Posted: December 13th, 2021

You are the manager of a pharmaceutical company and are considering

Question1.
You are the manager of a
pharmaceutical company and are considering what type of laptop computers to buy
for your salespeople to take with them on their calls. Two alternatives have
been proposed:
1. Purchase fairly
inexpensive (and less powerful) older machines for about $2,000 each. These
machines will be obsolete in three years and are expected to have an annual
maintenance cost of $150.
2. Purchase newer
and more powerful laptops for about $4,000 each. These machines will last five
years and are expected to have an annual maintenance cost of $50.
If the cost of capital is 12%, and depreciation is
straight-line, which option would you pick and why?Question2
Cell Phone is a cellular
firm that reported net income of $50 million in the most recent financial year.
The firm had $1 billion in debt, on which it reported interest expenses of $100
million in the most recent financial year. The firm had depreciation of $100
million for the year, and capital expenditures were 200% of depreciation. The
firm has a cost of capital of 11%. Assuming that there is no working capital
requirement, and a constant growth rate of 4% in perpetuity, estimate the value
of the firm.Question3
Managers in a company that is currently in a high growth stage
would like to raise external capital to help finance capital projects. They
believe equity is undervalued and would like to issue debt. Managers have
been informed that bondholder’s might be concerned that they will invest in
very risky projects that could result in large losses that will be borne by
them. Investment bankers have advised management to issue convertible bonds to
circumvent this problem.
1. Can convertible bonds
be helpful in the situation? Why or why not?
2. Is there anything
else management can do to alleviate the concerns of potential bondholders?Question4
You have been asked by
JJ Corporation, a California- based firm that manufacturers and services
digital satellite TV systems, to evaluate its capital structure. They currently
have 70 million shares outstanding trading at $10 per share. In addition, the
company has 500,000 bonds, with a coupon rate of 8%, trading at $1000 per bond.
JJ is rated BBB and the interest rate on BBB straight bonds is currently 10%.
The beta for the company is 1.2, and the current risk-free rate is 6%, the
market risk premium is 5%. The tax rate is 40%.a. What is the firm’s current
debt/equity ratio?
b. What is the firm’s current
weighted average cost of capital?JJ Corporation is
proposing to borrow $250 million and use it for the following purposes:
·
Buy back $100 million worth of stock OR
·
Pay $100 million in dividends.c. What will the firm’s cost of equity be
after this additional borrowing?
d. What will the firm’s weighted average
cost of capital be after this additional borrowing?
e. What will the value of the firm be
after this additional borrowing? (with zero growth? with 2% growth in
perpetuity)
f. Find the firm’s optimal debt equity
ratio
g. Why are capital
structure choices important to a firm’s strategic planning?
Question5
Please use the following
financial statements to answer question 5.Income Statement 2014Sales836,100Cost of Goods Sold650,700185,400Other Expenses17,100Earnings Before Interest & Tax168,300Interest Expense12,600Taxable Income155,700Taxes54,495Net Income101,205Balance Sheet 2014Current AssetsCash24,035Accounts Receivable38,665Inventory82,555Total145,255Fixed AssetsNet Plant & Equipment392,350Total Assets537,605Liabilities & Owners EquityCurrent LiabilitiesAccounts Payable64,600Notes Payable16,150Total80,750Long-term debt150,000Owner's EquityCommon Stock and Paid-in Surplus130,000Retained Earnings176,855Total Liabilities & Owner's Equity537,6051. The company would
like to grow at 20%. Assume that the dividend payout rate will remain constant,
what, if any, is the company’s external financing need? If the company plans to
meet any external financing needs with debt and the interest rate on debt is 5%
show how the income statement and balance sheet will be affected by the debt
issue.
2. Why is financial
planning crucial to a company’s strategic management?

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