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CHAPTER TWO PROBLEMS
1. Your corporation has the following cash flows:
Operating income $250,000
Interest received 10,000
Interest paid 45,000
Dividends received 20,000
Dividends paid 50,000
If the applicable tax table is as follows:
Taxable Income Rate
————– —-
$ 0 – 25,000 16%
25 – 50,000 19
50 – 75,000 30
75 -100,000 40
over 100,000 46
What is the corporation’s tax liability?
$80,530
2. Last year Rattner Robotics had $5 million in operating income (EBIT). The company
had net depreciation expense of $1 million and an interest expense of $1 million; its
corporate tax rate was 40 percent. The company has $14 million in current assets and $4
million in non-interest-bearing current liabilities; it has $15 million in net plant and
equipment. It estimates that it has an after-tax cost of capital of 10 percent. Assume that
Rattner’s only non-cash item is depreciation.
•What was the company’s net income for the year?
•
$2.4 million
•What was the company’s net cash flow?
•
$3.4 million
•What was the company’s net operating profit after taxes (NOPAT)?
•
$3.0 million
•What was the company’s operating cash flow?
•
$4.0 million
•If operating capital in the previous year was $24 million, what was the company’s
free cash flow (FCF) for the year?
•
$2.0 million
•What was the company’s economic value added?
•
$500,000
3. As an institutional investor paying a marginal tax rate of 46%, your after-tax
dividend yield on preferred stock with a 16% before-tax dividend yield would be:
14.9%
4. A 7% coupon bond issued by the state of New York sells for $1,000 and thus
provides a 7% yield to maturity. For an investor in the 40% tax bracket, what
coupon rate on a Carter Chemical Company bond that also sells at its $1,000 par
value would cause the two bonds to provide the investor with the same after-tax
rate of return?
11.67%
5. A corporation with a marginal tax rate of 46% would receive what AFTER-TAX
YIELD on a 12% coupon rate preferred stock bought at par?
Answer: 11.172%
6. You have just received financial information for the past two years for Powell
Panther Corporation:
Income Statements Ending December 31
(millions of dollars)
2000 1999
Sales $1,200.0 $1,000.0
Operating Costs (excluding depreciation) 1,020.0 850.0
Depreciation 30.0 25.0
Earnings before interest and taxes $ 150.0 $ 125.0
Less Interest expense 21.7 20.2
Earnings before taxes $ 128.3 $ 104.8
Less taxes (40%) 51.3 41.9
Net income available to common equity $ 77.0 $ 62.9
Common dividends $ 0.605 $ 0.464
Balance Sheets Ending December 31
(millions of dollars)
•1999
•
Cash and marketable securities $ 12.0 $ 10.0
Accounts receivable 180.0 150.0
Inventories 180.0 200.0
Net plant and equipment 300.0 250.0
Total Assets $ 672.0 $ 610.0
Accounts payable $ 108.0 $ 90.0
Notes payable 67.0 51.5
Accruals 72.0 60.0
Long-term bonds $ 150.0 $ 150.0
Common stock (50 million shares) 50.0 50.0
Retained earnings 225.0 208.5
Total liabilities and equity $ 672.0 $ 610.0
•What is the net operating profit (NOPAT) for 2000?
•
$90,000,000
•What are the amounts of net operating working capital for 1999 and 2000?
•
$210,000,000 and $192,000,000
•What are the amounts of total operating capital for 1999 and 2000?
•
$460,000,000 and $492,000,000
•What is free cash flow for 2000?
•
$58,000,000
•How much did the firm reinvest in itself over the accounting period?
•
$16,500,000
•At the present time (12/31/2000), how large a check could the firm write without it
bouncing?
•
$12,000,000
•A firm’s operating income (EBIT) was $400 million, their depreciation expense was
$40 million, and their increase in net investment in operating capital was $70
million. Assuming that the firm is in the 40% tax bracket, what was their free cash
flow?
•
$170 million
•In its recent income statement, Smith Software Inc. reported $23 million of net
income, and in its year-end balance sheet, Smith reported $401 million of retained
earnings. The previous year, its balance sheet showed $389 million of retained
earnings. What were the total dividends paid to shareholders during the most recent
year?
•
$11.0 million
9. Cox Corporation recently reported an EBITDA of $58 million and $7 million of
net income. The company has $12 million interest expense and the corporate tax
rate is 40.0% percent. What was the company’s depreciation and amortization
expense?
$34.33 million
10. Ravings Incorporated recently reported net income of $5.4 million. Its
operating income (EBIT) was $15 million, and its tax rate was 40 percent. What
was the company’s interest expense?
$6 million
11. In its recent income statement, Smith Software Inc. reported paying $10 million
in dividends to common shareholders, and in its year-end balance sheet, Smith
reported $419 million of retained earnings. The previous year, its balance sheet
showed $404 million of retained earnings. What was the firm’s net income during
the most recent year?
$25.0 million
12. Casey Motors recently reported net income of $19 million. The firm’s tax rate
was 40.0% and interest expense was $6 million. The company’s after-tax cost of
capital is 14.0% and the firm’s total investor supplied operating capital employed
equals $95 million. What is the company’s EVA?
$9.30 million
13. Brooks Sisters’ operating income (EBIT) is $194 million. The company’s tax
rate is 40.0%, and its operating cash flow is $148.4 million. The company’s interest
expense is $39 million. What is the company’s net cash flow? (Assume that
depreciation is the only non-cash item in the firm’s financial statements.)
$125.0 million
14. Valuable Incorporated’s stock currently sells for $45 per share. The firm has 20
million share of common outstanding. The firm’s total debt equals $600 million and
its common equity equals $400 million. What is the firm’s market value added?
$500 million
CHAPTER THREE PROBLEMS
1. ABC, Inc., sells all its merchandise on credit. It has a profit margin of 4%, an
average collection period of 60 days, receivables of $150,000, total assets of $3
million and a debt ratio of 0.64. What is the firm’s return on equity?
3.33 percent
2. The Smythe Corporation’s common stock is currently selling at $100 per share
which represents a P/E ratio of 10. If the firm has 100 shares of common stock
outstanding, a return on equity of 0.20, and a debt ratio of 0.67, what is its return on
total assets?
6.7 percent
3. If Winkler, Inc., has sales of $2 million per year (all credit) and an average
collection period of 35 days, what is its average amount of accounts receivable
outstanding (assume a 360 day year)?
$194,444
4. If a firm has total interest charges of $10,000 per year, sales of $1 million, a tax
rate of 40%, and a net profit margin of 6%, what is the firm’s times interest earned
ratio?
11 times
5. A firm that has an equity multiplier of 4.0 will have a debt ratio of:
0.75.
6. Given the following information, calculate the market price per share of WAM,
Inc.:
Earnings after interest and taxes = $200,000
Earnings per share = $2.00
Stockholders’ equity = $2,000,000
Market/Book ratio = 0.20
$4.00
7. A fire has destroyed a large percentage of the financial records of Hanson
Associates. You are charged with piecing together information in order to release a
financial report. You have found the return on equity to be 18%. If sales were $4
million, the debt ratio 0.40, and total liabilities $2 million, what was the return on
assets?
10.8%
8. Assume Conservative Corporation is 100% equity financed. Calculate the return
on equity given the following information:
1. Earnings before taxes = $2,000
2. Sales = $5,000
3. Dividend payout ratio = 60%
4. Total asset turnover = 2.0
5. Applicable tax rate = 50%
40 percent
9. You are considering a new product for your firm to sell. It should cause a 15%
increase in your profit margin but it will also require a 50% increase in total assets.
You expect to finance this asset growth entirely by debt. If the following ratios
were computed before the change, what will be the new ROE if the new product is
sold but sales remain constant?
Profit margin = 0.10
Total asset turnover = 2.0
Equity multiplier = 2
46 percent
10. Johnstown Chemicals, Inc., has a current ratio of 3.0, a quick ratio of 2.4, and
an inventory turnover of 6. Johnstown’s total assets are $1 million and its debt ratio
is 0.20. (The firm has no long-term debt.) What is Johnstown’s sales figure?
$720,000
11. Calculate the market price of a share of ABC, Inc., given the following
information: Stockholders’ equity = $1,250; price/earnings ratio = 5; shares
outstanding = 25; market/book ratio = 1.5.
$75.00
12. Jamestown, Inc., has earnings after interest deductions but before taxes of $300.
The company’s before-tax times interest earned ratio is 7.00. Calculate the
company’s interest charges.
$50.00
13. The G. Hobbs Company has determined that its return on equity is 15%.
Management is interested in the various components that went into this calculation.
However, one of the accountants has misplaced the profit margin ratio. As a finance
wizard, you know how to calculate the profit margin, given the following
information: total debt/total assets = 0.35, and total asset turnover = 2.8. What is
the profit margin?
3.48 percent
14. Lowe & Company has a debt ratio of 0.5, a capital intensity ratio of 4, and a
profit margin of 10%. The Board of Directors is unhappy with the current return on
equity (ROE), and they think it could be doubled. This could be accomplished (1)
by increasing the profit margin to 12% and (2) by increasing debt utilization. Total
asset turnover will not change. What new debt ratio, along with the 12% profit
margin, is required to double the ROE?
70 percent
15. The Local Company is a relatively small, privately owned firm. In 1981 Local
