1. Financial Forecasting. Small Motors Inc, which is currently operating at full capacity, has sales of $29,000, current assets of $1,600, current liabilities of $1,200, net fixed assets of $27,500, and a 5 percent profit margin. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 4.5 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, answer the following questions? ? Hint: (Additional Financing Required = Projected assets –projected liabilities-current equity-projected increase in retained earnings)
a. What is the amount of projected assets?
b. What is the amount of projected liabilities?
c. What is the current equity?
d. What is the projected increase in retained earning?
e. How much additional equity financing is required for next year?
1. 2. Future Value and Annuity Payments Christy and Michael are trying to decide if they will have enough money to retire early in 15 years, at age 60. Their current assets are $250,000 in retirement plans and they have $80,000 in other investments. Together, they contribute $30,000 per year to their retirement plans and another $6,000 to other investments.
a. If their assets grow at 9 percent per year, how much money will they have when they turn 60?
b. After they retire, they will invest their wealth more conservatively and it will earn 6 percent per year. What will be the amount of their annual payments if they expect to live for 30 years in retirement?
3. Cost of Capital (WACC). Suppose your company has decided to use a divisional WACC approach to analyze projects. The firm currently has 2 divisions, A and B, with betas for each division of 0.5 and 1.5, respectively. If all current and future projects will be financed with half debt and half equity, and if the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 5%) is 14% and the after-tax yield on the company’s bonds is 6%, what are the WACCs for divisions A and B? Hint: First Solve for Market Risk Premium (MRP). MRP = (Km-Rf)
a. Division A WACC?
b. Division B WACC?
