Q1. Calculating Financial Ratios -
Find the following financial ratios for Smolira Golf (use year-end figures rather than average values where appropriate):
Long-term Solvency ratios -
- Total debt ratio
- Debt-equity ratio
- Times interest earned ratio
- Cash coverage ratio
Profitability ratios
- Profit margin
- Return on assets
- Return on equity
Q2. Adjusted Present Value Valuation -The Joel Germunder Company:
The Joel Germunder Company (Gennunder) is a privately held family business that currently uses no debt in its capital structure. The owner-managers have a plan to expand the operations of the company over the next two years. Some of Germunder's younger owner-managers proposed a plan to issue a large amount of debt to not only expand the company's operations but to also pay the owners a one-time, special dividend. The younger owner-managers' plan is to finance the entire transaction by issuing $15 million of 10% debt.
After the company completes its expansion, the plan of the younger owner-managers is to use some of the free cash flows to repay the debt until the end of Year 3, but they will continue to pay some dividends in Years 1 through 3. As of the beginning of Year 4, they expect the company's cash flows to grow at the long-run inflation rate, which they expect to be 2.5%. At the end of Yeas 3, they believe that the company will have paid down a sufficient amount of debt so that the remaining debt will be used as the basis of a stable target capital structure, and the debt will grow at the overall growth rate of 2.5%. While the leverage of the company will decline some over the first three years, it will not fail enough to change the cost of debt. Moreover, since the debt-to-value ratio will stay die same after Year 3, the cost of debt will remain at 10%. The company does not hold any excess cash, and all equity free cash flows will be paid out as a dividend to shareholders. The company's chief financial officer prepared a set of financial forecasts that reflects this plan. The income statement, balance sheet, and cash flow statement forecasts appear in Exhibit P5.1. The forecasts assume the company will issue the debt at the end of Year 0, which is reflected in the balance sheet for that year. Germunder's income tax rate for all revenues and expenses (including interest) is 40%, and its unlevered cost of capital is 12%.
a. Use the financial statements in Exhibit P5.1 to measure Germunder's unlevered free cash flows in Years 1 through 4.
b. Value Germunder-the entire firm and equity -as of the end of Year 0, using the APV valuation method. Assume that the appropriate discount rate for interest tax shields is the unlevered cost of capital of the company.
c. As of the end of Year 0, what amount and percent of firm salve and what percent of equity value does Germander derive from the value of its interest tax shields?
d. What issues would you suggest the company's management think about before moving forward capital structure strategy?
e. As a consistency check on your previous valuation, value Germunder as of the end of Year the above assumptions with the WACC valuation method. Again, assume that the appropriate income rate interest tax shield is the unlevered cost of capital for this company.
f. As a consistency check on your previous valuation, value Germunder's equity using the equity DCF valuation method. Again assume that the appropriate discount rate for shields is the unlevered cost of capital for this company.
Attachment:- Corporate Finanace Assignment.rar