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Question:
Problem Assignment Three
Please solve the numerical portions of the problems below using Excel as an attachment. Provide the
remainder of the solutions in the spaces given, but you may adjust the spaces if necessary.
11-3: The equity section of the balance sheet for Lopez Digital Entertainment is as follows:
Common stock, $0.50 par
$545,000
Additional paid-in capital
$229,000
Retained earnings
$649,000
a. How many shares has the company issued?
Solution: Computation of the No of shares issued by company
No of shares issued =
Common stock
Par value
Where as
Common stock
$
545,000.00
Par value
$
0.50
No of shares issued =

$
$

No of shares issued =

545,000.00
0.50
1,090,000.00

Hence the No of shares issued by company is

1,090,000.00

b. What is the book value per share?

Solution: Computation of the Book Value per Share
Book Value per Share
Total common stock
No of shares
Where as
Total common stock
$1,423,000
No of shares
1,090,000.00
Book Value per Share

$1,423,000
1,090,000.00

Book Value per Share

1.306

Hence the Book value per share is

1.306

c. Suppose that Lopez Digital has made only one offering of common stock. At what price did it sell sh
Solution: computation of the Market price per Share
Market price per Share
Equity Capital amount
No of shares
Where as

Equity Capital amount

No of shares

$774,000
1,090,000.00

Market price per Share

$774,000
1,090,000.00

Market price per Share

0.71

Hence the Market Price per share is

0.71

11-6: A firm has a stock account of $4,000,000 (at $0.25 par) reported on its balance sheet. Yesterday
the firms stock had a closing price of $22.25. Today, the firm paid a $0.35 dividend and the closing pr
a. Determine the firms market capitalization at the end of the day yesterday.
Solution: Computation of the firm's Market Capitalization at the end of the yesterday
Market capitalization =
No of shares * Market value per share
Where as
No of Shares
16,000,000
Market value per share
$
22.25
Market capitalization =
Hence the Market Capitalization is

$
$

356,000,000
356,000,000

b. Determine the firms market capitalization at the end of the day today.
Solution: Computation of the firm's Market Capitalization at the end of the Today
Market capitalization =
No of shares * Market value per share
Where as
No of Shares
16,000,000
Market value per share
$
22.00
Market capitalization =
Hence the Market Capitalization is

$
$

352,000,000
352,000,000

c. Did the firms shares lose value or gain value between yesterday and today?
Calculate the amount of the loss or gain as part of the answer.
Solution: Computation of the loss or gain
On the basis of per share
Today Share price -yesterday share price
On the basis of per share
On the basis of total market capitalization
On the basis of total market capitalization

(0.25)

Today Market Capitalization-Yesterday Market

$

(4,000,000)

Conclusion:
The firm is loss $0.25 per compare to yesterday but company received dividend of $0.35 p

11-9: Meltzer Electronics estimates that its total financing needs for the coming year will be $34.5 mi
During the coming fiscal year, the firms required financing payments on its debt-and equity
financing will total $12.9 million. The firms financial manager estimates that operating cash flows
for the coming year will total $33.7 million and that the following changes will occur in the accounts n
Account Forecast Change
Gross fixed assets $8.9 million
Change in current assets +2.3 million
Change in accounts payable +1.3 million
Change in accrued liabilities +0.8 million
a. Use this equation [operating cash flow = {EBIT x (1-T)} + depreciation]
and the data given above to estimate Meltzers free cash flow in the coming year.
Solution:- Computation of the Meltzers free cash flow in the coming year
Particulars
Amount (Mil)
Operating cash flows
$
33.70
Less: Increase in gross fixed assets
$
(8.90)
Less: Increase in current assets
$
(2.30)
Add: increase in accounts payable
$
1.30
Add: Increase in accrued liabilities
$
0.80
Free cash flow in coming year
$
24.60
Hence the Free Cash Flow in coming year is

24.60

b.How much of the free cash flow will the firm have available as a source of new internal financing in
Solution:Free cash flow in coming year
$
24.60
Less: Financing payments on debt and equity financing $
12.90
Free cash flow available as a source of internal financing $
11.70
Hence the Free cash flow available as a source of internal financing is

c.How much external financing will Meltzer require during the coming year to meet its total forecast fi
Solution:Total financial need
$
34.50
Less: - Free cash flow available as a source of internal fi $
11.70
External financing needed
$
22.80
Hence the External financing needed is

22.80

17-2: For each of the callable bond issues in the following table shown below, calculate the after-tax
cost of calling the issue. Each bond has a $1,000 par value, and the various issue sizes and call prices
shown in the table below. The issuing firm is in the 40% tax bracket.

Bond
A
B
C
D
E
F

Size of Issue bonds

12000
20000
30000
50000
100000
500000

Solution: Computation of the after Tax cost of calling the issue

Bond

Size of Issue bonds

A
B
C
D
E
F

12000
20000
30000
50000
100000
500000

Computation of the after Tax cost of calling the issue par share
Bond
Size of Issue bonds
A
12000
B
20000
C
30000
D
50000
E
100000
F
500000

P13-3: The flotation cost, the initial maturity, and the number of years remaining to maturity are show
in the following table for a number of bonds. The issuing firm is in the 40% tax bracket.
Bond
Flotation Cost ($)
Initial Maturity of Bond (years)
Years Remaining to Maturity
A
250,000
30
22
B
500,000
15
5
C
125,000
20
10
D
750,000
10
1
E
650,000
15
6
a. Calculate the annual amortization of the flotation cost for each bond.
Solution: Computation of the Annual Amortization of the flotation cost for each bond
Bonds

Flotation
Cost

A
B
C
D
E

250,000
500,000
125,000
750,000
650,000

b. Determine the tax savings, if any, expected to result from the unamortized flotation cost if the bond
Solution: Computation of the following
Bonds
A
B
C
D
E

Flotation
Cost
250,000
500,000
125,000
750,000
650,000

esponding cell and press F2(Function Key on key board),

l as an attachment. Provide the

e spaces if necessary.
ainment is as follows:

stock. At what price did it sell shares to the market?

d on its balance sheet. Yesterday

0.35 dividend and the closing price is $22.00.

he end of the yesterday

* Market value per share

he end of the Today

* Market value per share

nd today?

price -yesterday share price

loss per share
Capitalization-Yesterday Market Capitalization
In total Capital market

received dividend of $0.35 per share

he coming year will be $34.5 million.

on its debt-and equity
es that operating cash flows
nges will occur in the accounts noted.

oming year.
oming year

rce of new internal financing in the coming year?

11.70

year to meet its total forecast financing need?

n below, calculate the after-tax

arious issue sizes and call prices are

Par value
1000
1000
1000
1000
1000
1000

Call price
1050
1030
1015
1050
1045
1060

Par value

Call price

$
$
$
$
$
$

1,000
1,000
1,000
1,000
1,000
1,000

$
$
$
$
$
$

Par value
1,000
1,000
1,000
1,000
1,000
1,000

$
$
$
$
$
$

1,050
1,030
1,015
1,050
1,045
1,060

$
$
$
$
$
$

Call price
1,050
1,030
1,015
1,050
1,045
1,060

Tax Rate
0.4
0.4
0.4
0.4
0.4
0.4

Total issue value @

Par
$
$
$
$
$
$

12,000,000
20,000,000
30,000,000
50,000,000
100,000,000
500,000,000

Tax Rate
0.4
0.4
0.4
0.4
0.4
0.4

After tax Call price is

$
630.00
$
618.00
$
609.00
$
630.00
$
627.00
$
636.00

Tax Rate

Annual Amortization
of flotation cost

remaining to maturity are shown

40% tax bracket.
Years Remaining to Maturity
22
5
10
1
6

tion cost for each bond

Initial

Years remaining

Maturity

to maturity

30
15
20
10
15

22
5
10
1
6

40%
40%
40%
40%
40%

$
$
$
$
$

8,333.33
33,333.33
6,250.00
75,000.00
43,333.33

mortized flotation cost if the bond were called today.

Initial

Years remaining

Maturity

Tax Rate

to maturity
30
15
20
10
15

22
5
10
1
6

40%
40%
40%
40%
40%

Annual Amortization
of flotation cost
$
$
$
$
$

8,333.33
33,333.33
6,250.00
75,000.00
43,333.33

Total issue value @

Call

Total value after

tax at par

$
$
$
$
$
$

$
$
$
$
$
$

12,600,000
20,600,000
30,450,000
52,500,000
104,500,000
530,000,000

7,200,000
12,000,000
18,000,000
30,000,000
60,000,000
300,000,000

Total value
after tax at
Caling the
issue
$
7,560,000
$ 12,360,000
$ 18,270,000
$ 31,500,000
$ 62,700,000
$ 318,000,000

Tax Savings on
unamortized
amount
$
73,333
$
66,667
$
25,000
$
30,000
$
104,000

If you want the formulas and any calculations, select the corresponding cell and press F
It will show all calculations and formulas Automatically
Question:
17-15
Note: This Question is not clear so taken from google
Strident Corporation is attempting to determine whether to lease or purchase a new
telephone system. The firm is in the 40 percent tax bracket, and its after-tax cost of debt
is currently 4.5 percent. The terms of the lease and the purchase are as follows:
Lease. Annual beginning-of-year lease payments of $22,000 are required over the 5-year
life of the lease. The lessor will pay all maintenance costs; the lessee will pay insurance
and other costs. The lessee will exercise its option to purchase the asset for $30,000 paid
along with the final lease payment.
Purchase. The $100,000 cost of the telephone system can be financed entirely with a 7.5
percent loan requiring annual end-of-year payments of $24,716 for five years. The firm in
this case will depreciate the equipment under MACRS using a 5-year recovery period.
(See Table 9.1 for applicable MACRS percentages.) The firm will pay $3,500 per year
for a service contract that covers all maintenance costs; the firm will pay insurance and
other costs. The firm plans to keep the equipment and use it beyond its 5-year recovery
period.
a. Calculate the after-tax cash outflows associated with each alternative.
Lease
Year
Lease Payment
After tax lease payment
Asset purchase
Total after tax cash flow

$
$

22,000
13,200

13,200

### $
13,200 $

22,000
13,200

13,200

13,200

Purchase
We first make the amortization schedule to separate the interest and principal as there will be tax
benefit on interest
Opening
Interest
Year
Balance
Payment
at 7.5%
1 $
100,000 $
24,716 $
2 $
82,784 $
24,716 $
3 $
64,277 $
24,716 $
4 $
44,382 $
24,716 $
5 $
22,994 $
24,716 $
Using the 5 years Straight line method depreciation and the depreciation tax shield is
Year
Depreciation
Tax shield
1
$
20,000 $
8,000
2
$
20,000 $
8,000
3
$
20,000 $
8,000
4
$
20,000 $
8,000
5
$
20,000 $
8,000

7,500
6,209
4,821
3,329
1,725

The after tax cash flows are

Year
Payment
Interest tax shield
Depreciation tax shield
After tax maintenance

$
$
$
$

24,716
(3,000)
(8,000)
2,100

$
$
$
$

24,716
(2,484)
(8,000)
2,100

$
$
$
$

24,716
(1,928)
(8,000)
2,100

After tax cash flow

15,816

16,332

16,888

B. Caluclate the present value of each cash outflow stream, using the after-tax cost of debt.

Solution: Computation of the following

The after tax cost of debt is 4.5%
The PV factors are for 4.5%
Year
PV factor
Lease
PV of cash flows
Total

Purchase
PV of cash flows
Total

0.9569

0.9157

0.8763

12,632
82,021

12,088

11,567

15,135
74,097

14,956

14,799

c. Which alternative-lease or purchase-would you recommend and why?

Solution: computation of the fellowing
Purchase is better option why because the PV of cost is lower than the leasing

Question:
17-14
Note: This Question is not clear so taken some assum
GMS Corporation is attempting to determine whether to lease or purchase research equipment.
The firm is in the 40% tax bracket, and its after-tax cost of debt is currently 6%. The terms of the le
and the purchase are as follows:

Lease: Annual beginning-of-year lease payments of $93,500 are required over the 3-year life of the
lease. The lessee will exercise its option to purchase the asset for $25,000 to be paid along with th
lease payment.

Purchase: The $250,000 cost of the research equipment can be financed entirely with a 10% loan (
tax). The firm in this case will depreciate the equipment using the straight-line method for three ye
The firm plans to keep the equipment and use it beyond its 3-year recovery period.
a. Calculate the after-tax cash outflows associated with each alternative.
Lease
Year

Lease Payment
After tax lease payment
Asset purchase

$
$

93,500
56,100

$
$

93,500
56,100

$
$
$

93,500
56,100
25,000

Total after tax cash flow

56,100

56,100

81,100

Purchase
We first make the amortization schedule to separate the interest and principal as there will be tax
benefit on interest
Opening
Interest
Year
Balance
Payment
at 10%
1 $
250,000 $
100,528 $
25,000
2 $
174,472 $
100,528 $
17,447
3 $
91,391 $
100,528 $
9,139
Using the 5 years Straight line method depreciation and the depreciation tax shield is
Year
Depreciation
Tax shield
1 $
83,333 $
33,333
2 $
58,157 $
23,263
3 $
30,464 $
12,185
The after tax cash flows are
Year
Payment
Interest tax shield
Depreciation tax shield
After tax maintenance

$
$
$
$

After tax cash flow

1
100,528 $
(10,000) $
(33,333) $
57,195

2
100,528
(6,979)
(23,263)
###

70,286

$
$
$
$

3
100,528
(3,656)
(12,185)
-

84,687

B. Caluclate the present value of each cash outflow stream, using the after-tax cost of debt.

Solution: Computation of the following

The after tax cost of debt is 6%
The PV factors are for 6%
Year
PV factor
Lease
PV of cash flows
Total
Purchase
PV of cash flows
Total

0.9434

0.8900

0.8396

52,925
170,946

49,929

68,093

53,957
187,616

62,554

71,105

c. Which alternative-lease or purchase-would you recommend and why?

Solution: computation of the fellowing
Lease is better option why because the PV of cost is lower than the purchasing

nding cell and press F2(Function Key on key board),

so taken from google books

ase a new
ax cost of debt

ver the 5-year

pay insurance
or $30,000 paid

irely with a 7.5

ars. The firm in
ery period.
0 per year
nsurance and
year recovery

$
$

22,000
13,200

$
$
$

22,000
13,200
30,000

13,200

43,200

Principal
$
$
$
$
$

17,216
18,507
19,895
21,387
22,991

Closing
Balance
$
$
$
$
$

82,784
64,277
44,382
22,994
3

$
$
$
$

24,716
(1,331)
(8,000)
2,100

$
$
$
$

24,716
(690)
(8,000)
2,100

17,485

18,126

5
0.8386

0.8025

11,069

34,666

14,662

14,545

so taken some assumed figures please change the figures answer change
research equipment.
Yearly payment is not given assumed under Trail and error basis
y 6%. The terms of the lease

over the 3-year life of the

to be paid along with the final

ntirely with a 10% loan (pre-line method for three years.

y period.

Closing
Principal
Balance
$
75,528 $
174,472
$
83,081 $
91,391
$
91,389 $
2

Not given in problem

and error basis