Seattle Steel Products

Case 4 – Seattle Steel Products

(also cited as Case 7 in original casebook)

Topic – Capital Structure Theory

(15th edition – textbook)

Omit 2 part of c State …implications, 2d, 3, 4b, 5abc, 7 and agency costs (in first sentence) and all of second sentence — (Express your answer in both equation and graphical forms, and also discuss the results.)

1. a. 474-8 b. 495-6 (textbook pages of examples / definitions / information)

1. a. 496 b. 496 c. 496, change 2c to: What was the main proposition MM developed in their no-tax model?

1. a. 497, change to: What was the main proposition MM developed in their tax model?

1. d. 497

1. 496-7

1. 495-9, change to: How does the addition of financial distress change the MM (with corporate taxes) model and the Miller model?

1. 499-500

1. 495-504

Case 6 – Indian River Citrus Company (revised)

(also cited as Case 12 in original casebook)

Topic – Cash Flow Estimation

(15th edition – textbook)

On page 49 in the casebook, change 500,000 to 600,000. On page 50, change 2 per carton to 3. These revisions will change most of the numbers in Table 1.

Omit 7, 8, 9, 10, 11, 12.

1. See textbook – page 420

1. 420-1

1. 421

1. Fill in Xs in Table 1. 423-7. Net Investment Outlay = price + freight + installation + change in NWC = project NCF (net cash flow) = initial cost at year 0. Change in NWC (net working capital) = inventories.

Salvage value – SV (salvage value) tax (40%) + recovery of NWC = termination CF (cash flow) + net op (operating) cash flow = project NCF in year 4.

1. Press CE/C to clear 1 number on screen. If you ever need to clear CFs, etc. in your calculator, press 2nd (to get yellow above key functions) +I- (reset) ENTER (set) 2nd CPT (quit).

Fill in Xs. 388-94, 405-6, 423-7. Omit MIRR. Depreciable basis = price + freight + installation. For year 1, 670,000 X 0.33 (33%) = 221,100. 670,000 – 221,100 = 448,900 book value. For year 4, MACRS factor = 0.07 (7%), depreciation expense = 46,900.

See years 1 and 4 as examples in Table 1. In year 1, 3 X 425,000 = 1,275,000 – 637,500 – 221,100 – 20,000 = 396,400 – 158,560 = 237,840 + 221,100 = 458,940 = project NCF = after tax, end-of-year cash inflows, CFt. In year 4, 3 X 425,000 = 1,275,000 – 637,500 – 46,900 – 20,000 = 570,600 – 228,240 = 342,360 + 46,900 = 389,260.

Table 1

Year MACRS Depreciation Book value

1 33% 221,100 448,900

2 X X X

3 X X X

4 7 46,900 0

100 X

Cash Flow Statements:

Year 0 Year 1 Year 2 Year 3 Year 4

Unit price $ 3 X X $ 3

Unit sales 425,000 X X 425,000

Revenues 1,275,000 X X 1,275,000

Operating costs 637,500 X X 637,500

Depreciation 221,100 X X 46,900

Other project effects 20,000 X X 20,000

Before tax income 396,400 X X 570,600

Taxes 158,560 X X 228,240

Net income 237,840 X X 342,360

Plus depreciation 221,100 X X 46,900

Net op cash flow 458,940 X X 389,260

Salvage value 100,000

SV tax X

Recovery of NWC X

Termination CF X

Project NCF X X X X X

= = = = =

Example: see Project S numbers in Table 11.1 on page 390-with your financial calculator, press CF 1000 +I- (1 keystroke – to make it negative) ENTER down arrow key (I could not find a symbol) 500 ENTER down arrow key down arrow key 400 ENTER down arrow key down arrow key 300 ENTER down arrow key down arrow key 100 ENTER down arrow key down arrow key NPV 10 ENTER down arrow key CPT (answer = $78.82) IRR CPT (answer = 14.49%). Note that case has termination cash flows in year 4, etc. – you need to make adjustments.

Payback period of Project S = about 2 years (page 406).

1. 387, 426, 427-9.