Number 1 (Choosing financial targets) Simplicity Company is evaluating their capital structure.

The CFO is concerned that the firm might be underleveraged, even though the firm has larger-than-average research and development and foreign tax credits when compared to other firms in its industry. The finance staff prepared the industry comparison shown here. a. Simplicitys objective is to achieve a credit standing that falls, in the words of the chief financial officer, comfortably within the A range. What target range would you recommend for each of the three credit measures? Chapter #18 472-497 b. Before settling on these target ranges, what other factors should Simplicitys chief financial officer consider? Chapters #20-21 c. Before deciding whether the target ranges are really appropriate for Symplicity in its current financial situation, what key issues specific to Symplicity must the chief financial officer resolve? Chapter #20 FUNDS FROM RATING FIXED CHARGE OPERATIONS/ LONG-TERM DEBT/ CATEGORY COVERAG E TOTAL DEBT CAPITALIZATION Aa A Baa 4.005.25x 3.004.30 1.953.40 6080% 4565 3555 1723% 2232 3041
(001700B01001)

Number 2 A10. (Dividend adjustment model) Spreadsheet Solutions Inc. has made a bundle selling spreadsheet software and has begun paying cash dividends. The firms chief financial officer would like the firm to distribute 25% of its annual earnings (POR 0.25) and adjust the dividend rate to changes in earnings per share at the rate ADJ 0.75. The firm paid $1.00 per share in dividends last year. It will earn at least $8.00 per share this year and each year in the foreseeable future. Use the dividend adjustment model, Equation (18.1), to calculate projected dividends per share for this year and the next four. Chapter #18 512-516 (180a1010) Number 3 (Dividend policy) The Dexter Company has 20 million common shares outstanding. It currently pays out$1.50 per share per year in cash dividends on its common stock. Historically, its payout ratio has ranged from 30% to 35%. Over the next five years it expects the earnings and discretionary cash flow shown below in millions. a. Over the five-year period, what is the maximum overall payout ratio the firm could achieve without triggering a securities issue? Chapter 18 pages 512-521

b. Recommend a reasonable dividend policy for paying out discretionary cash flow in years
(180b02002)

1 through 5. Earnings Discretionary cash flow 1 100 50 2 125 70 3 150 60 4 120 20 5 140 15 THEREAFTER 150per year 50per year

Number 4 (Comparing borrowing costs) Roadways Inc. has two financing alternatives: (1) A publicly placed $50 million bond issue. Issuance costs are $1 million, the bond has a 9% coupon paid semiannually, and the bond has a 20-year life. (2) A $50 million private placement with a large pension fund. Issuance costs are $500,000, the bond has a 9.25% annual coupon, and the bond has a 20-year life. Which alternative has the lower cost (annual percentage yield)? Chapter #21 pgs. 609-621
(0200a200)

Number 5 (Net advantage to leasing) Carrion Luggage, Ltd. is considering leasing $50 million worth of warehousing equipment under a lease that would require annual lease payments in arrears for five years. The net cash flows to the lessee over the term of the lease (with zero residual value) are given here. Carrions cost of secured debt is 11%, and its cost of capital is 14%. Carrion pays taxes at a 40% marginal rate. Chapter #21 pgs 614-621 a. Calculate the net advantage to leasing.

b. Calculate the IRR for the lease.

c. Should Carrion lease, or borrow and buy?

Year

Net cash flow ($ millions)

50

-15

-15

-15

-15

-15
(210b888)