjustment model, Equation (18.1), to calculate projected dividends per share for this year and the next four.

Per the table and figure 18.1: D1 = ADj [POR (EPSi) – D0] + D0

D1= .75 {.25 x $8.00 - $1.00} + $1.00 =
$1.75
D2= .75 {.25 x $8.00 - $1.75} + $1.75 =
$1.94
D3= .75 {.25 x $8.00 - $1.94} + $1.94 =
$1.99
D4= .75 {.25 x $8.00 - $1.98} + $1.98 =
$2.00
D5= .75 {.25 x $8.00 - $2.00} + $2.00 =
$2.00

B2.

(Dividend policy) A firm has 20 million common shares outstanding. It currently pays out $1.50 per share per year in cash dividends on its common stock. Historically, its payout ratio has ranged from 30% to 35%. Over the next five years it expects the earnings and discretionary cash flow shown below in millions.

a. Over the five-year period, what is the maximum overall payout ratio the firm could achieve without triggering a securities issue?

Total discretionary cash = 50 + 70 + 60 + 20 + 15 = $215
Total = 100 + 125 + 150 + 120 + 140 = $635
Maximum : = 215 divided by 636 = 33.87%

b. Recommend a reasonable dividend policy for paying out discretionary cash flow in years 1 through 5. 1 2 3 4 5 THEREAFTER Earnings 100,125,150,120,140,150 plus annually. Discretionary cash flow 50, 70, 60, 20, 15, 50 plus annually

dividend = 1.50 x 20 m shares = $30 million
Will eventually increase the dividend from 30 million to 50 million.
D1 =35 / 20 = $1.75
D2 =39 / 20 = $1.95
D3 = 4 3 / 20 = $2.15
D4 = 48 / 20 = $2.40
D5 = 50 / 20 = $2.50
35 + 39 + 43 + 48 + 50 = 215
Total discr. cash flow and large discr. cash flows initially=not a discr. shortage.

Chapter 20

A2.

(Comparing borrowing costs) Stephens Security has two financing alternatives: (a) A publicly placed $50 million bond issue. Issuance costs are $1 million, the bond has a 9% coupon paid semiannually, and the bond has a 20-year life. (b) A $50 million private placement with a large pension fund. Issuance costs are $500,000, the bond has a 9.25% annual...

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