Your company is about to take on a large project. It will use external financing. What features about the project would sway your decision between issuing debt or equity, and if any, how these would features sway it?
Your company is about to take on a large project. It will use external financing. What features about the project would sway your decision between issuing debt or equity, and if any, how these would features sway it?
Related questions
| Executive Fruitâs financial manager believes that sales in 2015 could rise by as much as 20% or by as little as 5%. Assets and costs change in proportion to sales, debt remains constant, and no new equity financing occurs. |
| a. | Recalculate the first-stage pro forma financial statements under these two growth assumptions and calculate the required external financing (All figures are in thousands). (Enter your answers in thousands.) |
| Base Case | 20% Growth | 5% Growth | ||||
| INCOME STATEMENT | ||||||
| Revenue | $ | 7,000 | $ | $ | ||
| Cost of goods sold | 6,300 | |||||
| EBIT | $ | 700 | $ | $ | ||
| Interest | 140 | |||||
| Earnings before taxes | $ | 560 | $ | $ | ||
| State and federal tax | 224 | |||||
| Net income | $ | 336 | $ | $ | ||
| Dividends | 224 | |||||
| Retained earnings | $ | 112 | $ | $ | ||
| BALANCE SHEET | ||||||
| Assets | ||||||
| Net working capital | $ | 700 | $ | $ | ||
| Fixed assets | 2,800 | |||||
| Total assets | $ | 3,500 | $ | $ | ||
| Liabilities and shareholders' equity | ||||||
| Long-term debt | $ | 1,400 | $ | $ | ||
| Shareholders' equity | 2,100 | |||||
| Total liabilities and shareholders' equity | $ | 3,500 | $ | $ | ||
| Required external financing | $ | $ | ||||
| b. | Assume any required external funds will be raised by issuing long-term debt and that any surplus funds will be used to retire such debt. Prepare the completed (second-stage) pro forma balance sheet. (Enter your answers in thousands.) |
| BALANCE SHEET | ||||||
| Base Case | 20% Growth | 5% Growth | ||||
| Assets | ||||||
| Net working capital | $ | 700 | $ | $ | ||
| Fixed assets | 2,800 | |||||
| Total assets | $ | 3,500 | $ | $ | ||
| Liabilities and shareholders' equity | ||||||
| Long-term debt | $ | 1,400 | $ | $ | ||
| Shareholders' equity | 2,100 | |||||
| Total liabilities and shareholders' equity | $ | 3,500 | $ | $ | ||
Garage, Inc., has identified the following two mutually exclusive projects:
| YEAR | CASH FLOW A | CASH FLOW B |
| 0 | $-29300.00 | $-29300.00 |
| 1 | 14700.00 | 4450.00 |
| 2 | 12600.00 | 9950.00 |
| 3 | 9350.00 | 15500.00 |
| 4 | 5250.00 | 17100.00 |
What is the IRR for each of these projects? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
IRR=
Project A %
Project B %
Using the IRR decision rule, which project should the company accept? Project A OR Project B?
Is this decision necessarily correct? YES OR NO?
If the required return is 11 percent, what is the NPV for each of these projects? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
NPV=
Project A $=
Project B $=
Which project will the company choose if it applies the NPV decision rule? Project A OR Project B?
At what discount rate would the company be indifferent between these two projects? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Discount rate %=
