المحاسب الإداري المعتمد الجزء 2 B. Corporate Finance

Tamsford: Two Automated Plants and the Leverage They Bring

Tamsford Linen Services

Question of 7 Tamsford: Two Automated Plants and the Leverage They Bring

Tamsford: Two Automated Plants and the Leverage They Bring Case-based question

الحالة

Tamsford Linen Services washes, presses and delivers bed linen, towels and staff uniforms for hotels and outpatient clinics from three regional plants. New hotel openings have pushed demand beyond what the three plants can process, so the board is considering two additional plants fitted with automated sorting and folding lines. Automation cuts the hourly labor needed per pound of laundry but adds equipment depreciation and a fixed annual service contract.

Item	Existing three plants (year just ended)	Two new plants (first full year, projected)
Revenue	$9,600,000	$7,800,000
Variable operating costs	$5,760,000	$3,120,000
Fixed operating costs	$3,840,000	$2,300,000

Tamsford has no interest-bearing debt and no preferred stock outstanding. The two plants need $11,000,000 of external capital, and the treasurer has obtained indicative terms for three instruments:

Instrument	Indicative terms
Debentures	10-year unsecured debentures, $1,000 face value, 8% annual coupon, issued at face value with no issuance costs; callable by Tamsford at $1,040 per debenture from the end of year 5; the indenture requires EBIT of at least 2.0 times annual interest
Cumulative preferred stock	Nonvoting; annual dividend of 9% of par; sold at par; no issuance costs
Common stock	New shares sold to outside investors in a public offering

The CFO's base plan is to raise the full $11,000,000 with the debentures. The board wants to understand how the plants and the financing would change the risk carried by Tamsford's common shareholders before choosing a financing mix.

الافتراضات

'Operating breakeven' means EBIT of zero. 'Net-income breakeven' means net income of zero.
Unless a question states otherwise, the projected year combines the existing plants' results for the year just ended, unchanged, with the new plants' first full year, and the full $11,000,000 is raised with the 8% debentures (annual interest $880,000).
Selling prices, variable cost ratios and fixed operating costs behave as shown within the relevant range; fixed operating costs do not change for revenue changes of up to 15% in either direction.
The income tax rate is 25% on all taxable income and does not change. Interest is deductible, and after the expansion Tamsford has enough taxable income to use each year's interest deduction in that year.
In the all-debenture plan there is no preferred stock, and the number of common shares stays constant.
Leverage measures are point estimates at the projected level of the all-debenture plan, not arc estimates between two activity levels. Keep full precision in intermediate steps.

Tamsford intends to add the automated plants, which raise its fixed operating costs, and to fund them entirely with the debentures. Which statement is correct about how these two decisions together change the risk borne by Tamsford's common shareholders?

الإجابة The two decisions offset each other: the plants raise fixed operating costs, but debt lowers risk because debenture holders absorb part of any earnings shortfall. The two effects add rather than compound, so a 1% change in revenue moves EPS by DOL plus DFL percent, in either direction. Fixed interest magnifies the change in EBIT that fixed operating costs already magnified, so EPS moves by a larger percentage than revenue, up or down. Because interest is tax-deductible, the debentures add no risk for shareholders as long as Tamsford earns enough taxable income to use each deduction.

The treasurer's summary of the proposed debentures is being checked before it goes to the board. Select the TWO statements that correctly describe these debentures.

اختيار إجابتين. المحدد 0 / 2

الإجابة Being debentures, they would be secured by a mortgage on the two new plants, so holders could claim those plants in a default. While a debenture is outstanding, Tamsford pays $80 a year on it whatever happens to market yields after the issue; yield changes move only its market price. If yields on comparable debt rose to 9% after the issue, the debentures would trade above $1,000, since bond prices move with market yields. Tamsford may redeem them at $1,040 from the end of year 5, which helps it if rates fall, so investors usually demand a higher yield. The call feature lets debenture holders demand early repayment at $1,040 if Tamsford's credit quality weakens, protecting them against a credit downgrade.

The board is comparing the three instruments for which indicative terms were obtained: the 8% debentures, the 9% cumulative preferred stock and new common stock. Select the THREE statements that correctly describe a trade-off among these instruments.

اختيار 3 إجابات. المحدد 0 / 3

الإجابة With interest deductible and each deduction usable in the year it is paid, the debentures' after-tax cost is 6.0%, below their 8% coupon. Preferred dividends are deductible like interest, so the preferred stock's after-tax cost would be 6.75%, which is 9% x (1 - 25%). Preferred dividends are a fixed charge ahead of common dividends, so issuing the preferred would also magnify EPS changes caused by EBIT changes. A missed dividend on the cumulative preferred stock is an event of default that lets the holders force Tamsford into bankruptcy to recover par. New common stock adds no fixed financing charge, so it adds no financial leverage, but it spreads earnings and voting control over more shares. Because common stock requires no scheduled payments and holders are paid only when the board chooses, it is normally Tamsford's cheapest source of capital.

Under the all-debenture plan, calculate Tamsford's degree of total leverage for the projected year, covering the existing plants and the new plants together. Use DTL = total contribution margin / earnings before tax. Keep full precision (do not round DOL or DFL first) and enter the multiple as a positive number rounded to two decimal places.

الإجابة times

بـ 2 منازل عشرية.

Complete the analysis of Tamsford's projected year under the all-debenture plan. In the year just ended, the existing plants reported Existing plants' position . Operating leverage turns a percentage change in revenue into a larger percentage change in Measure magnified by operating leverage ; the fixed debenture interest then turns that change into a still larger percentage change in Measure magnified by financial leverage . If revenue at every plant were 4% below the projection, with the same variable cost ratios and fixed costs, projected EBT would be EBT after a 4% revenue shortfall .

Classify each feature of Tamsford's plan by the type of leverage it creates or measures. (1) The $880,000 of annual debenture interest, payable whatever EBIT turns out to be: Debenture interest . (2) The ratio of the percentage change in EPS to the percentage change in revenue: EPS change relative to revenue change . (3) Replacing hourly sorting labor with automated lines whose depreciation and service contract do not vary with the pounds processed: Automated lines . (4) EPS rising by more than 10% when EBIT rises by 10%, with the tax rate and share count unchanged: EBIT-to-EPS magnification . (5) The ratio of the percentage change in EBIT to the percentage change in revenue: EBIT change relative to revenue change . (6) The rise in Tamsford's ratio of total assets to common equity under the CFO's base plan: Assets-to-equity ratio .

Tamsford's treasury policy requires each step of a financing decision to use the approved output of the step before it. Put the six steps in the required order, from first to last.

إعادة الترتيب بالسحب أو بأزرار الأسهم.

Using the component costs, calculate the WACC and projected interest coverage of several candidate mixes of the remaining instruments.
Estimate the external capital the two plants require after any internally available cash.
Recommend to the board the lowest-WACC candidate mix whose projected interest coverage meets the indenture's 2.0 times requirement.
For the instruments still under consideration, convert each set of indicative terms into an after-tax component cost.
For that capital amount, list the instruments Tamsford could issue and obtain indicative terms for each.
Remove from the list any instrument the board will not accept for reasons other than cost, for example one that would give outside investors a vote, impose new limits on Tamsford's dividends, or rank a new class of holders ahead of the existing shareholders.

جارٍ الحفظ…

تظهر الدرجات والإجابات الصحيحة والشروح فور تسليم الإجابات. ولا يحصل السؤال غير المُجاب على أي درجة.

جارٍ الفحص…

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