Fiance Midterm review, Ch1-6 fiance midterm practice from quizzes
You are evaluating the balance sheet for Goodman's Bees Corporation. From the balance sheet you find the following balances: cash and marketable securities = $800,000, accounts receivable = $1,600,000, inventory = $2,100,000, accrued wages and taxes = $570,000, accounts payable = $870,000, and notes payable = $670,000. Calculate Goodman Bees' net working capital.
$ 2,390,000 correct Net working capital = Current assets - Current liabilities. Goodman's Bees' current assets = Cash and marketable securities $ 800,000 Accounts receivable 1,600,000 Inventory 2,100,000 Total current assets $ 4,500,000 Current liabilities Accrued wages and taxes $ 570,000 Accounts payable 870,000 Notes payable 670,000 Total current liabilities $ 2,110,000 So the firm's net working capital was $2,390,000 ($4,500,000 - $2,110,000).
A deposit of $300 earns the following interest rates: a. 8 percent in the first year. b. 6 percent in the second year. c. 5 percent in the third year. What would be the third year future value? (Round your answer to 2 decimal places.)
$ 360.61 correct
Income Statement Barnyard, Inc.'s 2008 income statement lists the following income and expenses: EBIT = $503,500, Interest expense = $53,000, and Net income = $319,500. What is the 2008 Taxes reported on the income statement? There is not enough information to calculate 2008 Taxes. $131,000 $184,000 $450,500
$131,000
Statement of Cash Flows Ann's Flowers Inc. reported 2008 net income of $1.20 million and depreciation of $252,000. The top part Ann's Flowers, Inc.'s 2007 and 2008 balance sheets is listed below (in millions of dollars). Current assets: 2007 2008 Current liabilities: 2007 2008 Cash and marketable securities $3.20 $2.10 Accrued wages and taxes $1.02 $1.02 Accounts receivable 4.10 5.20 Accounts payable 3.02 4.10 Inventory 6.20 5.10 Notes payable 9.46 7.28 Total $13.50 $12.40 Total $13.50 $12.40 What is the 2008 net cash flow from operating activities for Ann's Flower's, Inc.? $1,332,000 -$1,100,000 $1,200,000 $2,532,000
$2,532,000
Income Statement Barnyard, Inc.'s 2008 income statement lists the following income and expenses: EBIT = $507,500, Interest expense = $44,000, and Taxes = $159,500. Barnyard's has no preferred stock outstanding and 130,000 shares of common stock outstanding. What are its the 2008 earnings per share? (Round your answer to 2 decimal places.) $3.57 $2.34 $2.68 $3.90
$2.34
Income Statement Bullseye, Inc.'s 2008 income statement lists the following income and expenses: EBIT = $901,000, Interest expense = $86,500, and Net income = $571,500. What is the 2008 Taxes reported on the income statement? $329,500 There is not enough information to calculate 2008 Taxes. $814,500 $243,000
$243,000
Free Cash Flow You are considering an investment in Crew Cut, Inc. and want to evaluate the firm's free cash flow. From the income statement, you see that Crew Cut earned an EBIT of $23.09 million, paid taxes of $3.91 million, and its depreciation expense was $7.91 million. Crew Cut's gross fixed assets increased by $10.09 million from 2007 to 2008. The firm's current assets increased by $6.09 million and spontaneous current liabilities increased by $3.91 million. What is Crew Cut's operating cash flow, investment in operating capital and free cash flow for 2008, respectively in millions? $27.09, $12.27, $14.82 $23.09, $10.09, $13.00 $23.09, $11.82, $11.27 $27.09, $10.09, $17.00
$27.09, $12.27, $14.82
TriCycle, Corp. began the year 2008 with $28 million in retained earnings. The firm earned net income of $8.8 million in 2008 and paid $1.18 million to its preferred stockholders and $3.18 million to its common stockholders. What is the year-end 2008 balance in retained earnings for TriCycle? $41.16 million $28 million $36.8 million $32.44 million
$32.44 million
Present Value What is the present value of a $3,900 deposit in year 5 and another $4,400 deposit at the end of year 9 if interest rates are 10 percent? $830.00 $3,520.01 $4,348.62 $4,287.62
$4,287.62 0 = CFO 3,900 = C01, 1 F01 0 = C02, 3 F02 4,400= C03. 1 F03 I = 10 NPV = 4,287.62
Statement of Cash Flows In 2008, Upper Crust had cash flows from investing activities of −$270,000 and cash flows from financing activities of −$163,000. The balance in the firm's cash account was $86,000 at the beginning of 2008 and $118,000 at the end of the year. What was Upper Crust's cash flow from operations for 2008? $118,000 $433,000 $32,000 $465,000
$465,000
Balance Sheet Jack and Jill Corporation's year-end 2009 balance sheet lists current assets of $254,000, fixed assets of $804,000, current liabilities of $191,000, and long-term debt of $296,000. What is Jack and Jill's total stockholders' equity? $1,058,000 There is not enough information to calculate total stockholder's equity. $571,000 $487,000
$571,000
Effective Annual Rate A loan is offered with monthly payments and a 10.25 percent APR. What's the loan's effective annual rate (EAR)? 16.68% 10.75% 9.75% 11.33%
(1 + .1025/12)^12 - 1 = .10746 = 10.75%
Balance Sheet You are evaluating the balance sheet for Campus Corporation. From the balance sheet you find the following balances: Cash and marketable securities = $394,000, Accounts receivable = $194,000, Inventory = $94,000, Accrued wages and taxes = $11,500, Accounts payable = $315,000, and Notes payable = $615,000. What is Campus's net working capital? $1,623,500 $941,500 -$259,500 $682,000
-$259,500
Last year, Lakesha's Lounge Furniture Corporation had an ROA of 7.5 percent and a dividend payout ratio of 25 percent. What is the internal growth rate?
0.075 x (1 - 0.25)/ 1 - [0.075 x (1 - 0.25)] =5.96
Last year, Lakesha's Lounge Furniture Corporation had an ROE of 17.5 percent and a dividend payout ratio of 20 percent. What is the sustainable growth rate?
0.175 x (1 - 0.20)/1- [0.175 x (1 - 0.20)]=16.28
A 2-year Treasury security currently earns 1.73 percent. Over the next two years, the real risk-free rate is expected to be 1.00 percent per year and the inflation premium is expected to be 0.30 percent per year. Calculate the maturity risk premium on the 2-year Treasury security.
1..73% = 0.30% + 1.00% + 0.00% + 0.00% + MP=>MP = 1.73% - (0.30% + 1.00% + 0.00% + 0.00%) = 0.43% 0.43%
Determinants of Interest Rate for Individual Securities A Corporation's 10-year bonds have an equilibrium rate of return of 10.00 percent. For all securities, the inflation risk premium is 1.53 percent and the real interest rate is 3.03 percent. The security's liquidity risk premium is .18 percent and maturity risk premium is .73 percent. The security has no special covenants. What is the bond's default risk premium? 2.00% 5.47% 4.53% 12.41%
10.00% = 1.53% + 3.03% + DRP + .18% + .73% => DRP = 10.00% - (1.53% + 3.03% + .18% + .73%) = 4.53%
Sustainable Growth Rate Last year Umbrellas Unlimited Corporation had an ROE of 15.8% and a dividend payout ratio of 40.7%. What is the sustainable growth rate? 9.37% 34.27% 24.90% 10.34%
10.34%
What annual rate of return is earned on a $5,000 investment when it grows to $7,750 in four years? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
11.58 correct %
Four Years Future Value What is the future value of $10,000 deposited for four years earning 9% interest rate annually?
14,116 PV = 10,000, PMT = 0, I =9, N = 4, FV = 14,116
Unbiased Expectations Theory One-year Treasury bills currently earn 4.60 percent. You expect that one year from now, one-year Treasury bill rates will increase to 4.75 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities? 4.7500% 9.3500% 4.6750% 4.6000%
1R2 = [(1 + .0460)(1 + .0475)]1/2 −1 = 4.6750%
9.00% = 1.52% + 3.02% + DRP + .17% + .72% => DRP = 9.00% - (1.52% + 3.02% + .17% + .72%) = 3.57%
1R2 = [(1 + .0560)(1 + .0585)]^1/2 − 1 = 5.725%
Liquidity Premium Hypothesis One-year Treasury bills currently earn 6.25 percent. You expect that one year from now, one-year Treasury bill rates will increase to 6.50 percent. The liquidity premium on two-year securities is .150 percent. If the liquidity theory is correct, what should the current rate be on two-year Treasury securities? 6.3750% 4.3000% 6.4500% 12.9000%
1R2 = [(1 + .0625)(1 + .0650 + .0015)]^1/2 − 1 = 6.4500%
One-year Treasury bills currently earn 2.35 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 2.55 percent and that two years from now, 1-year Treasury bill rates will increase to 3.05 percent. The liquidity premium on 2-year securities is 0.05 percent and on 3-year securities is 0.15 percent. If the liquidity premium theory is correct, what should the current rate be on 3-year Treasury securities? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
1R2 = [(1 + 0.0235)(1 + 0.0255 + 0.0005)(1 + 0.0305 + 0.0015)]1/3 - 1 = 2.72% 1R2 = [(1 + 0.0235)(1 + 0.0255 + 0.0005)(1 + 0.0305 + 0.0015)]1/3 - 1 = 2.72%
One-year Treasury bills currently earn 2.55 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.05 percent and that two years from now, 1-year Treasury bill rates will increase to 3.45 percent. If the unbiased expectations theory is correct, what should the current rate be on 3-year Treasury securities? (
1R3 = [(1 + 0.0255)(1 + 0.0305)(1 + 0.0345)]1/3 - 1 = 3.02% 1R3 = [(1 + 0.0255)(1 + 0.0305)(1 + 0.0345)]1/3 - 1 = 3.02%
Unbiased Expectations Theory Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows: 1R1=4.50%, E(2r1) =5.50%, E(3r1) =6.00%, E(4r1)=6.35% Using the unbiased expectations theory, what is the current (long-term) rate for four-year-maturity Treasury securities? 6.3500% 1.5510% 5.5875% 5.5852%
1R4 = [(1 + .0450)(1 + .0550)(1 + .0600)(1 + .0635)]1/4 − 1 = 5.5852%
Liquidity Premium Hypothesis Based on economists' forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: R1 = 5.50% E(r2) = 6.60% L2 = .30% E(r3) = 6.80% L3 = .33% E(r4) = 7.00% L4 = .35% Using the liquidity premium hypothesis, what is the current rate on a four-year Treasury security? 7.0000% 6.7175% 6.4750% 7.3500%
1R4 = [(1 + .0550)(1 + .0660 + .0030) (1 + .0680 + .0033)(1 + .0700 + .0035)]1/4 − 1 = 6.7175%
Liquidity Premium Hypothesis Based on economists' forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: R1 = 5.75% E(r2) = 6.85% L2 = .55% E(r3) = 7.05% L3 = .58% E(r4) = 7.25% L4 = .60% Using the liquidity premium hypothesis, what is the current rate on a four-year Treasury security? 7.8500% 6.7250% 7.2500% 7.1543%
1R4 = [(1 + .0575)(1 + .0685 + .0055) (1 + .0705 + .0058)(1 + .0725 + .0060)]^1/4 − 1 = 7.1543%
Unbiased Expectations Theory Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows: 1R1=6.20%, E(2r1) =6.70%, E(3r1) =7.70% E(4r1)=8.20% Using the unbiased expectations theory, what is the current (long-term) rate for four-year-maturity Treasury securities? 1.9900% 8.2000% 7.2000% 7.1970%
1R4 = [(1 + .0620)(1 + .0670)(1 + .0770)(1 + .0820)]1/4 − 1 = 7.1970%
On March 11, 20XX, the existing or current (spot) 1-, 2-, 3-, and 4-year zero coupon Treasury security rates were as follows: 1R1 = 0.65%, 1R2 = 1.30%, 1R3 = 1.70%, 1R4 = 1.85% Using the unbiased expectations theory, calculate the 1-year forward rates on zero coupon Treasury bonds for years 2, 3, and 4 as of March 11, 20XX
2 1.95% 3 2.50% 4 2.30 % 2f1= [(1 + 1R2)2/(1 + 1R1)] - 1 3f1= [(1 + 1R3)3/(1 + 1R2)2] - 1 4f1= [(1 + 1R4)4/(1 + 1R3)3] - 1 2f1 = [(1 + 1R2)2 / (1 + 1R1)] - 1 = [(1 + 0.0130)2 / (1 + 0.0065)] - 1 = 1.95% 3f1 = [(1 + 1R3)3 / (1 + 1R2)2] - 1 = [(1 + 0.0170)3 / (1 + 0.0130)2] - 1 = 2.50% 4f1 = [(1 + 1R4)4 / (1 + 1R3)3] - 1 = [(1 + 0.0185)4 / (1 + 0.0170)3] - 1 = 2.30%
Ramakrishnan, Inc., reported 2015 net income of $20 million and depreciation of $2,700,000. The top part of Ramakrishnan, Inc.'s 2015 and 2014 balance sheets is reproduced below (in millions of dollars).
2015 2014 2015 2014 Current assets: Current liabilities: Cash and marketable securities $ 25 $ 12 Accrued wages and taxes $ 24 $ 21 Accounts receivable 85 78 Accounts payable 73 65 Inventory 139 116 Notes payable 65 60 Total $ 249 $ 206 Total $ 162 $ 146 Calculate the 2015 net cash flow from operating activities for Ramakrishnan, Inc. (Enter your answer in dollars not in millions.) Explanation: Cash Flows from Operating Activities Net income $ 20,000,000 Additions (sources of cash): Depreciation 2,700,000 Increase in accrued wages and taxes 3,000,000 Increase in accounts payable 8,000,000 Subtractions (uses of cash): Increase in accounts receivable − 7,000,000 Increase in inventory − 23,000,000 Net cash flow from operating activities: $ 3,700,000
Ramakrishnan, Inc., reported 2015 net income of $50 million and depreciation of $3,000,000. The top part of Ramakrishnan, Inc.'s 2015 and 2014 balance sheets is reproduced below (in millions of dollars).
2015 2014 2015 2014 Current assets: Current liabilities: Cash and marketable securities $ 55 $ 18 Accrued wages and taxes $ 36 $ 27 Accounts receivable 89 84 Accounts payable 101 95 Inventory 186 128 Notes payable 95 90 Total $ 330 $ 230 Total $ 232 $ 212 Calculate the 2015 net cash flow from operating activities for Ramakrishnan, Inc. (Enter your answer in dollars not in millions.) 5,000,000 Explanation: Cash Flows from Operating Activities Net income $ 50,000,000 Additions (sources of cash): Depreciation 3,000,000 Increase in accrued wages and taxes 9,000,000 Increase in accounts payable 6,000,000 Subtractions (uses of cash): Increase in accounts receivable − 5,000,000 Increase in inventory − 58,000,000 Net cash flow from operating activities: $ 5,000,000
What's the present value of a $980 annuity payment over six years if interest rates are 10 percent? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
4,268.16 PVA6=980x[1- 1/(1+.10)^6/.10]=980x4.355261
Solving for Rates What annual rate of return is earned on a $3,800 investment when it grows to $8,100 in eighteen years?
4.29 PV = -3,800, N = 18, PMT = 0, FV = 8,100, CPT I = 4.29
Determinants of Interest Rate for Individual Securities A 2-year Treasury security currently earns 4.50 percent. Over the next two years, the real interest rate is expected to be 2.19 percent per year and the inflation premium is expected to be 1.39 percent per year. What is the maturity risk premium on the 2-year Treasury security? .90% 5.30% 1.06% .92%
4.50% = 2.19% + 1.39% + 0.00% + 0.00% + MP => MP = 4.50% − (2.19% + 1.39% + 0.00% + 0.00%) = .92%
Discounting Two Years What is the present value of a $560 payment in two years when the discount rate is 8 percent?
480.11 FV = 560, PMT = 0, I = 8, N = 2, PV = 480.11
Forecasting Interest Rates On May 23, 20XX, the existing or current (spot) one-year, two-year, three-year, and four-year zero-coupon Treasury security rates were as follows: 1R1 = 5.50%, 1R2 = 6.00%, 1R3 = 6.50%, 1R4 = 6.70% Using the unbiased expectations theory, what is the one-year forward rate on zero-coupon Treasury bonds for year four as of May 23, 20XX 6.175% 7.30% 22.86% 6.70%
4f1 = [(1 + 1R4)4/(1 + 1R3)3] - 1 = [(1 + .0650)4/(1 + .0600)3] - 1 = 7.30%
Forecasting Interest Rates On May 23, 20XX, the existing or current (spot) one-year, two-year, three-year, and four-year zero-coupon Treasury security rates were as follows: 1R1 = 5.70%, 1R2 = 6.20%, 1R3 = 6.70%, 1R4 = 6.90% Using the unbiased expectations theory, what is the one-year forward rate on zero-coupon Treasury bonds for year four as of May 23, 20XX 6.90% 7.50% 23.55% 6.375%
4f1 = [(1 + 1R4)4/(1 + 1R3)3] - 1 = [(1 + .0670)4/(1 + .0620)3] - 1 = 7.50%
Internal Growth Rate Last year Umbrellas Unlimited Corporation had an ROA of 10.8% and a dividend payout ratio of 49.2%. What is the internal growth rate? 116.64% 1% 5.8% 2.49%
5.8%
Determinants of Interest Rate for Individual Securities A 2-year Treasury security currently earns 6.00 percent. Over the next two years, the real interest rate is expected to be 3.03 percent per year and the inflation premium is expected to be 2.03 percent per year. What is the maturity risk premium on the 2-year Treasury security? .94% 1.20% 1.00% 5.06%
6.00% = 2.03% + 3.03% + 0.00% + 0.00% + MP => MP = 6.00% − (2.03% + 3.03% + 0.00% + 0.00%) = .94%
Determinants of Interest Rate for Individual Securities The Wall Street Journal reports that the rate on 3-year Treasury securities is 7.15 percent, and the 6-year Treasury rate is 7.20 percent. From discussions with your broker, you have determined that expected inflation premium is 2.95 percent next year, 2.75 percent in Year 2, and 3.30 percent in Year 3 and beyond. Further, you expect that real interest rates will be 3.80 percent annually for the foreseeable future. What is the maturity risk premium on the 6-year Treasury security? .65% .10% .45% .05%
7.20% = 3.30% + 3.80% + MP => MP = 7.20% − (3.30% + 3.80%) = .10%
Determinants of Interest Rate for Individual Securities A Corporation's 20-year bonds have an equilibrium rate of return of 8.00 percent. For all securities, the inflation risk premium is 1.68 percent and the real interest rate is 3.43 percent. The security's liquidity risk premium is .48 percent and maturity risk premium is .93 percent. The security has no special covenants. What is the bond's default risk premium? 1.48% 1.60% 2.90% 14.52%
8.00% = 1.68% + 3.43% + DRP + .48% + .93% => DRP = 8.00% − (1.68% + 3.43% + .48% + .93%) = 1.48%
Determinants of Interest Rate for Individual Securities The Wall Street Journal reports that the rate on 3-year Treasury securities is 8.45 percent, and the 6-year Treasury rate is 8.55 percent. From discussions with your broker, you have determined that expected inflation premium is 3.80 percent next year, 4.05 percent in Year 2, and 4.25 percent in Year 3 and beyond. Further, you expect that real interest rates will be 4.15 percent annually for the foreseeable future. What is the maturity risk premium on the 6-year Treasury security? .35% .05% .15% .60%
8.55% = 4.25% + 4.15% + MP => MP = 8.55% - (4.25% + 4.15%) = .15%
Compute the present value of a $2,700 deposit in year 2 and another $2,200 deposit at the end of year 4 if interest rates are 9 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
A=P(1+r/100)^n where A=future value P=present value r=rate of interest n=time period. Present value $ 3831.07 PV = $2,700 ÷ (1 + 0.09)^2 + $2,200 ÷ (1 + 0.09)^4 = $2,272.54 + $1,558.54 = $3,831.07
Which of the following is NOT considered a hybrid organization? S corporation Limited liability partnership Limited liability company Limited partnership All of these are considered hybrid organizations.
All of these are considered hybrid organizations.
Which of the following managers would NOT use finance? Operational managers Marketing managers Human resource managers All of these would use finance.
All of these would use finance.
What is the future value of a $880 annuity payment over five years if interest rates are 9 percent? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Annual payment, A = $880 Number of payments, n = 5 Interest rate, r = 9% = 0.09 Future value $ 5266.55 fva5=880x(10.09)^5-1/0.09880x5.9847=5266.55
In 2015, Jake's Jamming Music, Inc., announced an ROA of 8.61 percent, ROE of 15.00 percent, and profit margin of 17.5 percent. The firm had total assets of $10.0 million at year-end 2015. Calculate the 2015 value of net income available to common stockholders for Jake's Jamming Music, Inc. (Enter your answers in dollars not in millions and round to the nearest whole dollar.)
Answer a. ROA = 8.61% Total Assets = $10,000,000 ROA = Net Income / Total Assets 8.61% = Net Income / $10,000,000 Net Income = $861,000 Answer b. ROE = 15.00% Net Income = $861,000 ROE = Net Income / Common Stockholders' Equity 15.00% = $861,000 / Common Stockholders' Equity Common Stockholders' Equity = $5,740,000 Answer c. Profit Margin = 17.5% Net Income = $861,000 Profit Margin = Net Income / Net Sales 17.5% = $861,000 / Net Sales Net Sales = $4,920,000
Future Value At age 25 you invest $1,600 that earns 8.5 percent each year. At age 35 you invest $1,600 that earns 11.5 percent per year. In which case would you have more money at age 60? At age 35 invest $1,600 at 11.5 percent. Both yield the same amount at age 60. At age 25 invest $1,600 at 8.5 percent. There is not enough information to determine which case earns the most money at age 60.
At age 25 invest $1,600 at 8.5 percent. At 25: N = 60 - 25 = 35, PV = 1,600, I = 8.5, PMT = 0, CPT FV = 27,807.43 At 35: N = 60 - 35 = 25, PV = 1,600, I = 11.5, PMT = 0, CPT FV = 24,321.57
Mr. Husker's Tuxedos, Corp. began the year 2015 with $256 million in retained earnings. The firm earned net income of $33 million in 2015 and paid dividends of $5 million to its preferred stockholders and $10 million to its common stockholders. What is the year-end 2015 balance in retained earnings for Mr. Husker's Tuxedos?The statement of retained earnings for 2015 is as follows: Balance of retained earnings, December 31, 2014 $256m Plus: Net income for 2015 33m Less: Cash dividends paid Preferred stock $5m Common stock 10m Total cash dividends paid 15m Balance of retained earnings, December 31, 2015 $274m
Balance of retained earnings, December 31, 2015 $274m
Use the following financial statements for Lake of Egypt Marina, Inc.
Balance sheet Assets Liabilities and Equity Current assets: Current liabilities: Cash and marketable securities $ 40 $ 36 Accrued wages and taxes $ 45 $ 33 Accounts receivable 45 33 Accounts payable 40 27 Inventory 208 84 Notes payable 35 24 Total $ 293 $ 153 Total $ 120 $ 84 Fixed assets: Long term debt: $ 211 $ 117 Gross plant and equipment $ 260 $ 168 Stockholders' equity: Less: Depreciation 78 39 Preferred stock (3 million shares) $ 3 $ 3 Common stock and paid-in surplus (18 million shares) 18 18 Net plant and equipment $ 182 $ 129 Retained earnings 148 78 Other long-term assets 25 18 Total $ 207 $ 147 Total $ 169 $ 99 Total assets $ 500 $ 300 Total liabilities and equity $ 500 $ 300 Income statement Net sales (all credit) $ 650 $ 450 Less: Cost of goods sold 390 261 Gross profits $ 260 $ 189 Less: Other operating expenses 52 36 Earnings before interest, taxes, depreciation, and amortization (EBITDA) $ 208 $ 153 Less: Depreciation 39 27 Earnings before interest and taxes (EBIT) $ 169 $ 126 Less: Interest 39 36 Earnings before taxes (EBT) $ 130 $ 90 Less: Taxes 39 27 Net income $ 91 $ 63 Less: Preferred stock dividends $ 3 $ 3 Net income available to common stockholders $ 88 $ 60 Less: Common stock dividends 18 18 Addition to retained earnings $ 70 $ 42 Per (common) share data: Earnings per share (EPS) $ 4.890 $ 3.330 Dividends per share (DPS) $ 1.000 $ 1.000 Book value per share (BVPS) $ 9.220 $ 5.330 Market value (price) per share (MVPS) $ 15.600 $ 13.400 Construct the DuPont ROA and ROE breakdowns for Lake of Egypt Marina, Inc. (Do not round intermediate calculations. Round your answers to 2 decimal places.) DuPont Analysis ROA 17.60 correct % ROE 52.07 correct %
You are considering an investment in Roxie's Bed & Breakfast Corp. During the last year, the firm's income statement listed an addition to retained earnings of $16.80 million and common stock dividends of $1.20 million. Roxie's year-end balance sheet shows common stockholders' equity of $57.0 million with 20 million shares of common stock outstanding. The common stock's market price per share was $8.00. What is Roxie's Bed & Breakfast's book value per share? (Round your answer to 2 decimal places.) Book value per share $ What is Roxie's Bed & Breakfast's earnings per share? (Round your answer to 2 decimal places.) Earnings per share $ Calculate the market-to-book ratio. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Market-to-book ratio times Calculate the price-earnings ratio. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price-earnings ratio times
Book value per share $ 2.85 What is Roxie's Bed & Breakfast's earnings per share? (Round your answer to 2 decimal places.) Earnings per share $ 0.9 Calculate the market-to-book ratio. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Market-to-book ratio 2.81 times Calculate the price-earnings ratio. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price-earnings ratio 8.89 times
You are considering an investment in Roxie's Bed & Breakfast Corp. During the last year the firm's income statement listed an addition to retained earnings of $4.8 million and common stock dividends of $2.2 million. Roxie's year-end balance sheet shows common stockholders' equity of $35 million with 10 million shares of common stock outstanding. The common stock's market price per share was $9.00. What is Roxie's Bed & Breakfast's book value per share and earnings per share? Calculate the market-to-book ratio and PE ratio.
Book value per share = $35m / 10m = $3.50 per share Earnings per share = ($4.8m + $2.2m) / 10m = $0.70 per share Mkt to bk=9.00/3.50=2.57 times Price-earnings (PE) ratio=9.00/0.70=12.86 times
You are considering an investment in Roxie's Bed & Breakfast Corp. During the last year, the firm's income statement listed an addition to retained earnings of $4.8 million and common stock dividends of $2.2 million. Roxie's year-end balance sheet shows common stockholders' equity of $35 million with 10 million shares of common stock outstanding. The common stock's market price per share was $9.00. What is Roxie's Bed & Breakfast's book value per share? (Round your answer to 2 decimal places.) Book value per share $ What is Roxie's Bed & Breakfast's earnings per share? (Round your answer to 2 decimal places.) Earnings per share $ Calculate the market-to-book ratio. (Round your answer to 2 decimal places.) Market-to-book ratio times Calculate the price-earnings ratio. (Round your answer to 2 decimal places.) Price-earnings ratio times
Book value per share = COmmon Equity/No of shares outstanding 3.50 Earnings per share = Net Income/No of shares outstanding 0.70 Market-to-book ratio = Mkt Value pe share/Book valyue oer share 2.57 Price-earnings ratio = Price per share/EPS 12.86
You are considering an investment in Roxie's Bed & Breakfast Corp. During the last year, the firm's income statement listed an addition to retained earnings of $9.00 million and common stock dividends of $2.90 million. Roxie's year-end balance sheet shows common stockholders' equity of $42.7 million with 17 million shares of common stock outstanding. The common stock's market price per share was $9.50
Book value per share = Common Equity/No of shares outstanding=2.51 Earnings per share = Net Income/No of shares outstanding =0.7 Market-to-book ratio = Mkt Value pe share/Book value per share =3.78 Price-earnings ratio = Price per share/EPS =13.57 Book value per share = $42.7m / 17m = $2.51 per share Earnings per share = ($9.00m + $2.9m) / 17m = $0.70 per share Market-to-book ratio=9.5/2.51 Price earnings ration9.50/.70
Use the following financial statements for Lake of Egypt Marina, Inc. LAKE OF EGYPT MARINA, INC Balance Sheet as of December 31, 2015 and 2014 (in millions of dollars) 2015 2014 2015 2014 Assets Liabilities and Equity Current assets: Current liabilities: Cash and marketable securities $ 45 $ 36 Accrued wages and taxes $ 40 $ 20 Accounts receivable 40 32 Accounts payable 35 24 Inventory 223 148 Notes payable 30 32 Total $ 308 $ 216 Total $ 105 $ 76 Fixed assets: Long term debt: 67 200 Gross plant and equipment $ 255 $ 200 Stockholders' equity: Less: Depreciation 88 40 Preferred stock (4 million shares) $ 4 $ 4 Common stock and paid-in surplus (16 million shares) 16 16 Net plant and equipment $ 167 $ 160 Retained earnings 308 104 Other long-term assets 25 24 Total $ 192 $ 184 Total $ 328 $ 124 Total assets $ 500 $ 400 Total liabilities and equity $ 500 $ 400 LAKE OF EGYPT MARINA, INC. Income Statement for Years Ending December 31, 2015 and 2014 (in millions of dollars) 2015 2014 Net sales (all credit) $ 800 $ 600 Less: Cost of goods sold 320 192 Gross profits $ 480 $ 408 Less: Other operating expenses 64 36 Earnings before interest, taxes, depreciation, and amortization (EBITDA) 416 372 Less: Depreciation 48 30 Earnings before interest and taxes (EBIT) $ 368 $ 342 Less: Interest 48 42 Earnings before taxes (EBT) $ 320 $ 300 Less: Taxes 96 90 Net income $ 224 $ 210 Less: Preferred stock dividends $ 4 $ 4 Net income available to common stockholders $ 220 $ 206 Less: Common stock dividends 16 16 Addition to retained earnings $ 204 $ 190 Per (common) share data: Earnings per share (EPS) $ 13.750 $ 12.875 Dividends per share (DPS) $ 1.000 $ 1.000 Book value per share (BVPS) $ 20.250 $ 7.500 Market value (price) per share (MVPS) $ 15.100 $ 12.900
Calculate the following ratios for Lake of Egypt Marina, Inc. as of year-end 2015. (Use sales when computing the inventory turnover and use common stockholders' equity when computing the equity multiplier. Round your answers to 2 decimal places. Use 365 days a year.) a. Current ratio 2.93 correct times b. Quick ratio 0.81 correct times c. Cash ratio 0.43 correct times d. Inventory turnover 1.43 incorrect times e. Days' sales in inventory 84.63 incorrect days f. Average collection period 18.25 correct days g. Average payment period 39.92 correct days h. Fixed asset turnover 3.64 incorrect times i. Sales to working capital 3.94 correct times j. Total asset turnover 1.60 correct times k. Capital intensity 0.63 correct times l. Debt ratio 34.40 correct % m. Debt-to-equity .52 correct times n. Equity multiplier 1.52 correct times o. Times interest earned 6.67 incorrect times p. Cash coverage 8.67 correct times q. Profit margin 28.00 incorrect % r. Gross profit margin 60.00 correct % s. Operating profit margin 46.00 correct % t. Basic earnings power 73.60 correct % u. ROA 44.80 incorrect % v. ROE 67.07 incorrect % w. Dividend payout 7.27 correct % x. Market-to-book ratio .75 correct times y. PE ratio 1.10 correct times
Consider a $1,800 deposit earning 8 percent interest per year for five years.
Consider a $1,800 deposit earning 8 percent interest per year for five years. What is the future value? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Future value $ 2,644.80 correct How much total interest is earned on the original deposit? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Total interest earned $ 844.80 correct How much is interest earned on interest? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Interest earned on interest $ 124.80 correct
You are evaluating the balance sheet for PattyCake's Corporation. From theproblems balance sheet you find the following balances: cash and marketable securities = $400,000; accounts receivable = $1,200,000; inventory = $2,100,000; accrued wages and taxes = $500,000; accountsLG1payable = $800,000; and notes payable = $600,000. Calculate PattyCakes' current ratio, quick ratio, and cash ratio.
Current rati= $400,000 + $1,200,000 + $2,100,000/$500,000 + $800,000 + $600,000=1.95 Quick ratio (acid-test ratio)=($400,000 + $1,200,000 + $2,100,000) - $2,100,000/ $500,000 + $800,000 + $600,000=.84 times Cash ratio=400000/ $500,000 + $800,000 + $600,000=.21 times
You are evaluating the balance sheet for PattyCake's Corporation. From the balance sheet you find the following balances: cash and marketable securities = $380,000; accounts receivable = $1,240,000; inventory = $2,140,000; accrued wages and taxes = $520,000; accounts payable = $820,000; and notes payable = $640,000.
Current ratio 1.90 times Calculate PattyCakes' quick ratio. (Round your answer to 2 decimal places.) Quick ratio 0.82 times Calculate PattyCakes' cash ratio. (Round your answer to 2 decimal places.) Cash ratio 0.19 times Current ratio=$380,000 + $1,240,000 + $2,140,000 /$520,000 + $820,000 + $640,000=1.90 Quick ratio (acid-test ratio)=($380,000 + $1,240,000 + $2,140,000) - $2,140,000/$520,000 + $820,000 + $640,000=.82 Cash ratio=380,000/$520,000 + $820,000 + $640,000 =.19
You are evaluating the balance sheet for PattyCake's Corporation. From the balance sheet you find the following balances: cash and marketable securities = $480,000; accounts receivable = $1,040,000; inventory = $1,940,000; accrued wages and taxes = $420,000; accounts payable = $720,000; and notes payable = $440,000. Calculate PattyCakes' current ratio. (Round your answer to 2 decimal places.) Current ratio times Calculate PattyCakes' quick ratio. (Round your answer to 2 decimal places.) Quick ratio times Calculate PattyCakes' cash ratio. (Round your answer to 2 decimal places.) Cash ratio times
Current ratio = current assets / current liabilities = ( 480000 + 1040000+1940000)/ (420000 + 720000+440000) = 3460000 / 1580000 = 2.19 Quick ratio = (3460000 - 1940000) / 1580000 = 0.96 Cash ratio = 480000 / 1580000 = .30
Tater and Pepper Corp. reported sales for 2015 of $39 million. Tater and Pepper listed $7.2 million of inventory on its balance sheet. How many days did Tater and Pepper's inventory stay on the premises? (Use 365 days a year. Round your answer to 2 decimal places.)
Days' sales in inventory 67.38 days Inventory turnover 5.42 times Days' sales in inventory =$7.2m × 365/39m=67.38 inventory turnover=39m/7.2m=5.42
Tater and Pepper Corp. reported sales for 2015 of $23 million. Tater and Pepper listed $5.6 million of inventory on its balance sheet. How many days did Tater and Pepper's inventory stay on the premises? (Use 365 days a year. Round your answer to 2 decimal places.) Days sales in inventory days How many times per year did Tater and Pepper's inventory turn over? (Round your answer to 2 decimal places.) Inventory turnover times
Days' sales in inventory = (5.6*365)/23 = 88.8696 days Inventory turnover ratio = 23/5.6 = 4.1071 days
tater and Pepper Corp. reported sales for 2015 of $23 million. Tater and Pepper listed $5.6 million of inventory on its balance sheet. Using a 365 day year, how many days did Tater and Pepper's inventory stay on the premises? How many times per year did Tater and Pepper's inventory turn over?
Days' sales in inventory =$5.6m x 365/23=88.87 days inventory turnover=23m/5.6m=4.11
Dakota Corporation 15-year bonds have an equilibrium rate of return of 8 percent. For all securities, the inflation risk premium is 1.50 percent and the real risk-free rate is 2.60 percent. The security's liquidity risk premium is 0.60 percent and maturity risk premium is 1.20 percent. The security has no special covenants. Calculate the bond's default risk premium. (
Default risk premium: = Corporate bond return- inflation risk premium- real risk-free rate- liquidity risk premium- maturity risk premium = 8%-1.50%-2.60%-0.60%-1.20% = 2.10% 8.00% = 1.50% + 2.60% + DRP + 0.60% + 1.20% => DRP = 8.00% - (1.50% + 2.60% + 0.60% + 1.20%) = 2.10%
A loan is offered with monthly payments and a 13 percent APR. What's the loan's effective annual rate (EAR)?
EAR= (1 +0.13/12)^12 -1 =0.1380=13.80%
A loan is offered with monthly payments and a 11.50 percent APR. What's the loan's effective annual rate (EAR)?
EAR=(1+APR/m)^m-1 where m=compounding periods Hence EAR=(1+0.115/12)^12-1 which is equal to =12.13%(approx).
The Fitness Studio, Inc.'s, 2015 income statement lists the following income and expenses: EBIT = $774,000, interest expense = $110,000, and taxes = $232,400. The firm has no preferred stock outstanding and 100,000 shares of common stock outstanding. Calculate the 2015 earnings per share. (Round your answer to 2 decimal places.)
EBIT $ 774,000 Interest expense - 110,000 EBT $ 664,000 Taxes - 232,400 Net income $ 431,600 Earnings per share (EPS)=$431,600/100,000 shares = $4.32 per share
The Fitness Studio, Inc.'s 2015 income statement lists the following income and expenses: EBIT = $773,500, interest expense = $100,000, and taxes = $234,500. The firm has no preferred stock outstanding and 100,000 shares of common stock outstanding. Calculate the 2015 earnings per share.Using the setup of an income statement in Table 2.2: EBIT $773,500 Interest expense -100,000 EBT $ 673,500 Taxes -234,500 Net income $439,000
Earnings per share (EPS) =439000/100000=4.39
Determinants of Interest Rate for Individual Securities You are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 3.60 percent. Your broker has determined the following information about economic activity and the corporation bonds: Real interest rate = 2.55% Default risk premium = 1.85% Liquidity risk premium = .75% Maturity risk premium = 1.60% What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds? 1.05% and 7.80%, respectively 1.05% and 6.75%, respectively 3.60% and 10.35%, respectively 1.05% and 1.56%, respectively
Expected (IP) = i - RIR = 3.60% - 2.55% = 1.05% ij* = 1.05% + 2.55% + 1.85% + .75% + 1.60% = 7.80%
Determinants of Interest Rate for Individual Securities You are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 5.30 percent. Your broker has determined the following information about economic activity and the corporation bonds: Real interest rate = 4.90% Default risk premium = 4.05% Liquidity risk premium = 1.15% Maturity risk premium = 3.80% What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds? .40% and 14.30%, respectively .40% and 13.90%, respectively 5.30% and 19.20%, respectively .40% and 2.86%, respectively
Expected (IP) = i - RIR = 5.30% - 4.90% = .40% ij* = .40% + 4.90% + 4.05% + 1.15% + 3.80% = 14.30%
One-year Treasury bills currently earn 3.50 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.70 percent. The liquidity premium on 2-year securities is 0.11 percent. If the liquidity theory is correct, what should the current rate be on 2-year Treasury securities? (Round your answer to 2 decimal places.)
Expected rate of one year bill one year from now = 3.70% Expected rate of one year security one year from now = 3.70% + liquidity premium = 0.0370 + 0.0011 = 0.0381 Rate of 2-year secutiry = (1.0350 * 1.0381)1/2 - 1 = 1.03655 - 1 = 0.03655 = 3.66%
Casello Mowing & Landscaping's year-end 2015 balance sheet lists current assets of $435,500, fixed assets of $550,500, current liabilities of $416,900, and long-term debt of $315,100. Calculate Casello's total stockholders' equity.
Explanation: Recall the balance sheet identity: Assets = Liabilities + Equity. Rearranging this equation: Equity = Assets - Liabilities. Thus, the balance sheets would appear as follows: Book value Book value Assets Liabilities and Equity Current assets $ 435,500 Current liabilities $ 416,900 Fixed assets 550,500 Long-term debt 315,100 Stockholders' equity 254,000 Total $ 986,000 $ 986,000 Total stockholders' equity $ 254,000
The Fitness Studio, Inc.'s, 2015 income statement lists the following income and expenses: EBIT = $779,000, interest expense = $210,000, and taxes = $199,150. The firm has no preferred stock outstanding and 100,000 shares of common stock outstanding.
Explanation: EBIT $ 779,000 Interest expense - 210,000 EBT $ 569,000 Taxes - 199,150 Net income $ 369,850 Earnings per share (EPS)=$369,850/100,000 shares = $3.70 per share
Muffin's Masonry, Inc.'s, balance sheet lists net fixed assets as $26.00 million. The fixed assets could currently be sold for $43.00 million. Muffin's current balance sheet shows current liabilities of $11.50 million and net working capital of $10.50 million. If all the current accounts were liquidated today, the company would receive $7.85 million cash after paying the $11.50 million in current liabilities. What is the book value of Muffin's Masonry's assets today and the market value of these assets? (Enter your answers in millions of dollars rounded to 2 decimal places.)
Explanation: Net working capital (book value) = Current assets (book value) - Current liabilities (book value) = $10.5m = Current assets (book value) - $11.5m => Current assets (book value) = $10.50m + $11.50m = $22.00m Total assets (book value) = $22.00m + $26.00m = $48.00m Net working capital (market value) = Current assets (market value) - Current liabilities (market value) = $7.85m = Current assets (market value) - $11.50m => Current assets (market value) = $7.85m + $11.50m = $19.35m Total assets (market value) = $19.35m + $43.00m = $62.35m
You are evaluating the balance sheet for Goodman's Bees Corporation. From the balance sheet you find the following balances: cash and marketable securities = $610,000, accounts receivable = $2,100,000, inventory = $2,600,000, accrued wages and taxes = $620,000, accounts payable = $920,000, and notes payable = $720,000.
Explanation: Net working capital = Current assets - Current liabilities. Goodman's Bees' current assets = Cash and marketable securities $ 610,000 Accounts receivable 2,100,000 Inventory 2,600,000 Total current assets $ 5,310,000 Current liabilities Accrued wages and taxes $ 620,000 Accounts payable 920,000 Notes payable 720,000 Total current liabilities $ 2,260,000 So the firm's net working capital was $3,050,000 ($5,310,000 - $2,260,000).
Mr. Husker's Tuxedos Corp. began the year 2015 with $272 million in retained earnings. The firm earned net income of $41 million in 2015 and paid dividends of $8 million to its preferred stockholders and $11 million to its common stockholders. What is the year-end 2015 balance in retained earnings for Mr. Husker's Tuxedos? (Enter your answer in millions of dollars.)
Explanation: The statement of retained earnings for 2015 is as follows: 2015 Balance of retained earnings, December 31, 2014 $ 272 m Plus: Net income for 2015 41 m Less: Cash dividends paid Preferred stock $ 8 m Common stock 11 m Total cash dividends paid 19 m Balance of retained earnings, December 31, 2015 $ 294 m
Mr. Husker's Tuxedos Corp. began the year 2015 with $276 million in retained earnings. The firm earned net income of $43 million in 2015 and paid dividends of $4 million to its preferred stockholders and $13 million to its common stockholders. What is the year-end 2015 balance in retained earnings for Mr. Husker's Tuxedos? (Enter your answer in millions of dollars.)
Explanation: The statement of retained earnings for 2015 is as follows: 2015 Balance of retained earnings, December 31, 2014 $ 276 m Plus: Net income for 2015 43 m Less: Cash dividends paid Preferred stock $ 4 m Common stock 13 m Total cash dividends paid 17 m Balance of retained earnings, December 31, 2015= $ 302 m
Present Value of an Annuity What is the present value of a $1,200 annuity payment over 6 years if interest rates are 12 percent? $2,368.59 $607.96 $4,933.69 $5,476.51
FV = 0 PMT = 1,200 I = 12 N = 6 CPT PV = 4,933.69 =4,933.69
Compute the value in 25 years of a $1,000 deposit earning 10 percent per year.
FVN = PV × (1 + i)^N FV25 = $1,000 × (1 + 0.10)^25 = $1,000 × 10.83471 = $10,834.71 Or N=25, I=10, PV=−1000, PMT=0, CPT FV == 10,834.71
You are considering an investment in Fields and Struthers, Inc., and want to evaluate the firm's free cash flow. From the income statement, you see that Fields and Struthers earned an EBIT of $98 million, had a tax rate of 30 percent, and its depreciation expense was $9 million. Fields and Struthers' gross fixed assets increased by $64 million from 2014 and 2015. The firm's current assets increased by $52 million and spontaneous current liabilities increased by $44 million.
Fields and Struthers' NOPAT was: NOPAT = EBIT(1 - Tax rate) = $98m(1 - 0.30) = $68.6m Operating cash flow for 2015 was: OCF = NOPAT + Depreciation = $68.6m + $9m = $77.6m Investment in operating capital for 2015 was: IOC = ΔGross fixed assets + ΔNet operating working capital = $64m + ($52m - $44m) = $72 m Accordingly, Fields and Struthers' free cash flow for 2015 was: FCF = Operating cash flow - Investment in operating capital = $77.6m - $72m = $5.6m In other words, in 2015, Fields and Struthers had cash flows of $5.6 million available to pay its stockholders and debtholders.
You are considering an investment in Fields and Struthers, Inc., and want to evaluate the firm's free cash flow. From the income statement, you see that Fields and Struthers earned an EBIT of $62 million, had a tax rate of 30 percent, and its depreciation expense was $5 million. Fields and Struthers' NOPAT gross fixed assets increased by $32 million from 2014 to 2015. The firm's current assets increased by $20 million and spontaneous current liabilities increased by $12 million. Calculate Fields and Struthers' NOPAT, operating cash flow, investment in operating capital and free cash flow for 2015.
Fields and Struthers' NOPAT was:NOPAT = EBIT(1 - Tax rate) = $62m(1 - 0.30) = $43.4m Operating cash flow for 2015 was:OCF = NOPAT + Depreciation = $43.4m + $5m = $48.4m Investment in operating capital for 2015 was:IOC = ΔGross fixed assets + ΔNet operating working capital = $32m + ($20m - $12m) = $40 m Accordingly, Fields and Struthers' free cash flow for 2015 was:FCF = Operating cash flow - Investment in operating capital= $48.4m - $40m = $8.4m In other words, in 2015, Fields and Struthers had cash flows of $8.4 million available to pay its stockholders and debtholders.
Oakdale Fashions, Inc., had $410,000 in 2015 taxable income. Use the tax schedule in Table 2.3 to calculate the company's 2015 income taxes.
From Table 2.3, the $410,000 of taxable income puts Oakdale Fashion, Inc. in the 34 percent tax bracket. Thus, Tax liability = Tax on base amount + Tax rate (amount over base): = $113,900 + 0.34 ($410,000 - $335,000) = $139,400 Note that the base amount is the maximum dollar value listed in the previous tax bracket. The average tax rate for Oakdale Fashions Inc. comes to: Average tax rate = $139,400/$410,000=34.00% If Oakdale Fashions, Inc. earned $1 more of taxable income, it would pay 34 cents (its tax rate of 34 percent) more in taxes. Thus, the firm's marginal tax rate is 34 percent.
Oakdale Fashions, Inc., had $430,000 in 2015 taxable income. Use the tax schedule in Table 2.3 to calculate the company's 2015 income taxes.
From Table 2.3, the $430,000 of taxable income puts Oakdale Fashion, Inc. in the 34 percent tax bracket. Thus, Tax liability = Tax on base amount + Tax rate (amount over base): = $113,900 + 0.34 ($430,000 - $335,000) = $146,200 Note that the base amount is the maximum dollar value listed in the previous tax bracket. The average tax rate for Oakdale Fashions Inc. comes to: $146,200 Average tax rate = = 34.00% $430,000 If Oakdale Fashions, Inc. earned $1 more of taxable income, it would pay 34 cents (its tax rate of 34 percent) more in taxes. Thus, the firm's marginal tax rate is 34 percent.
Compute the value in 33 years of a $2,000 deposit earning 9 percent per year. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Future value $ 34364.12 Fv=PV × (1 + i)^n Fv33=$2,000 × (1 + 0.09)^33 = $2,000 × 17.18203 = $34,364.06
Compute the value in 32 years of a $1,500 deposit earning 8 percent per year. (Do not round intermediate calculations. Round your final answer to 2 decimal places.
Future value $ 17,605.62
Compute the future value in year 9 of a $4,500 deposit in year 1 and another $4,000 deposit at the end of year 5 using an 9 percent interest rate. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Future value $ 14612.86 FV9 = $4,500 × (1 + 0.09)8 + $4,000 × (1 + 0.09)4 = $8,966.53 + $5,646.33 = $14,612.86 or FV9 = $4,500 × (1 + 0.09)^8 + $4,000 × (1 + 0.09)^4 = $8,966.53 + $5,646.33 = $14,612.86
What is the future value of a $970 annuity payment over four years if interest rates are 8 percent? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Future value $ 4,370.93 correct Fva4=970x(1+0.08)^4 -1/0.08=4,370.93 ± 0.1%
How much would be in your savings account in 9 years after depositing $220 today if the bank pays 9 percent per year? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Future value $ 477.82 correct
What is the future value of $800 deposited for one year earning an 10 percent interest rate annually?
Future value $ 880 correct
Compute the future value in year 7 of a $3,400 deposit in year 1 and another $2,900 deposit at the end of year 4 using a 8 percent interest rate.
HenceWe use the formula: A=P(1+r/100)^n where A=future value P=present value r=rate of interest n=time period. Hence A=$5279.73(1.08)^7 =$9048.54(Approx). FV7 = $3,400 × (1 + 0.08)6 + $2,900 × (1 + 0.08)^3 = $5,395.37 + $3,653.16 = $9,048.54
Determine the interest rate earned on a $1,700 deposit when $2,000 is paid back in one year. (Round your answer to 2 decimal places.)
Interest rate 17.65 correct % $1,700 × (1 + i) = $2,000; Solving for i yields 0.1765, or 17.65 percent
Last year, Lakesha's Lounge Furniture Corporation had an ROA of 7.2 percent and a dividend payout ratio of 27 percent. What is the internal growth rate?
Internal Growth Rate = (ROA * b) / 1 - (ROA * b) 5.55% Internal growth rate=0.072x(1-.27)/1 - [0.072 × (1 - 0.27)]
At age 39 you invest $1,500 that earns 8 percent each year. At age 54 you invest $1,500 that earns 11 percent per year. In which case would you have more money at age 65? Investing at age 39 Investing at age 54
Investing at age 39
This subarea of finance involves methods and techniques to make appropriate decisions about what kinds of securities to own, which firms' securities to buy, and how to be paid back in the form that the investor wishes. Real markets Investments Financial management None of these
Investments
Which of the following statements is incorrect? Most sole proprietors raise money by borrowing from banks. S corporations are considered a hybrid organization. An advantage of sole proprietorships is that the owner has complete control. Partnerships have unlimited liability.
Most sole proprietors raise money by borrowing from banks.
Future Value Compute the future value in year 6 of a $250 deposit in year 1 and another $50 deposit at the end of year 4 using a 10% interest rate. $463.13 $435.00 $470.00 $531.47
N = 6 - 1 = 5 N = 6 - 4 = 2 I = 10 I = 10 PV = 250 PV = 50 PMT = 0 PMT = 0 CPT FV = $402.63 CPT FV = $60.50 402.63 + 60.50 = 463.13
Approximately how many years does it take to double a $500 investment when interest rates are 10 percent per year?
N = 72 / 10 7.20 years
Future Value of an Annuity What is the future value of a $630 annuity payment over 8 years if the interest rates are 7 percent? $5,621.37 $1,082.46 $6,463.68 $5,392.80
N = 8 I = 7 PV = 0 PMT = 630 CPT FV = 6,463.68
Muffin's Masonry, Inc.'s, balance sheet lists net fixed assets as $19.00 million. The fixed assets could currently be sold for $29.00 million. Muffin's current balance sheet shows current liabilities of $8.00 million and net working capital of $7.00 million. If all the current accounts were liquidated today, the company would receive $7.50 million cash after paying the $8.00 million in current liabilities. What is the book value of Muffin's Masonry's assets today and the market value of these assets? (Enter your answers in millions of dollars rounded to 2 decimal places.)
Net working capital (book value) = Current assets (book value) - Current liabilities (book value) = $7.0m = Current assets (book value) - $8.0m => Current assets (book value) = $7.00m + $8.00m = $15.00m Total assets (book value) = $15.00m + $19.00m = $34.00m Net working capital (market value) = Current assets (market value) - Current liabilities (market value) = $7.50m = Current assets (market value) - $8.00m => Current assets (market value) = $7.50m + $8.00m = $15.50m Total assets (market value) = $15.50m + $29.00m = $44.50m
Compute the present value of an $850 payment made in 10 years when the discount rate is 12 percent.
PV = FV / (1 + i)^N PV = $850 / (1 + 0.12)^10 = $850 / 3.10585 = $273.68 Or N=10, I=12, PMT=0, FV=−850, CPT PV == 273.68
What is the present value of a $700 annuity payment over six years if interest rates are 10 percent?
PVA6=700 x [1- 1/(1+0.10)^6 /0.10] =700 x 4.355261 =3048.68 Or N=4, I=10, PMT=−700, FV=0, CPT PV == 3,048.68
Approximately how many years are needed to double a $500 investment when interest rates are 13.75 percent per year?
Period 5.24 years n=72/13.75
Approximately how many years are needed to double a $500 investment when interest rates are 10.75 percent per year?
Period 6.70 years N = 72 / 10.75 ≈ 6.70 years
Approximately how many years are needed to double a $100 investment when interest rates are 6.00 percent per year? (Round your answer to 2 decimal places.)
Period 12.00 correct years
What's the present value of a $840 annuity payment over four years if interest rates are 8 percent? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Present Value = Amount * Present Value of Annuity Factor ( 8%,4) = $ 840 * ( 3.31212684) = $ 2,782.19 pva4=840{1-1/(10.08)^4/0.08]=840-3.312127=2782.19
What is the present value of a $400 payment in one year when the discount rate is 5 percent? (Round your answer to 2 decimal places.)
Present value $ 380.95 PV = FV/(1+i) PV = $400 / (1 + 0.05) = $400 / 1.05 = $380.95
What is the present value of a $1,050 payment made in seven years when the discount rate is 9 percent?
Present value $ 574.49 PV = FV/(1 + i)^N PV = $1,050 / (1 + 0.09)^7 = $1,050 / 1.82804 = $574.39
What is the present value of a $1,800 payment made in six years when the discount rate is 8 percent? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Present value $ 1,134.31 correct
Last year, Hassan's Madhatter, Inc., had an ROA of 7.5 percent, a profit margin of 12 percent, and sales of $25 million. Last year, how much did Hassan's Madhatter, Inc. have in total assets? (Enter your answer in millions.) Total assets $ m
Profit margin = Net income/sales 12% = Net income/$25 million Net income = $3 million ROA = Net income/Total assets 7.50% = $3 million/Total assets Total assets = $40 million. ROA = 0.075 = (0.12 × $25m) / Total assets) => Total assets = (0.12 × $25m) / 0.075 = $40m
This type of business organization is entirely legally independent from its owners. Partnership Sole proprietorship Hybrid organizations Public corporations
Public corporations
In 2015, Jake's Jamming Music, Inc., announced an ROA of 8.60 percent, ROE of 14.90 percent, and profit margin of 18.1 percent. The firm had total assets of $9.9 million at year-end 2015. Calculate the 2015 value of net income available to common stockholders for Jake's Jamming Music, Inc. (Enter your answers in dollars not in millions and round to the nearest whole dollar.) Net income $ Calculate the 2015 value of common stockholders' equity for Jake's Jamming Music, Inc. (Round your answer to the nearest dollar amount.) Common stockholders' equity $ Calculate the 2015 value of net sales for Jake's Jamming M
ROA = Net income / Total assets 0.0860 = Net income / 9900000 Net income = $851400 ROE = Net income / Total common stockholder's equity 0.1490 = 851400 / Total common stockholder's equity Total common stockholder's equity = $5714094 Profit margin = Net income / Sales 0.181 = 851400 / Sales Sales = $4703867
Last year, Lakesha's Lounge Furniture Corporation had an ROA of 7.5 percent and a dividend payout ratio of 25 percent. What is the internal growth rate?
ROA*b / (1-ROA*b) where b = retention ratio = 1-dividend payout ratio Hence, Internal growth rate = ROA*(1-dividend payout ratio) / (1-ROA*(1-dividend payout ratio)) = 7.5%*75%/ (1-7.5%*75%) = Hence, Internal growth rate = 5.96% Internal growth rate=0.075 × (1 - 0.25)/1 - [0.075 × (1 - 0.25)]
Casello Mowing & Landscaping's year-end 2015 balance sheet lists current assets of $437,200, fixed assets of $552,800, current liabilities of $418,600, and long-term debt of $318,500. Calculate Casello's total stockholders' equity.
Recall the balance sheet identity: Assets = Liabilities + Equity. Rearranging this equation: Equity = Assets - Liabilities. Thus, the balance sheets would appear as follows: Book value Book value Assets Liabilities and Equity Current assets $ 437,200 Current liabilities $ 418,600 Fixed assets 552,800 Long-term debt 318,500 Stockholders' equity 252,900 Total $ 990,000 $ 990,000 252,900
What would be more valuable, receiving $700 today or receiving $775 in three years if interest rates are 8 percent? Receiving $775 in future Receiving $700 today
Receiving $700 today
Last year Lakesha's Lounge Furniture Corporation had an ROE of 18.0 percent and a dividend payout ratio of 23 percent. What is the sustainable growth rate? What is the sustainable growth rate?
Retention rate=1-dividend payout rate Sustainable growth rate=(ROE*Retention rate)/[1-(ROE*Retention rate)] =16.09 Sustainable growth rate=0.180 × (1 - 0.23)/1- [0.180 × (1 - 0.23)]
Last year, Hassan's Madhatter, Inc., had an ROA of 8 percent, a profit margin of 14.08 percent, and sales of $25 million. Calculate Hassan's Madhatter's total assets.
Return on Assets (ROA) = Net income / Total assets Net Income is 14.08% on sales Sales = 25 million Net Income = 14.08% of 25 million Net Income = 3.52 million Return on Assets (ROA) = Net Income / Total Assets 0.08 = 3.52 / Total Assets Total Assets = 44 Million ROA = 0.08 = (0.1408 × $25m) / Total assets) => Total assets = (0.1408 × $25m) / 0.08 = $44m
2-1 Balance Sheet You are evaluating the balance sheet for Goodman's Bees Corporation.problems From the balance sheet you find the following balances: cash and marketable securities =LG1 $400,000, accounts receivable = $1,200,000, inventory = $2,100,000, accrued wages and taxes = $500,000, accounts payable = $800,000, and notes payable = $600,000. Calculate Goodman Bees' net working capital. Net working capital = Current assets -Current liabilities. Goodman's Bees' current assets = Cash and marketable securities = $400,000 Accounts receivable = 1,200,000 Inventory = 2,100,000 Total current assets $3,700,000 and current liabilities = Accrued wages and taxes = $500,000 Accounts payable = 800,000Notes payable = 600,000Total current liabilities $1,900,000
So the firm's net working capital was $1,800,000 ($3,700,000 - $1,900,000).
What is the difference in perspective between finance and accounting? Timing Risk Ownership Liability
Timing
The Dakota Corporation had a 2015 taxable income of $32,500,000 from operations after all operating costs but before (1) interest charges of $8,500,000; (2) dividends received of $750,000; (3) dividends paid of $5,250,000; and (4) income taxes.
Use the tax schedule in Table 2.3 to calculate Dakota's income tax liability. (Round your answer to the nearest dollar amount.) a. The first 70 percent of the dividends received is not taxable. Thus, only 30 percent of the dividends received is taxed, so: Taxable income = $32,500,000 - $8,500,000 + (0.3)$750,000 = $24,225,000 Now Dakota Corp.'s tax liability will be: Tax liability = $6,416,667 + 0.35 ($24,225,000 - $18,333,333) = $8,478,750 What are Dakota's average and marginal tax rates on taxable income? (Round your answers to the nearest whole percent.) Dakota Corp.'s average tax rate is: Average tax rate = $8,478,750/$24,225,000 = 35% Finally, if Dakota Corp earned $1 more of taxable income, it would pay 35 cents (based on its tax rate of 35 percent) more in taxes. Thus, the marginal tax rate is 35 percent.
Oakdale Fashions, Inc., had $390,000 in 2015 taxable income. Use the tax schedule in Table 2.3 to calculate the company's 2015 income taxes.
Use the tax schedule in Table 2.3 to calculate the company's 2015 income taxes. Income taxes $ 132,600 What is the average tax rate? (Round your answer to 2 decimal places.) Average tax rate 34.00 correct % What is the marginal tax rate? Marginal tax rate
Methods to minimize agency problem include all EXCEPT: award the CEO stock options. allow the CEO to purchase bonds via an employee bond option plan. offer the managers an equity stake in the firm. allow the CEO to purchase stock via an employee stock option plan.
allow the CEO to purchase bonds via an employee bond option plan.
A loan is offered with monthly payments and a 7.50 percent APR. What's the loan's effective annual rate (EAR)?
effective rate of Interest = (1+r/n)^n -1 n= 12 r = 7.50% =(1+7.50%/12)^12 -1 =(1.00625)^12 -1 = 1.0776-1 = .0776 = 7.76
ou are considering an investment in Fields and Struthers, Inc., and want to evaluate the firm's free cash flow. From the income statement, you see that Fields and Struthers earned an EBIT of $74 million, had a tax rate of 30 percent, and its depreciation expense was $9 million. Fields and Struthers' gross fixed assets increased by $40 million from 2014 and 2015. The firm's current assets increased by $36 million and spontaneous current liabilities increased by $20 million.
fields and Struthers' NOPAT was: NOPAT = EBIT(1 - Tax rate) = $74m(1 - 0.30) = $51.8m Operating cash flow for 2015 was: OCF = NOPAT + Depreciation = $51.8m + $9m = $60.8m Investment in operating capital for 2015 was: IOC = ΔGross fixed assets + ΔNet operating working capital = $40m + ($36m - $20m) = $56 m Accordingly, Fields and Struthers' free cash flow for 2015 was: FCF = Operating cash flow - Investment in operating capital = $60.8m - $56m = $4.8m
What is the future value of a $700 annuity payment over six years if interest rates are 10 percent?
fva6=700 x (1+0.06)^6 -1/0.10 =$7007.7156$5,400.93 Or N=6, I=10, PV=0, PMT=−700, CPT FV == 5,400.93
Determinants of Interest Rate for Individual Securities A particular security's default risk premium is 3.90 percent. For all securities, the inflation risk premium is 2.90 percent and the real interest rate is 2.70 percent. The security's liquidity risk premium is 1.20 percent and maturity risk premium is 1.80 percent. The security has no special covenants. What is the security's equilibrium rate of return? 2.50% 12.50% 5.10% 25.00%
ij* = 3.90% + 2.90% + 2.70% + 1.20% + 1.80% = 12.50%
Determinants of Interest Rate for Individual Securities A particular security's default risk premium is 4.60 percent. For all securities, the inflation risk premium is 3.35 percent and the real interest rate is 3.55 percent. The security's liquidity risk premium is 1.25 percent and maturity risk premium is 1.85 percent. The security has no special covenants. What is the security's equilibrium rate of return? 10.00% 2.92% 13.35% 14.60%
ij* = 4.60% + 3.35% + 3.55% + 1.25% + 1.85% = 14.60%
This subarea of finance is important for adapting to the global economy. International finance Financial institutions and markets Financial management Investments
international finance
A potential future negative impact to value and/or cash flows is often discussed in terms of probability of loss and the expected magnitude of the loss. This is called: risk. standard deviation. options. coefficient of variation.
risk
Last year Lakesha's Lounge Furniture Corporation had an ROE of 17.5 percent and a dividend payout ratio of 20 percent. What is the sustainable growth rate? What is the sustainable growth rate? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Sustainable growth rate
sustainable growth rate = ROE x (1 - dividend-payout ratio) =16.28 Sustainable growth rate=0.175 × (1 - 0.20)/1- [0.175 × (1 - 0.20)]
When determining a form of business organization, all of the following are considered EXCEPT: the physical location of the business. who owns the firm. the owners' risks. the tax ramifications.
the physical location of the business.
