Reference no: EM13343571
1. Shapland Inc. has fixed operating costs of $650,000 and variable costs of $55 per unit. If it sells the product for $95 per unit, what is the break-even quantity?
2. Schweser Satellites Inc. produces satellite earth stations that sell for $95,000 each. The firm's fixed costs, F, are $1.5 million, 50 earth stations are produced and sold each year, profits total $400,000; and the firm's assets (all equity financed) are $4 million. The firm estimates that it can change its production process, adding $5 million to investment and $500,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $12,000 and (2) increase output by 17 units, but (3) the sales price on all units will have to be lowered to $87,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 12%, and it uses no debt.
a. What is the incremental profit?
$ ________
To get a rough idea of the project's profitability, what is the project's expected rate of return for the next year (defined as the incremental profit divided by the investment)? Round your answer to two decimal places.
Should the firm make the investment?
_________________
b. Would the firm's break-even point increase or decrease if it made the change?
_________________
c. Would the new situation expose the firm to more or less business risk than the old one?
_________________
I. The new situation would have more business risk than the old one.
II. The new situation would have less business risk than the old one.
III. It is impossible to state unequivocally whether the new situation would have more or less business risk than the old one.
3. Southwestern Wear Inc. has the following balance sheet:
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Current assets
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$1,875,000
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Accounts payable
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$375,000
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Fixed assets
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1,875,000
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Notes payable
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750,000
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|
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Subordinated debentures
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750,000
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|
|
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Total debt
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$1,875,000
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|
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Common equity
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1,875,000
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Total assets
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$3,750,000
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Total liabilities and equity
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$3,750,000
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The trustee's costs total $210,250, and the firm has no accrued taxes or wages. Southwestern has no unfunded pension liabilities. The debentures are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of $3 million is received from sale of the assets?
Distribution of proceeds on liquidation:
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1. Proceeds from sale of assets
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$ ______
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|
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2. First mortgage, paid from sale of assets
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$ ______
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|
|
3. Fees and expenses of administration of bankruptcy
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$ _______
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|
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4. Wages due workers earned within 3 months
prior to filing of bankruptcy petition
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$ ________
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|
|
5. Taxes
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$ ________
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|
|
6. Unfunded pension liabilities
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$ ________
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|
|
7. Available to general creditors
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$ ______
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Distribution to general creditors:
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Claims of
General
Creditors
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Claim
(1)
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Application of 100%
Distribution
(2)
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After
Subordination
Adjustment
(3)
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Percentage of
Original Claims Received
(4)
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Notes payable
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$ ________
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$ ________
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$ ________
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________ %
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Accounts payable
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$ ________
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$ ________
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$ ________
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________ %
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Subordinated debentures
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$ ________
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$ ________
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$ ________
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________ %
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Total
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$ ________
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$ ________
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$ ________
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The remaining $ ________ will go to the common stockholders.
4.The Verbrugge Publishing Company's 2010 balance sheet and income statement are as follows (in millions of dollars).
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Balance Sheet
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|
|
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Current assets
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$168
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Current liabilities
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$42
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Net fixed assets
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153
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Advance payments
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78
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Goodwill
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15
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Reserves
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6
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|
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$6 preferred stock, $112.50 par value (1,200,000 shares)
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135
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$10.50 preferred stock, no par, callable at $150 (60,000 shares)
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9
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Common stock, $1.50 par value (6,000,000 shares)
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9
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Retained earnings
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57
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Total assets
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$336
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Total claims
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$336
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Income Statement
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Net sales
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$540.0
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Operating expense
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516.0
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Net operating income
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$ 24.0
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Other income
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3.0
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EBT
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$ 27.0
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Taxes (50%)
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13.5
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Net income
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$ 13.5
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Dividends on $6 preferred
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7.2
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Dividends on $10.50 preferred
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0.6
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Income available to common stockholders
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$ 5.7
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Verbrugge and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the $6 preferred will be exchanged for one share of $2.90 preferred with a par value of $39.00 plus one 7% subordinated income debenture with a par value of $73.5. The $10.50 preferred issue will be retired with cash.
a. Construct the pro forma balance sheet while assuming that reorganization takes place. Show the new preferred at its par value. Enter your answers in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.
The pro forma balance sheet (in millions of dollars) follows:
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Current assets
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$ ________
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Current liabilities
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$ ________
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Net fixed assets
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$ ________
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Advance payments
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$ ________
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Goodwill
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$ ________
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Reserves
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$ ________
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|
|
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Subordinated debentures
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$ ________
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|
|
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$2.9 preferred stock, $39 par value(1,200,000 shares)
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$ ________
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|
|
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Common stock, $1.50 par value (6,000,000 shares)
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$ ________
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|
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Retained earnings
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$ ________
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Total assets
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$ ________
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Total claims
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$ ________
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b. Construct the projected income statement. Enter your answers in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.
The pro forma income statement (in millions of dollars) follows:
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Net sales
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$ ________
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Operating expense
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$ ________
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Net operating income
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$ ________
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Other income
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$ ________
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EBIT
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$ ________
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Interest expense
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$ ________
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EBT
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$ ________
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Taxes (50%)
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$ ________
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Net income
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$ ________
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Dividends on $2.90 preferred
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$ ________
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Income available to common stockholders
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$ ________
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c. Required earnings is defined as the amount that is just enough to meet fixed charges (debenture interest and/or preferred dividends). What are the required pre-tax earnings before and after the recapitalization? Enter your answers in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.
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The required pre-tax earnings before recapitalization
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$ ________ million
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The required pre-tax earnings after recapitalization
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$ ________ million
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5.At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining Company had the following balance sheet shown below (in thousands of dollars). The court, after trying unsuccessfully to reorganize the firm, decided that the only recourse was liquidation under Chapter 7. Sale of the fixed assets, which were pledged as collateral to the mortgage bondholders, brought in $370,000, while the current assets were sold for another $310,000. Thus, the total proceeds from the liquidation sale were $680,000. The trustee's costs amounted to $70,000; no single worker was due more than $2,000 in wages; and there were no unfunded pension plan liabilities.
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Current assets
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$ 400
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Account payable
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$ 50
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Net fixed assets
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600
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Accrued taxes
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40
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|
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Accrued wages
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30
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Notes payable
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180
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|
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Total current liabilities
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$ 300
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|
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First-mortgage bonds*
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300
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Second-mortgage bonds*
|
200
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Debentures
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200
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Subordinated debentures**
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100
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Common stock
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50
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Retained earnings
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-150
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Total assets
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$1,000
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Total claims
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$1,000
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Notes:
*All fixed assets are pledged as collateral to the mortgage bonds.
**Subordinated to notes payable only.
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a. How much will McDaniel's shareholders receive from the liquidation? Round your answer to the nearest dollar.
$ ________
b. How much will the mortgage bondholders receive? Round your answer to the nearest dollar.
$ ________
c. How much will other priority claimants receive from the liquidation? Round your answers to the nearest dollar.
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Claimant
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Amount
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Trustee's expenses
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$ ________
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Workers' wages due
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$ ________
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Governments' taxes due
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$ ________
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Total
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$ ________
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d. How much will the remaining general creditors receive from the distribution before subordination adjustment? Round your answers to the nearest dollar.
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Account
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Amount Received
|
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Accounts payable
|
$ ________
|
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Notes payable
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$ ________
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Second mortgage bonds
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$ ________
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Debentures
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$ ________
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Subordinated debentures
|
$ ________
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Total
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$ ________
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What is the effect of adjusting for subordination? Round your answers to the nearest dollar.
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Account
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Amount Received after
subordination adjustment
|
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Notes payable
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$ ________
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Subordinated debentures
|
$ ________
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