Answer true or false to each of the following. Briefly

Answer true or false to each of the following. Briefly explain your reasoning for each answer.

a. If a company gets into financial difficulty, it can use some of its shareholders’ equity to pay its bills for a time.

b. It is impossible for a firm to have a negative book value of equity without the firm going into bankruptcy.

c. If a company increases its dividend, its net income will decrease.

d. You can construct a sources and uses statement for 2017 if you have a company’s balance sheets for year-end 2016 and 2017.

e. The “goodwill” account on the is an attempt by accountants to measure the benefits that result from a company’s public relations efforts in the community.

f. A reduction in an asset account is a use of cash, while a reduction in a liability account is a source of cash.

g. A company’s market value of equity must always be higher than its book value of equity.

Yosemite Corp. has an outstanding debt of $10 million on

Yosemite Corp. has an outstanding debt of $10 million on which it pays a 5 percent fixed interest rate annually. Yosemite just made its annual interest payment and has three years remaining until maturity. Yosemite believes that interest rates will fall over the next three years and that floating-rate debt will allow it to reduce its overall borrowing costs. A bank offers Yosemite a three-year interest rate swap with annual payments in which Yosemite will pay LIBOR, currently at 5.1 percent, and receive a 4.8 percent fixed rate on $10 million notional principal. Suppose that LIBOR turns out to be 4.7 percent in one year and 4.4 percent in two years. Including interest payments on Yosemite’s outstanding debt and payments on the swap, what will be Yosemite’s net interest payments for the next three years?

Toys-4-Kids manufactures plastic toys. Sales and production are highly seasonal.

Toys-4-Kids manufactures plastic toys. Sales and production are highly seasonal. The following is a quarterly pro forma forecast indicating external financing needs for 2018. Assumptions are in parentheses.

a. How do you interpret the negative numbers for income taxes in the first two quarters?

b. Why are cash balances in the first two quarters greater than the minimum required $200,000? How were these numbers determined?

c. How was “external financing required” (appearing at the bottom of the forecast) determined?

d. Do you think Toys-4-Kids will be able to borrow the external financing required as indicated by the forecast?

Universal Products Co. has almost finished its pro forma financial

Universal Products Co. has almost finished its pro forma for 2018, as shown next.

a. Assume that Universal plans to purchase $500,000 in fixed assets during 2018 and to dispose of no fixed assets during 2018. What would be its forecast for net fixed assets in 2018?

b. Assume that Universal plans to have a payout ratio of 50 percent in 2018 and will neither sell nor repurchase equity during 2018. What would be its forecast for owners’ equity in 2018?

c. Given the assumptions in questions (a) and (b), what is Universal’s projected external funding required for 2018?

Answer the following questions based on the information in the

Answer the following questions based on the information in the table. The tax rate is 40 percent and all dollars are in millions. For simplicity, assume that the companies have no other liabilities other than the debt shown next.

a. Calculate each company’s ROE, ROA, and ROIC.

b. Why is Pacific’s ROE so much higher than Atlantic’s? Does this mean Pacific is a better company? Why or why not?

c. Why is Atlantic’s ROA higher than Pacific’s? What does this tell you about the two companies?

d. How do the two companies’ ROICs compare? What does this suggest about the two companies?

Continuing problem 10, Westmark Industrial’s annual income statement and balance

Continuing problem 10, Westmark Industrial’s annual income statement and for December 31, 2017, are shown next. Additional information about the company’s accounting methods and the treasurer’s expectations for the first quarter of 2018 appear in the footnotes.

                           Income Statement
January 1, 2017 to December 31, 2017 ($ thousands)    

Net sales ………………………………………………………   $6,000
   Cost of goods sold1 …………………………………….    3,900
Gross profits ………………………………………………..     2,100
   Selling and administrative expenses2 …………..  1,620
   Interest expense ………………………………………….       90
   Depreciation………………………………………………..     90
Net profit before tax ……………………………………..      300
   Tax (33%) ………………………………………………………     99
Net profit after tax $ …………………………………….       201

                                Balance Sheet
             December 31, 2017 ($ thousands)
Assets
Cash …………………………………………………………….    $ 300
Accounts receivable ……………………………………..       960
Inventory …………………………………………………….     1,800
   Total current assets ………………………………….     3,060
Gross fixed assets ………………………………………         900
   Accumulated depreciation ……………………….        150
Net fixed assets ………………………………………….        750
   Total assets ……………………………………………..   $3,810
Liabilities
Bank loan …………………………………………………..          $ 0
Accounts payable ……………………………………….     1,740
Miscellaneous accruals4 ……………………………..          60
Current portion long-term debt5 …………………       210
Taxes payable ……………………………………………..      300
Total current liabilities …………………………………   2,310
Long-term debt ……………………………………………     990
Shareholders’ equity ……………………………………      510
Total liabilities and equity …………………………… $3,810

1 Cost of goods sold consists entirely of items purchased in first quarter.
2 Selling and administrative expenses consist entirely of wages.
3 Depreciation is at the rate of $30,000 per quarter.
4 Miscellaneous accruals are not expected to change in the first quarter.
5 $210 due in March 2018. No payments for remainder of year.

a. Use this information and the information in problem 10 to construct a pro forma income statement for the first quarter of 2018 and a pro forma for March 31, 2018. What is your estimated external financing need for March 31?

b. Does the March 31, 2018 estimated external financing equal your cash surplus (deficit) for this date from your in problem 10? Should it?

c. Do your pro forma forecasts tell you more than your does about Westmark’s financial prospects?

d. What do your pro forma income statement and tell you about Westmark’s need for external financing on February 28, 2018?

In July 2007, News Corp. entered into an agreement to

In July 2007, News Corp. entered into an agreement to purchase all of the outstanding shares of Dow Jones and Company for $60 per share. Immediately prior to the News Corp. bid, the shares of Dow Jones traded at $33 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of interest-bearing liabilities on the of Dow Jones was $1.46 billion.

a. Estimate the cost of this acquisition to the shareholders of News Corp.

b. What value did News Corp. place on the control of Dow Jones and Company?

Flatbush Shipyards is a no-growth company expected to pay a

Flatbush Shipyards is a no-growth company expected to pay a $12-per-share annual into the distant future. Its capital is 15 percent. The new president abhors the no-growth image and proposes to halve next year’s to $6 per share and use the savings to acquire another firm. The president maintains that this strategy will boost sales, earnings, and assets. Moreover, he is confident that after the acquisition, dividends in year 2 and beyond can be increased to $12.75 per share.

a. Do you agree that the acquisition will likely increase sales, earnings, and assets?

b. Estimate the per share value of Flatbush’s stock immediately prior to the president’s proposal.

c. Estimate the per share value immediately after the proposal has been announced.

d. As an owner of Flatbush, would you support the president’s proposal? Why or why not?

Starbucks Corporation recently had a market value of equity of

Starbucks recently had a market value of equity of $90 billion with 1.5 billion shares outstanding. The book value of its equity is $6 billion.

a. What is Starbucks’ stock price per share? What is its book value per share?

b. If the company repurchases 25 million shares in the stock market at their current price, how will this affect the book value of equity if all else remains the same?

c. If there are no taxes or transaction costs, and investors do not change their perceptions of the firm, what should the market value of the firm be after the repurchase?

d. Instead of a share repurchase, the company decides to raise money by selling an additional 25 million shares on the market. If it can issue these additional shares at the current market price, how will this affect the book value of equity if all else remains the same?

e. If there are no taxes or transaction costs, and investors do not change their perception of the firm, what should the market value of the firm be after this stock issuance? What would its price per share be?

Procureps, Inc. (P) is considering two possible acquisitions, neither of

Procureps, Inc. (P) is considering two possible acquisitions, neither of which promises any enhancements or synergistic benefits. V1 is a poorly performing firm in a declining industry with a price-to-earnings ratio of 8 times. V2 is a high-growth technology company with a price-to-earnings ratio of 35 times. Procureps is interested in making any acquisition that increases its current earnings per share. All of Procureps’s acquisitions are exchange-of-share mergers.

a. Calculate the maximum percentage premium Procureps can afford to pay for V1 and V2 by replacing the question marks in the following table.

b. What do your answers to part (a) suggest about the wisdom of using “avoid dilution in earnings per share” as a criterion in merger analysis?