1.Financing

Nile Holdings

Selected Financial Information as of December 31, 2016

Last year's EBIT (2016)

$ 300.0 million

Expected EBIT (2017)

$ 333.0 million

Current Portion of Existing LT Debt due 2017

$ 46.25 million

Interest Due in 2017 on Existing Debt

$ 75.0 million

Tax Rate

40%

Times Interest Earned (2016)

4.0

Common Stock Price per Share

$ 50.00

Common Shares Outstanding

25.0 million

Dividends per Share

$ 2.50

Please refer to the financial information for Nile Holdings above.Nile must decide how to finance a $100 million investment.

A. Assume Nile raises $100 million of new debt at the end of 2016, at an interest

rate of 8.25%.

a.Calculate the firm's pro forma 2017 times-interest-earned (TIE) ratio.

b.Calculate 2017's times-burden-covered ratio.

c.What percentage can EBIT fall before they can no longer meet their annual burden?

d.Calculate 2017's earnings per share.

B. Now assume Nile sells 2 million new shares at $50 a share instead of raising new

debt.

a. Calculate the firm's pro forma 2017 times-interest-earned (TIE) ratio.

b. Calculate 2017's times-burden-covered ratio.

c. What percentage can EBIT fall before they can no longer meet their annual burden?

d. Calculate 2017's earnings per share.

C. Comparing parts A and B, would you recommend they issue Debt or Equity?

2.Recap

An all-equity business has 100 million shares outstanding selling for $25 a share. Management believes that interest rates are unreasonably low and decides to execute a leveraged recapitalization (a recap). It will raise $1.0 billion in debt and repurchase 40 million shares.

a. What is the market value of the firm prior to the recap?

b. What is the market value of equity?

c. Assuming the irrelevance proposition holds, what is the market value of the firm after the recap?

d. What is the market value of equity after the recap?

3.Investment

An investment costing $200,000 promises an after-tax cash flow of $40,000 per year for 7 years.

a. Find the investment's accounting rate of return.

b. Find the investment's payback period.

c. Find the investment's net present value at a 15 percent discount rate.

d. Find the investment's benefit-cost ratio (profitability index) at a 15 percent discount rate.

e. Find the investment's internal rate of return.

f. Assuming the required rate of return on the investment is 15 percent, which

of the above figures of merit indicate the investment is attractive? Which indicate it is unattractive?

4.WACC

Key facts and assumptions concerning Costco Company, at December 31, 2016, appear below.

Facts and Assumptions

Yield to maturity on long-term government bonds

3.28%

Yield to maturity on company long-term bonds

4.62%

Coupon rate on company long-term bonds

5.50%

Market price of risk, or risk premium

6.10%

Estimated company equity beta

0.80

Stock price per share

$75.08

Number of shares outstanding

449.5

Book value of equity

$11585

Book value of interest-bearing debt

$2524

Tax rate

35.00%

Use the above information to answer the following questions.

a. Estimate Costco's cost of equity capital.

b. Estimate Costco's weighted-average cost of capital.

5.Cash Flow

A company is considering two alternative methods of producing a new product. The relevant data concerning the alternatives are presented below.

Alternative I

Alternative II

Initial Investment

$ 60000

$120000

Annual Cash Receipts

$ 70000

$ 80000

Annual Cash Disbursements

$ 25000

S 32000

Annual Depreciation

$ 10000

$ 20000

Expected Life (years)

6

6

Salvage Value

0

0

At the end of the useful life of either the product will be discontinued. The company's tax rate is 40 percent and its cost of capital is 10 percent.

a.Calculate the annual cash flows for each investment

b. Calculate the net present value of each alternative.

c. Calculate the internal rate of return for each alternative.

d. If the projects are independent, and there is no capital rationing, which alternative(s) should be chosen?

e. If the projects are mutually exclusive, due to capital rationing, which alternative(s) should be chosen?

6.Merger

Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $50 per share. The number of outstanding shares at the time of the announcement was 80 million. The book value of liabilities on the balance sheet of Slick Co. was $2.50 billion. What was the cost of this acquisition to the shareholders of Ginormous Oil?

7.Free Cash Flow

Given the forecast below, estimate the fair market value per share of Kenmore Air's equity at the end of 2016 if the company has 25,000 shares outstanding and the market value of its interest-bearing liabilities on the valuation date equals $200,000. Assume that after 2020, earnings before interest and tax will remain constant at $110,000, depreciation will equal capital expenditures in each year, and working capital will not change. Kenmore Air's weighted-average cost of capital is 11 percent and its tax rate is 40 percent.

FORECAST FOR KENMORE AIR, INC.

YEAR

2017

2018

2019

2020

20000

42000

48000

56000

1. Financing Nile Holdings Selected Financial Information as of December 31, 2016 Last year's EBIT (2016) $ 300.0 million Expected EBIT (2017) $ 333.0 million Current Portion of Existing LT Debt due 2017 $ 46.25 million Interest Due in 2017 on Existing Debt $ 75.0 million Tax Rate 40% Times Interest Earned (2016) 4.0 Common Stock Price per Share $ 50.00 Common Shares Outstanding 25.0 million Dividends per Share $ 2.50 Please refer to the financial information for Nile Holdings above. Nile must decide how to finance a $100 million investment. A. Assume Nile raises $100 million of new debt at the end of 2016, at an interest rate of 8.25%. a. b. c. d. Calculate the firm's pro forma 2017 times-interest-earned (TIE) ratio. Calculate 2017's times-burden-covered ratio. What percentage can EBIT fall before they can no longer meet their annual burden? Calculate 2017's earnings per share. B. Now assume Nile sells 2 million new shares at $50 a share instead of raising new debt. a. Calculate the firm's pro forma 2017 times-interest-earned (TIE) ratio. b. Calculate 2017's times-burden-covered ratio. c. What percentage can EBIT fall before they can no longer meet their annual burden? d. Calculate 2017's earnings per share. C. Comparing parts A and B, would you recommend they issue Debt or Equity? 2. Recap An all-equity business has 100 million shares outstanding selling for $25 a share. Management believes that interest rates are unreasonably low and decides to execute a leveraged recapitalization (a recap). It will raise $1.0 billion in debt and repurchase 40 million shares. a. What is the market value of the firm prior to the recap? b. What is the market value of equity? c. Assuming the irrelevance proposition holds, what is the market value of the firm after the recap? d. What is the market value of equity after the recap? 3. Investment An investment costing $200,000 promises an after-tax cash flow of $40,000 per year for 7 years. a. Find the investment's accounting rate of return. b. Find the investment's payback period. c. Find the investment's net present value at a 15 percent discount rate. d. Find the investment's benefit-cost ratio (profitability index) at a 15 percent discount rate. e. Find the investment's internal rate of return. f. Assuming the required rate of return on the investment is 15 percent, which of the above figures of merit indicate the investment is attractive? Which indicate it is unattractive? 4. WACC Key facts and assumptions concerning Costco Company, at December 31, 2016, appear below. Facts and Assumptions Yield to maturity on long-term government bonds 3.28% Yield to maturity on company long-term bonds 4.62% Coupon rate on company long-term bonds 5.50% Market price of risk, or risk premium 6.10% Estimated company equity beta 0.80 Stock price per share $75.08 Number of shares outstanding 449.5 Book value of equity $11585 Book value of interest-bearing debt $2524 Tax rate 35.00% Use the above information to answer the following questions. a. Estimate Costco's cost of equity capital. b. Estimate Costco's weighted-average cost of capital. 5. Cash Flow A company is considering two alternative methods of producing a new product. The relevant data concerning the alternatives are presented below. Alternative I Alternative II Initial Investment $ 60000 $120000 Annual Cash Receipts $ 70000 $ 80000 Annual Cash Disbursements $ 25000 S 32000 Annual Depreciation $ 10000 $ 20000 Expected Life (years) 6 6 Salvage Value 0 0 At the end of the useful life of either the product will be discontinued. The company's tax rate is 40 percent and its cost of capital is 10 percent. a. Calculate the annual cash flows for each investment b. Calculate the net present value of each alternative. c. Calculate the internal rate of return for each alternative. d. If the projects are independent, and there is no capital rationing, which alternative(s) should be chosen? e. If the projects are mutually exclusive, due to capital rationing, which alternative(s) should be chosen? 6. Merger Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $50 per share. The number of outstanding shares at the time of the announcement was 80 million. The book value of liabilities on the balance sheet of Slick Co. was $2.50 billion. What was the cost of this acquisition to the shareholders of Ginormous Oil? 7. Free Cash Flow Given the forecast below, estimate the fair market value per share of Kenmore Air's equity at the end of 2016 if the company has 25,000 shares outstanding and the market value of its interest-bearing liabilities on the valuation date equals $200,000. Assume that after 2020, earnings before interest and tax will remain constant at $110,000, depreciation will equal capital expenditures in each year, and working capital will not change. Kenmore Air's weighted-average cost of capital is 11 percent and its tax rate is 40 percent. YEAR 2017 20000 FORECAST FOR KENMORE AIR, INC. 2018 2019 42000 48000 2020 56000