Short-Term Investments - High Point University



Best Case

Worst Case

Realistic Scenario

Short-Term Investments

1. Balance—p.50

2. Interest Income: (ST Investments + New ST Investments)*Interest Earned

3. Risk Level p. 50—0 Lowest Risk 90 day T-Bill, 9 Highest Risk -40% to +45%

4. Cash Shortages and Marketable Securities Liquidation p.50

a. If there is no cash, marketable securities will be liquidated with a 3% penalty—cash shortage X 1.03 = mkt sec liquidated

b. The 3% penalty is charged as interest expense (finance charges)

c. Mkt securities are liquidated at the end of the period, so there is interest

d. Tax reduction from account penalty loan interest

e. Cash Shortage = Short Term Penalty Loan + Reduction of Mkt Securities

f. If not enough marketable securities, then ST Penalty Loan at the rate of 8% QUARTERLY; Penalty Debt automatically retired in next period

g. Penalty Loan Shortage: Cash Shortage + 8% to pay for the interest p.52

h. The tax benefit of paying interest charges will give a positive cash ending balance== 40% of interest charges

Dividends (Common Stock) p. 75

1. Dividend Payout Rate = Annual Dividends Per Share/EPS

2. Stability = negative when the dividends in dollar terms are reduced

3. The greater the NPV projects, the lower the Dividend Payout Rate should be. P.27

4. The Higher the Earnings Growth Rate, the lower the Dividend Payout Rate

5. Dividend Yield = (Dividend X 4)/Stock Price p. 76

6. Dividend Yield is more important in slow growth environments p. 77

7. Common stock dividends cannot cause negative common stockholder equity. P.75

Debt: p. 63

1. When debt is issued, there is a .00125 or .125% charge per million dollars of debt issued in the quarter

2. The riskier the company, the greater the interest expense

Short Term Loans P. 64

1. 1 Year Loans—repaid in 4 equal, quarterly payments p. 64

2. Retiring the debt early is not an option p. 64

3. The loan is at the beginning of the quarter; however, 25% is paid back at the end of the year. So, you will have interest on the full loan, but the balance sheet will only show 75% of the loan amount. P. 64

Intermediate-Term Loans: Two-year (8 quarters) and three-year (12 quarters) P. 65

Two Year (8 Quarter) Loans

1. The loan is at the beginning of the quarter and repaid in equal installments over 8 quarters.

2. Debt due in four quarters will be listed as a current liability.

3. Retirement before maturity is allowed without penalty.

4. For interest calculation purposes, a retirement is viewed as taking place at the beginning of the quarter. P. 65

Long-Term Bonds

1. Issued for 10 years or 40 quarters

2. Repayable in 40 equal quarterly principal payments starting at the end of the issuance quarter

3. $50,000 flotation cost every time a bond is issued—part of the bond interest expense

4. Callable Bonds: premium rate of 8 percent if retired before maturity—8% is listed as a bond redemption cost on the income statement

a. most distant payments are retired first

b. a specific issue is not retired

5. The four quarters bond debt due is listed as a current liability

Common Stock

1. Affected by Six Items p. 71

2. Issuance of Common Stock

a. $50,000 underwriting charge per secondary offering

b. 5% of current price is a flotation charge

c. Receipts per share: p 73

d. Don’t forget, when shares are issued, you will pay a dividend on the shares

e. Issuing additional shares is dilutive

3. Repurchase (aka stock buy back) of Common Stock (p. 73)

a. Must specify the number of shares to buy back

b. Must determine the tender price per share

c. A lower price share requires a higher percent premium

d. An “all or none” repurchase is not available.

e. A $1 charge per share occurs on shares requested to be tendered but are NOT

f. The debt/common equity must be 4:1 or stronger. Short term, intermediate, and long-term debt are the debt items used in the calculation; the condition applies to repurchase of common stock not the issuance of debt.

Cost of Capital (or Weighted Average Cost of Capital) p. 25

1. Debt cost of capital= Interest Rate * (1 – tax rate)

2. Commons stock cost of capital: As a start— cost of preferred stock + (preferred stock cost of capital – before tax bond cost of capital

3. New or declining firms have a higher cost of capital vs. established or mature companies

Capital Budgeting

See Excel spreadsheet

Plants-- Units of Plant Purchased— P. 54

1. It takes two quarters to build a new plant—e.g., plant ordered in q2 is usable in q4

2. Plant life: 20 quarters; Depreciation—straight line—1/20th; starts when operational

3. Fixed $250,000 order cost every time plant capacity is purchased

4. Total plant cost is cash outflow in period it is ordered

5. Purchase Plant by units—e.g., (20,000 units X $321 per unit) + $250,000

Machinery-- Units of Machinery Purchased

1. 1 unit of machine capacity = the ability to produce 1 unit

2. Purchase in period 1, available/operational in period 2

3. Depreciation = 1/8—starts in period after acquisition

4. Machinery: 8 quarter useful life

5. Machinery can only be purchased—sale is not an option

Warehousing Fees

Note: As long as I control how much you produce, warehousing fees will be difficult to control

1. Ending inventory-- $1 first 2,000; $3.00 next 5,000; $8.00 thereafter

2. Part of COGS

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