Preferred shares

Short answers are fine. Only one value as answer for one question.

The questions might seem long but actually the answers are only one short answer for each question.

(Check the attached file. It’s easier to read than here)

1) A firm’s stock has a beta of 1.05, the expected return on the market is 12 percent, and the risk-free

rate is 5 percent. The firm’s marginal tax rate is 30%. If the firm were to issue new common stocks,

investment bank will charge 6% flotation cost. From this information, if the firm decides to spend

retained earnings in positive NPV project, what would be the cost of the retained earnings?

2) JKL preferred stocks have the par value of $90 and pay dividend of 9%. Currently the

market trades JKL’s preferred stock at a required return of 12.5%. JKL’s marginal tax rate is

20%. If there are 2,000,000 of preferred shares outstanding traded in the market, how much

money does JKL need to retire all of these preferred shares?

3) AMZ Co. has bonds outstanding with total market value of $80,000,000. This bond has yield to

maturity of 7.55% for investors. The company also has $150,000,000 worth of common stock

outstanding. The stock has a beta of 1.23. The risk free rate is currently at 1.0% and the market risk

premium is 6%. AMZ Co.’s tax rate is 35%. What is AMZ’s weighted average cost of capital?

4) A firm has zero debt in its capital structure. Its overall cost of capital (all-equity firm’s cost

of capital) is 10%. The firm is considering a new capital structure with 40% debt to total

assets. The interest rate on the debt would be 7%. Assuming the tax rate is 20% and there’s no

other imperfections, its cost of equity capital with the new capital structure would be …?

5) A firm has EBIT of $58,000. It has to pay interest of 7.5% on $300,000 long-term debts. This firm

pays tax at the rate of 25%. What is the amount of money that belongs to shareholders and lenders,

combined?

6) Shawhan Supply plans to maintain its optimal capital structure of 30% debt, 30% preferred stock,

and 40% common stock into the future. The required return on each component is: interest rate from

commercial bank loan = 11%; preferred stock = 11%; and common stock = 16%. Assuming a 30%

marginal tax rate, what after-tax rate of return must Shawhan Supply earn on its investments if the

value of the firm is to remain unchanged?

Page 2 of 3

7) Briefly explain which one of these three portfolios that you would choose to invest.

Portfolio A: expected return = 11.0%; standard deviation = 12%

Portfolio B: expected return = 10.5%; standard deviation = 12%

8)

Burr Habit Corporation is considering a new product line. The company currently manufactures several

lines of snow skiing apparel. The new products, insulated ski shorts, are expected to generate gross

profit of $1 million per year for the next five years. They expect that during this five year period, they

will lose about $250,000 per year in gross profit on their existing lines of longer ski pants as a result of

the introduction of the new product line. The new line will require no additional equipment or space in

the plant and can be produced in the same manner as the existing apparel products. The new project will,

however, require that the company spend an additional $80,000 per year on insurance in case customers

sue for frostbite. Also, a new marketing director would be hired to oversee the line at $45,000 per year

in salary and benefits. Because of the different construction of the shorts, an increase in inventory of

3,800 would be required initially. If the marginal tax rate is 30%, compute the incremental free cash

flows for year 1-5.

9)

Your company is considering replacing an old steel cutting machine with a new one. Two years ago, you

sent the company engineers and a marketing manager to evaluate business opportunity (feasibility

study) from the new machine’s operation and efficiency. The $3,500 cost for this feasibility study has

already been paid. If the new machine is purchased, it would require $5,500 in installation and

modification costs to make it suitable for operation in your factory. The old machine originally cost

$50,000 five years ago and is being depreciated by $5,000 per year. The new machine will cost $85,000

before installation and modification. The old machine can be sold today for $10,000. The marginal tax

rate for the firm is 20%.

a) What is the after-tax cash flows from selling the old machine?

b) Compute the relevant initial outlay in this capital budgeting decision (netting out

money from selling old machine).

Page 3 of 3

10)

A portfolio composes of $200 worth of stock A and $100 worth of B. What is the portfolio

risk and return? All details are in the following table. You are expected to show necessary

calculations (not just give the answers).

Rate of return if state occurs

State of

economy

Probability of

state of economy

Stock A Stock B

Recession 30% -6% 3%

Normal 60% 11% 9%

Expanding 10% 12% -5%

Value of each stock

in the portfolio

$200

$100

11)

A firm is trying to determine whether to replace an existing asset. The proposed asset has a purchase

price of $50,000 and has installation costs of $3,000. The asset will be depreciated over its five year life

using the straight-line method. The new asset is expected to increase sales by $17,000 and nondepreciation

expenses by $2,000 annually over the life of the asset. Due to the increase in sales, the firm

expects an increase in working capital during the asset’s life of $1,500, and the firm expects to be able to

sell the asset for $6,000 at the end of its life. The existing asset was originally purchased three years ago

for $25,000, has a remaining life of five years, and is being depreciated using the straight-line method.

The expected salvage value at the end of the asset’s life (i.e., five years from now) is $5,000; however,

the current sale price of the existing asset is $20,000, and its current book value is $15,625. The firm’s

marginal tax rate is 34 percent and its required rate of return is 12 percent.

a) The net initial outlay if the new asset is purchased is:

b) The net incremental free cash flows from this new investment are:

c) The after-tax terminal cash flow (at the end of year 5) is:

d) The NPV for this replacement decision is:

Average cost of capital

Question 1

In computing the cost of capital, which sources of capital should be considered? Why do firms calculate their weighted average cost of capital? As the financial manager for your company, explain how you would use the cost of capital of your firm, or a firm you are familiar with, to determine the required rate of return on investment opportunities. Search the SEU library or the internet for an academic or industry-related article. Select an article that relates to cost of capital and doing business in Saudi Arabia.

For your discussion post, your first step is to summarize the article in two paragraphs describing what you think are the most important points made by the authors (remember to cite the information, as appropriate). For the second step, include the reference listing with a hyperlink to the article. Please note, do not copy the article into your post and limit your summary to two paragraphs. Let me know if you have any questions. Enjoy your search.

Question 2

CAPM, RS = RF + b (RM – RF)

Implementing the Approach

Betas are widely available, and T-bill rates or the rate on long-term Treasury securities are often used for RF. The expected market risk premium is the more difficult number to come up with – make sure that the market risk premium used is consistent with the risk-free rate chosen.

One of the problems is that we really do need an expectation, but we only have past information, and market risk premiums do vary through time. Early in 2000, Federal Reserve Chairman Alan Greenspan indicated that part of his concern with the state of the U.S. stock markets at that time was the reduction in the market risk premium. He felt that investors were either becoming less risk averse, or they did not truly understand the risk they were taking by investing in stock.

Nonetheless, the historical average is often used as an estimate of the market risk premium.

Advantages and Disadvantages of the Approach

-This approach explicitly adjusts for risk in a fashion that is consistent with capital market history.

-It is applicable to virtually all publicly traded stocks.

-The main disadvantage is that the past is not a perfect predictor of the future, and both beta and the market risk premium vary through time.

A recent study finds that almost 3/4 of U.S. companies use the CAPM in capital budgeting, indicating that industry has largely approved this approach for estimating the cost of equity.

Please fill in the blanks with numerical input as per your perspective:

Current

Rf=?

Risk Market Premium=?

Beta=?

Capital expenditure

Question 1

Choose a public company, and discuss the following:

  • In your opinion, what is 1 long-term goal of the company? Explain your answer.
  • What is a capital expenditure?
  • Describe a capital expenditure of the company. Why is this item a capital expenditure? Explain your answer.
  • How does this capital expenditure contribute to the long-term goals of the company as described earlier? Explain your answer.
  • What are the challenges for the budget manager for this particular capital expenditure? Explain your answer.
  • What is a potential solution for the budget manager? Explain your answer.

Question 2

Homework Set #4: Chapters 9, 10, & 11

Due Week 8 and worth 100 points

Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link above.

A. Bad Boys, Inc. is evaluating its cost of capital. Under consultation, Bad Boys, Inc. expects to issue new debt at par with a coupon rate of 8% and to issue new preferred stock with a $2.50 per share dividend at $25 a share. The common stock of Bad Boys, Inc. is currently selling for $20.00 a share. Bad Boys, Inc. expects to pay a dividend of $1.50 per share next year. An equity analyst foresees a growth in dividends at a rate of 5% per year. Bad Boys, Inc. marginal tax rate is 35%. If Bad Boys, Inc. raises capital using 45% debt, 5% preferred stock, and 50% common stock, what is Bad Boys cost of capital?

B. If Bad Boys, Inc. raises capital using 30% debt, 5% preferred stock, and 65% common stock, what is Bad Boys cost of capital?

C. On page 457, your textbook details the term Cannibalization. In your own words, identify two corporations that have dealt with cannibalization and what steps were taken to overcome the cannibalization. Please provide any citations and references. Please be articulate in your responses.

Planning cycle

 

For this assignment, you and your group will create a capital plan. Your plan will take into consideration all of the information you know about Universal Parts Company. Additionally, you will make and document any assumptions necessary to plan for UPC’s capital needs. The director of finance has provided you with the following information:

  • UPC will need $100 million in the next 10 years to sustain its growth and remain competitive in its market.
  • UPC’s desired capital structure is 30% debt and 70% equity.
  • UPC will sell its fleet of trucks within the next 12 months. Instead, the company plans to lease trucks for shipping products to customers.

Individual Portion:

Using course materials and the library, identify 4 sections (or stages) in designing a capital plan for UPC. For instance, you may pick 4 sections in the capital planning cycle. Your group should share the sections in the planning cycle such that the group will cover all of the sections in the cycle.

Sections in a capital plan may include the following:

  1. Capacity condition evaluation and needs assessment
  2. Project proposal discussions and management
  3. Capital project submission
  4. Financial analysis of projects
  5. Analysis of project impact and risks
  6. Appropriations
  7. Ranking of project options and scenarios
  8. Project filtering and accept or reject decisions
  9. Analysis of capital sources and funding
  10. Allocation of funds among independent or mutually exclusive projects
  11. Review and approval of capital plan
  12. Capital budget reviews, monitoring, and reporting

Please add your file. Note that only a Word document and Excel spreadsheet (if applicable to your sections) are required for the individual portion.

Your assignment will be graded in accordance with the following criteria. Click here to view the grading rubric.

Group Portion:

Your group will put together all of the responses from individual members and create a complete capital planning cycle for UPC. Submit Excel worksheets for your calculations and a Word document for your discussions.

Additionally, include a PowerPoint Presentation of your capital planning cycle.

Warehousing facility

 

Scenario: You work for an investment banking firm and have been asked by management of Vestor Corporation (not real), a software development company, to calculate its weighted average cost of capital, to use in evaluating a new company investment. The firm is considering a new investment in a warehousing facility, which it believes will generate an internal rate of return of 11.5%. The market value of Vestor’s capital structure is as follows:

Source of Capital Market Value
Bonds $10,000,000
Preferred Stock $2,000,000
Common Stock $8,000,000

To finance the investment, Vestor has issued 20 year bonds with a $1,000 par value, 6% coupon rate and at a market price of $950. Preferred stock paying a $2.50 annual dividend was sold for $25 per share. Common stock of Vestor is currently selling for $50 per share and has a Beta of 1.2. The firm’s tax rate is 34%. The expected market return of the S&P 500 is 13% and the 10-Year Treasury note is currently yielding 3.5%.

Determine what discount rate (WACC) Vestor should use to evaluate the warehousing facility project.

Assess whether Vestor should make the warehouse investment.

Prepare your analysis in a minimum of 300 words in Microsoft® Word.

Use Microsoft® Word tables in the presentation if you choose.

Show all calculations and analysis in the presentation.

Format your assignment consistent with APA guidelines.

Capital management

Question 1

WORKING CAPITAL MANAGEMENT (350 WORDS)

Using the attached article by Pasandideh and Darabi (2015) assigned in this unit, “The Effect of Working Capital Strategies on Performance Evaluation Criteria,” discuss the importance of effective working capital management, its role in meeting the firm’s strategic objectives, and its effect in value creation. Be sure to provide examples of metrics used to evaluate working capital management and discuss how these metrics should be interpreted. Provide support for your discussion.

Question 2

The availability of funds effects the capital budgeting decisions. The amount of funds available for capital expenditures will be either limited or unlimited. Funds would be considered unlimited when a firm is willing to acquire, through borrowing or equity, any amount of capital as long as the return on the investment is higher than the cost of the funds. When the funds that a firm will make available for capital investment are limited, and the firm has more opportunities for profitable investments than the limited funds can cover, the condition is described as capital rationing.

Your assignment is to focus on the following:

  • Describe how capital-budgeting decision criteria would be different in a capital-rationing situation than in a situation in which capital rationing was not necessary, and explain the reasons for the difference in criteria.
  • Describe the discounted-cash flow technique or techniques you would recommend in a capital-rationing situation and explain your reasons for your recommendation.

Write your response as a one-page memo

Question 3

FACTORS INFLUENCING CAPITAL STRUCTURE

Based upon the readings of the attached 3 articles in this unit and your understanding of capital markets, discuss the following questions:

  • What difference is there between investors and the general public?
  • What role do investors play in the evolution of capital markets?
  • What role do financial institutions play in the capital markets?
  • What role do governments play in the capital markets?
  • What are the primary factors that influence decisions regarding the capital structure of corporations?
  • How do these factors change over time?
  • What markets do we refer to with the term “capital markets”

500 words (references page words not included)

Ensure that all three articles are cited in text and in the references page.

 

Capital budgeting

CAPITAL BUDGETING PAPER

OVERVIEW

For this week’s assignment, review the attached articles and any outside research (at least 3 outside references) you have done related to how the evaluation process and selection of capital projects are affected by mutually exclusive projects, project sequencing, and capital rationing. Pay particular attention to Burns and Walker’s 2009 article, “Capital Budgeting Surveys: The Future is Now,” which is attached .

INSTRUCTIONS

Write a 5-page paper (References and cover pages not included) that summarizes your conclusions about capital budgeting. Include the following:

  • Analyze the major components of capital budgeting process evaluation and selection of capital projects.
  • Explain the rationale and the effect of mutually exclusive projects.
  • Examine some of the foundations and key issues of capital budgeting decision making, including how companies can determine the success of their portfolio of investment projects and decisions on capital rationing.
  • Assess ethical considerations that may arise in capital budgeting.
  • Compare and contrast project sequencing and capital rationing.
  • Explain the calculation and interpretation of net present value (NPV), internal rate of return (IRR), payback period, and profitability index (PI) of a capital project.
  • Explain the calculation and interpretation of the weighted average cost of capital (WACC), including how taxes affect the cost of capital from different capital sources.
  • Based on the article, briefly evaluate the current development on capital budgeting and benefits discussed by Burns and Walker (2009).

Be sure your assignment meets the following guidelines. Refer to the attached scoring guide for specific information about how your paper will be evaluated.

  • Written communication: Written communication is free of errors that detract from the overall message.
  • Scholarship: Use at least 5 outside sources to support your main points and analysis.
  • APA formatting: All resources and citations should be formatted according to current APA style and formatting guidelines.
  • Length: 5 typed, double-spaced pages (Introduction and conclusion required)
  • Font and font size: Times New Roman, 12 point.
  • Please pay close attention to the paper scoring guide and ensure that you covered all elements.
  • Any questions or concerns, please let me know

Internal rate of return

Question 1

Answer each question

  • Describe how net present value is used in the financial decision making process.
  • Explain the disadvantages of using the payback method.
  • Compare and contrast the internal rate of return (IRR) method from the net present value method (NPV)
  • Review the financial considerations a company should make before investing in a project.
  • Understand how net working capital, depreciation and interest influence the decision to buy or not to buy.
  • Explain how inflation and interest rates affect the capital budgeting process.
  • Describe how the options to expand or abandon a project are integrated in the capital budgeting process.
  • Explain how decision trees are used to value investment alternatives

Question 2

Case Study Attached

This assignment allows students to work with issues related to the cost of capital. In addition, students will practice calculations related to capital structure and use them in making financial decisions.Required Activities:

1. Determine the weighted average cost of capital based on using retained earnings in the capital structure. Note: The percentage composition in the capital structure for bonds, preferred stock, and common equity should be based on the current capital structure of long-term financing as shown in Figure 1 above (it adds up to $18 million). Common equity will represent 60 percent of financing throughout this case. Use Rollins Instruments data to calculate the cost of preferred stock and debt. Show your work on your assignment document.

2. Recompute the weighted average cost of capital based on using new common stock in the capital structure. Note: The weights remain the same, only common equity is now supplied by new common stock, rather than by retained earnings. After how much new financing will this increase in the cost of capital take place? Determine this by dividing retained earnings by the percent of common equity in the capital structure. Show your work on your assignment document.

3. Write a 1 page summary that provides the following : A. Differentiate between the methods used in question 1 above and those used in question 2 above as it relates to the results. B. Provide your opinion on which method you would suggest and why, based on your findings. C. Add this summary below your answers to 1 and 2 above on your assignment file.

 

Manager motives

 

SEPARATE EACH DISCUSSION AND RESPONSES

INITIAL DISCUSSION:

Who is responsible for your motivation at work? You or your manager?

CLASSMATE POST 1:

Who is responsible for your motivation at work? You or your manager?

Both. It is up to your manager and the company that you work for to provide you with your basic needs in order to be content and able to focus on your duties. This falls under Maslow’s Hierarchy of Needs that states, “Individual’s most basic needs must be met before they become motivated to achieve higher level needs.” Mark, 2014. Once these basic needs are met, then the Hertzberg theory of Two-Factor Theory of Motivation comes into play. In your workplace you need to have a manager that helps to motivate you by making sure you feel supported, you feel secure in your job and you have a plan to progress in the company if you so desire. This theory summed up says that if you have a manager and a company that supports you then the motivation will be intrinsic. You will be more apt to go above and beyond. I feel that you need to also take some ownership in this to be sure you are communicating with your manager what you need to be successful. You cannot expect your manager to read your mind.

As a manager, you need to be aware of what your team is comfortable with in regards to communication. Having weekly or bi-weekly one-on-one meetings with your team to understand what they are working on and if there are challenges or successes that you can support and praise them for. When your team feels connected, they are more motivated at work.

CLASSMATE POST 2:

Who is responsible for your motivation at work? You or your manager?

I believe both yourself and your manager are responsible for motivation at work. For yourself, you have to find that drive that makes you want to get things done. That drive can come from many things. You may strive to be a respected member of your team, or you may want to produce products that impress your boss which could possibly result in a raise. Whatever the case may be, you have to find that energy from somewhere in yourself that makes you want to do the work. I personally find the motivation to do my job, and for about everything I do really, from my family. I want to be a good example for my kids and I want my family to be proud of my accomplishments. This motivates me to work hard.

Your manager should be a source of motivation at work as well. For me, my manager motivates me to work hard by being supportive of my efforts and rewarding me at appraisal time for the work that I have accomplished. He provides feedback and clarification when he sees something that needs to be improved. He does this in a manner that is effective and promotes change. In my mind, a manager of this sort motivates his personnel as they feel like valued members of the team. On my team, we feel like our opinions and ideas are valued. His actions motivate us to work harder and we each feel like we have an impact on the overall mission.

Department of labour

Question 1

Review your textbook and the United States Department of Labor –Statistics website listed above and provide a summary of Key Labor Statistics influencing Human Resource Management (HRM). Select one statistic from that list. Then detail how the Human Resources Department within an organization is impacted by this statistic.

Youssef-Morgan, C. M., & Stark. E. (2014). Strategic human resource management:

  • Chapter 1 Introduction to Human Resource Management
  • Chapter 2 Strategic HR Planning

Question 2

(CHIPOTLE RESTUARANTS) You will use this organization in each weekly individual assignment throughout the course.

You have been promoted as Vice President in charge of knowledge management (KM) and intellectual capital (IC).

Prepare a 525- to 700-word summary on how you will contribute to the organization’s growth using knowledge management (KM) and intellectual capital (IC).

Explain the purpose of knowledge management (KM) and intellectual capital (IC) within the chosen organization.

Analyze how the chosen organization can use knowledge management (KM) and intellectual capital (IC) as a competitive tool.

Format your paper consistent with APA guidelines.

Question 3

Please watch this video where Dan Pink presents important information about motivating people that would not include rewards — where higher incentives actually lead to poor performance, suggesting a mismatch between what science knows and what business does (18 minutes).

Give your summary

RESPOND 1:

Lesson to be learned:

The lesson to be learned is the use of negative reinforcement in order to meet his objective. Ben Franklin was not satisfied with the lack of communication of the supervisors and engineers, so he gave a directive of early morning meetings at 6:30 a.m., before the regular shift started at 7:30 a.m. The staff was not happy with the meetings but after several weeks everyone showed up and the objective of open communication had been met. As the meetings prolonged for two weeks consistently, Ben encouraged the staff if the desired outcome continued satisfactory, “sunrise service” would soon come to an end. The author included this in the book because managers will use negative reinforcement all the time and not realize it. Within organizations, behavior can and will be controlled by managers with the use of negative reinforcement in order to produce a desired outcome.

How theory helps explain what is going on:

According to study.com, negative reinforcement is defined as “when something unwanted that is already present is removed because a person’s action, and results in something favorable for that person. Thus the person is encouraged to keep repeating the action to get the favorable result”. Organizations use negative reinforcement as a motivating tool to get desired results out of unfavorable actions. In this case, Ben used “sunrise service” as a negative reinforcement in order to meet his desired outcome, which was to open the doors of communication as he and his team realized the project was not going so well. He decided to give a directive to supervisors and engineers for meetings at 6:30 a.m., an hour before their normal work day begins. Despite the fact that one of his staff made a comment of “if we can’t get those people together now, we certainly can’t get them together when we’re all half sleep”, Ben used his authority positive that he knew what he was doing. With the use of negative reinforcement, his objective was met. Other tactics that could have been used is a paid lunch break, with lunch provided, in order to meet the his objective.

What personal experiences relate:

A personal experience that is relates is the staff in one of our essential service departments. The department was having attendance issues, causing the staff to pull doubles or call in agency staff to fulfill shifts last minute. Management decided to put out a memo stating if the staff did not come in to work for any reason, disciplinary action would take place, no matter the excuse. This is a negative reinforcement as management directed an unfavorable action in order to meet the desired objective of attendance. In a situation like this, rather than pin pointing the attendance issues and trying to see what may be causing the attendance issues, management used negative reinforcement as a motivating factor. The management was satisfied with the outcome because attendance did improve, despite the fact of unhappy employees. In the case that management consulted with human resources, other tools could have been utilized to ensure attendance improved with happier employees.

Cherry, Kendra. (2018). How negative Reinforcement works.