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

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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)

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## 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.

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

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