Tire City’s financial health. How well is the company performing? 2. Based on Mr… Martin’s prediction for 1996 sales of $28,206,000, and for 1997 sales of $33,847,000 and relying on the other assumptions provided in the Tire City case, prepare complete pro formal forecasts of Tic’s 1996 and 1997 Income statements and year-end balance sheets.
As a preliminary assumption, assume any new financing required will be in the form of bank debt. Assume all debt (I. E. , existing debt and any ewe bank debt) bears interest at the same rate of 10%. 3. Using your set of pro formal forecasts, assess future financial health of Tire City as of the end of 1997. Will Tire City be In a stronger or weaker financial condition two years from now? 4. What would be the impact on Tic’s external funding needs as of the end of 1996 if inventory were not reduced by the end of 1996? 5.
Suppose the proposed terms of the bank credit Included a covenant (a contractual obligation that bids a borrower to specific actions or outcomes as a condition for extending a loan) that read as follows: “The company just maintain net working capital (defined for purposes of this loan as accounts receivable plus inventories minus accounts payable) of at least $4 million. For purposes of this covenant, net working capital will be measured at the end of each fiscal year. ” Is TIC likely to be able to satisfy this covenant In both 1996 and 1997? 6.
As a lender, would you be willing to loan TIC the funds needed to expand its warehouse facilities and finance its growth? Why or why not? Monmouth, Inc. 1. If you were Mr… Vincent, executive vice president of Monmouth, Inc. , would you try to gain control of Robertson Tool In May 2003? Explain. 2. What Is the maximum price that Monmouth can afford to pay, based on a discounted cash flow valuation? Based on market multiples of BEAT? 3. Why is Simmons eager to sell its position to Monmouth for $50 per share? What are the concerns of and alternatives for each of the other groups of Robertson shareholders? . What offer would you make In an effort to gain the support of the Robertson family and the great majority of the stockholders, while improving the long-term trend of Month’s earnings per share over the next five years? Marriott Corporation: The Cost of Capital 1. Are the four components of Amorist’s financial strategy consistent with its growth objective? 2. How does Marriott use its estimate of its cost of capital? Does this make sense? 3. What is the weighted average cost of capital for Marriott Corporation? A. What risk-free rate and risk premium did you use to calculate the cost of equity? . How did you measure Amorist’s cost of debt? C. Did you use arithmetic or geometric averages to measure rates of return? Why? 4. A single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time? . What is the cost of capital for the lodging and restaurant divisions of Marriott? A. What risk-free rate and risk premium did you use in calculating the cost of equity for each division? Why did you choose these numbers? B. How did you measure the cost of debt for each division?
Should the debt cost differ across divisions? Why? C. How did you measure the beta of each division? 7. What is the cost of capital for Amorist’s contract services division? How can you estimate its equity costs without publicly traded comparable companies? Blaine Kitchenware, Inc. : Capital Structure 1. Do you believe Beeline’s current capital structure and payout policies are appropriate? Why or why not? 2. Should Dubbing’s recommend a large share repurchase to Beeline’s board? What are the primary advantages and disadvantages of such move? 3.
Consider the following share repurchase proposal: Blaine will use $209 million of cash from its balance sheet and $50 million in new debt-bearing interest at the rate of 6. 75% to repurchase 14. 0 million shares at a price of $18. 50 per share. How would such a buyback affect Blaine? Consider the impact on, among other things, SKI’s earnings per share and ROE, its interest coverage and debt ratios, the emails ownership interest, and the company’s cost of capital. 4. As a member of Beeline’s controlling family, would you be in favor of this proposal?
Would you be in favor of it as a non-family shareholder? 5. Suppose that Mr… Dubbing’s has obtained from Beeline’s bank the quotes below for default spreads over 10-year Treasury bonds [note that these are different from the more general corporate bond yield in case Exhibit 4. ] What do these quotes imply about SKI’s cost of debt at the various debt levels and credit ratings? Compute SKI’s weighted average cost of capital at each of the indicated debt levels. What do your calculations imply about Beeline’s optimal capital structure?
Flash Memory, Inc. 1 . Assuming the company does not invest in the new product line, prepare forecasts income statements and balance sheets at year-end 2010, 2011, and 2012. Based on these forecasts, estimate Flash’s required external financing: in this case all required external financing takes the form of additional notes payable from its commercial bank, for the same period. 2. What course of action do you recommend regarding the proposed investment in the new product line? Should the company accept or reject this investment opportunity? How does your recommendation from question 2 above impact your estimate of the company’s forecasted income statements and balance sheets, and required external financing in 2010, 2011, and 2012?
