Finance Hmwrk set1
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Problem 2-3 Income statement
Molteni Motors Inc. recently reported $2.25 million of net income. Its EBIT was $5.25 million, and its tax rate was 40%. What was its interest expense? (Hint: Write out the headings for an income statement and then fill in the known values. Then divide $2.25 million net income by 1 − T = 0.6 to find the pre-tax income. The difference between EBIT and taxable income must be the interest expense.) Round your answer to the nearest dollar. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000.
2
Kendall Corners Inc. recently reported net income of $2.4 million and depreciation of $456,000. What was its net cash flow? Assume it had no amortization expense. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000.
3.
In its most recent financial statements, Del-Castillo Inc. reported $50 million of net income and $850 million of retained earnings. The previous retained earnings were $843 million. How much in dividends did the firm pay to shareholders during the year? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000.
4.
Vigo Vacations has $195 million in total assets, $5.4 million in notes payable, and $22.5 million in long-term debt. What is the debt ratio? Round your answer to two decimal places.
5.
Reno Revolvers has an EPS of $1.10, a cash flow per share of $4.85, and a price/cash flow ratio of 10.0. What is its P/E ratio? Round your answer to two decimal places.
6.
Needham Pharmaceuticals has a profit margin of 2.5% and an equity multiplier of 1.9. Its sales are $100 million and it has total assets of $40 million. What is its Return on Equity (ROE)? Round your answer to two decimal places.
7.
Assume you are given the following relationships for the Haslam Corporation:
|
Sales/total assets |
2.2 |
|
Return on assets (ROA) |
4% |
|
Return on equity (ROE) |
5% |
1. Calculate Haslam's profit margin. Do not round intermediate calculations. Round your answer to two decimal places. %
2. Calculate Haslam's liabilities-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places. %
3. Suppose half of Haslam's liabilities are in the form of debt. Calculate the debt-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places. %
8.
The Nelson Company has $1,080,000 in current assets and $400,000 in current liabilities. Its initial inventory level is $200,000, and it will raise funds as additional notes payable and use them to increase inventory.
1. How much can Nelson's short-term debt (notes payable) increase without pushing its current ratio below 1.3? Round your answer to the nearest cent.
$
2. What will be the firm's quick ratio after Nelson has raised the maximum amount of short-term funds? Round your answer to two decimal places.
9.
The Morris Corporation has $350,000 of debt outstanding, and it pays an interest rate of 9% annually. Morris's annual sales are $1.75 million, its average tax rate is 30%, and its net profit margin on sales is 3%. If the company does not maintain a TIE ratio of at least 3 to 1, its bank will refuse to renew the loan and bankruptcy will result. What is Morris's TIE ratio? Do not round intermediate calculations. Round your answer to two decimal places.
10.
eBook
What is the future value of a 6%, 5-year ordinary annuity that pays $600 each year? Round your answer to the nearest cent. $
If this were an annuity due, what would its future value be? Round your answer to the nearest cent. $
Use both the TVM equations and a financial calculator to find the following values. Round your answers to the nearest cent. (Hint: Using a financial calculator, you can enter the known values and then press the appropriate key to find the unknown variable. Then, without clearing the TVM register, you can "override" the variable that changes by simply entering a new value for it and then pressing the key for the unknown variable to obtain the second answer. This procedure can be used in parts b and d, and in many other situations, to see how changes in input variables affect the output variable.)
a. An initial $500 compounded for 10 years at 6.9 percent. $
b. An initial $500 compounded for 10 years at 13.8 percent. $
c. The present value of $500 due in 10 years at a 6.9 percent discount rate. $
d. The present value of $500 due in 10 years at a 13.8 percent discount rate. $
11
a. Find the present values of the following cash flow streams. The appropriate interest rate is 6%. Round your answers to the nearest cent. (Hint: It is fairly easy to work this problem dealing with the individual cash flows. However, if you have a financial calculator, read the section of the manual that describes how to enter cash flows such as the ones in this problem. This will take a little time, but the investment will pay huge dividends throughout the course. Note that, when working with the calculator's cash flow register, you must enter CF0 = 0. Note also that it is quite easy to work the problem with Excel, using procedures described in the Chapter 4 Tool Kit .)
|
Year |
Cash Stream A |
Cash Stream B |
|
1 |
$100 |
$300 |
|
2 |
400 |
400 |
|
3 |
400 |
400 |
|
4 |
400 |
400 |
|
5 |
300 |
100 |
b. Stream A $ Stream B $
c. What is the value of each cash flow stream at a 0% interest rate? Round your answers to the nearest cent. Stream A $ Stream B $
12
While Mary Corens was a student at the University of Tennessee, she borrowed $11,000 in student loans at an annual interest rate of 8%. If Mary repays $1,800 per year, then how long (to the nearest year) will it take her to repay the loan? Do not round intermediate calculations. Round your answer to the nearest whole number.
year(s)
13.
You need to accumulate $10,000. To do so, you plan to make deposits of $1,800 per year - with the first payment being made a year from today - into a bank account that pays 9.47% annual interest. Your last deposit will be less than $1,800 if less is needed to round out to $10,000. How many years will it take you to reach your $10,000 goal? Round your answer up to the nearest whole number. year(s)
How large will the last deposit be? Round your answer to the nearest cent. $
14
LL Incorporated's currently outstanding 11% coupon bonds have a yield to maturity of 13%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is LL's after-tax cost of debt? Round your answer to two decimal places.
%
15
Summerdahl Resort's common stock is currently trading at $39.00 a share. The stock is expected to pay a dividend of $2.75 a share at the end of the year (D1 = $2.75), and the dividend is expected to grow at a constant rate of 8% a year. What is the cost of common equity? Round your answer to two decimal places.
%
16
Booher Book Stores has a beta of 0.8. The yield on a 3-month T-bill is 3% and the yield on a 10-year T-bond is 7%. The market risk premium is 6.5%, and the return on an average stock in the market last year was 13.5%. What is the estimated cost of common equity using the CAPM? Round your answer to two decimal places.
%
17
David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company's outstanding bonds is 9%, and the company's tax rate is 40%. Ortiz's CFO has calculated the company's WACC as 10.95%. What is the company's cost of equity capital? Round your answer to two decimal places.
%
18
A project has an initial cost of $58,050, expected net cash inflows of $12,000 per year for 8 years, and a cost of capital of 9%. What is the project's NPV? (Hint: Begin by constructing a time line.) Do not round your intermediate calculations. Round your answer to the nearest cent.
$
19
A project has an initial cost of $50,000, expected net cash inflows of $12,000 per year for 8 years, and a cost of capital of 9%. What is the project's IRR? Round your answer to two decimal places.
%
20
A project has an initial cost of $36,925, expected net cash inflows of $8,000 per year for 11 years, and a cost of capital of 13%. What is the project's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.
%
21
A project has an initial cost of $68,700, expected net cash inflows of $8,000 per year for 10 years, and a cost of capital of 13%. What is the project's PI? Do not round your intermediate calculations. Round your answer to two decimal places.______
22
A project has an initial cost of $54,175, expected net cash inflows of $11,000 per year for 8 years, and a cost of capital of 13%. What is the project's payback period? Round your answer to two decimal places.
years
23
A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 9 years, and a cost of capital of 11%. What is the project's discounted payback period? Round your answer to two decimal places.
years
24
NPVs, IRRs, and MIRRs for Independent Projects
Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck is $17,100 and that for the pulley system is $22,430. The firm's cost of capital is 14%. After-tax cash flows, including depreciation, are as follows:
|
Year |
Truck |
Pulley |
||
|
1 |
$5,100 |
|
$7,500 |
|
|
2 |
5,100 |
|
7,500 |
|
|
3 |
5,100 |
|
7,500 |
|
|
4 |
5,100 |
|
7,500 |
|
|
5 |
5,100 |
|
7,500 |
|
a. Calculate the IRR for each project. Round your answers to two decimal places.
Truck: % What is the correct accept/reject decision for this project? Is it accept or reject
a. Pulley: % What is the correct accept/reject decision for this project?
b. Calculate the NPV for each project. Round your answers to the nearest dollar, if necessary. Enter each answer as a whole number. For example, do not enter 1,000,000 as 1 million.
Truck: $ What is the correct accept/reject decision for this project?
Pulley: $ What is the correct accept/reject decision for this project?
c. Calculate the MIRR for each project. Round your answers to two decimal places.
Truck: % What is the correct accept/reject decision for this project?
Pulley: % What is the correct accept/reject decision for this project?
25
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $14 million, and production and sales will require an initial $3 million investment in net operating working capital. The company's tax rate is 30%.
a. What is the initial investment outlay? Write out your answer completely. For example, 2 million should be entered as 2,000,000. $
b. The company spent and expensed $150,000 on research related to the new project last year. Would this change your answer?
c. Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. How would this affect your answer? The project's cost will .
26
The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service:
|
Projected sales |
$25 million |
|
Operating costs (not including depreciation) |
$11 million |
|
Depreciation |
$4 million |
|
Interest expense |
$5 million |
The company faces a 30% tax rate. What is the project's operating cash flow for the first year (t = 1)? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$
27
Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $19 million, of which 70% has been depreciated. The used equipment can be sold today for $6.65 million, and its tax rate is 40%. What is the equipment's after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$
28
Although the Chen Company's milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $41,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $8,400 per year. It would have zero salvage value at the end of its life. The Project cost of capital is 10%, and its marginal tax rate is 35%. Should Chen buy the new machine?
29
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,080,000, and it would cost another $21,500 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $669,000. The machine would require an increase in net working capital (inventory) of $18,000. The sprayer would not change revenues, but it is expected to save the firm $366,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.
a. What is the Year 0 net cash flow? $
b. What are the net operating cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.
|
Year 1 |
$ |
|
Year 2 |
$ |
|
Year 3 |
$ |
c. What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)? Do not round intermediate calculations. Round your answer to the nearest dollar. $
d. If the project's cost of capital is 10 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar. $ Should the machine be purchased?
30
Broussard Skateboard's sales are expected to increase by 15% from $9.0 million in 2016 to $10.35 million in 2017. Its assets totaled $4 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 6%, and the forecasted payout ratio is 75%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year. Round your answer to the nearest dollar. Do not round intermediate calculations.
$
31
Broussard Skateboard's sales are expected to increase by 25% from $7.6 million in 2016 to $9.50 million in 2017. Its assets totaled $4 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 70%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar. $
Assume that an otherwise identical firm had $5 million in total assets at the end of 2016. The identical firm's capital intensity ratio (A0*/S0) is than Broussard's; therefore, the identical firm is capital intensive - it would require increase in total assets to support the increase in sales.
