Problems - 721,1746,973,180=0.1=10% (6-3) Determine...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
itable makes the chance of bankruptcy fall, especially since the company’s outlook is good, and the company currently appears to have suff 7 21,1746,973,180=0.1=10% 721,1745,134,077=0.14=14% ution Margin= 721,1746,973,180-5,134,077=0.39=39% (6-3) Determine whether the bonds are a good buy @ the current price? Step 1: Calculate the TIE for the past 3 years TIE=EBIT/Interest *Numbers taken from Income Statement provided 1990 TIE= (77.9+208.8)/208.8= 1.4 interest on borrowings plus interest 1989 TIE= (185.6+276.7)/276.7= 1.7 1988 TIE= (614.8+116.4+2.9)/116.4= 6.3 Average TIE= (1.4+1.7+6.3)/3= 3.1 Step 2: Calculate remaining cash left after paying creditors Source Recurring EBT 77.9 I/S +Depreciation 160.4 CFs =Cash Flow 238.3 +Cash 13.0 B/S cash and s/t investmets +Receivables*(0.9) 382.1 B/S-424.6(0.9) +Mkt Securities 34.0 B/S investments -Current Liabilities 427.9 B/S first one +Accruals 277.3 B/S accrued liabilities +Line of Credit 70.0 Given in question =Remaining Cash 22.09% =586.8 (totals of above )/2656.1 (net sales)= 0.2209 *After all creditors are paid in bankruptcy the company will have 22.09% left in cash Step 3: Look at given Value Line industry data and calculate cash flows -Since 1990 a (0.47-0.30)/0.47= 36% drop in the price of polyethylene, which makes up 54% of Quantum’s sale from Value Line’s company page. This price drop would result in a 0.54*2656.2*0.36=516.4 drop in cash flows (2656.2 is 1990 net sales found on I/S). However, the sales price drop is partially offset by the reported (0.26-0.19)/0.26=27% drop in raw material ethylene prices in 1991, which would reduce COGS by 0.54*2184.6*0.27=318.5 (2184.6 is ’90 COGS found on I/S). The net effect of these two price changes is to reduce cash inflows by 516.4-318.5=197.9. Such a reduction would cause the company to report negative earnings for 1991, but the company would still be able to generate a positive cash flow of 238.3-197.9=40.4. Regardless, the company would end up with positive ending cash for the year (586.8-197.9=388.9) and could continue to operate at a loss under the current conditions for some time, given their positive cash flow and their high level of liquidity. Step 4: Liquidation Analysis Source/Notes Cash @ 100% 13.0 B/S cash and short term invest +Receivables @ 90% 382.1 B/S receive times 90% +Inventory @50% 183.0 B/S +Prepaid @5% 4.7 B/S +Associated Cos. @10% 3.1 B/S (given that they are losing money) +Mkt Securities @100% 34.0 B/S +Property @ 20% 404.1 B/S +Deferred charges @10% 15.6 B/S +Goodwill @ 0% 0 B/S =Total Liquidation Value 1039.6 Add all * 0.95 =Net to Creditors 987.6 -To Secured 363.8 (Given in question) <404.1 (collateral value in liquidation) =To Unsecured 623.8 / Divided by Unsecured Claims 2729 =3223-230.2-363.8 (Total Liab. – Deferred Taxes on Income-Amount to secured) =Payoff to Unsecured 22.8% Payoff to Subordinated 193.3 =847.7*0.228 (847.7 is given in Question) Remaining to Senior Claims 1028.6 ={1332.4(1-0.228)} + {363.8-363.8} *Because 193.3<1028.6, Subordinated must give all 193.3 to the Senior Creditors (which are all the interest-bearing debt that is not subordinated)
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/29/2011 for the course FIN 322 taught by Professor Zhu during the Spring '11 term at Oakland University.

Page1 / 11

Problems - 721,1746,973,180=0.1=10% (6-3) Determine...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online