8 is an annual rate we can calculate an effective

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18 Question 17 (20 points total) Steve Notch is the newly hired CFO for the Minecraft Mining Company, a gold and silver mining firm. Steve was new to the mining industry, coming from Redstone Electronics, a consumer electronics firm. In order to better learn and understand the business, Steve began to examine the financial statements of the firm. Exhibit 9 shows selected information from the latest income statements and Exhibit 10 shows portions of the latest balance sheets. The company faces a tax rate of 40%. Minecraft is a publicly traded company listed on the Overworld exchange under the ticker symbol MINE. The firm has 2 million shares outstanding each priced at $15 per share. The company also has one existing bond issue outstanding with a coupon rate of 4%. The bonds currently trade at par value. The company operates in a wide variety of environments, ranging from jungles, to deserts, and even arctic tundras. Over the past five years, the firm has maintained its existing debt-equity ratio, but Steve was more financially conservative and determined that the target debt/equity ratio for the company was only 25%. The company planned to get to that target as soon as it could. Exhibits 11 - 14 showed information that Steve had either used at Redstone or that his predecessor at Minecraft had available. Steve thought some of it might be useful. Exhibit 9: Selected Information from Minecraft’sIncome Statements Numbers in Millions 2016 Revenues 45.0 Depreciation Expense 9.2 Interest Expense 1.2 Net Income 3.5 Exhibit 10: Selected Information from Recent Balance Sheets (numbers in millions) 2015 2016 Total Assets 120 145 Liabilities: Short-term Debt 0 Long Term Debt 30 Equity: Common Equity 10 SECTION VII: COST OF CAPTIAL…CAN YOU DIG IT???0 30 10
19 Exhibit 11: Selected data on interest rates and historical returns Current rates on Treasuries 1-year T-bill rate 0.50% 10-year T-bond rate 3.00% Historical Stock Performance MINE returns in excess of 1-year T-bills (Prior 50 years) 11.00% MINE returns in excess of 10 year T-bonds (Prior 50 years) 9.00%

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