## (solution) Hello, This is my Week6 Problem Set, I i have 6 hours to do that

Hello, This is my Week6 Problem Set, I i have 6 hours to do that but if you can finish it before it will help me for completing the other questions like last time. This more complicated but don't worry. As usual if I have a good grade, I will give a good tip.
P18­4

Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of \$1.48 million per year, growing at a rate of 2.4 % per year. Goodyear has an equity cost of capital of 8.7 %, a debt cost of capital of 6.8 %, a marginal corporate tax rate of 37 %, and a debt­

equity ratio of 2.8. If the plant has average risk and Goodyear plans to maintain a constant debt­equity ratio, what after­tax amount must it receive for the plant for the divestiture to be profitable?

A divestiture would be profitable if Goodyear received more than \$

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P18­5 Suppose Alcatel­Lucent has an equity cost of capital of 9.3 %, market capitalization of \$10.80 billion, and an enterprise value of \$15.0 billion with a debt cost of capital of 5.8 % and its marginal tax rate is 38 %.

a. What is Alcatel­Lucent's WACC?

b. If Alcatel­Lucent maintains a constant debt­equity ratio, what is the value of a project with average risk and the following expected free cash flows?

Year

FCF (\$ million) 0 1 2 3 49 101 67 ­100 c. If Alcatel­Lucent maintains its debt­equity ratio, what is the debt capacity of the project in part (b)? a. What is Alcatel­Lucent's WACC?

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P19­1 (similar to)

You would like to compare Ideko's profitability to its competitors' profitability using the EBITDA/sales multiple. Given Ideko's current sales of \$73.8 million, use the information in the table below to compute a range of EBITDA for Ideko assuming it is run as profitably as its competitors.

Ideko Financial Ratios Comparison, Mid­2005

Ratio Oakley, Inc. Luxottica

Group Nike, Inc. Sporting

Goods Industry P/E

EV/Sales

EV/EBITDA

EBITDA/Sales 24.9×

2.1×

11.5×

16.9% 27.9×

2.8×

14.3×

18.3% 18.3×

1.4×

9.1×

15.9% 20.3×

1.4×

11.3×

12.1% (Select the best choice below.)

A.This implies an EBITDA range of \$11.734 million to \$12.472 million.

B.This implies an EBITDA range of \$8.930 million to \$13.505 million.

C.This implies an EBITDA range of \$11.734 million to \$13.505 million.

D.This implies an EBITDA range of \$8.930 million to \$12.472 million.

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P19­2

Assume that Ideko's market share will increase by 0.45 percent per year (e.g., Ideko's market share will be 10.15%

in 2006). What production capacity will Ideko require each year for the next five years? When will an expansion become necessary (i.e., when will production volume exceed the current level by 50%)?

Ideko Sales Assumptions

Sales Data

Market Size (000 units) Growth/Year

4.75% 2005

10,100 Market Share 0.45% 9.7% What production capacity will Ideko require each year for the next five years?

First compute the projected annual market share. Then, using these projections, calculate the projected annual production volume: (Round the volumes to one decimal place and the percentage of market share to two decimal places.)

Sales Data

Market Size (000 units)

Market Share

Production Volume (000 units) Growth/Year

2005

4.75% ?? 0.45%

?? ?? % Enter any number in the edit fields and then click Check Answer.

6 parts remainin P19-3

Assuming that Ideko's market share after 2005 will increase each year, the required

production volume for the following five years are shown below:

Sales Data

Growth/Year

Market Size (000 units)

5.25%

Market Share

0.50%

Production Volume (000 units) 2005

10,100.0

10.30%

1,040.3 2006

10,630.3

10.80%

1,148.1 2007

11,188.4

11.30%

1,264.3 2008

11,775.8

11.80%

1,389.5 2009

12,394.0

12.30%

1,524.5 2010

13,044.7

12.80%

1,669.7 Ideko's production plant will require an expansion in 2010 (when production volume will exceed the current level by 50%), and the cost of this expansion will be \$14.1 million. Assuming the financing of the expansion will be delayed accordingly, calculate the projected interest payments and the amount of the projected interest tax shields (assuming that the interest rates on the term loans is 6.6%) through 2010. Consider an income tax rate of 35 %. Ideko's balance sheet for 2005 is shown here? (Click on the Icon located on the top­right corner of the data table below in order to copy its contents into a spreadsheet.) Estimated 2005 Balance Sheet Data for

Ideko Corporation

Balance Sheet (\$ 000)

Assets

Cash and Equivalents 6,164 Accounts Receivable 18,493

Inventories 6,165

Total Current Assets 30,822

Property, Plant, and Equipment 49,500

Goodwill 72,332

Total Assets 1 5,654 ======

Liabilities and Stockholders' Equity

Accounts Payable 4,654

Debt 114,500

Total Liabilities 119,154

Stockholders' Equity 33,500

Total Liabilities and Equity 152,654 ====== (Round to the nearest \$ 000.) Debt and Interest (\$ 000) 2005 Outstanding Debt

Interest on Term Loan 6.6%

Interest Tax Shield ?? ?? ?? Enter any number in the edit fields and then click Check Answer.

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P19­4

Under the assumption that Ideko's market share will increase by 0.40 percent per year, you project the following investment and depreciation:

Fixed Assets and Capital Investment (\$ 000)

2005

2006

2007

2008

2009

2010

New Investment 4,800 4,800 4,800 4,800 4,800 20,000 Depreciation (5,440) (5,376) (5,318) (5,267) (5,220) (6,698) Using this information and the information here ? Growth

2005

Sales Data Market Size (000 units) 4.90%

9,900 Market Share 0.40%

10.15% Average Sales Price (\$/unit) 1.90%

73.14

Cost of Goods Data Raw Materials (\$/unit) 0.85%

15.73 Direct Labor Costs (\$/unit) 4.15%

18.05

OperatingExpense Data Sales and Marketing (% sales) 14.86 Administrative (% sales) 18.05

Interest on Term Loan (\$ 000) (72) 2006 2007 2008 2009 2010 10,385 10,894 11,428 11,988 12,575

10.55% 10.95% 11.35% 11.75% 12.15%

74.53 75.95 77.39 78.86 80.36

15.86

18.80 16.00

19.58 16.13

20.39 16.27

21.24 16.41

22.12 16.21 17.56 18.91 19.26 19.26

15.05 15.05 14.05 13.05 13.05

(6,722) (6,722) (6,722) (6,722) (6,722) icon to import the table into a spreadsheet and use all the values as rounded on the

spreadsheet. DO NOT recalculate the forecasted values.), project net income through 2010

(that is, reproduce Table 19.7 under the new assumptions). Assume the corporate tax rate is 35 % Ideko's income statement for 2005 is shown here

Estimated 2005 Income Statement Data for Ideko Corporation

Income Statement (\$ 000)

Sales 73,495

Cost of Goods Sold

Raw Materials (15,806) Direct Labor Costs (18,138)

Gross Profit 39,551

Sales and Marketing (10,921)

EBITDA 15,364

Depreciation (5,440)

EBIT 9,924

Interest Expense (net) (72)

Pretax Income 9,852

Income Tax (3,448)

Net Income 6,404

To build the pro forma income statement, we begin with Ideko's sales.??(Round to the nearest \$ 000.)

Income Statement (\$ 000)

2005

2006

2007

2008

2009

2010

Sales 73,495 ?? ?? ?? ?? ?? Enter any number in the edit fields and then click Check Answer.

10 parts remaining

P29­1 (book/static)

What inherent characteristic of corporations creates the need for a system of checks on manager behavior? (Select the best choice below.)

A. The best method of reducing conflicts of interest between shareholders and corporate managers is to allow the shareholders the ability to run the corporation themselves. It is more efficient and provides a drastic reduction in conflicts of interest.

B. Corporate managers are by nature greedy and cannot be trusted in any way. Therefore, a system of checks, created

by the Board of Directors, is normally instituted to control managerial behavior.

C. The corporation allows for the separation of management and ownership. Thus, those who control the operations of the corporation and how its money is spent are not the same who have invested in the corporation. This creates a clear conflict of interest and this conflict between the investors and managers creates the need for investors to devise a system of checks on managers­the system of corporate governance.

D. There really is no need to have a system of corporate governance. If shareholders are not satisfied with the management of a company they can simply sell their shares in that company.

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P29­2 (book/static)

Which of these problems is NOT an example of an agency problem?

(Select the best choice below.)

A. Perquisite consumption.

B. Synergies.

C. Value destroying acquisitions.

D. All of the above.

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P29­3 (book/static)

Name one advantage and one disadvantage of the corporate organizational structure? (Select all of the choices below that apply.) A. One advantage of the corporate organizational form is that it allows those who have the capital to fund an enterprise to be different from those who have the expertise to manage the enterprise. This critical separation allows a wide class of investors to share the risk of the enterprise. B. One disadvantage of the corporate organizational structure is that the separation between ownership and management comes at a cost­the managers will act in their own best interests, not in the best interests of the shareholders who own the firm.

C. One advantage of the corporate organizational structure is that shareholder and management interests are closely aligned thus insuring that management acts in the best interest of the shareholders.

D. One disadvantage of the corporate organizational form is that it restricts the number of investors that share in the risk of the corporation, thus requiring firms to seek their capital from banks.

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P29­4 (book/static)

What is the role of the board of directors in corporate governance???(Select the best choice below.)

A. The board is empowered to hire and fire managers and set compensation contracts. B. Typically, a board of directors approves major investment decisions and acquisitions.

C. The board of directors is the primary internal control mechanism and the first line of defense to prevent fraud, agency conflicts, and mismanagement. D. All of the above are functions of a board of directors.

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P29­8 (book/static)

What is a whistleblower?

(Select the best choice below.)

A. The act of restating earnings.

B. Somebody who blows a whistle.

C. An employee who reports internal fraud to authorities.

D. None of the above.

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P29­9 (book/static)

Identify one advantage and one disadvantage of increasing the options granted to CEOs? (Select the correct choices below.)

A. The advantage is that, since options increase in value when the firm's stock price increases, the CEO's wealth and incentives will be more closely tied to the shareholders' wealth.

B. The disadvantage is that, since options increase in value when the firm's stock price decreases, the CEO's wealth and incentives are less closely tied to the shareholders' wealth.

C. The advantage is that option grants will decrease a CEO's incentives to game the system by timing the release of information to fit the option granting schedule or to artificially smooth earnings.

D.The disadvantage is that option grants can increase a CEO's incentives to game the system by timing the release of information to fit the option granting schedule or to artificially smooth earnings.

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