The expected return is calculated by the following formula.

a)      Market Value Balance Sheet Before Announcement

The market value balance sheet before announcement of debt is presented below:

The after tax earnings of the company is around $1,080,000. While share price is not given in the case scenario which will be calculated as:

The market value of the balance sheet after the debt announcement is presented below:

a)      Share Prices Immediately

After the change of equity value now share prices would be as following: 

a)      Market Value Balance Sheet After Restructuring

The market value for the statement of financial position (balance sheet) after the restructuring of equity would as the following:

In the above table, the present value of the tax shield is calculated as:

a)      Required Return on Peterson Equity

The restructuring will also change the required rate of return. The required return for the company is calculated by the use of the following formula:

Problem: 2

a)      Sensitivity Analysis and Scenario Analysis

Sensitivity analysis is a measure to evaluate the impact of one variable changing over time. While on the other hand, scenario analysis considers the impact of all variables changing over the selected time frame.

b)     Sensitivity Analysis

For instance, measuring the impact of a specific piece of information regarding advertising on sales.

c)      Scenario Analysis

The scenario analysis is examining the overall impact of advertising on sales with all information aspects.

d)     Purpose of calculating degree operating leverage

The operating leverage enables the managerial staff to maintain and manage their debt. Otherwise, the increase in debt can be critical for the financial health of the company.

e)      NPV and EVA

Problem: 3

Considering the given scenario, Blue Plc has a total of 4.5 million shares outstanding (4.5 million * $80 = 450000000). While comparatively equity of Green company worth more than Blue Plc by $350000000. Although, Blue has the cost of debt greater than Green. Thus, it can be concluded that Blue equity is not better to buy than Green equity.

Problem: 4

a)      Value of Unlevered Firm

The value of the unlevered firm is earning after interest and tax divided by the cost of capital. See the following calculation for Moon Industries’ unlevered firm value.

a)      Adjusted present value

The leverage value for Moon Industries is calculated using adjusted present value.

Using the formula:

a)      Flow to Equity Method

The firm value is to be calculated by the use of flow to equity method.

Calculating Earning After Interest Before Tax

 Now calculating Equity value:

See the following table for the calculated equity value of the company with the use of flow to the equity method.

Problem: 5

a) Company Issues Rights

Company issues rights for the increase of their capital. Whenever companies need additional capital (for operations or meeting financial obligations) they issue rights. 

b) Problem and Solution 

For instance, ABC company is unable to meet its financial obligation. While the company cannot borrow more money to pay off its debt. In such a situation, they offer their rights to the debtor company to pay down debt. 

Problem: 6 

a) Cost Function 

The expenses and production cost will change over the change in total shipments number. In this table, change in the number of ships at sea will change marginal cost, the average variable cost, and average total cost for the shipment.

b) Perfect Shipping 

Considering the case scenario, if ships are only financed by the equity then the company would be able to generate profit higher than the profit it would generate by financing the operations with debt. The company need to generate more than 1.5 million if operations are only financed by equity. While the company would be required to generate 5 million if operations are financed by debt as it would require the additional cost of debt [interest].

c) Perfect Shipping Earn on Average Per Ship

If case perfect Shipping finance its operations by both methods equity (30%) and debt (70%) then the company would need to generate more than 4 million to survive (at zero profit). 

Assumptions:

• Increase in debt financing will increase interest cost 

• The decrease in the percentage of debt financing will reduce interest cost and required operating income will be reduced as well.  

d) The optimal number of Ships and Debt to Equity

The company need to keep an optimal number of ships at sea for cost control and profit maximization. Increase in debt financing would increase the debt to equity ratio. Somehow, an optimal debt to equity ratio is less than 50%. 

e) Ship owner and Shipping Company 

The shipowner is the person whom goods are shipped by the sea. For instance, a vehicle manufacturing company is the owner of the ship by which they make the shipment of their vehicles. While the shipping company is the company that provide shipment and freight services.

Problem: 7 

a. The Fleet 

The Belship company is working as a shipment and fright company. This company has net cash flow from financing activities around 22,063. While earning before tax is around 54, 048 in the year 2018. 

b. Risk Factors 

The company is having some risk some of which are presented in the annual report. The following type of risk factors can generate a larger impact on the future value of the company.  

1) Liquidity Risk 

2) Financial Loss Risk

3) Increasing Cost risk

4) Competitive Risk 

5) Risk of bankruptcy 

6) Risk of loss in accounts receivables

7) Solvency Risk 

8) Higher volatility Risk 

9) Operational Risk 

10) Increasing fuel prices risk 

c. Capital Structure 

The capital structure of the company should be optimal to control the increasing cost of interest. Moreover, an increase in equity financing can also increase the risk of extremal involvement in the company's operations. The investors take interest and draw an impact on the decision-making process because of excessive equity financing. 

d. Volatility, Net asset value, and Share price 

Volatility: The volatility represents the fluctuation between share prices a company. Increase in volatility represents a greater risk of investment.

Net Asset value: the net book value of assets (plant and non-current) represent the worth of assets after amortization and depreciation expenses. 

Share prices: the share prices of Belships Company is $6.15 (per share) as stated by Yahoo Finance. 

e. Company’s Dividend Policy

 The company set out dividend policies for its common shareholders. Belships company is also offering dividend to its investors of common shares. The forward dividend for 2019 is 0.83%. 

f. Buy, Hold, or Sell 

As an analyst, I would recommend an investor to buy the share of Belships as current prices are low. Somehow, the company is expecting an increase in the share prices which will benefit an investor. The investors who have already purchased the share of Belships Company should also wait for increase in the share prices rather than selling at lower market values.