1) Harley Motors has $25 million in assets, which were financed with $10 million of debt and $15 million of equity. Harley’s tax rate is 40%. If Harley’s unlevered beta is 0.8, what is Harley’s current (levered) beta? Show your work.
2) Explain how the firm can achieve its optimal capital structure based on the trade-off theory.
3) Carter Corporation’s sales are expected to increase from $X in 2012 to $10 million in 2013. Its assets totaled $5 million at the end of 2012. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2012, current liabilities are $1.8 million, consisting of $500,000 of account payable, $800,000 of notes payable, and $500,000 of accruals. Its profit margin is forecasted to be 8%, and the forecasted retention ratio is 40%. If the firm can achieve this increase in sales without raising funds externally, what was the firm’s sales ($X) during 2012? Show your work.
4) Global Inc. has its own target capital structure that consists of debt and equity. The firm anticipates that its capital budget for the next year will be $1,500,000. If it reports net income of $1,200,000 and wants to maintain a 20% payout ratio, what is its target capital structure (%debt/%equity)? The firm follows a residual dividend policy. Show your work.
5) You are the vice president of International InfoXchange, headquartered in Chicago, Illinois. All shareholders of the firm live in the US. Earlier this month, you obtained a loan of 20 million Canadian dollars from a bank in Toronto to finance the construction of a new plant in Montreal. At the time the loan was received, the exchange rate was $1 = 0.85 Canadian dollar. By the end of the month, it has unexpectedly dropped to 0.80 Canadian dollar. Has your company made a gain or loss as a result and by how much? Ignore any interest on your loan. Show your work.
6) A firm purchases materials on terms of 3/15, net 40 and it can borrow the funds from a bank at an APR of 30%. Should the firm use the bank loan by taking the discount or the full credit period by giving up the discount? Show your work including nominal annual cost of trade credit.