Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Following is the information for Spices, Inc. in year 2020 where it expects to reach its maturity stage. Cash flows are expected to grow at
Following is the information for Spices, Inc. in year 2020 where it expects to reach its maturity stage. Cash flows are expected to grow at a long-term rate of 6% onwards. The firm has 9% cost of debt, 20% cost of equity, 25% tax rate and 0.4 target debt-to-value ratio. Spices, Inc. also has $2,600,000 interest-bearing debt obligation and 100,000 shares outstanding. Net income = $1,200,576 Interest = $312,000 Earnings before interest and taxes = $1,235,520 Depreciation expense = $924,480 Capital expenditure = $1,529,280 Required Cash Surplus Cash Accounts Receivable Inventories Accounts Payable Accrued Liabilities Bank Loan 2019 1,200,000 2,547,635 3,456,000 4,320,000 2,592,000 1,520,875 2,840,000 2020 1,080,000 2,888,662 3,697,920 4,622,400 2,773,440 1,749,006 2,600,000 Questions: A. Determine the venture's enterprise value in 2019. (6 marks) B. Suppose Spices, Inc. has also issued convertible preferred stocks with a conversion ratio of 2 and they are currently valued at $10 each. What is the minimum price that a share of the Spices, Inc.'s common stock should be valued at? (2 mark) C. Why is it important for the venture that convertible securities also be callable? (2 marks) Following is the information for Spices, Inc. in year 2020 where it expects to reach its maturity stage. Cash flows are expected to grow at a long-term rate of 6% onwards. The firm has 9% cost of debt, 20% cost of equity, 25% tax rate and 0.4 target debt-to-value ratio. Spices, Inc. also has $2,600,000 interest-bearing debt obligation and 100,000 shares outstanding. Net income = $1,200,576 Interest = $312,000 Earnings before interest and taxes = $1,235,520 Depreciation expense = $924,480 Capital expenditure = $1,529,280 Required Cash Surplus Cash Accounts Receivable Inventories Accounts Payable Accrued Liabilities Bank Loan 2019 1,200,000 2,547,635 3,456,000 4,320,000 2,592,000 1,520,875 2,840,000 2020 1,080,000 2,888,662 3,697,920 4,622,400 2,773,440 1,749,006 2,600,000 Questions: A. Determine the venture's enterprise value in 2019. (6 marks) B. Suppose Spices, Inc. has also issued convertible preferred stocks with a conversion ratio of 2 and they are currently valued at $10 each. What is the minimum price that a share of the Spices, Inc.'s common stock should be valued at? (2 mark) C. Why is it important for the venture that convertible securities also be callable? (2 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started