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:

Current assets	$1,875,000		Accounts payable	$375,000
Fixed assets	1,875,000		Notes payable	750,000
			Subordinated debentures	750,000
			Total debt	$1,875,000
			Common equity	1,875,000
Total assets	$3,750,000		Total liabilities and equity	$3,750,000

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:

1. Proceeds from sale of assets	$ ______
2. First mortgage, paid from sale of assets	$ ______
3. Fees and expenses of administration of bankruptcy	$ _______
4. Wages due workers earned within 3 months prior to filing of bankruptcy petition	$ ________
5. Taxes	$ ________
6. Unfunded pension liabilities	$ ________
7. Available to general creditors	$ ______

 

Distribution to general creditors:

Claims of General Creditors	Claim (1)	Application of 100% Distribution (2)	After Subordination Adjustment (3)	Percentage of Original Claims Received (4)
Notes payable	$ ________	$ ________	$ ________	________ %
Accounts payable	$ ________	$ ________	$ ________	________ %
Subordinated debentures	$ ________	$ ________	$ ________	________ %
Total	$ ________	$ ________	$ ________

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).

Balance Sheet
Current assets	$168		Current liabilities	$42
Net fixed assets	153		Advance payments	78
Goodwill	15		Reserves	6
			$6 preferred stock, $112.50 par value (1,200,000 shares)	135
			$10.50 preferred stock, no par, callable at $150 (60,000 shares)	9
			Common stock, $1.50 par value (6,000,000 shares)	9
			Retained earnings	57
Total assets	$336		Total claims	$336

 

Income Statement
Net sales	$540.0
Operating expense	516.0
Net operating income	$ 24.0
Other income	3.0
EBT	$ 27.0
Taxes (50%)	13.5
Net income	$ 13.5
Dividends on $6 preferred	7.2
Dividends on $10.50 preferred	0.6
Income available to common stockholders	$ 5.7

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:

Current assets	$ ________		Current liabilities	$ ________
Net fixed assets	$ ________		Advance payments	$ ________
Goodwill	$ ________		Reserves	$ ________
			Subordinated debentures	$ ________
			$2.9 preferred stock, $39 par value(1,200,000 shares)	$ ________
			Common stock, $1.50 par value (6,000,000 shares)	$ ________
			Retained earnings	$ ________
Total assets	$ ________		Total claims	$ ________

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:

Net sales	$ ________
Operating expense	$ ________
Net operating income	$ ________
Other income	$ ________
EBIT	$ ________
Interest expense	$ ________
EBT	$ ________
Taxes (50%)	$ ________
Net income	$ ________
Dividends on $2.90 preferred	$ ________
Income available to common stockholders	$ ________

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.

The required pre-tax earnings before recapitalization	$ ________ million
The required pre-tax earnings after recapitalization	$ ________ million

 

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.

Current assets	$ 400		Account payable	$ 50
Net fixed assets	600		Accrued taxes	40
			Accrued wages	30
			Notes payable	180
			Total current liabilities	$ 300
			First-mortgage bonds*	300
			Second-mortgage bonds*	200
			Debentures	200
			Subordinated debentures**	100
			Common stock	50
			Retained earnings	-150
Total assets	$1,000		Total claims	$1,000
Notes: *All fixed assets are pledged as collateral to the mortgage bonds. **Subordinated to notes payable only.

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.

Claimant	Amount
Trustee's expenses	$ ________
Workers' wages due	$ ________
Governments' taxes due	$ ________
Total	$ ________

d.        How much will the remaining general creditors receive from the distribution before subordination adjustment? Round your answers to the nearest dollar.

Account	Amount Received
Accounts payable	$ ________
Notes payable	$ ________
Second mortgage bonds	$ ________
Debentures	$ ________
Subordinated debentures	$ ________
Total	$ ________

What is the effect of adjusting for subordination? Round your answers to the nearest dollar.

Account	Amount Received after subordination adjustment
Notes payable	$ ________
Subordinated debentures	$ ________