Professional Documents
Culture Documents
1 Assignments
1 Assignments
1 Assignments
Important note: each case has the questions at the end- there is no need to
answer those question and only to address “Action Items” in all exercises.
Additionally I’d like to ask for a special "private" request for this assignment to
keep the content private.
Action Items:
1. Read the East Coast Yachts case below.
2. Complete the 5-Step Critical Thinking Decision Making Matrix. (Attached below.)
3. Write a 1-page business brief of your analysis.
4. Attach your completed matrix as an appendix to your business brief.
Action Items:
1. Read the Cash Flows at East Coast Yachts case below.
2. Complete the 5-Step Critical Thinking Decision Making Matrix. (Attached below.)
3. Write a 1-page business brief of your analysis.
4. Attach your completed matrix as an appendix to your business brief.
Larissa has also provided the following information. During the year, the company raised $40
million in new long-term debt and retired $22.8 million in long-term debt. The company also
sold $30 million in new stock and repurchased $36 million. The company purchased $60 million
in fixed assets, and sold $6,786,000 in fixed assets.
Larissa has asked Dan to prepare the financial statement of cash flows and the accounting
statement of cash flows. She has also asked you to answer the following questions:
1. How would you describe East Coast Yachts’ cash flows?
2. Which cash flows statement more accurately describes the cash flows at the company?
3. In light of your previous answers, comment on Larissa’s expansion plans.
Exercise 3: Case 3 – Financing East Coast Yachts Expansion Plan
Action Items:
1. Read the Financing East Coast Yachts Expansion Plan case below
2. Complete the 5-Step Critical Thinking Decision Making Matrix. (Attached below.)
3. Write a 1-page business brief of your analysis.
4. Attach your completed matrix as an appendix to your business brief.
After Dan’s EFN analysis for East Coast Yachts (see the Closing Case in Chapter 3), Larissa has
decided to expand the company’s operations. She has asked Dan to enlist an underwriter to
help sell $40 million in new 20-year bonds to finance new construction. Dan has entered into
discussions with Renata Harper, an underwriter from the firm of Crowe & Mallard, about which
bond features East Coast Yachts should consider and also what coupon rate the issue will likely
have. Although Dan is aware of bond features, he is uncertain as to the costs and benefits of
some of them, so he isn’t clear on how each feature would affect the coupon rate of the bond
issue.
1. You are Renata’s assistant, and she has asked you to prepare a memo to Dan describing the
effect of each of the following bond features on the coupon rate of the bond. She would also
like you to list any advantages or disadvantages of each feature.
a. The security of the bond, that is, whether or not the bond has collateral. b. The
seniority of the bond. c. The presence of a sinking fund. d. A call provision with
specified call dates and call prices.
e. A deferred call accompanying the above call provision.
f. A make-whole call provision.
g. Any positive covenants. Also, discuss several possible positive covenants East Coast
Yachts might consider.
h. Any negative covenants. Also, discuss several possible negative covenants East Coast
Yachts might consider.
i. A conversion feature (note that East Coast Yachts is not a publicly traded company). j.
A floating rate coupon.
Dan is also considering whether to issue coupon bearing bonds or zero coupon bonds. The YTM
on either bond issue will be 6.5 percent. The coupon bond would have a 6.5 percent coupon
rate. The company’s tax rate is 35 percent.
2. How many of the coupon bonds must East Coast Yachts issue to raise the $40 million? How
many of the zeroes must it issue?
3. In 20 years, what will be the principal repayment due if East Coast Yachts issues the coupon
bonds? What if it issues the zeroes?
4. What are the company’s considerations in issuing a coupon bond compared to a zero coupon
bond?
5. Suppose East Coast Yachts issues the coupon bonds with a make-whole call provision. The
make-whole call rate is the Treasury rate plus .40 percent. If East Coast calls the bonds in 7
years when the Treasury rate is 5.6 percent, what is the call price of the bond? What if it is 9.1
percent?
6. Are investors really made whole with a make-whole call provision?
7. After considering all the relevant factors, would you recommend a zero coupon issue or a
regu- lar coupon issue? Why? Would you recommend an ordinary call feature or a make-whole
call feature? Why?
Exercise 4: Case 4– Stock Valuation at Ragan Engines
Action Items:
1. Read the Stock Valuation at Ragan Engines case below
2. Complete the 5-Step Critical Thinking Decision Making Matrix. (Attached below.)
3. Write a 1-page business brief of your analysis.
4. Attach your completed matrix as an appendix to your business brief.
Larissa has asked Dan to determine a value per share of Ragan stock. To accomplish this, Dan
has gathered the following information about some of Ragan’s competitors that are publicly
traded:
Nautilus Marine Engines’ negative earnings per share (EPS) were the result of an accounting
write-off last year. Without the write-off, EPS for the company would have been $1.85. Last
year, Ragan had an EPS of $4.20 and paid a dividend to Carrington and Genevieve of $157,500
each. The company also had a return on equity of 20 percent. Larissa tells Dan that a required
return for Ragan of 16 percent is appropriate.
1. Assuming the company continues its current growth rate, what is the value per share of the
company’s stock?
2. Dan has examined the company’s financial statements, as well as examining those of its
competitors. Although Ragan currently has a technological advantage, Dan’s research indicates
that Ragan’s competitors are investigating other methods to improve efficiency. Given this, Dan
believes that Ragan’s technological advantage will last only for the next five years. After that
period, the company’s growth will likely slow to the industry average. Additionally, Dan believes
that the required return the company uses is too high. He believes the industry average
required return is more appropriate. Under Dan’s assumptions, what is the estimated stock
price?
3. What is the industry average price-earnings ratio? What is Ragan’s price-earnings ratio?
Comment on any differences and explain why they may exist.
4. Assume the company’s growth rate declines to the industry average after five years. What
percentage of the stock’s value is attributable to growth opportunities?
5. Assume the company’s growth rate slows to the industry average in five years. What future
return on equity does this imply?
6. Carrington and Genevieve are not sure if they should sell the company. If they do not sell the
company outright to East Coast Yachts, they would like to try and increase the value of the
company’s stock. In this case, they want to retain control of the company and do not want to
sell stock to outside investors. They also feel that the company’s debt is at a manageable level
and do not want to borrow more money. What steps can they take to try and increase the price
of the stock? Are there any conditions under which this strategy would not increase the stock
price?
Action Items
1. Complete the following problems:
a. Chapter 3 – Concept Question 5
b. Chapter 4 – Concept Question 3
2. Show all calculations as needed to answer the questions.
3. Compile your answers in a Word document.
Submission Instructions:
Submit your Word document to the class Drop Box via the Drop Box app under the heading,
“Other.” Your professor will inform you when the assignment is due.
Note: Even though you are submitting all exercises to the same location, they will appear as
different revisions under “Other.”
Chapter 3 – Concept Question 5
Present Value
Suppose two athletes sign 10-year contracts for $80 million. In one case, we’re told that the
$80 million will be paid in 10 equal installments. In the other case, we’re told that the $80
million will be paid in 10 installments, but the installments will increase by 5 percent per year.
Who got the better deal?
1. Read the closing case for Chapter 19, East Coast Yachts Goes Public, below:
GoesPublicWorksh
eet.doc
3. Read the closing case for Chapter 20, East Coast Yachts Goes International, below:
InternationalWorks
heet.doc
5. Select ONE question from each worksheet and provide your response to those two
questions.
The key question(s) that needs to be answered to solve this problem is…
(Every problem has questions connected to it. Here we want you to write out the most
important question(s) you need to answer to solve the problem. State it clearly and precisely.
Being specific is very important.)
Note: Remember to view the information you have obtained for potential bias. This is from the
perspective of your own bias to the research and the bias of the authors who compiled the data
and the research you gathered. In other words, do not discount the importance of other’s data
because of your own bias(is).
If this problem does not get solved, some important implications are…
(Evaluate options, taking into account the advantages and disadvantages of possible decisions
before acting. What consequences are likely to follow from this or that decision?)