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Horizon Lines appears to be facing both operating and financial challenges. To determine the extent of its financial problem, we need to analyze its interest coverage and leverage ratios for 2011 based on the projections provided in Exhibit 8. A low interest coverage ratio and high leverage ratio would indicate significant financial distress and potential default on debt obligations. By examining these ratios, we can ascertain whether Horizon's financial woes stem primarily from its operations or its capital structure. If it's
primarily a financial problem, addressing the capital structure through restructuring may be necessary for long-term viability.
Each of the three financial restructuring options for Horizon Lines comes with
its own set of advantages and disadvantages. Option 1 involves issuing equity, which could dilute existing shareholders but provide immediate funds
to improve liquidity. Option 2, issuing new debt, may lead to increased interest expenses and further financial strain if not managed properly. Option
3, restructuring existing debt, could alleviate immediate pressure but may involve complex negotiations with creditors and potential conflicts of interest. Despite the risks associated with each option, the preferred choice depends on Horizon's specific circumstances and long-term strategic goals. Personally, I lean towards Option 1 as it offers the flexibility to raise capital without adding further debt burden, provided it's executed judiciously.
In the event of choosing Option 1 (issuing equity), the number of shares needed to raise $100 million can be calculated by dividing the desired amount by the current share price. Assuming Horizon aims to raise additional
capital while maintaining its existing capital structure of $524 million ($330 million of convertibles and $194 million of senior credit facility), issuing new shares could help achieve this financial objective without further increasing debt obligations. The exact number of shares required would depend on the prevailing market conditions and investor appetite for Horizon's equity offering.
If Option 3, debt restructuring, is selected, careful planning is essential to ensure the cooperation of current debt holders. The restructuring plan could involve renegotiating terms such as interest rates, maturity dates, and possibly converting debt to equity. Debt holders may agree to such a plan if it offers them a better chance of recouping their investments compared to the alternative of Horizon defaulting on its obligations. By presenting a compelling restructuring proposal that balances the interests of all stakeholders, Horizon can potentially secure the necessary support from its creditors and pave the way for financial recovery.
Milestone II: CASE 47 - Rosetta Stone: Pricing the 2009 IPO
Rosetta Stone's decision to go public entails both advantages and disadvantages. Going public can provide access to a broader investor base and facilitate raising capital for expansion and growth initiatives. Additionally, it enhances the company's visibility and credibility in the market, potentially attracting strategic partnerships and acquisition opportunities. However, the process of going public also subjects the
company to stringent regulatory requirements, increased scrutiny from shareholders and analysts, and the pressure to deliver consistent financial performance to meet market expectations. Therefore, Rosetta Stone needs to carefully weigh these factors before proceeding with the IPO.
Calculating the proposed market price for Rosetta Stone shares involves employing both discounted cash flow (DCF) and market multiples methods. The DCF approach entails forecasting future cash flows generated by the company and discounting them back to their present value using an appropriate discount rate. Market multiples, on the other hand, involve comparing Rosetta Stone's key financial metrics, such as earnings or revenue, to those of comparable publicly traded companies to derive a valuation multiple. By applying these methods, we can arrive at a range of valuations for Rosetta Stone shares, which can then be used to determine the proposed market price.
Recommending a selling price for Rosetta Stone shares requires careful consideration of various factors, including the company's growth prospects, competitive positioning, industry trends, and prevailing market conditions. The recommended price should strike a balance between maximizing shareholder value and attracting investor interest. It should reflect the intrinsic value of the company as determined through rigorous financial analysis, while also taking into account investor expectations and the potential for aftermarket trading dynamics post-IPO.
The market-multiples approach offers several advantages, such as simplicity,
transparency, and reliance on market-derived data. By comparing Rosetta Stone to similar publicly traded companies, this method provides a quick and
intuitive way to gauge the company's relative valuation. However, it may oversimplify the analysis and fail to capture the unique aspects of Rosetta Stone's business model and growth potential. Additionally, market multiples are sensitive to market fluctuations and changes in investor sentiment, which could result in volatile valuation estimates.
Conducting a discounted cash flow (DCF) analysis requires careful examination of Rosetta Stone's financial forecast presented in Case Exhibit 8.
It involves scrutinizing key assumptions underlying the forecast, such as revenue growth rates, operating margins, and capital expenditure requirements. Assessing the reasonableness of the forecast period is essential to ensure that it adequately captures the company's long-term growth prospects without making overly optimistic or pessimistic assumptions.
Determining an appropriate discount rate for Rosetta Stone's cash-flow forecast involves evaluating the company's risk profile and cost of capital. Factors to consider include the company's beta, debt-to-equity ratio, and prevailing market conditions. The discount rate should reflect the expected return demanded by investors commensurate with the level of risk associated with investing in Rosetta Stone.
Developing a terminal value for Rosetta Stone involves making assumptions about the company's future growth and profitability beyond the explicit
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Related Questions
Which of the following assumptions are necessary for AFN equation to work?
1) The ratios A0/S and LO/S, the profit margin, and payout ratio are stable.
2) Common stock and long-term debt are tied directly to sales.
3) None of the firm's ratios will change.
4) Fixed assets, but not current assets, are tied directly to sales.
5) Last year's total assets were not optimal for last year's sales.
arrow_forward
Consider the comprehensive example involving Burlington Resources (Table 16.5). In this example, it was assumed that forecasted sales and expected EBIT, as well as the interest rates on short-term and long-term debt, were independent of the firm’s working capital investment and financing policies. However, these assumptions are not always completely realistic in practice. Sales and EBIT are generally a function of the firm’s inventory and receivables policies. Both of these policies, in turn, affect the firm’s level of investment in working capital. Likewise, the interest rates on short-term and long-term debt are normally a function of the riskiness of the firm’s debt as perceived by lenders and, hence, are affected by the firm’s working capital investment and financing decisions.
Forecasted Sales
Expected EBIT
(in Millions
(in Millions
Interest Rate
Policy
of Dollars)
of Dollars)
STD (%)
LTD (%)
Aggressive
$98
$9.8
9.1
10.1
Moderate
99…
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An analyst at a company notes that its cost of debt is far below that of equity. He concludes that it is important for the firm to maintain the ability to increase its borrowing because if it cannot borrow, it will be forced to use more expensive equity to finance some projects. This might lead it to reject some projects that would have seemed attractive if evaluated at the lower cost of debt.
How do you balance the amount of equity and debt? Explain the significance of maintaining the ability to increase borrowing capacity for a company with a lower cost of debt compared to equity. How does this impact project evaluation and investment decisions, and what role does the concept of cost of capital play in such considerations?
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Using the following data for Jackson Products Company, answer Parts a through g:
Evaluate the liquidity position of Jackson relative to that of the average firm in theindustry. Consider the current ratio, the quick ratio, and the net working capital (currentassets minus current liabilities) for Jackson. What problems, if any, are suggested by thisanalysis?b) Evaluate Jackson’s performance by looking at key asset management ratios. Are anyproblem apparent from this analysis?c) Evaluate the financial risk of Jackson by examining its times interest earned ratio and itsequity multiplier ratio relative to the same industry average ratios.d) Evaluate the profitability of Jackson relative to that of the average firm in its industry,.e) Give an overall evaluation of the performance of Jackson relative to other firms in itsindustry.f) Perform a DuPont analysis for Jackson. What areas appear to have the greatest need forimprovement?g) Jackson’s current P/E ratio is 7 times. What factor(s) are…
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. The directors as well as the other stakeholders of Roche Pakistan were worried as the company documented losses in 2010 after the implementation of an expansion plan. Therefore, they hired you to get the company back on tract in terms of its financial position. You being the financial analyst would analyze the current financial health and suggest that what actions should be taken to recover the losses and regain its financial health. Moreover, you are required to answer the following questions, using the recent and projected financial information shown below. Clearly explain your answers, not just no or yes.
Income Statements
2009
2010
2011E
Sales$ 3,432,000
$ 5,834,400
$ 7,035,600
CGS 2,864,000
4,980,000
5,800,000
Depreciation18,900
116,960
120,000
Other Expenses340,000
720,000
612,960
Total Op Costs$ 3,222,900
$ 5,816,960
$ 6,532,960
EBIT$ 209,100
$ 17,440
$ 502,640
Interest Expense62,500
176,000
80,000
EBT$ 146,600
$ (158,560)
$ 422,640
Taxes (40%)58,640
(63,424)
169,056
Net…
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1. Suppose that a financial institution has a negative $25 million difference between its assets and liabilities. Is the institution exposed to refinancing risk or reinvestment risk and what will happen to net income if there is a rise in interest rates?
2. Suppose a financial institution has a positive $25 million difference between its assets and liabilities. Is the institution exposed to refinancing risk or reinvestment risk and what will happen to net income if there is a drop in interest rates?
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Which of the following statement is not true as part of building financial statement forecast model?
While the bare minimum may be last year's balance sheet, it is unlikely that you can produce useful projections based only on a single period.
Financial statement forecasting models have to start with at least some historical financial statements for the company.
Using the historical data from the top competitor of the industry is important to create some benchmarks to assets if the company has been doing well or poorly.
All statements are true.
We need to get historical financial statements for at least three years - five is better and make sure that they are based on consistent accounting polices.
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Debt management ratios measure how effectively the firm uses its
plant and equipment. Which of the following statements is
CORRECT?
The use of debt will always decrease a firm's ROE.
O Debt exposes the firm to more financial risk than if it was financed only
with equity.
Firms with relatively high debt ratios typically have lower expected
returns when the economy is normal, but experience higher returns and
possibly face bankruptcy if the economy goes into a recession.
The TIE ratio measures the extent to which operating income can
increase before the firm is unable to meet its annual interest costs.
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Regarding the EPS fallacy, which of the following statements is correct:
a. When a company issues debt and uses all the proceeds to buy back equity and as a result EPS rises, the fact that some analysts associate the rise of EPS to an improvement in the company's performance is called the EPS fallacy.
b. All given statements are correct.
c. One of the reasons behind the EPS fallacy is not to take into account that when EPS rises mechanically due to a leveraged recapitalisation, the cost of equity also rises in the same proportion and the share price does not change (assume no taxes and perfect capital markets world).
d. Suppose companies A and B have identical cash flows but different capital structures. Suppose further that EPS(A) > EPS(B). We cannot conclude that A has a better performance than B.
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The DuPont equation shows the relationships among asset management, debt management, and ratios. Management can use the DuPont equation to analyze ways of improving the firm's performance. Its equation is:
Ratio analysis is important to understand and interpret financial statements; however, sound financial analysis involves more than just calculating and interpreting numbers. factors also need to be considered.
Quantitative Problem: Rosnan Industries' 2022 and 2021 balance sheets and income statements are shown below.
Balance Sheets
2022
2021
Assets
Cash and equivalents
$
70
$
55
Accounts receivable
275
300
Inventories
375
350
Total current assets
$
720
$
705
Net plant and equipment
2,000
1,490
Total assets
$
2,720
$
2,195
Liabilities and Equity
Accounts payable
$
150
$
85
Accruals
75
50…
arrow_forward
Which of the following is the correct explanation for the purpose of financial risk ratios?
Select one:
a. They show the probability of whether the company will face problems in operations.
b. They show the profitability of the company over a specific period of time.
c. They show the relative proportion of debt items with respect to shareholders' equity or total capital.
d. They show the relative levels of liquid assets of the company.
According to the information given in the table below, which of the following is Raw materials consumed?
Opening Stock Raw Materials 32300
Purchases 128800
Freight in 4950
Sales return 2350
Wages paid to labor 78900
Closing Stock Raw Materials 28400
Select one:
a. 135300
b. 149900
c. 143700
d. 137650
d. Current ratio
arrow_forward
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Industry
Company
Current Ratio
Debt-Asset Ratio
Oil & Gas
Industry Average 2020
1.08
.52
Exxon
.80
.51
Marathon Oil
1.32
.41
BP America
11.01
.66
arrow_forward
Which of the following statements is correct?
A. If assets and spontaneously generated liabilities are not projected to grow at the same rate as sales, then the AFN method will provide more accurate forecasts than the projected financial statement method.
B. Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the AFN forecast.
C. A negative AFN indicates that retained earnings and spontaneous capital are far more than sufficient to finance the additional assets needed.
D. AFN is defined as the funds that a firm must raise internally.
E. The AFN equation for forecasting funds requirements requires only a forecast of the firm’s balance sheet. Although a forecasted income statement may help clarify the results, income statement data are not essential because funds needed relate only to the balance sheet.
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Suppose company Z is already in financial distress and the equity holders are very close to default. Suddenly there is a shock that causes an increase in the standard deviation of the return on company Z's assets. Which of the following correctly describes the new situation faced by company Z?
A) Debt value will increase with the shock and equity holder are more likely to default.
B) Equity value will increase with the shock and equity holder are less likely to default.
C) Both Debt value and equity value will increase but the likelihood of default is unchanged.
D) Both debt value and equity value will decrease and the likehood of default will increase.
arrow_forward
Which of the following is the correct explanation for the purpose of financial risk ratios?
Select one:
a. They show the relative levels of liquid assets of the company.
b. They show the relative proportion of debt items with respect to shareholders' equity or total capital.
c. They show the profitability of the company over a specific period of time.
d. They show the probability of whether the company will face problems in operations.
arrow_forward
In the mid-2000s, Fannie Mae was in severe financial difficulty and desperately needed additionalcapital for the company to survive. What factors prevented Fannie Mae from simply providingpotential lenders with misleading financial statements to make the company look like a risk-freeinvestment?
arrow_forward
Which of the following is the correct explanation for the purpose of financial risk ratios?
Select one:
O a. They show the relative proportion of debt items with respect to shareholders' equity or total capital.
b. They show the profitability of the company over a specific period of time.
c. They show the probability of whether the company will face problems in operations.
O d. They show the relative levels of liquid assets of the company.
arrow_forward
S1: When developing forecasted financial statements there are some inputs that management controls such as the growth rate and operating costs/sales ratio, while other inputs such as the tax rate and interest rate are not under its control. S2: A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.
a. Both statements are true.
b. Only statement 1 is true.
c. Only statement 2 is true.
d. Both statements are false.
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Related Questions
- Which of the following assumptions are necessary for AFN equation to work? 1) The ratios A0/S and LO/S, the profit margin, and payout ratio are stable. 2) Common stock and long-term debt are tied directly to sales. 3) None of the firm's ratios will change. 4) Fixed assets, but not current assets, are tied directly to sales. 5) Last year's total assets were not optimal for last year's sales.arrow_forwardConsider the comprehensive example involving Burlington Resources (Table 16.5). In this example, it was assumed that forecasted sales and expected EBIT, as well as the interest rates on short-term and long-term debt, were independent of the firm’s working capital investment and financing policies. However, these assumptions are not always completely realistic in practice. Sales and EBIT are generally a function of the firm’s inventory and receivables policies. Both of these policies, in turn, affect the firm’s level of investment in working capital. Likewise, the interest rates on short-term and long-term debt are normally a function of the riskiness of the firm’s debt as perceived by lenders and, hence, are affected by the firm’s working capital investment and financing decisions. Forecasted Sales Expected EBIT (in Millions (in Millions Interest Rate Policy of Dollars) of Dollars) STD (%) LTD (%) Aggressive $98 $9.8 9.1 10.1 Moderate 99…arrow_forwardAn analyst at a company notes that its cost of debt is far below that of equity. He concludes that it is important for the firm to maintain the ability to increase its borrowing because if it cannot borrow, it will be forced to use more expensive equity to finance some projects. This might lead it to reject some projects that would have seemed attractive if evaluated at the lower cost of debt. How do you balance the amount of equity and debt? Explain the significance of maintaining the ability to increase borrowing capacity for a company with a lower cost of debt compared to equity. How does this impact project evaluation and investment decisions, and what role does the concept of cost of capital play in such considerations?arrow_forward
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- The DuPont equation shows the relationships among asset management, debt management, and ratios. Management can use the DuPont equation to analyze ways of improving the firm's performance. Its equation is: Ratio analysis is important to understand and interpret financial statements; however, sound financial analysis involves more than just calculating and interpreting numbers. factors also need to be considered. Quantitative Problem: Rosnan Industries' 2022 and 2021 balance sheets and income statements are shown below. Balance Sheets 2022 2021 Assets Cash and equivalents $ 70 $ 55 Accounts receivable 275 300 Inventories 375 350 Total current assets $ 720 $ 705 Net plant and equipment 2,000 1,490 Total assets $ 2,720 $ 2,195 Liabilities and Equity Accounts payable $ 150 $ 85 Accruals 75 50…arrow_forwardWhich of the following is the correct explanation for the purpose of financial risk ratios? Select one: a. They show the probability of whether the company will face problems in operations. b. They show the profitability of the company over a specific period of time. c. They show the relative proportion of debt items with respect to shareholders' equity or total capital. d. They show the relative levels of liquid assets of the company. According to the information given in the table below, which of the following is Raw materials consumed? Opening Stock Raw Materials 32300 Purchases 128800 Freight in 4950 Sales return 2350 Wages paid to labor 78900 Closing Stock Raw Materials 28400 Select one: a. 135300 b. 149900 c. 143700 d. 137650 d. Current ratioarrow_forwarddiscuss the meaning of liquidity and solvency as it applies to a company's liquidity and credit-risk. It is often thought that the higher the company's current ratio and/or the lower the debt-to-asset ratio, the better the company's financial condition. Do you agree with these statements? Select from industry examples noted below to support/explain your point of view Industry Company Current Ratio Debt-Asset Ratio Oil & Gas Industry Average 2020 1.08 .52 Exxon .80 .51 Marathon Oil 1.32 .41 BP America 11.01 .66arrow_forward
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