How much is the cash and retained earning in 2018?(hint, only long-term debt is interest bearing).



1.  A) How much is the cash and retained earning in 2018?(hint, only long-term debt is interest bearing).

B) Apply 5-components DuPont analysis on ROE, how much is the operating contribution and how much is the financing contribution.

C). How much is the sustainable growth rate in 2018? If the firm targets a 30% growth rate in the following three years, and the firm doesn’t want to issue new equity, what will be the firm’s capital structure (D/A ratio) by the end of year 3?  (profit margin, asset turnover ratio, payout ratio remain constant over the period).


2. Cost of Capital and Capital Structure

There is some additional information:


A) How much is WACC now. (Use market value based capital structure)

B) BigQuiz is considering to issue 50 million long-term debt to buyback its existing stocks. How many shares can be bought? Suppose the new debt has the same interest rate as the existing debt, how much will be EPS before and after the stock repurchase?

C). How much is WACC after stock repurchase

D). Why do more and more firms prefer stock repurchase to cash dividend?


3. DDM model

Bigquiz is experiencing rapid growth. Dividends are expected to grow at 20% per year during the next three years. After that period, dividend will grow at 5% for ever. Using two stage dividend discount model, what is the stock price today?


4. Capital Budgeting

BigQuiz is considering for the purchase of a new equipment to replace its current equipment. The board wants to know the maximum price they can offer, that is, how high must the price be for the project to have a zero NPV. You are hired as a consultant, and you quickly find the following facts:

1.The existing equipment was bought 5 years ago at $40,000. It is expected to last for 10 years, the machine is depreciated on a straight-line basis over 10 years.

2.If the old machine is sold now, the market value is $25,000

3.The new equipment would not affect revenues. But maintenance fees would be reduced by $5000 per year. In addition, the new machine would save power cost by $3000 per year.

4.The new machine is expected to be used for 5 years. The equipment will be depreciated using MACRS deprecation over five years. The deprecation rate in each year for 5-year recovery period class is (0.2, 0.32, 0.192, 0.115, 0.115, 0.058). BigQuiz expects to sell the new equipment for $5000 at the end of year 5.

5.The new machine will increase working capital by $100000.

6.The company’s tax rate is 20%

7.The appropriate discount rate for this project is 10%

Based on the above information, what is the maximum price the company will pay for this machine. In addition, managers are unsure about the cost saving from the new machine. If oil price continue to fall, then energy saving from the new machine would be reduced to $1000 per year. How does this uncertainty affect manager’s decision.


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