Douglas Kinghorn

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Question

Problem Assignment Three

Please solve the numerical portions of the problems below using Excel as an at

remainder of the solutions in the spaces given, but you may adjust the spaces i

11!" The e#uity section of the balance sheet for $ope% &igital Entertainment is'ommon stoc(, )*.+* par )++,***

Additional paidin capital )--,***

/etained earnings )0,***

a. ow many shares has the company issued2

!olution "omputation of the #o of shares issued by company

3o of shares issued 4 'ommon stoc(

Par value

5here as

'ommon stoc( ) ++,***.**

Par value ) *.+*

3o of shares issued 4 ) ++,***.**

) *.+*

3o of shares issued 4 1,**,***.**

$ence the #o of shares issued by company is %,&'&,&&&&&

b. 5hat is the boo( value per share2

!olution "omputation of the ook *alue per !hare

6oo( 7alue per 8hare Total common stoc(

3o of shares

5here as

Total common stoc( )1,-!,***

3o of shares 1,**,***.**

6oo( 7alue per 8hare )1,-!,***

1,**,***.**

6oo( 7alue per 8hare ) 1.!*0

$ence the ook +alue per share is %-&.

c. 8uppose that $ope% &igital has made only one o9ering of common stoc(. At

!olution computation of the /arket price per !hare

:ar(et price per 8hare E#uity 'apital amount

3o of shares

5here as


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E#uity 'apital amount );;,***

3o of shares 1,**,***.**

:ar(et price per 8hare );;,***

1,**,***.**

:ar(et price per 8hare ) *.;1

$ence the /arket 0rice per share is &1%

110" A reported on its ba

the


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"onclusion

6he rm is loss &25 per compare to yesterday but company recei+ed

11" :elt%er Electronics estimates that its total L G depreciationM

and the data given above to estimate :elt%er@s free cash Cow in the coming ye

!olution7 "omputation of the /elt4ers free cash 8ow in the coming y

0articulars Amount (/il)

Bperating cash Cows ) !!.;*$ess" Kncrease in gross

$ess" Kncrease in current assets ) =-.!*>

Add" increase in accounts payable ) 1.!*

Add" Kncrease in accrued liabilities ) *.F*

Dree cash Cow in coming year ) -.0*

$ence the Free "ash Flow in coming year is 29.&

b.ow much of the free cash Cow will the


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ond !i4e of Issue bonds

A 1-***

6 -****

' !****

& +****

E 1*****

D +*****

!olution "omputation of the after 6a< cost of calling the issue


A 1-***

6 -****

' !****

& +****E 1*****

D +*****

"omputation of the after 6a< cost of calling the issue par share


A 1-***

6 -****

' !****

& +****

E 1*****D +*****

P1!!" The Cotation cost, the initial maturity, and the number of years remainin

in the following table for a number of bonds. The issuing


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A -+*,***

6 +**,***

' 1-+,***

& ;+*,***

E 0+*,***

b. &etermine the tax savings, if any, expected to result from the unamorti%ed C

!olution "omputation of the following

ondsFlotation

"ost

A -+*,***

6 +**,***

' 1-+,***

& ;+*,***

E 0+*,***


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

achment. Provide the

f necessary.

as follows"

hat price did it sell shares to the mar(et2


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lance sheet. ?esterday

end and the closing price is )--.**.

the yesterday

alue per share

the 6oday

alue per share

erday share price

loss per share

tion?esterday :ar(et 'apitali%ation

Kn total 'apital mar(et


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di+idend of &-5 per share

year will be )!.+ million.

tand e#uity

erating cash Cows

ccur in the accounts noted.

r.

ar

internal


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0ar +alue "all price

1*** 1*+*

1*** 1*!*

1*** 1*1+

1*** 1*+*

1*** 1*+

1*** 1*0*

0ar +alue "all price 6a< =ate

) 1,*** ) 1,*+* *. ) 1-,***,***

) 1,*** ) 1,*!* *. ) -*,***,***

) 1,*** ) 1,*1+ *. ) !*,***,***

) 1,*** ) 1,*+* *. ) +*,***,***) 1,*** ) 1,*+ *. ) 1**,***,***

) 1,*** ) 1,*0* *. ) +**,***,***

0ar +alue "all price 6a< =ate After ta< "all price is

) 1,*** ) 1,*+* *. ) 0!*.**

) 1,*** ) 1,*!* *. ) 01F.**

) 1,*** ) 1,*1+ *. ) 0*.**

) 1,*** ) 1,*+* *. ) 0!*.**

) 1,*** ) 1,*+ *. ) 0-;.**) 1,*** ) 1,*0* *. ) 0!0.**

g to maturity are shown

rac(et.

emaining to :aturity

--

+

1*

1

0

for each bond

Initial >ears remaining6a< =ate

/aturity to maturity

6otal issue +alue ?0ar

Annual Amorti4ationof 8otation cost


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!* -- *N :,-----

1+ + *N --,-----

-* 1* *N .,25&&&

1* 1 *N 15,&&&&&

1+ 0 *N 9-,-----

otation cost if the bond were called today.

Initial >ears remaining6a< =ate

/aturity to maturity

!* -- *N ) F,!!!.!!

1+ + *N ) !!,!!!.!!

-* 1* *N ) 0,-+*.**

1* 1 *N ) ;+,***.**

1+ 0 *N ) !,!!!.!!

Annual Amorti4ationof 8otation cost


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) 1-,0**,*** ) ;,-**,*** ) ;,+0*,***

) -*,0**,*** ) 1-,***,*** ) 1-,!0*,***

) !*,+*,*** ) 1F,***,*** ) 1F,-;*,***

) +-,+**,*** ) !*,***,*** ) !1,+**,***) 1*,+**,*** ) 0*,***,*** ) 0-,;**,***

) +!*,***,*** ) !**,***,*** ) !1F,***,***

6otal issue +alue ?"all

6otal +alue afterta< at par

6otal +alueafter ta< at"aling the

issue


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1-,---

..,..1

25,&&&

-&,&&&

%&9,&&&

6a< !a+ings onunamorti4ed

amount


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Question

1;1+ #ote 6his Question is not clear so take

8trident 'orporation is attempting to determine whether to lease or purchase a ne

telephone system. The


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The after tax cash flows are

Year 1 2 3

Payment $ 2-,)1. $ 2-,)1. $ 2-,)1.

'nterest tax shel $ 43,0005 $ 42,-/-5 $ 41,2/5

eprecaton tax shel $ 4/,0005 $ 4/,0005 $ 4/,0005

After tax mantenance $ 2,100 $ 2,100 $ 2,100

After tax cash flow $ 15,816 $ 16,332 $ 16,888

B. Caluclate the present value of each cash outflow stream, usin the after!tax cost of "e#t.


The after tax cost of et s -*+

The P6 factors are for -*+

Year 1 2 3

P6 factor 0*+. 0*1+) 0*/).3

Lease

P6 of cash flows 12,.32 12,0// 11,+.)

otal 82,%21

Purchase

P6 of cash flows 1+,13+ 1-,+. 1-,)

otal &',%(&

c. 5hich alternativelease or purchasewould you recommend and why2

!olution computation of the fellowing

Purchase s etter opton why ecause the P6 of cost s lower than the leasn&

Question

1;1 #ote 6his Question is not clear so take

:8 'orporation is attempting to determine whether to lease or purchase research

The


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Lease Payment $ 3,+00 $ 3,+00 $ 3,+00

After tax lease payment $ +.,100 $ +.,100 $ +.,100

Asset purchase $ 2+,000

Total after tax cash flow $ +.,100 $ +.,100 $ /1,100

Purchase

We frst ma!e the amort"aton scheule to separate the nterest an prncpal as there wll e tax

eneft on nterest

%penn& 'nterest

Year (alance Payment at 10

1 $ 2+0,000 $ 100,+2/ $ 2+,000

2 $ 1)-,-)2 $ 100,+2/ $ 1),--)

3 $ 1,31 $ 100,+2/ $ ,13

sn& the + years tra&ht lne metho eprecaton an the eprecaton tax shel s

Year eprecaton Tax shel

1 $ /3,333 $ 33,333

2 $ +/,1+) $ 23,2.3

3 $ 30,-.- $ 12,1/+

The after tax cash flows are

Year 1 2 3

Payment $ 100,+2/ $ 100,+2/ $ 100,+2/

'nterest tax shel $ 410,0005 $ 4.,)5 $ 43,.+.5

eprecaton tax shel $ 433,3335 $ 423,2.35 $ 412,1/+5

After tax mantenance $ 7 ### $ 7

After tax cash flow $ 5&,1(5 $ &%,286 $ 8',68&

B. Caluclate the present value of each cash outflow stream, usin the after!tax cost of "e#t.


The after tax cost of et s .

The P6 factors are for .

Year 1 2 3

P6 factor 0*-3- 0*/00 0*/3.

LeaseP6 of cash flows +2,2+ -,2 ./,03

otal 1&%,('6

Purchase

P6 of cash flows +3,+) .2,++- )1,10+

otal 18&,616

c. 5hich alternativelease or purchasewould you recommend and why2

!olution computation of the fellowingLease s etter opton why ecause the P6 of cost s lower than the purchasn&


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ll and press F2(Function Key on key board),

from google books

debt

year

nce

paid

a ;.+

rm in

.

and

ery

- +

$ 22,000 $ 22,000

$ 13,200 $ 13,200

$ 30,000

$ 13,200 $ -3,200

8losn&

Prncpal (alance

$ 1),21. $ /2,)/-

$ 1/,+0) $ .-,2))

$ 1,/+ $ --,3/2

$ 21,3/) $ 22,-

$ 22,1 $ 3


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' 5

$ 2-,)1. $ 2-,)1.

$ 41,3315 $ 4.05

$ 4/,0005 $ 4/,0005

$ 2,100 $ 2,100

$ 1&,'85 $ 18,126

9 5

0*/3/. 0*/02+

11,0. 3-,...

1-,..2 1-,+-+

some assumed gures please change the gures answer change

e#uipment. ?early payment is not given assumed under Trail and erro

terms of the lease

year life of the

d along with the


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8losn&

Prncpal (alance

$ )+,+2/ $ 1)-,-)2

$ /3,0/1 $ 1,31

$ 1,3/ $ 2

3ot given in problem


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r basis


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Douglas Kinghorn