Rou Balance Sheets, 12/31/04 Current assets Net fixed assets 125,200 $1,012,969
ID: 2754975 • Letter: R
Question
Rou Balance Sheets, 12/31/04 Current assets Net fixed assets 125,200 $1,012,969 $18,097,800 $252,351 $1,265,320 Total assets $0$9,239,300 $0 $10,480,400 $0$2,206,400 $1,000,000$8,510,490 $265,320 $8,026,000 $1,265,320 $16,536,490 Table 2. Information Pertaining to Router Inc Preferred Stock Common stock Retained earnings Total common equity (50,000 shares for Router) Ul $1,265,320 Total liabilities and equity Unit Demand, Expected 16,000 Income Statements, 2004 $3,556,000 $82,739,300 Sales Revenues $3,247,505 $74,727,413 ed ope $329 Operating costs Operating Income (EBIT) Taxable Income Variable cost/unit Total fixed op. costs Non-cash component of FC Maximum units of capacity Required Capital (or assets) Plan L are cash costs. The other half $76,000 $400,000consists of depreciation and $232,495 $4,392,327 $200,000 20,000 $1,500,000 amortization charges. 693,000 $232,495 $3,699,327 132,000 $92,998 Preferred divide Net Income for common Free Cash Flow (FCF) Variable cost/unit cO $2.800.000 Plan H are cash costs. The other hal $1,400,000 consists of depreciation and Non-cash component of FC Maximum units of capacity 35,000 $4,000,000 Other Financial Data: 2004 Shares outstanding PNC 2,626,180 50,000 Dividends per share Dividend payout ratio NOPAT 2b. Sales Revenue Probabilitv Distribution $2,635 $139,497 $109,497 times Factor times ROE OC $12,653 Book value per share Revenue to ma Price/Book ratio 8,000 $3,072,000 Market Risk Premium 6,000 $6,144,000 $9,216,000 20,000 20,000 $7,680,000 24,000 $7,680,000 2.000 Expected V $2,404,220 8,764 Preferred stock/Assets Common equityl/Assets nterest rate on all debt Preferred dividend yield 2e. Inputs Used in Financial Leverage Analysis Values for Router at Present Time: Existing total assets, (from Tab 2 2c. Interest Rates for Router with Different Capital Structure:s The following interest rate schedule was developed after discussions with bankers, and it applies regardless of whether Router goes with Plan L or Plan H. Bankers were shown projections of financial statements and then asked how much they would charge Router at different capital structures. Capital structures are measured at book values, but the bankers indicated that the same rates would apply if the capital structure were measured in market $1,265,320 $1,265,320 Existing net capital Total capital required for Plan Additional capital needed for Plan Shares currently outstanding Target price per share for IPO (after split Add'l Data for Capital Structure Analysis $1,265,320 $1,265,320 $1,500,000 $4,000,000 $234,680 $2,734,680 50,000 50,000 Interest Rate Cost Schedule Percen nancedfinanced Rate on Router is not expected to grow, hence will require no new operating capital. Therefore its FCFEBIT(1-T) WI 0090 Free Cash Flow, FCF $566,400 21. Important Outputs at D/V=40% Router's total value after implementing pla otal operating capital required under plan. New money required to implement pla e of PNC 2d. Hamada Equation Input:s In this table, we apply the Hamada equation to Router, given that its unlevered beta is 1 Shares outstanding as calculated above ng Hamada bExplanation / Answer
under plan L,beta(levered) =1.54
cost of equity=.048+1.54*(.05)=0.125
cost of capital if entire debt of 40% is borrowed at 8.6%=.40*(1-.40)*.086+.60*0.125=0.09564
Value of firm router=222000/0.09564=2321205
if Router borrowed 20% of its capital at 7.6% rate, then borrowed an additional 20% at a higher rate of 8.1% then the cost of capital would be revised to .40*(1-.40)*.5*(.081+.076)+.60*0.125=0.09384
Value of firm router=222000/0.09384=2365729
Thus under plan L value of stock=2,365,729-234,680=2,131,049 is increased from 2,086,525.
under plan H,beta(levered) =1.82
cost of equity=.048+1.82*(.05)=0.139
cost of capital if entire debt of 40% is borrowed at 8.6%=.40*(1-.40)*.086+.60*0.139=0.10404
Value of firm router=566400/0.10404=5,444,060
if Router borrowed 20% of its capital at 7.6% rate, then borrowed an additional 20% at a higher rate of 8.1% then the cost of capital would be revised to .40*(1-.40)*.5*(.081+.076)+.60*0.139=0.10224
Value of firm router=566400/0.10224=5,539,906
Thus under plan H value of stock=5,539,906-2,734,680=2,805,226 is increased from 2,709,380.
Thus if Router borrowed 20% of its capital at 7.6% rate, then borrowed an additional 20% at a higher rate, brining its debt up to a total of 40% of capitial the value of stock would increase in both the cases.
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