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Suppose that East Corporation has issued voting and nonvoting stock.  Investors hope that holders of the voting stock will use their power to vote out the company’s incompetent management.  Would you expect the voting stock to sell for a higher price?  Explain.
January 16, 2018

BA513 Connect Assignment Week 6

BA513 Connect Assignment Week 6

 

The Modern Language Corporation earned $1.6 million on net assets of $20 million. The cost of capital is 11.5%. Calculate the net ROI and EVA. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Enter your “ROI” answer as a percent rounded to 2 decimal places, and enter your “EVA” answer in millions rounded to 2 decimal places.)

 

   
ROI%
EVA$million

Select the missing words:

 

“A project’s economic income for a given year equals the project’s (Click to select) investment cash flow less its (Click to select) book economic depreciation. New projects may take several years to reach full profitability. In these cases book income is (Click to select) greater less than economic income early in the project’s life and (Click to select) less greater than economic income later in its life.”
The table below shows a condensed income statement and balance sheet for Androscoggin Copper’s Rumford smelting plant (figures in $ millions). Assume the cost of capital is 9%.

 

Income Statement for 2015Assets, December 31, 2015
Revenue$56.66 Net working capital$7.08 
Raw materials cost 18.72     
Operating cost 21.09 Investment in plant and equipment 69.33 
Depreciation 4.50 Less accumulated depreciation 21.01 
Pretax income$12.35 Net plant and equipment$48.32 
Tax at 35% 4.32     
Net income$8.03 Total assets$55.40 

 

  1. Calculate the plant’s EVA. (Enter your answer in millions rounded to 2 decimal places.)

 

EVA            $ million

 

  1. As the table above shows, the plant is carried on Androscoggin’s books at $48.32 million. However, it is a modern design, and could be sold to another copper company for $95 million. How should this fact change your calculation of EVA? (A negative answer should be indicated by a minus sign. Enter your answer in millions rounded to 2 decimal places.)

 

EVA            $ million

Select the appropriate terms to complete the following sentences.

 

  1. If a lender ranks behind the firm’s general creditors in the event of default, his or her loan is said to be (Click to select) preferred stock convertible subordinated warrant floating rate common stock senior .

 

  1. Interest on many bank loans is based on a (Click to select) subordinated floating rate common stock preferred stock warrant convertible senior of interest.

 

  1. A (Click to select) convertible senior warrant preferred stock floating rate subordinated common stock bond can be exchanged for shares of the issuing corporation.

 

  1. A (Click to select) senior floating rate common stock subordinated warrant convertible preferred stock gives its owner the right to buy shares in the issuing company at a predetermined price.

 

  1. Dividends on (Click to select) convertible warrant senior preferred stock subordinated floating rate common stock cannot be paid unless the firm has also paid any dividends on its (Click to select) common stock subordinated senior floating rate preferred stock warrant convertible .

In 2015 Beta Corporation earned gross profits of $760,000.

 

  1. Suppose that it is financed by a combination of common stock and $1 million of debt. The interest rate on the debt is 10%, and the corporate tax rate is 35%. How much profit is available for common stockholders after payment of interest and corporate taxes? (Do not round intermediate calculations. Enter your answer in dollars not millions and round your answer to the nearest whole dollar amount.)

 

Profit available to common stockholders            $

 

  1. Now suppose that instead of issuing debt Beta is financed by a combination of common stock and $1 million of preferred stock. The dividend yield on the preferred is 8% and the corporate tax rate is still 35%. How much profit is now available for common stockholders after payment of preferred dividends and corporate taxes? (Do not round intermediate calculations. Enter your answer in dollars not millions and round your answer to the nearest whole dollar amount.)

 

Profit available to common stockholders            $

 

 

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