Question

Paste B I U SA EE - $ % 00 BINOMDIS хv fe A с D E F G H 42 43 14. (15 points) Your company currently has book value of equity of $150 million, debt of $65 million, and non-debt liabilities of $50 million. Your company 44 forecasts net income of $50 million for the upcoming year. It employs a 30% payout ratio. Year-end assets are forecast at $330 million, and non-debt 45 liabilities are projected to grow by $6 million. 46 A. What net new financing is required? 65 48 49 50 51 52 53 B. Your company desires to move toward a 35% accounting debt-to-value (i.e., D/(D+E)) ratio. How much new debt and 54 how much new equity should it issue to achieve that outcome at the end of the year? 55 - 56 57 58 59 60 15. (3.5 points) Consider a stock that paid four dividends periodically over the course of the past year. Under what 61 circumstances would the IRR associated with investing in that stock for the past vear have been higher than the realized Sheet1 + Enter Quiz saved at 11:10ar

Answer 1

14. A. In this question, we just need to balance the Assets = Liabilities + Equity equation at the end of the year

Assets at the end of the year = $330 million

Since the company employs a 30% payout ratio, it retains 70% of its profits. Since profits for the year are forecasted to be $50 million, $35 million ($50 million x 70%) will be retained into the company.

So, Equity at the end of the year = Current book value of equity + Retained earnings = $150 million + $35 million = $185 million

Non-debt liabilities at the end of the year = Current non-debt liabilities + projected increase in non-debt liabilities = $50 million + $6 million = $56 million

Thus, using the balancing equation mentioned in the beginning to arrive at the Debt at the end of the year = Assets at the end of the year - (Equity at the end of the year + Non-debt liabilities at the end of the year) = $330 million - ($185 million + $56 million) = $89 million

Net new financing required = Debt at the end of the year - Current Debt = $89 million - $65 million = $24 million

14. B. As per data from the above calculations, the year end debt (D) stands at $89 million and the year end book value of equity (E) at $185 million. So, currently D + E = $274 million.

Assuming that we want whole numbers of both debt and equity so as to arrive at an accounting debt-to-value ratio of 35%, based on trial and error calculation, we can arrive at the solution the this is achievable at D + E of $300 million. Consequently, for 35% debt-to-value, Debt has to be 35% of $300 million.

So, Debt = 35% x $300 million = $105 million

And Equity = $300 million - $105 million = $195 million

Basis the above, New Debt it should issue = $105 million - $89 million = $16 million

And, New Equity it should issue = $195 million - $185 million = $10 million