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FINAL TEST

MM. 5007: FINANCIAL MANAGEMENT COURSE PT. KPC-MBA PROGRAM School of Bus !"ss #!$ M#!#%"&"!' B#!$u!% I!s' 'u'" of T"ch!olo%( No)"&*"+ ,7'h- .0,/ 0T#1" ho&" T"s'2

1. After finishing analysis of company performance and preparation of pro forma budget, the Board of Directors ToysForAll also asking to Mr. reat !id and his Team to de"elop rele"ant cash flo#s for $%isterToys &ompany's machine rene#al or replacement decision (%isterToys is the sister company of ToysForAll) Board of Directors e*pect the firm's net operating profit after ta*es for the ne*t + years to be as sho#n in the follo#ing table. year 1 9 : 0 + 678AT 9/,/// :/,/// 0/,/// +/,/// .0,///

Mr. $ reat !id is beginning to de"elop the rele"ant cash flo#s needed to analy,e #hether to rene# or replace %isterToys only depreciable asset, a machine that originally cost -./,///, has a current book "alue of ,ero, and no# be sold for -0/,///. 1e estimates that at the end of + years, the e*isting machine can be sold to net -0,/// before ta*es. Mr. $ reat !id plans to use the follo#ing information to de"elop the rele"ant cash flo#s for each of the alternati"es. Al'"+!#' )" ,. 2ene# the e*isting machine at a total depreciable of -13/,///. The rene#ed machine #ould ha"e a + year usable life and #ould be depreciated under straight line depreciation method. 2ene#ing the machine #ould result in the follo#ing pro4ected re"enues and e*penses (e*cluding depreciation and interest)5

;ear 1 9 : 0 +

2e"enue -9,///,/// 9,:+/,/// 9,.//,/// 9,3+/,/// :,1//,///

<*penses (e*cl.depr.and int.) -1,./:,/// 1,=.3,0// 1,3:.,9// 1,33.,9// 1,>:.,9//

The rene#ed machine #ould result in an increased in"estment in net #orking capital of -:/,///. At the end of + years, the machine could be sold to net -1.,/// before ta*es. Al'"+!#' )" .. 2eplace the e*isting machine #ith a ne# machine that costs -9//,/// and re?uires installation costs of -9/,///. The ne# machine #ould ha"e a + year usable life and #ould be depreciated under straight line depreciation method. The firm's pro4ected re"enues and e*penses (e*cluding depreciation and interest), if it ac?uires the machine, #ould be as follo#s5 year 1 9 : 0 + re"enue -9,///,/// 9,:+/,/// 9,.//,/// 9,3+/,/// :,1//,/// <*penses (e*cl.depr.and int.) -1,+9>,/// 1,.=>,.// 1,39>,3// 1,>=>,3// 1,>>=,3//

The ne# machine #ould result in an increased in"estment in net #orking capital of -00,///. At the end of + years, the ne# machine could be sold to net -+/,/// before ta*es. The firm has a >@ cost of capital and is sub4ect to a :/@ ta* rate. As noted, the company uses straight line depreciation method. Mr. $ reat !id has actually prepared that analyses, but he need your opinion about this decision, on the basis of your comparison of their rele"ant cash flo#s, #hich alternati"e appears to be betterA 7f course he needs also your recommendation based on the calculation the initial in"estment, the incremental operating cash flo#, the terminal cash flo#, and the rele"ant cash flo# associated #ith each of the alternati"es.

9. Mr. Bimbo, the chief financial officer for Aneka Bndustri &oy, in early of Cune 9/1:, #as gi"en the task of assessing the impact of proposed risky in"estment on the firm's stock "alue. To perform the necessary analysis, Bimbo gathered the follo#ing information on the firm's stock.

During the immediate past + years (9//3 D 9/19), the annual di"idends paid on the firm's common stock #ere as follo#s5

;ear 9//3 9//> 9/1/ 9/11 9/19

Di"idend per share - /.1: - /.10 - /.1+ - /.1= - /.1>

The firm e*pects that #ithout the proposed in"estment, the di"idend in 9/1: #ill be - /.91 per share and the historical annual rate of gro#th #ill continue in the future. &urrently, the re?uired return on the common stock is 1+@. Mr. Bimbo's research indicates that if the proposed in"estment is undertaken, the 9/1: di"idend #ill rise to -/.9: per share and the annual rate of di"idend gro#th #ill increase to 10@. 1e feels that in the best case, the di"idend #ould continue to gro# at this rate each year into the future and that in the #orst case, the 10@ annual rate of gro#th in di"idends #ould continue only through 9/1+, and then at the beginning of 9/1., #ould return to the rate that #as e*perienced bet#een 9//3 and 9/19. As a result of the increased risk associated #ith the proposed risky in"estment, the re?uired return on the common stock is e*pected to increase by 9@ to an annual rate of 1=@, regardless of #hich di"idend gro#th outcome occurs. Armed #ith the preceding information, Mr. Bimbo must no# assess the impact of the proposed risky in"estment on the market "alue of Aneka Bndustri &oy's stock. To simplify his calculations, he plans to find the current "alue per share of Aneka Bndustri &oy's common stock, and then to find the "alue of Aneka Bndustri &oy's common stock in the e"ent that it undertakes the proposed risky in"estment and assuming that the di"idend gro#th rate stays at 10@ fore"er. &ompare this "alue to that found before. Ehat effect #ould the proposed in"estment ha"e on the firm's stockholdersA <*plain your ans#erF Bn the other hand, Ms Bembie has been considering in"esting in the bonds of Aneka Bndustri &oy. The numbers of bonds #ere issued 9,/// shares, + years ago at their - +,/// par "alue (per share) and ha"e e*actly 1/ years remaining until they mature. They ha"e an >@ coupon interest rate, are con"ertible into +,/// shares of common stock, and can be called any time at - +,0//. The bond is rated A# by Moody's. The Aneka Bndustri &oy, a manufacturer of sporting goods, recently ac?uired a medium athleticG#ear

company (8T. Athletic Distro) that #as in financial distress. As a result of the ac?uisition, Moody's and other rating agencies are considering a rating change for Aneka Bndustri &oy bonds. 2ecent economic data suggest that e*pected inflation, currently at .@ annually, is likely to increase to a =@ annual rate. Ms Bembie remains interested in the Aneka Bndustri &oy bond but is concerned about inflation, a potential rating change, and maturity risk. To get a feel for the potential impact of these factors on the bond "alue, she decided to apply the "aluation techni?ues she learned in her Financial Management &ourse at MBA 8rogramG%BM BTB. Bf the price of the common stock into #hich the bond is con"ertible rises to -1.+ per share after + years and the issuer calls the bonds at - +,0//, should Bembie let the bond be called a#ay from her or should she con"ert it into common stockA For the re?uired return is 1/@, calculate the bond's "alue, assuming annual interest >@, indicate #hether the bond #ill sell at a discount, at a premium, or at par "alueA 7n early 9/1:, actually, Mr. Bimbang as financial analyst at Aneka Bndustri &oy (one of the staff of Mr. Bimbo) had to decide #hat to do about 8T. Athletic Distro. As a result of mismanagement and in"entory problem, Athletic Distro has become bankrupt. Among its unsecured debts are total pastGdue accounts of - :.3 Million o#ed to Aneka Bndustri &oy. 2ecogni,ing that it probably cannot reco"er the full - :.3 Million that Athletic Distro o#es it, the management of Aneka Bndustri &oy has isolated t#o mutually e*clusi"e alternati"e actions5 (1) ac?uire Athletic Distro through an e*change of stock, or (9) let Athletic Distro be li?uidated and reco"er Aneka Bndustri &oy proportionate claim against any funds a"ailable for unsecured creditors. Aneka Bndustri's management fells that ac?uisition of Athletic Distro #ould ha"e appeal in that it #ould allo# Aneka Bndustri &oy to integrate "ertically and e*pand its business from strictly industrial manufacturing to include marketing and distribution. 7f course, the firm #ants to select the alternati"e that #ill create the most "alue for its shareholders. &harged #ith making a recommendation as to #hether Aneka Bndustri should ac?uire Athletic Distro or allo# it to be li?uidated, Mr. Bimbang gathered the follo#ing data. Ac3u +" A'hl"' c 4 s'+o: 6egotiations #ith Athletic Distro management ha"e resulted in a planned ratio of e*change of /.. share of Aneka Bndustri for each share of Athletic Distro common stock. The follo#ing table reflects current data for Aneka Bndustri and Aneka Bndustri's e*pectations of the data "alues for Athletic Distro #ith proper management in place. Btem Aneka Bndustri Athletic Distro

<arnings a"ailable for common stock 6umber of shares of common stock outstanding Market price per share

- 1,93/,/// 1.,///,/// - 1..

- :./,/// :,///,/// - 1.9

Aneka Bndustri &oy estimates that after the proposed ac?uisition of Athletic Distro, its priceHearnings (8H<) ratio #ill be 13.+ L 3u $#' o! of A'hl"' c 4 s'+o: Athletic distro #as denied its petition for reorgani,ation, and the courtG appointed trustee #as e*pected to charge - ://,/// for his ser"ices in li?uidating the firm. Bn addition, - 9//,/// in unpaid bills #ere e*pected to be incurred bet#een the time of filling the bankruptcy petition and formal action by the court. The firm's preli?uidation balance sheet is sho#n bello#. Athletic Distro Balance sheet. (December :1st, 9/19) Assets &ash 0/,/// Marketable securities 9,/// Accounts 2ecei"able :,.//,/// Bn"entories .,///,/// 8repaid e*penses 93,/// Total current assets >,.=/,/// Iand 6et plant 6et e?uipment Total fi*ed assets Total 3:/,/// 0//,/// =//,/// 1,>:/,/// - 11,.//,/// Iiabilities and %tockholders' <?uity Accounts payable +,0//,/// 6otes payable D Bank 9,.//,/// Accrued #ages 90/,/// Jnsecured customer deposits 19/,/// Ta*es payable 10/,/// Total current liabilities 3,+//,/// First mortgage %econd mortgage Jnsecured bonds Total longGterm debt &ommon stock (: Mill. %hares) 8aidGin capital in e*cess of par 2etained earnings Total stockholders' <?uity Total .//,/// 0//,/// 3//,/// 1,3//,/// 90/,/// >./,/// 1//,/// 1,://,/// - 11,.//,///

The trustee expects to liquidate the assets for $ 6.4 million - $ 5 million from current assets and $ 1.4 million from fixed asset. ;ou ha"e to help Mr Bimbang to make the recommendation for Aneka Bndustri &oy #ith regard to its best action5 ac?uisition or li?uidation of Athletic Distro, in comparing ho# much the total market "alue of Aneka Bndustri &oy #ill change as a result of ac?uiring Athletic Distro, and ho# much of its - :.3 million balance due from Athletic Distro #ill Aneka Bndustri &oy reco"er as a result of li?uidation of Athletic distroA Note: (1) you have to analyze and make the evaluation calculation the post mer!er earnin!s per share "#$%& for 'neka (ndustri )oy* assumin! that it acquires 'thletic +istro under the terms !iven.

(2) 'nd then you must estimate post mer!er price earnin!s "$ #& ratio and your findin! in "1& to find the post mer!er share price. (3) you also must determine ho, much each claimant ,ill receive if 'thletic +istro is liquidated under the terms !iven. sk#, 6o"ember 1=th, 9/1:

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