ChangWu Inc. is planning its operations for next year, and the CEO wants you to forecast the firm's additional funds needed (AFN) using data shown below. What is the additional funds needed (AFN) for the coming year?

Last yr's sales = S0 $200,000 Last yr's accounts payable $50,000

Sales growth rate = g 40% Last yr's notes payable $15,000

Last yr's total assets = A*0 $162,500 Last year's accruals $20,000

Last yr's profit margin = M 20.0% Target payout ratio 25.0%

ii. Changqing Publishing recently reported $9,750 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%. During the year, the firm had expenditures on fixed assets and net working capital that totaled $1,550. These expenditures were necessary for it to sustain operations and generate future sales and cash flows. What was its free cash flow?

iii The Tenant Company, founded in 1870, has evolved into a leading producer of large-sized floor sweepers and scrubbers. Its latest dividend per share was $0.96, its earnings per share was $1.85, and its return on equity was 16.9%.

Based on these data, calculate a value for Tenant common stock by applying the constant growth dividend valuation model. Assume that an investors required rate of return is a 5% premium over the risk-free rate of return of 7%.

To your disappointment, the calculation in part a results in a value below the stocks current market price. Consequently, you apply the constant growth dividend valuation model using the same required rate of return as in part a, but using the companys stated goal of earning 20% per year on shareholders equity and maintaining a 30% dividend payout ratio. However, you find that you are unable to calculate a meaningful answer. Explain why you cannot calculate a meaningful answer, and identify an alternative valuation model that may be more appropriate.

iv A stock analyst has obtained the following information about J-Mart:

(1) The company has noncallable bonds with 20 years maturity remaining and a maturity value of $1,000. The bonds have a 12 percent annual coupon and currently sell at a price of $1,273.8564.

(2) Over the past four years, the returns on the market and on J-Mart were as follows:

Year Market J-Mart

2006 12.0% 14.5%

2007 17.2 22.2

2008 -3.8 -7.5

2009 20.0 24.0

Using Market and J-Mart return information and a calculator's regression feature we find b = 1.3585.

(3) The current risk-free rate is 6.35 percent, and the expected return on the market is 11.35 percent. The company's tax rate is 35 percent.

The company anticipates that its proposed investment projects will be financed with 70 percent debt and 30 percent equity.

What is the company's estimated weighted average cost of capital (WACC)?

v Bill Technologies has a target capital structure which is 40 percent debt and 60 percent equity. The equity will be financed with retained earnings. The companys bonds have a yield to maturity of 10 percent. The companys stock has a beta = 1.1. The risk-free rate is 6 percent, the market risk premium is 5 percent, and the tax rate is 30 percent. The company is considering a project with the following cash flows:(respectivly)

Year

0

1

2

3

4

Cash Flow

($50,000)

35,000

43,000

60,000

-40,000

a. What is the projects net present value (NPV)?

b. The CEO of Bill Technologies wants to use the IRR criterion, while the CFO favors the NPV method, and you were hired to advise the firm on the best procedure. There are issues or problems associated with the IRR criterion. For example, some projects may have multiple IRRs. Another issue is related to the reinvestment rate assumptions. Still another issue is that there could be a conflict of ranking based on IRR and NPV for some mutually exclusive projects. Discuss why there is a conflict of ranking based on IRR and NPV in capital budgeting in some cases? How do you resolve the conflict when it occurs?