financial management questions

Scott Schneider, CEO of Carolina, Inc., needs your help to better understand and solve some of the financial issues and tasks that Carolina is currently dealing with. See below.

• Carolina used to keep its excess cash with Fidelity Money Market fund. Over the last few years this fund has been posting an average return of 0.1% per month and you believe this performance pattern will continue into foreseeable future. Carolina invests into this account: 1,000,000 today; will add another 4,000,000 in 1 year and add another 2,000,000 in 2 years. How much will be in this account in 4 years? (Assume constant interest rate and no more additions/withdrawals).
• CFO of Carolina suggested setting a reserves account of $12,000,000 to replace some of its aging machinery in 2.5 years from today. Company plans to set aside 2,000,000 right away and then start contributing into reserves quarterly (at the end of each quarter) and it can earn 6% APR on the balance. How much needs to be allocated into this account each quarter?
• Carolina is considering a purchase of a new warehouse for its expanding parts division. Purchase will be financed with a $3,000,000 loan.The term of the loan: 15 years, amortizing (monthly payments), APR of 4%.The first payment is due one month from the day loan is taken.
• Carolina has being outsourcing all of its local deliveries to Virginia Inc., small local transportation firm. Now Carolina’s management is considering acquisition of Virginia. It is estimated that acquisition will generate annual cost savings of $600,000.For planning purposes you assume these savings will continue forever at this level.If the appropriate discount rate is 5%, what is the offering price that Carolina should make for Virginia Inc.?
• Part of Virginia purchase will be financed with a conventional, interest-only loan. CEO got quotes from couple banks: First National Bank offers 4.15 percent loans with monthly compounding. State Bank offers loans at 4.05 percent compounded semi-annually. Based on this information only, which bank is offering a better deal for Carolina? Why?
• Carolina will have to replace few trucks in its fleet at the end of this year. Carolina can lease trucks or buy them today with cash. Lease will require monthly lease payments of $12,500 at the beginning of each month for the next 5 years. Alternatively, Carolina can buy trucks today for $650,000 with available cash. If the opportunity cost of funds is 6.2% per year, should Carolina buy or lease? (Ignore taxes, service costs, down payment, fees on the lease etc. Hint: two options can be compared from cost perspective).
• Calculate selected ratios for Carolina (for Year 2022 only) in the table below:
• Carolina’s ROE for 2022 is 12.5% versus average ROE of 21.6% for the industry. What might be a reason(s) for the difference? What needs to be improved to bring Carolina’s ROE to par with the competition? Explain briefly.
• As with many other corporations, portion of Carolina’s assets is financed with debt. Name three reasons why use of leverage may be beneficial for the firm; three reasons why excessive reliance on debt financing may have negative consequences for the company (shareholders).
• Find Total Debt Ratio for Carolina for Year 2021. Let’s say, industry average in 2021 was 65%. If Carolina decides to bring its leverage in line with the industry, how this can be done? Name at least two ways how Carolina may adjust its debt ratio to the level of industry average (explain briefly. No need to show calculations).
• Ratio analysis is commonly used tool in corporate valuation and business analysis. A) Briefly discuss some of the limitations of ratios use (name at least four limiting factors); B) What are possible solutions/improvements to these limitations (discuss any 2 from part A above).
• Carolina issued a 15-year semi-annual non-callable bond four years ago. Bond has a $1,000 face value, coupon rate of 6% and it currently sells for $945. Carolina needs to issue 10-year semi-annual note. Note will be non-callable and is expected to get the same credit rating as outstanding bond issue. If Carolina wants to issue and sell new note at par, find approximate coupon rate that needs to be assigned to the note. (Hint: similar bonds/notes should be providing approximately same returns).
• Consider Carolina’s outstanding bond in the problem above: it is semi-annual 15-year bond issued 4 years ago, it sells for $945 and has 6% coupon. If this bond were callable with 3 years prior to maturity, how can one estimate average expected profitability on this bond? (Assume call price of $1060).
• Carolina is considering an acquisition of Double Crossing Inc. (DC). Before initiating negotiations with DC, Carolina’s management needs to understand intrinsic value of DC (find total firm value and price per share of DC Inc.).
• Give recommendation to Carolina’s CEO regarding debt financing with bonds: adding which provisions/characteristics to the bond issue would allow to reduce cost of financing (name at least 3 provisions); and adding which provisions/characteristics will increase cost of bonds financing (name at least 3 provisions)?
• CDG model is known for frequent inaccuracies in stock valuation in practice. What might be the potential issues with CDG model in case with Carolina (name at least 3 reasons why CDG model can be quite inaccurate valuation technique. Be specific, refer to any part of Problem 5 to support your answer if needed).
• Investor is considering two individual investments (out of set A-E above) to be added into existing, well-diversified portfolio.
• Briefly explain the concept of “market efficiency”. What will market efficiency mean for the validity and usefulness of all valuation methods/models (multiples valuation, CDG, FCF models and CAPM)?

• What will be the amount of each monthly payment?
• Alternatively, Carolina can use 20-year, monthly amortizing loan with 4.6% APR. How much more in total interest Carolina will pay if it goes with 20-year rather than 15-year loan? (Assume no pre-payments, refinancing, late payments etc.)

From this point answer any 7 questions and leave 8 questions blank

Use information below for questions 7-10 below.

Carolina, Inc. Balance Sheet

Carolina Inc. Income Statement

Briefly comment on key aspects of Carolina’s financial performance vs. its competition. Which area(s) may need to be substantially improved and why?

Use the following information:

Debt: $320 million

Common stock shares outstanding: 50 million

Expected FCF in 2016: $75 million

FCF growth rate: 3.0%

WACC: 9%

For the next question use the table below.

• Which investments would risk-averse investor add into portfolio (i.e., choosing low risk investments is the primary goal)? Why?
• If she is planning to invest in a portfolio of 2 assets only. As a rational, risk-averse investor, which two investments should she select? Why?