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Three Finance NPV Problems

Exercise 20-6
Schumann Shoe Manufacturer is considering whether or not to refund a $70 million, 10% coupon, 30-year bond issue that was sold 8 years ago. It is amortizing $4.5 million of flotation costs on the 10% bonds over the issue’s 30-year life. Schumann’s investment bankers have indicated that the company could sell a new 22-year issue at an interest rate of 8 percent in today’s market. Neither they nor Schumann’s management anticipate that interest rates will fall below 6 percent any time soon, but there is a chance that interest rates will increase.

A call premium of 10 percent would be required to retire the old bonds, and flotation costs on the new issue would amount to $5 million. Schumann’s marginal federal-plus-state tax rate is 40 percent. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term government securities returning 5 percent annually during the interim period.

a. Perform a complete bond refunding analysis. What is the bond refunding’s NPV?
b. At what interest rate on the new debt is the NPV of the refunding no longer positive?

Exercise 18-6
As part of its overall plant modernization and cost reduction program, Western Fabrics’ management has decided to install a new automated weaving loom. In the capital budgeting analysis of this equipment, the IRR of the project was found to be 20% versus the project’s required return of 12%.

The loom has an invoice price of $250,000, including delivery and installation charges. The funds needed could be borrowed from the bank through a 4-year amortized loan at a 10% interest rate, with payments to be made at the end of each year. In the event that the loom is purchased, the manufacturer will contract to maintain and service it for a fee of $20,000 per year paid at the end of each year. The loom falls in the MACRS 5-year class, and Western’s marginal federal-plus-state tax rate is 40%.
Aubey Automation Inc., maker of the loom, has offered to lease the loom to Westen for $70,000 upon delivery and installation (at t=0) plus 4 additional annual lease payments of $70,000 to be made at the ends of Years 1 through 4. (Note that there are 5 lease payments in total.) The lease agreement includes maintenance and servicing. Actually, the loom has an expected life of eight years, at which time its expected salvage value is zero; however, after 4 years, its market value is expected to equal its book value of $42,500. Tanner-Woods plans to build and entirely new plant in 4 years, so it has no interest in either leasing or owning the proposed loom for more than that period.

a. Should the loom be leased or purchased?
b. The salvage value is clearly the most uncertain cash flow in the analysis. Assume that the appropriate salvage value pre-tax discount rate is 15 percent. What would be the effect of a salvage value risk adjustment on the decision?
c. Assuming that the after-tax cost of debt should be used to discount all anticipated cash flows, at what lease payment would the firm be indifferent to either leasing or buying?

Exercise 15-12
Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown below. Data for the risk-free rate, the market risk premium, an estimate of Reacher’s unlevered beta, and the tax rate are also shown below. Based on this information, what is the firm’s optimal capital structure and what is the weighted average cost of capital at the optimal structure? 

what is a quadratic indirect attack model

On a whiteboard, flip chart, or blank white paper, draw a quadratic indirect attack model. Identify who you believe to be the (1) targets of violence, (2) target of terror, and (3) target of terror. 

Structural Configurations For Organizations

Assignment 1:—Structural Configurations for Organizations

Henry Mintzberg (1980) introduced a new way to explain structural configurations by “clustering various functions into groupings and showing their relative size and clout in response to different missions and external challenges” (Bolman & Deal, 2009, p. 78). Other authors offer different ways of looking at this topic.

Using the University online library resources, locate a minimum of four different scholarly sources that offer different approaches on structural configurations for organizations.

Complete the following:

  • Pick two extra approaches, one of those being Sally Helgesen’s (1995) “The Web of Inclusion.”
  • From the manager’s standpoint, examine the different approaches and provide the pros and cons of each one of them when compared to Mintzberg’s proposal.

Write your initial response in a minimum of 400 words. Apply APA standards to citation of sources.

By Thursday, January 9, 2014, post your responses to the appropriate Discussion Area.

Bolman, L., & Deal, T. (2009). Reframing organizations: Artistry, choice, and leadership(4th ed.). Jossey-Bass.

Helgesen, S. (1995). The Web of Inclusion: A New Architecture for Building Great Organizations. New York: Currency/Doubleday.

Mintzberg, H. (1980). Structure in 5’s: A synthesis of the research on organization design.Management Science, 26(3), 322–341.

Assignment 2: Home Depot Analysis

For this assignment, you will review an article describing a situation in which a business leader used a management approach that proved to be unsuccessful. You will write an analysis that covers the requirements listed in the directions below.

Directions:

Review the following:

Using the University online library resources, locate at least 2 different scholarly sources on the topic.

Write a paper that covers the following:

  1. Explain what led to an unsuccessful outcome at Home Depot.
  2. Analyze the Home Depot scenario utilizing the four-frame model (i.e., Structure, HR, Political, and Symbolic). 
  3. Explain which frames were more useful in your analysis and justify your reasoning.
  4. Explain an experience you have faced in your own career that is similar to the situation presented in this case. Analyze the approach taken and assess its success. 

Write a 2–3-page paper in Word format. Utilize at least two scholarly sources in support. Your paper should be written in a clear, concise, and organized manner; demonstrate ethical scholarship in accurate representation and attribution of sources; and display accurate spelling, grammar, and punctuation.