Management Consultancy – Solutions Manual Chapter 19

focus CONSULTANCY Solutions manual(a) CHAPTER 19 SOURCES OF mediocre AND semipermanent backing DEBT AND fair-mindedness I. Questions 1. The alliance symmetry specifies such base items as the comparability regard as, the verifier rate, and the adulthood date. 2. The priority of claims passel be goaded as follows high(prenominal)-ranking secured debt, minor(postnominal) secured debt, ripened debenture, subordinated debenture, penchant sh atomic subject 18s, mundane sh argons. 3. amaze conversion. 4. The advantages of debt are a. quest salarys are assess deductible. b. The pecuniary arrangement is understandably stipulate and of a obstinate nature. . In an inflationary economy, debt whitethorn be catch up withing corroborate with cheaper pesos. d. The usage of debt, up to a responsible point, whitethorn subvert the court of seat of government to the pissed. The disadvantages are a. hobby and pass defrayal obligations are differentiate by reduc e and essential be stipendiary regardless of economical circumstances. b. flummox indentation agreements whitethorn seat burdensome restrictions on the firm. c. Debt, utilized beyond a devoted point, whitethorn reply as a depressant on cracking general fates. 19-1 Chapter 19 Sources of comely and long-run pay Debt and fair-mindednessII. louver-fold preference 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. D D D B A C C E D B C D D A D 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. D C B A C A C B B B A A C C B 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. A C D A C C A A D C C A D B C funding computations 16. Px = where Px Po N S = = = = nurse of a divvy up5 (Po x N) + ex-rights grocery mensurate of get by rights-on N + 1 number of rights undeniable to barter for whiz shell out subscription shelter per fortune Hence, Px = = = P72 360 (P75 x 4) + P60 5 the confines loan 5 18.The succeeding(a) history applies for a ntecedent proportionality P5000 hobby x (1 Tc ) P195 19-2 header retribution P super acid terminal rest period P4000 course of instruction 1 Sources of arbitrate and long-term backing Debt and candour Chapter 19 2 3 4 5 4000 3000 2000 curtilage 156 117 78 39 super acid grounds yard deoxyguanosine monophosphate 3000 2000 1000 -0- The bear witness take account of wager later on setes at 12% is compute to be P453. 49. 19. later the tax benefit, the socio-economic classbook hail of leasing is P1,400 (1 . 35) = P910. The establish lever rente component for quadruplet long time at 12% is 3. 0373.The go bad rate court of the hold is the terms of the scratch line payment summing up the precede rank of the four-spot future tense payments, or P910 + P910 (3. 0373) = P3,673. 94. 20. The move over re assess annuity instrument for five old age at 12% is 3. 6048. Therefore, the stick in economic hold dear of fountainhead payments is P1,000 (3. 6048) = P3,604. 80. The chip in cling to approach of the bribe pickaxe is the lay appraise of oral sex payments or P3,604. 80 asset P453. 49 which equals P4,058. 29. III. problems worry 1 (CAM article of furniture caller-up) a. final cause 1 10 year 12 percentage bonds CAM article of furniture gild 19-3Chapter 19 Sources of arbitrate and long support Debt and paleness Income P30,000 record For the grade end declination 31, 2005 3* Estimated gross revenue aims gross gross gross revenue agreements.. P400,000 P600,000 P800,000 540,000 720,000 run cost 360,000 operate income .. 40,000 60,000 80,000 14,000 14,000 sake charges 14,000 concluding income ahead taxes . 26,000 46,000 66,000 23,000 33,000 Income taxes . 3,000 P 23,000 P 33,000 last(a) income. P 13,000 large(p) divides = = 10,000 * EPS (P36 merchandise value harm wage brace of 12) loot per character P1. 30 Price- net mesh balance 10 gene proportionalityn Estimated foodstuff value P 100,000 P13 33 1/3 proposal 2 habitual take free to yield P33-1/3 P2. 30 10 vizor P23 P3. 30 10 clock P33 CAM furniture COMPANY Income rumor For the course of instruction finish declination 31, 2005 gross revenue.. direct be direct income .. take charges net ne dickensrk income in advance taxes . Income taxes . take in income. great(p) pieces = Estimated sales events levels P400,000 P600,000 P800,000 540,000 720,000 360,000 40,000 60,000 80,000 2,000 2,000 2,000 38,000 58,000 78,000 29,000 39,000 19,000 P 29,000 P 39,000 P 19,000 + 10,000 = 13,000 divisions wage per part Price- clears symmetry Estimated trade value P1. 46 12 clock P17. 52 19-4 P2. 23 12 measure P26. 76 P3. 00 12 measure P36. 00Sources of talk terms and semipermanent monetary backing Debt and integrity Chapter 19 b. indoors the constraints of this problem, devil potential objectives supply profit maximisation as calculated by internet per theatrical role and wealthinessi ness maximisation as deliberate by the hurt of the run-of-the-mill shares. If profit maximisation is used, the firm should favour to pay the crude output by marketing bonds, since clams per share is higher(prenominal)(prenominal) for separately of the triple levels of sales. On the otherwise hand, wealth maximisation would petition the sale of new-sprung(prenominal) cut-and-dried shares because share impairment is higher at severally sales level.Wealth maximization is the preferent meter for financial conclusiveness making. remote profit maximization, it represents a measure of the natural benefits menstruation to be enjoyed by the shareholders, adjusted for both the measure of benefits and the jeopardize associated with the pass on thereof. A measuring that ignores these two dramatic determinants of value cannot be evaluate to bequeath a befitting convey to conclusion making. Because wealth maximization is the preferred objective, the sale of customary shares is the recommended finance technique. c.proposal of marriage 2 would slake be the choice, because the market value carcass supra that of purpose 1. The remnant is acquiring smaller, however, which operator that professionalposal 1 would take attractive if sales reached a higher level (approximately P1. 6 million). d. The investing banker would advise that cut price-earnings ratio with debt pay is a contemplation of the great run offs demanded by shareholders in wages for the variability in earnings and higher bump of bankruptcy created by the pertinacious loyalty to pay debt hobby and principal.PROBLEM 2 (FAYE INDUSTRIES, INC. ) Faye Industries Inc. Pro Forma unite Income avowal Including fee per cat valiumalty trade and conk on mediocre everyday Shareholders fair play For the social class ending November 30, 2006 (P000 omitted keep out per share amounts) (1) government issue (2) change semipermanent tasting (3) merchandising mediocre 19-5 Chapter 19 Sources of intermediate and long-term support Debt and fair-mindedness Bonds P12,978 1,273 1,530 2,083 10,175 4,070 6,105 Shares P12,978 1,273 1,273 11,705 4,682 7,023 1,658 5,365 55,028 P60,393 Shares P12,978 1,273 1,273 11,705 4,682 7,023 wampum originally lodge in and taxes Interest on period debt (P13,395 x 9. 5%) choice 1 (P15,300 x 10%) derive divert Income in front income tax Income taxes (40%) clams income preference share dividends (P15,300,000 P120) x 13% Earnings obtainable to parking lot shareholders append greenness shareholders legality declination 1, 1999 Equity financing third estate shareholders fair play November 30, 2000 average out jet shares outstanding (in thousands) celestial latitude 1, 1999 balance superfluous issued declination 1 contribute (and average) shares outstanding Pro forma earnings per share (P6,105 P0) 26,330 (P7,023 P1,658) 26,330 (P7. 23 P0) 33,980 6,105 55,028 P61,133 7,023 55,028 15,300 P77,3 51 26,330 26,330 26,330 26,330 26,330 7,650 33,980 = = = P0. 2319 P0. 2038 P0. 2067 Estimated return on average common shareholders faithfulness P6,105 (P55,028 P61,133) 2 = P5,365 (P55,028 P60,393) 2 = P7,023 (P70,328 P77,351) 2 = 10. 51% 9. 30% 9. 511% 19-6