Fin-419- Week 4- Scott Equipment

Debt to Equity ℎℎ ′ 9,771+1,885 Dividend Payout Inventory Turnover = 0.069 Working backwards from the income tax expense, we estimate income tax rate to be 34%. NOPAT is then Operating profit taxes, or 3,137*(1-0.34) = 0.319 Average

The firm has decided to increase the debt finance component portion from 20% to 30% which is a good decision since the interest payments are 100% tax deductible. The appropriate capital structure would be to

|1 |$ 60 |$ 45 |$ 105 |$ 60 |$ 45 |$ 105 |$ 45 |

Bixton Company’s new chief financial officer is evaluating Biston’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.

Problem 1: Jonathon Barrs is a manager for Easy Manufacturing, LLC. He wishes to evaluate three possible investments. These investments are for the purchase of new machine tools from Germany, Japan, and a local US manufacturer. The firm earns 10% on its investments and they have a risk index of 5%. The chart below lays out the expected return and expected risks of the three projects.

As part of the expansion plan, Wie will acquire some used equipment by signing a zero-interest-bearing note. The note has a maturity value of $50,000 and matures in 5 years. A reliable fair value measure for the equipment is not available, given the age and specialty nature of the equipment. As a result, Wie 's accounting staff is unable to

The capital structure of this retail drugstore is determined by 42,5% Debt and 57,50% Equity due to $8.239 of the total debt and $11,104,30 of Equity resulting in $19,313.60 of Total Liabilities and Shareholders’ Equity for 2007. Among the main debt-financing sources,

used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,

4. Based on the scenarios in Ex. 81, and on your assessment of the optimal amount of debt to be used in Seagate's capital structure, how much are Seagate's operating assets worth? Assume that of the $765 million in cash that the buyout team will acquire as part of the transaction, $500 million is required for new investment in net working capital and $265 million is excess cash. Also, assume that the buyout team plans to pay down its debt as cash flows permit during the forecast period. Estimate the value of Seagate's operating assets under the following two scenarios:

Our analysis attempts to answer the question, “What are the things a company must consider when analyzing a new investment or project?” According to the text, a firm’s first objective when deciding to take on new debt should be that its return on net assets (RONA) should be greater than its weighted average cost of capital (WACC). Since we are working with an income statement only and do not have an amount for net assets, we will instead use return on invested capital (ROIC), which measures how well a company is using its money to generate returns. Comparing a company 's return on capital (ROIC) with its cost of capital (WACC) reveals whether invested capital was used effectively. From our spreadsheet calculations we see that using our estimated operating profit provides us with a 19.9% return on invested capital with only a 7.2% weighted average cost for that same capital. If these numbers are even close to correct, George should definitely make the move.

Profitability ratios are basically figures to measure if the company is doing well in the terms of profit[13]. ROCE ratio has increased in 2011 but in 2012 it deteriorates by 3%. This fall indicates that company was not successfully getting high returns as a percentage of its resources available, compared to 2011.

The biggest change in Abbott’s balance sheet can be seen in the composition of its asset accounts. In 2006, % of the firm’s assets were current, while 69% were of the long-term variety. In 2010, however, the portion of current assets increased by 7%. This increase in current assets is most visible in cash and short-term investments (4% in 2006 to 9% in 2010) and corresponds with a higher level of uncertainty in today’s economy. The fact that Abbott Laboratories has chosen to increase the value of liquid assets on its balance sheet indicates low returns on long-term investments and a preference of keeping cash on hand rather than reinvesting in the business.

Ms. Ringer is largely supporting operations through her line of credit versus managing costs. In review of the operating costs, overhead and administration have increased by 8% from 2008-2011 or $116,870. In addition salary dollars continue to increase from 2008-2011 by $111,150 with no efforts to flex. The other expenses are staying steady in proportion to gross revenues. There may be opportunities in these areas however salaries and overhead is the greatest opportunity to scale back costs and contribute to increased net income and ultimately positive cash flows. Flexing salaries and benefit to 44% of gross revenue and reducing overhead and expenses to 10% of gross revenue is recommended for Ms. Ringer to increase net income to $152,956 and equity to $240,214 (exhibit Operating Statements-2012 proforma).

Debt financing is considered the fastest and cheapest method of financing growth of a company, however using debt to finance accelerated and explosive growth can have his drawbacks. The debt financing option enjoyed by Loewen kept shareholders stake in the business constant, and reduced the company’s tax liability. As shown in exhibit 4, from year 1989 to 1996 (excluding the special items regarding the law suits in 1995), the increase in debt (from 79.7 to 1428.6) led to an increase in EBITDA (from 21.4 to 251.9), operating profit(from 17.7 to 195.1) and net income (from 6.2 to 63.9), and led to an increase in the dividends paid throughout these years (from 0 to 11.4), and thus kept the shareholders happy. These results have encouraged investors to invest more in Loewen, and have encouraged Loewen to issue more debt to finance its acquisitions, until they arrived to a point where the debt to equity ratio became too high due to lots of reasons.

I have included the firm's original income statement and balance sheet without the purchase and then with the machine purchase. I have assumed that the firm would use the $218,000 to reduce the bank loans balance for each year. This reduction of the bank loan balance will lower their three restrictive financial ratios.