Question

Scott's Watermelon Company has the following inputs: Sales = $44,000,000 Total assets on balance sheet =...

Scott's Watermelon Company has the following inputs: Sales = $44,000,000 Total assets on balance sheet = $100,000,000 Total debt in capital structure = $30,000,000 Ke = 15% Kd = 10% (before tax adjustment) Tax rate = 40% The anticipated ongoing net operating income (EBIT) is $17,000,000. With the following data, please tell me what the total fair market value of Scott's Watermelon Company is.

Amy's Pet Supply Warehouse is trying to figure out their degree of combined leverage. You aim to help them out. Solve for DCL with the following provided information:

Fixed operating expenses = $20,800,000

Scott's wife, Sofia, loves hula hooping and her company, Sofia's Hoop Jam, is expecting a 17% increase in revenue with the new hoop workshops that shes putting on. She has been told that she needs to keep an eye on her degree of operating leverage. She has no idea what this means. All that she knows is that her operating income will likely increase from $300,000 to $350,000 during that time period. Calculate her DOL for her.

Aaron's Gummi Factory is taking off. Due to American's poor diet, people are buying gummi candies like they won't ever exist again. Aaron's Gummi Factory has the following data points:

Annual total sales = $44,000,000
Annual credit sales = $37,000,000
Credit terms = net 30
Average collection period = 45 days

Aaron is tired of dealing with an average collection period of 45 days and wants to reduce it some. He is considering adjusting terms to 1/10 net 30. Not all the customers will take the discount but it is reasonable to assume that 35% of the customers will. If all goes to plan, the average collection period will drop by 12 days.

After concluding your analysis, should Aaron offer the discount? Assuming that the company's required rate of return on receivables is 14%.

No. It doesn't make sense because his pretax profits will decline by around $41,000.

Yes. It does maek sense because his pretax profits will increase by around $54,000.

No. It doesn't make sense because his pretax profits will decline by around $88,000.

Yes. It does make sense because his pretax profits will increase by around $41,000.

Var. cost ratio = 0.30
Market value of outstanding debt = $10,000,000 (they all have a 9% coupon off of par value)
Common stock outstanding = 200,000 shares
Most recent sales figure for the year = $32,200,000
Marginal tax rate = 40%

Scott's sister, Amy, owns a very large pet supply business in Wisconsin. Last year she sold $30,000,000 worth of product to her wholesalers "net 30". Scott recently reviewed the financials of her company and determined that their average collection period is 48 days. Amy was not happy with this number, as her cash flow is becoming tight and difficult to deal with due to customers taking too long to pay. Scott mentioned that she should consider offering a cash discount for those customers who pay much more quickly--perhaps a 2% cash discount for those who pay in full within ten days. After some consideration, Amy decided to move forward with it; expecting that roughly 50% of her customers will take advantage of the discount. If all goes well, the average collection period should decline by 18 days. The opportunity cost on the receivables investment is 16%. Determine the cost to Amy.

Prior to declaring bankruptcy, Radio Shack had the following figures on its financial statements:

Common stock ($0.50 par, 900,000 shares outstanding: $450,000
Contributed capital in excess of par: $5,580,000
Retained earnings: $21,204,000
Total common stockholder's equity: $27,234,000

The stock was trading at $20 per share (far lower than its price of $76 a year before). Either way, they decided to issue a stock dividend of 10% and a cash dividend of $0.10 per share. What did retained earnings change to?

After Scott's company had a really good year, they decided that they were going to issue a stock dividend. They declared that this stock dividend was going to be a 25% stock dividend. Prior to the stock dividend, the market price of the stock was $18. The stock will pay a quarterly cash dividend of $0.08/share after the stock dividend. If the $0.08/share dividend is maintained over the next year, what is the post-stock dividend yield?

Sofia expects that she will have to spend some additional money to purchase equipment for her business. She is going to have to purchase a very specialized tubing bender. She was shocked to find out that this is going to cost $42,000. In addition to that, the tubing bender has to be shipped from across the world and the shipping cost is $1,500 with a timeframe of about three months out. The installation costs are going to be $4,800.

This machine is going to replace the machine that she purchased off of Craigslist years ago. She paid $10,000 for that machine seven years ago and it currently has a market value of zero. The new tubing bender is far more efficient than the one off of Craigslist. She anticipates that it will reduce her operating costs by $6,600 a year.

What is Sofia's net investment on this new purchase?

Cellar Door Garage, a motorcycle design fabricator, expects that it will have an EBIT figure of $2,500,000. The owner of Cellar Door Garage, Casper, expects that while this is the expected EBIT figure, there will be a degree of variability. The EBIT figure of $2,500,000 comes with a standard deviation of $800,000. Casper recognizes that he will have to incur interest charges of $1,200,000 and have to pay out preferred dividends of $300,000. If the company's marginal tax rate is 35%, what is the probability that Casper's company will have a negative EPS? Assume that EBIT will be normally distributed.

Homework Answers

Answer #1

So many questions in a single post!!!!

You have asked multiple unrelated questions in the same post. I have addressed the first one. Please post the balance questions separately one by one.

Scott's Watermelon Company has the following inputs: Sales = $44,000,000 Total assets on balance sheet = $100,000,000 Total debt in capital structure = $30,000,000 Ke = 15% Kd = 10% (before tax adjustment) Tax rate = 40% The anticipated ongoing net operating income (EBIT) is $17,000,000. With the following data, please tell me what the total fair market value of Scott's Watermelon Company is.

Wd = D/A = 30 / 100 = 30%; We = 1 - Wd = 1 - 30% = 70%

WACC. r = Wd x Kd x (1 - T) + We x Ke = 30% x 10% x (1 - 40%) + 70% x 15% = 12.30%

the total fair market value of Scott's Watermelon Company = EBIT x (1 - T) / r = 17,000,000 x (1 - 40%) / 12.3% = $ 82,926,829

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