Reynolds Construction (RC) needs a piece of equipment that costs

Reynolds Construction (RC) needs a piece of equipment that costs $100,000. The equipment has an economic life of 2 years and no residual value. The equipment will not require maintenance because its useful life is so short. RC can borrow the full cost of the equipment at an interest rate of 8% with payments due at the end of the year. Alternatively, RC can lease the equipment for $55,000 with payments due at the end of the year. Assume RC chooses the lease, which is a finance lease for financial reporting purposes. Answer the following questions. 

a. What is the initial lease liability that must be reported on the balance sheet?

b. What is the initial right-of-use asset?

c. What will RC report as an interest expense at Year 1?

d. What will RC report as an amortization expense at Year 1?

e. What will RC report as the lease liability at Year 1?

f. What will RC report as the right-of-use asset at Year 1?

Crane Rafting Corporation is considering an acquisition of Frost Ski

Crane Rafting is considering an acquisition of Frost Ski Supplies. Frost has a pre-merger 8% unlevered cost of equity, 6% pre-tax cost of debt, and 25% tax rate. Its pre-merger forecasted free cash flows and debt are expected to grow at a constant 5% rate after Year 4. Frost has 800 million outstanding shares.

If Crane makes the acquisition, synergies will increase Frost’s free cash flows.

Crane will also add debt at Frost’s 6% rate. Crane’s tax rate is 25%. The post-merger forecasted free cash flows and debt are expected to grow at a constant 5% rate after Year 4.

Data for Frost’s pre-merger and post-merger FCF and debt are shown here:

a. What is Frost’s pre-merger unlevered horizon value? What is its Year-0 unlevered value?

b. What is Frost’s pre-merger horizon value tax shield? What is its Year-0 tax shield value? Assume debt is added on the first day of the year; that is, calculate interest expenses for Year t based on debt at Year t.

c. What is Frost’s current value of levered operations? What is its value of equity? What is the minimum stock price per share that Frost’s shareholders should accept?

d. What is Frost’s post-merger unlevered horizon value to Crane? What is its Year-0 unlevered value?

e. What is Frost’s post-merger horizon value tax shield to Crane? What is its Year-0 tax shield value? Assume debt is added on the first day of the year; that is, calculate interest expenses for Year t based on debt at Year t.

f. What is Frost’s post-merger Year-0 value of levered operations to Crane? What is its value of equity? (Hint: Remember that Crane assumes Frost’s debt and subsequently issues more debt.) What is the maximum stock price per share that Crane should offer?

g. What percentage of Frost’s pre-merger at Year 4 consisted of debt? You already have the values you need to calculate the total value at the horizon.

What percentage after the merger? How much of Frost’s post-merger increase in value to Crane is due to improved FCF?

Jenny Cochran, a graduate of the University of Tennessee with

Jenny Cochran, a graduate of the University of Tennessee with 4 years of experience as an equities analyst, was recently brought in as assistant to the chairman of the board of Computron Industries, a manufacturer of computer components. During the previous year, Computron had doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Cochran was assigned to evaluate the impact of the changes. She began by gathering and other data.

Assume that you are Cochran’s assistant and that you must help her answer the following questions:

a. What effect did the expansion have on sales and net income? What effect did the expansion have on the asset side of the balance sheet? What effect did it have on liabilities and equity?

b. What do you conclude from the statement of cash flows?

c. What is free cash flow? Why is it important? What are FCF’s five uses?

d. What is Computron’s net operating profit after taxes (NOPAT)? What are operating current assets? What are operating current liabilities? How much net operating working capital and total net operating capital does Computron have?

e. What is Computron’s free cash flow? What are Computron’s “net uses” of its FCF?

f. Calculate Computron’s return on invested capital (ROIC). Computron has a 10% cost of capital (WACC). What caused the decline in the ROIC? Was it due to operating profitability or capital utilization? Do you think Computron’s growth added value?

g. Cochran also has asked you to estimate Computron’s Economic Value Added (EVA). She estimates that the after-tax cost of capital was 10% in both years.

h. What happened to Computron’s Market Value Added (MVA)?

i. The Tax Cut and Jobs Act (TCJA) was signed into law in 2017. Briefly describe its key provisions for corporate taxes.

j. Assume that a has $87 million of taxable income from operations. It also received interest income of $8 million and dividend income of $10 million. The federal tax rate is 21%, and the dividend exclusion rate is 50%. What is its taxable income and federal tax liability?

k. Briefly describe the TCJA’s key provisions for personal taxes.

l. Assume that you are in the 25% marginal tax bracket and that you have $20,000 to invest. You have narrowed your investment choices down to municipal bonds yielding 7% or equally risky corporate bonds with a yield of 10%. Which one should you choose and why? At what marginal tax rate would you be indifferent?

Cumberland Industries’ most recent balance sheets (in thousands of dollars)

Cumberland Industries’ most recent balance sheets (in thousands of dollars) are shown, below and in the partial model in the file:

a. The company’s sales for 2015 were $455,150,000, and EBITDA was 15% of sales. Furthermore, depreciation amounted to 11% of net fixed assets, interest charges were $8,575,000, the corporate tax rate was 40%, and Cumberland pays 40% of its net income out in dividends. Given this information, construct Cumberland’s 2015 income statement. 

b. Next, construct the firm’s statement of shareholders equity for the year ended December 31, 2015, and the 2015 statement of cash flows.

c. Calculate net operating working capital, total net operating capital, net operating profit after taxes, and for 2015.

d. Calculate the firm’s EVA and MVA for 2015. Assume that Cumberland had 10 million Shares outstanding, that the 2015 closing stock price was $17.25 per share, and that its after-tax (W ACC) was 12%.

e. What will be the retained earnings for year 2015 if the tax rate is 30% and the pay out ratio is 35%? Make necessary changes in the balance sheet.