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- The Berndt Corporation expects to have sales of 12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be 1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Berndts federal-plus-state tax rate is 40%. Berndt has no debt. a. Set up an income statement. What is Berndts expected net income? Its expected net cash flow? b. Suppose Congress changed the tax laws so that Berndts depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow? c. Now suppose that Congress changed the tax laws such that, instead of doubling Berndts depreciation, it was reduced by 50%. How would profit and net cash flow be affected? d. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?Payne Products had $1.6 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $1 million of fixed assets and intends to keep its debt ratio at its historical level of 60%. Payne’s debt interest rate is currently 8%. You are to evaluate three different current asset policies: (1) a restricted policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% of sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes are expected to be 12% of sales. Payne’s tax rate is 40%. What is the expected return on equity under each current asset level? In this problem, we have assumed that the level of expected sales is independent of current asset policy. Is this a valid assumption? Why or why not? How would the overall risk of the firm vary under each policy?Standard, Inc. reported EBIT of $35 million for last year. Depreciation expense totaled $20 million and capital expenditures came to $7 million. Free cash flow is expected to grow at a rate of 6 percent for the foreseeable future. Stuart faces a 21 percent tax rate and has a .40 debt to equity ratio with $120 million (market value) in debt outstanding. Standard's equity beta is 1.25, the risk-free rate is currently 5 percent and the market risk premium is estimated to be 7.5 percent. What is the current value (in millions) of Standard's equity? Multiple Choice: $237.34 $352.42 $427.42 $583.62 $710.85
- Standard, Inc. reported EBIT of $57.00 million for last year. Depreciation expense totaled $20 million and capital expenditures came to $7 million. The company increased net working capital by $2 million. Free cash flow is expected to grow at a rate of 5.30% for the foreseeable future. Standard faces a 40% tax rate and has a 0.40 debt to equity ratio with $200 million (market value) in debt outstanding. Standard's equity beta is 1.24, the risk-free rate is currently 5% and the market risk premium is estimated to be 6%. What is the current value (in millions) of Standard's equity?Beach & Company reported EBIT of $40 million for last year. Depreciation expense totaled $18 million and capital expenditures came to $8 million. Free cash flow is expected to grow at a rate of 5 rate for the foreseeable future. Beach faces a 21 percent tax rate and has a .50 debt to equity ratio with $200 million (market value) in debt outstanding. Beach's equity beta is 1.25, the risk-free rate is currently 4.5 percent and the market risk premium is estimated to be 8 percent. What is the current total value of Beach & Company (in millions)? Multiple Choice $919.46 $787.29 $655.02 $1,025.95 $840.95Edwards Construction currently has debt outstanding with a market value of $75,000. The company has a WACC of 9 percent and has EBIT of $8,750 in the next year. The tax rate is 20%. What is the debt-to-value ratio if the EBIT’s growth rate is 5%? a. 42.86% b. 39.33% c. 96.42% d. 32.45%
- Kirk Construction has an outstanding debt with a market value of $75,000. The company's Weighted Average Cost of Capital (WACC) is 10%. Its upcoming Earnings Before Interest and Taxes (EBIT) is $10,000 (t-1). The EBIT is expected to grow by 5% per year indefinitely. The tax rate is 20%. What is the equity value of Kirk Construction? $85,000 $155,000 $160,000 $125,000Lauryn’s Doll Co. had EBIT last year of $47 million, which is net of a depreciation expense of $4.7 million. In addition, Lauryn’s made $7.25 million in capital expenditures and increased net working capital by $2.8 million. Assume that Lauryn’s has a reported equity beta of 1.5, a debt-to-equity ratio of .5, and a tax rate of 21 percent. What is Lauryn’s FCF for the year?(Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)Payne Products had $1.6 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $1 million of fixed assets and intends to keep its debt ratio at its historical level of 40%. Payne’s debt interest rate is currently 8%. You are to evaluate three different current asset policies: (1) a restricted policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% of sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes are expected to be 12% of sales. Payne’s tax rate is 25%. What is the expected return on equity under each current asset level? In this problem, we have assumed that the level of expected sales is independent of current asset policy. Is this a valid assumption? Why or why not? How would the overall risk of…
- A company is financed with equity of $4.5 million and a bank loan of $2.5 million with an interest rate of 8.6% per annum. The EBIT is $1.12 million. The applicable tax rate is 19%. Use the above information to calculate the following: a) change in the return on equity and the degree of financial leverage given a 15% increase in EBIT next year, b) change in the return on equity and the degree of financial leverage given a 5% decrease in EBIT in the following year (the year following the year in which EBIT grew by 15%).Payne Products had $2.4 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $2 million of fixed assets and intends to keep its debt ratio at its historical level of 60%. Payne's debt interest rate is currently 10%. You are to evaluate three different current asset policies: (1) a restricted policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% of sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes are expected to be 14% of sales. Payne's tax rate is 35%, a. What is the expected return on equity under each current asset level? Round your answers to two decimal places. Tight policy % 76.77 Moderate policy Relaxed policy 9.04 5.05 1% b. In this problem, we have assumed that the level of expected sales is…Lauryn's Doll Company had EBIT last year of $41 million, which is net of a depreciation expense of $4.1 million. In addition, Lauryn's made $4 million in capital expenditures and increased net working capital by $2.0 million. Assume that Lauryn's has a reported equity beta of 1.4, a debt-to-equity ratio of 0.4, and a tax rate of 21 percent. What is Lauryn's FCF for the year? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. FCF million
