HiI need people to write a case for my finance class, it is gonna be Johnson Window company Capital structure. Please write a case no less than 10 pages. There are 10 questions at the end of case, please make sure to consider the answer of the questions(please do not directly quote the question, but talk about the answer while writing), and analysis of this case.I already finished the data calculate that would be helpful and easier for your work.Thanks.
case_8.pdf
data.xlsx
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number ol’share s that could be issued to the tbunders at $0. l0 each and still have sufhcient value leli
in rhe firm to raise enough ecluity capital at $10 per share to meel. the firm’s initial capital recluirernents. Thus, Gibbs concluded that she should create a business plan that not only described thc
product, the rnarkcts to be served, and the firm’s production plans, but which also outlined the
anticipated financing requirements in some detail.
The initial marketing plan called fbr selling thc tinted windows directly to large contractors
and usin-9 sevcral wholesalers to distribute the items to architects and small contractors. At a pro.jected average selling price of $750 per unit, they had little doubt that sales would be strong. Howcver, thc tintcd windows will be used prirnarily in new construction, and this industry has always
been subject to highly cyclical sales. Further, although the sunbelt region is continuing to L’xperience
relatively strong commercial and residential markets, other sunbelt areas such as Houston have been
sufl’ering liom high commercial vacancy rates and depressed residential markets. Thus. Gibbs t’elt
uncomlitrtable about using a point cstimate tbr unit sales. st’r she developed estimates firr threc possible scenarios: rlost likely, optirnistic, and pessimistic, with probabilities ol occurrence of 0.50,
0.25, and 0.25, respectively. Of course, Cibbs realizes that unit sales could assume almost any value.
but I’rer discrete distribution is roughly cornparable to a continuons norrnal distribution which has a
range of plus or n.rinus 2 standard deviations abttut the mean:
Probability
Unit Sales
Pessimistic
0.25
52,200
Most likely
Optimistic
050
025
67,500
82,800
Scenario
Dollar
Sales
$39,150,000
50,625,000
62,100,000
After an in-depth study, Phillips, the engineer-production manager, identified two alternative
production processes that could be employed, and he asked Gibbs to evaluate the financial irnplications of the alternatives and to recornnrend a course of action. Plan A involves only a sn.rall amount
of automated equiprnent, as most of the window cornponents would bc purchased ticlm local subcontractors. Under this plan, annual fixcd costs are estimated to be $7,769,900. while variable costs
would be $585 per unit produced. The second alternative. Plan B, would recluire the firm to make a
significant investment in fabrication machinery, resulting in a fixed cost estintate ol’$17,845,000 per
year and variable costs clf $4 l5 per unit. Neither l’ixed cost estimate includes interest expense,
since thc capitalization mix is still uncertain. The company plans to set the initial sales price at
$750 per unit regardless of which production process is chosen. Total capital requirernents lbr both
current and fixed assets. as well as start-up operating tunds, are estimated to be $14.0 million under
Plan A and $20.0 million under Plan B.
To help with the capitalization decision. Gibbs had extensive meetings with investment
bankers, venture capitalists, cornmercial bankers, insurance exccutives. and mutual-l’und managers.
On the basis of these rreetings, shc constructed the following estimates lbr the relationship between
financial leverage and capital costs:
Amount
Borrowed
S O million
4 million
8 nlilllon
12 1nillion
16 milllon
Cost of
Debt
00Sを
H.0
120
140
170
@ 1994 South-Western, a part of Cengage Learning
70
Cost of Equity
140%
150
17.0
200
24.0
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bankers invariably put on a “road show” where they, along with company executives, travel
around lhe country and meet with institutional investors and security analysts to pre-sell the
stock and gct an idea of the interest in the company. The final price is adjusted to re{lect
investor reactions. with this background, answer the fbllowing questions:
a. If the firm’s tax rate, T, is estimated at 40 percent, what amount ol’ financial leverage
would maximize the value ctf the firm’l
b. How many shares will the tbunders receive? What is the value of their shares’l
c. Calculate Johnson Window’s weighted average cosr ol’capiral (WACC) at each debt
levcl. What is the relationship between Johnson’s value and its WACC ?
d. Suppose an investor purchased shares at $ I 0. learneri that the fbunders had bought their
shares tor onty $0.10, and then f’elt cheated and threatened to sue the cornpany and its
lbunders. Would this person have a good case’l Should the SEC protect investors liom
this kind of thing’/
Gibbs is well aware of the t’act that the average manutacturing company has a tinres-interestearned (TIE) ratio of about 6. Using TIE as a risk measure, together with your answer to
Question 2, how risky does the company appear to be?
4.
Supptrse Johnson is planning to raise debt by issuing a2}-year term loan. What would be the
annual payment, including both interest and principal amortization’l Use this intbrrnation to
calculate Jclhnson’s expected first-year debt service coverage ratio, clefined here as
EBIT/(Interest expense + Befbre-tax principal repayment). If the average manutacturing
firm has a coverage ratio of about 4. what does this indicate about Johnson’s riskiness?
5.
Suppose this were your company. Would your choice of debt level be inlluenced by your
other asset holdingsT That is, would it matter whether your entire net worth was invested in
the company as opposed to the situation where you owned rnillions of dollars ol’stocks in
other cornpanies in addition to your holdings in Johnson Window,l
6.
The entire analysis depends on (a) Gibbs’s estimates ol’the costs of debt and equity at diffbrent capital structures, and (b) the validity of the ecluation given in
2.
a. How confident
are you in Gibbs’s sstimates
mates af’fbct the capital structure decision l
euestion
olku and k.? Could changes in
these esti-
b. What assulnptions underlie the equity valuation equation? Is it likcly that Johnson
meets
these assumptions?
A theory has been expressed in the finance literature that “intbrmation asymrnetries” cause
investors to interpret the sale of stock by a company as a “signal” that things nlay gct worse
in the future, whereas the use of debt is taken as a positive signal. In general, what implicatitlns does this have lbr capital structure policy? Does it matter il’the flrrn in cluestion is a
mature company or a start-up firm? Would it matter if the lounders planne
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