Bus Finance Final - Work out Problems

Precision Aviation had a profit margin of 6.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?

16.88%

Last year Thomson Inc's earnings per share were $3.50, and its growth rate during the prior 5 years was 6.6% per year. If that growth rate were maintained, how many years would it take for Thomson's EPS to triple?

17.19

A bond issued by the State of Pennsylvania provides a 5.75% yield. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 35.00% tax bracket?

8.85%

Royce Corp's sales last year were $250,000, and its net income was $23,000. What was its profit margin?

9.20%

Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm's total-debt-to-total-capital ratio was 17.5%. The firm finances using only debt and common equity, and its total assets equal total invested capital. Based on the DuPont equation, what was the ROE? Do not round your intermediate calculations.

9.21%

Grossnickle Corporation issued 20-year, noncallable, 7.4% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity?

$1,220.55

On 12/31/18, Hite Industries reported retained earnings of $475,000 on its balance sheet, and it reported that it had $135,000 of net income during the year. On its previous balance sheet, at 12/31/17, the company had reported $445,000 of retained earnings. No shares were repurchased during 2018. How much in dividends did the firm pay during 2018?

$105,000

Suppose you inherited $175,000 and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?

$18,157.02

Lintner Beverage Corp. reported the following information from their financial statements: Operating income (EBIT) =$10,500,000Interest payments on long-term debt =$1,750,000Dividend income =$1,000,000 Calculate Lintner's total tax liability using the corporate tax schedule below: Taxable IncomeTax on Base of BracketPercentage on Excess above Base$0-$50,000$015%$50,000-$75,0007,50025 $75,000-$100,00013,75034 $100,000-$335,00022,25039 $335,000-$10,000,000113,90034 $10,000,000-$15,000,0003,400,00035 $15,000,000-$18,333,3335,150,00038 Over $18,333,3336,416,66735 Assume a 70% dividend exclusion for tax on dividends.

$3,077,000

You deposit $825 today in a savings account that pays 6% interest, compounded annually. How much will your account be worth at the end of 25 years?

$3,540.79

Your sister is thinking about starting a new business. The company would require $300,000 of assets, and it would be financed entirely with common stock. She will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business?

$40,500

You want to quit your job and go back to school for a law degree 4 years from now, and you plan to save $8,800 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today?

$40,510.15

Bradshaw Beverages began operations in 2014. The table below contains the company's taxable income during each year of its operations. Notice that the company lost money in each of its first three years. The corporate tax rate has been 40% each year. YearTaxable Income2014-$100,0002015-$500,0002016-$200,0002017$800,0002018$1,000,000 Assume that the company has taken full advantage of the Tax Code's carry-back, carry-forward provisions, and assume that the current provisions were applicable in 2014. How much did the company pay in taxes during 2018?

$400,000

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?

$537.78

Pace Co. borrowed $10,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would Pace have to pay in a 30-day month?

$60.42

Brown Office Supplies recently reported $18,000 of sales, $8,250 of operating costs other than depreciation, and $1,750 of depreciation. It had $9,000 of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 40%. How much was the firm's earnings before taxes (EBT)?

$7,370

Last year Rocco Corporation's sales were $700 million. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

$936.76

Last year Almazan Software reported $10.500 million of sales, $6.250 million of operating costs other than depreciation, and $1.300 million of depreciation. The company had $5.000 million of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $0.310 million. By how much will net income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes. (Round your final answer to 3 decimal places.)

-$0.202

Bob has $2,500 invested in a bank that pays 5.4% annually. How long will it take for his funds to double?

13.18 years

X-1 Corp's total assets at the end of last year were $395,000 and its EBIT was $52,500. What was its basic earning power (BEP) ratio?

13.29%

Nagel Equipment has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The T-bill rate is 4.00%, and the T-bond rate is 5.25%. The annual return on the stock market during the past 4 years was 10.25%. Investors expect the average annual future return on the market to be 14.75%. Using the SML, what is the firm's required rate of return? Do not round your intermediate calculations.

13.61%

Ten years ago, Lucas Inc. earned $0.50 per share. Its earnings this year were $5.00. What was the growth rate in earnings per share (EPS) over the 10-year period?

25.89%

Suppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $4,100. What interest rate would you earn if you bought this bond at the offer price?

3.17%

The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Balance Sheet (Millions of $)Assets 2018Cash and securities $3,000Accounts receivable 15,000Inventories 18,000Total current assets $36,000Net plant and equipment $24,000Total assets $60,000Liabilities and Equity Accounts payable $18,630Accruals 8,370Notes payable 6,000Total current liabilities $33,000 Long-term bonds $9,000Total liabilities $42,000Common stock $5,040Retained earnings 12,960Total common equity $18,000Total liabilities and equity $60,000 Income Statement (Millions of $)2018Net sales $84,000Operating costs except depreciation78,120Depreciation 1,680Earnings before interest and taxes (EBIT)$4,200Less interest 900Earnings before taxes (EBT) $3,300Taxes 1,320Net income $1,980 Other data: Shares outstanding (millions) 500.00Common dividends (millions of $) $693.00Int rate on notes payable & L-T bonds6%Federal plus state income tax rate40%Year-end stock price $47.52 Refer to Exhibit 4.1. What is the firm's ROA? Do not round your intermediate calculations.

3.30%

Last year Rennie Industries had sales of $270,000, assets of $175,000 (which equals total invested capital), a profit margin of 5.3%, and an equity multiplier of 1.2. The CFO believes that the company could reduce its assets by $51,000 without affecting either sales or costs. The firm finances using only debt and common equity. Had it reduced its assets by this amount, and had the debt/total invested capital ratio, sales, and costs remained constant, how much would the ROE have changed? Do not round your intermediate calculations.

4.04%

Mantle Corporation is considering two equally risky investments: ∙ A $5,000 investment in preferred stock that yields 6.75%.∙ A $5,000 investment in a corporate bond that yields 10.00%. What is the breakeven corporate tax rate that makes the company indifferent between the two investments? Assume a 70.00% dividend exclusion for tax on dividends. (Do not round your intermediate answer and round your final answer to two decimal places.)

40.75%

Company A has a beta of 0.70, while Company B's beta is 1.45. The required return on the stock market is 9.00%, and the risk-free rate is 2.25%. What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.) Do not round your intermediate calculations.

5.06%

Suppose Community Bank offers to lend you $10,000 for one year at a nominal annual rate of 6.50%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?

6.66%

A company with a 15% tax rate buys preferred stock in another company. The preferred stock has a before-tax yield of 7.50%. Assume a 70% dividend exclusion for tax on dividends. What is the preferred stock's after-tax return? (Round your final answer to two decimal places.)

7.16%

Suppose the U.S. Treasury offers to sell you a bond for $687.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price?

7.79%

Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $270,000 and its net income was $10,600. The firm finances using only debt and common equity, and its total assets equal total invested capital. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $10,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income by this amount, how much would the ROE have changed? Do not round your intermediate calculations.

8.84%

Mulherin's stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 2.30%. What is the required rate of return on the market? (Hint: First find the market risk premium.) Do not round your intermediate calculations.

9.98%