Homework 1-4 Questions AND Answers PDF

Preview

Summary

Download Homework 1-4 Questions AND Answers PDF

Description

HOMEWORK 1: A firm's capital structure refers to the firm's: proportions of financing from current and long-term debt and equity. One disadvantage of the corporate form of business ownership is the: double taxation of profits. The primary goal of financial management is to: maximize the current value per share of the existing stock. A conflict of interest between the stockholders and managers of a firm is referred to as the: agency problem.

Homework 3: 1) If Muenster, Inc., has an equity multiplier of 1.6, total asset turnover of 2.2, and a profit margin of 4 percent, what is its ROE? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) ROE = (PM)(TAT)(EM) ROE = (.040)(2.20)(1.60) ROE = .1408, or 14.08% 2) If the Moran Corp. has an ROE of 14 percent and a payout ratio of 22 percent, what is its sustainable growth rate? We need to calculate the retention ratio to calculate the sustainable growth rate. The retention ratio is:

b = 1 – .22 b = .78 Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE × b)/[1 – (ROE × b)] Sustainable growth rate = [.14(.78)]/[1 – .14(.78)] Sustainable growth rate = .1226, or 12.26%

3) The Raindrop Company has an ROE of 14 percent and a payout ratio of 30 percent. What is the company’s sustainable growth rate? The sustainable growth is: Sustainable growth rate

=

ROE × b 1 – ROE × b

where: b = Retention ratio = 1 – Payout ratio = .7 So: Sustainable growth rate

=

.140 × .7 1 – .140 × .7

Sustainable growth rate = .1086, or 10.86%

4) Firm A and Firm B have debt-total asset ratios of 25 percent and 15 percent, respectively, and returns on total assets of 8 percent and 13 percent, respectively. What is the return on equity for Firm A and Firm Firm A Firm B D/TA = .25

D/TA = .15

(TA − E)/TA = .25

(TA − E)/TA = .15

(TA/TA) − (E/TA) = .25

(TA/TA) − (E/TA) = .15

1 − (E/TA) = .25

1 − (E/TA) = .15

E/TA = .75

E/TA = .85

E = .75(TA)

E = .85 (TA)

Rearranging ROA, we find:

NI/TA = .08

NI/TA = .13

NI = .08(TA)

NI = .13(TA)

Since ROE = NI/E, we can substitute the above equations into the ROE formula, which yields:

Firm A: ROE = .08(TA)/.75(TA) ROE = .08/.75 ROE = .1067, or 10.67% Firm B: ROE = .13(TA)/.85 (TA) ROE = .13/.85 ROE = .1529, or 15.29%

5) Terrell, Inc.’s net income for the most recent year was $16,150. The tax rate was 25 percent. The firm paid $3,910 in total interest expense and deducted $5,180 in depreciation expense. What was t This problem requires you to work backward through the income statement. First, recognize that net income = (1 − TC)EBT. Plugging in the numbers given and solving for EBT, we get:

EBT = $16,150/(1 − .25)

EBT = $21,533.33

Now, we can add interest to EBT to get EBIT as follows:

EBIT = EBT + Interest paid EBIT = $21,533.33 + 3,910 EBIT = $25,443.33

To get EBITD (earnings before interest, taxes, and depreciation), the numerator in the cash coverage ratio, add depreciation to EBIT:

EBITD = EBIT + Depreciation EBITD = $25,443.33 + 5,180 EBITD = $30,623.33

Now, we can plug the numbers into the cash coverage ratio and calculate:

Cash coverage ratio = EBITD/Interest Cash coverage ratio = $30,623.33/$3,910 Cash coverage ratio = 7.83 times he company’s cash coverage ratio for the year?

The common-size balance sheet answers are found by dividing each category by total assets. For example, the cash percentage for 2018 is:

$8,064/$281,009 = .0287, or 2.87%

This means that cash is 2.87% of total assets.

The common-base year answers are found by dividing each category value for 2019 by the same category value for 2018. For example, the cash common-base year number is found by:

$10,004/$8,064 = 1.2406

This means the cash balance in 2019 is 1.2406 times as large as the cash balance in 2018.

8) Sourstone, Inc., had total assets of $293,000 and equity of $184,000 at the beginning of the year. At the end of the year, the company had total assets of $318,000. During the year, the company sold no new equity. Net income for the year was $98,000 and dividends were $47,000. What is the sustainable growth rate if you calculate ROE based on the end-of-period equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) What is the sustainable growth rate if you calculate ROE based on the beginning-of-period equity?

7) The

most recent financial statements for Scott, Inc., appear below. Interest expense will remain constant; the tax rate and the dividend payout rate also will remain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales.

HOMEWORK 2: Klingon Cruisers, Inc., purchased new cloaking machinery five years ago for $10 million. The machinery can be sold to the Romulans today for $9.1 million. Klingon's current balance sheet shows net fixed assets of $8 million, current liabilities of $780,000, and net working capital of $220,000. If all the current accounts were liquidated today, the company would receive $1.02 million cash. What is the book value of Klingon's assets today? 9,000,000(Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

b What is Klingon's market value of assets? 101,120,000 .

Terri Simmons is single and had $173,000 in taxable income. Use the rates from Table 2.3.

a Calculate her income taxes. 37,050 (Do not round intermediate calculations . and round your answer to the nearest whole dollar amount, e.g., 32.) b What is the average tax rate? 21.42 (Do not round intermediate calculations . and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c What is the marginal tax rate? 32 .

Sheaves, Inc., has sales of $56,000, costs of $25,400, depreciation expense of $2,850, and interest expense of $2,600. If the tax rate is 25 percent, what is the operating cash flow, or OCF? 24,313

Earnhardt Driving School’s 2018 balance sheet showed net fixed assets of $5 million, and the

2019 balance sheet showed net fixed assets of $5.6 million. The company’s 2019 income statement showed a depreciation expense of $210,000. What was the company's net capital spending for 2019? 810,000

The 2018 balance sheet of Speith’s Golf Shop, Inc., showed long-term debt of $5.8 million, and the 2019 balance sheet showed long-term debt of $6.2 million. The 2019 income statement showed an interest expense of $150,000. What was the firm’s cash flow to creditors during 2019? -250,000

The 2018 balance sheet of Speith’s Golf Shop, Inc., showed $570,000 in the common stock account and $2.4 million in the additional paid-in surplus account. The 2019 balance sheet showed $610,000 and $2.8 million in the same two accounts, respectively. If the company paid out $515,000 in cash dividends during 2019, what was the cash flow to stockholders for the year? 75,000

The 2018 balance sheet of Speith’s Golf Shop, Inc., showed long-term debt of $2.9 million, and the 2019 balance sheet showed long-term debt of $3.15 million. The 2019 income statement showed an interest expense of $145,000. The 2018 balance sheet showed $470,000 in the common stock account and $4.5 million in the additional paid-in surplus account. The 2019 balance sheet showed $510,000 and $4.8 million in the same two accounts, respectively. The company paid out $510,000 in cash dividends during 2019. Suppose you also know that the firm’s net capital spending for 2019 was $1,330,000, and that the firm reduced its net working capital investment by $61,000. What was the firm’s 2019 operating cash flow, or OCF?

1,334,000

Schwert Corp. shows the following information on its 2019 income statement: sales = $251,000; costs = $156,000; other expenses = $7,900; depreciation expense = $18,400; interest expense = $14,400; taxes = $19,005; dividends = $11,500. In addition, you’re told that the firm issued $5,900 in new equity during 2019 and redeemed $4,400 in outstanding longterm debt. (Do not round intermediate calculations.)

a. What is the 2019 operating cash flow? 68,095 b. What is the 2019 cash flow to creditors? 18,800 c. What is the 2019 cash flow to stockholders? 5,600 d If net fixed assets increased by $25,000 during the year, what was the addition to net working . capital (NWC)? 295

During 2019, Rainbow Umbrella Corp. had sales of $770,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $610,000, $125,000, and $180,000, respectively. In addition, the company had an interest expense of $56,000 and a tax rate of 21 percent. (Assume that interest is fully deductible.)

a. What is the company's net income for 2019? -201,000 (A negative answer should be indicated by a minus sign. Do not round intermediate calculations.) b. What is its operating cash flow? 35,000

During 2019, Rainbow Umbrella Corp. had sales of $840,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $600,000, $125,000, and $170,000, respectively. In addition, the company had an interest expense of $59,000 and a tax rate of 21 percent. (Assume that interest is fully deductible.) Suppose the company paid out $61,000 in cash dividends. If spending on net fixed assets and net working capital was zero, and if no new stock was issued during the year, what was the net new long-term debt? 5,000

Cusic Industries had the following operating results for 2019: sales = $33,409; cost of goods sold = $23,771; depreciation expense = $5,907; interest expense = $2,665; dividends paid = $1,915. At the beginning of the year, net fixed assets were $19,850, current assets were $6,991, and current liabilities were $3,938. At the end of the year, net fixed assets were $24,421, current assets were $8,630, and current liabilities were $4,592. The tax rate was 23 percent.

a. b. c. d1. d2.

What is net income for 2019? 821 What is the operating cash flow for 2019? 9,393 What is the cash flow from assets for 2019? -2,070 If no new debt was issued during the year, what is the cash flow to creditors? 2,665 If no new debt was issued during the year, what is the cash flow to stockholders -4,735

HOMEWORK 4: A LOT IN NOTE BOOK 1) First City Bank pays 7 percent simple interest on its savings account balances, whereas Second City Bank pays 7 percent interest compounded annually. If you made a $67,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 9 years? 13,966.77

ANSWER: 23,176.77-109210=13,966.77 2) Compute the future value of $2,000 compounded annually for 10 years at 9 percent. (9=i/y, -2000=pv, 10=n, cpt fv=4,734.73) b. Compute the future value of $2,000 compounded annually for 10 years at 12 percent. (12=i/y, -2000=pv, 10=n, cpt fv 6211.70.) c. Compute the future value of $2,000 compounded annually for 15 years at 9 percent.(9=i/y, -2000=pv, 15=n, cpt fv=7284.96.

3) Years=n, interest rate=i/y, future value=fv, cpt pv= answers

4) PRESENT VALUE=PV, YEARS=N, FUTURE VALUE=FV, CPT I/Y= ANSWERS 5) a At 7.4 percent interest, how long does it take to double your money? (Round your . answer to 2 decimal places, e.g., 32.16.) b At 7.4 percent interest, how long does it take to quadruple it? (Round your answer . to 2 decimal places, e.g., 32.16.)

MAKE PV NEGATIVE -1

6) AN Investor purchasing a British consol is entitled to receive annual payments from the British government forever.

What is the price of a consol that pays $240 annually if the next payment occurs one year from today? The market rate is 3.7 percent 64,486.49

7) Compute the future value of $2,500 continuously compounded for 5 years at an APR of 12 percent. 4,555.00 b. Compute the future value of $2,500 continuously compounded for 4 years at an APR of 8 percent. 3,442.50 c. Compute the future value of $2,500 continuously compounded for 12 years at an APR of 7 percent. 5,790.41 d. Compute the future value of $2,500 continuously compounded for 10 years at an APR of 7 percent 5,034.02

A-

B-

C-

D-

8) specter Co. has identified an investment project with the following cash flows. Year 1 2 3 4

Cash Flow $ 750 990 1,25 0 1,35 0

a If the discount rate is 7 percent, what is the present value of these . cash flows? b If the discount rate is 18 percent, what is the present value of . these cash flows? c If the discount rate is 24 percent, what is the present value of . these cash flows?

9) An investment offers $6,500 per year for 20 years, with the first payment occurring one year from now. a If the required return is 7 percent, . today? 68,861.09 b What would the value today be if the . years? 88,435.89 c What would the value today be if the . years? 92,042.53 d What would the value today be if the . 92,857.14

what is the value of the investment payments occurred for 45 payments occurred for 70 payments occurred forever?

10) Find the EAR in each of the following cases. (Use 365 days a year)

11) One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of $750 per month. You will charge 2.10 percent per month interest on the overdue balance. If the current balance is $20,000, how long will it take for the account to be paid off? $20,000 PV IS NEGATIVE

12) Mark Weinstein has been working on an advanced technology in laser eye surgery. His technology will be available in the near term. He anticipates his first annual cash flow from the technology to be $185,000, received two years from today. Subsequent annual cash flows will grow at 4.5 percent in perpetuity. What is the present value of the technology if the discount rate is 9 percent? This is a growing perpetuity. The present value of a growing perpetuity is:

PV = C/(r – g) PV = $185,000/(.09 – .045) PV = $4,111,111.11

It is important to recognize that when dealing with annuities or perpetuities, the present value equation calculates the present value one period before the first payment. In this case, since the first payment is in two years, we have calculated the present value one year from now. To find the value today, we discount this value as a lump sum. Doing so, we find the value of the cash flow stream today is:

PV = FV/(1 + r)t PV = $4,111,111.11/(1 + .09)1 PV = $3,771,661.57

13) What is the present value of an annuity of $7,200 per year, with the first cash flow received three years from today and the last one received 25 years from today? Use a discount rate of 8 percent.

THIS IS PRESENT VALUE OF THE ANNUITY OF ONE PERIOD BEFORE THE FIRST PAYMENT, OR YEAR 2. THE CASH FLOW TODAY IS:

14) Southern California Publishing Company is trying to decide whether to revise its popular textbook, Financial Psychoanalysis Made Simple. The company has estimated that the revision will cost $90,000. Cash flows from increased sales will be $21,600 the first year. These cash flows will increase by 4 percent per year. The book will go out of print five years from now. Assume that the initial cost is paid now and revenues are received at the end of each year. If the company requires a return of 10 percent for such an investment, calculate the present value of the cash inflows of the project The cash flows are a growing annuity, so the present value is: PV = C {[1/(r – g)] – [1/(r – g)] × [(1 + g)/(1 + r)]t} PV = $21,600{[1/(.10 – .04)] – [1/(.10 – .04)] × [(1 + .04)/(1 + .10)]5} PV = $88,039.54 The company should reject the project since the cost is more than the increased cash flows.

15) You need a 25-year, fixed-rate mortgage to buy a new home for $315,000. Your mortgage bank will lend you the money at an APR of 6.1 percent for this 300-month loan. However, you can only afford monthly payments of $1,550, so you offer to pay off any remaining loan balance at the end of the loan in the form of a single balloon payment. How large will this balloon payment have to be for you to keep your monthly payments at $1,550?

16) Consider a firm with a contract to sell an asset for $155,000 four years from now. The asset costs $96,000 to produce today.

a Given a relevant discount rate on this asset of 14 percent per year, calculate the profit (or . loss) the firm will make on this asset. (A loss should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b At what rate does the firm just break even? .

17) Given a discount rate of 3.8 percent per year, what is the value at Year 10 of a perpetual stream of $2,200 annual payments that begins at Year 20?

18) Suppose you are going to receive $12,600 per year for five years. The appropriate interest rate is 7.5 percent.

a- What is the present value of the payments if they are in the form of an ordinary 1. annuity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a- What is the present value if the payments are an annuity due? (Do not round 2. intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b- Suppose you plan to invest the payments for five years. What is the future value if the 1. payments are an ordinary annuity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b- Suppose you plan to invest the payments for five years. What is the future value if the 2. payments are an annuity due?

19) You have 35 years left until retirement and want to retire with $1.9 million. Your salary is paid annually, and you will receive $69,000 at the end of the current year. Your salary will increase at 2 percent per year, and you can earn a return of 8 percent on the money you invest. If you save a constant percentage of your salary, what percentage of your salary must you save each year? We need to find the first payment into the retirement account. The present value of the desired amount at retirement is:

PV = FV/(1 + r)t PV = $1,900,000/(1 + .08)35 PV = $128,505.63

This is the value today. Since the savings are in the form of a growing annuity, we can use the growing annuity equation and solve for the payment. Doing so, we get:

PV = C{[1/(r – g)] – [1/(r – g)] × [(1 + g)/(1 + r)]t} $128,505.63 = C{[1/(.08 – .02)] – [1/(.08 – .02)] × [(1 + .02)/(1 + .08)]35} C = $8,916.38

This is the amount you need to save next year. So, the percentage of your salary is:

Percentage of salary = $8,916.38/$69,000 Percentage of salary = .1292, or 12.92%

Note that this is the percentage of your salary you must save each year. Since your salary is increasing at 2 percent, and the savings are increasing at 2 percent, the percentage of salary will remain constant.

20) Two banks in the area offer 20-year, $225,000 mortgages at 4.7 percent and charge a $3,400 loan application fee. However, the application fee charged by Insecurity Bank and Trust is refundable if the loan application is denied, whereas that charged by I. M. Greedy and Sons Mortgage Bank is not. The current disclosure law requires that any fees that will be refunded if the applicant is rejected be included in calculating the APR, but this is not required with nonrefundable fees (presumably because r...