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corporate finance core principles
Corporate Finance Core Principles and Applications 5th edition Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan - Solutions
Y3K, Inc., has sales of $6,180, total assets of $3,680, and a debt–equity ratio of .45. If its return on equity is 15 percent, what is its net income?
A company has net income of $263,000, a profit margin of 7.4 percent, and an accounts receivable balance of $165,700. Assuming 80 percent of sales are on credit, what is the company’s days’ sales in receivables?
The Optical Scam Company has forecast a sales growth rate of 18 percent for next year. The current financial statements are shown below. Current assets, fixed assets, and short-term debt are proportional to sales.INCOME STATEMENTSales...........................................................$
Prince Albert Canning PLC had a net loss of £17,218 on sales of £153,875. What was the company’s profit margin? Does the fact that these figures are quoted in a foreign currency make any difference? Why? In dollars, sales were $223,180. What was the net loss in dollars?
Firm A and Firm B have debt/total asset ratios of 35 percent and 30 percent and returns on total assets of 8 percent and 9 percent, respectively. Which firm has a greater return on equity?
For 2017, calculate the cash flow from assets, cash flow to creditors, and cash flow to stockholders.Use the following information for Ingersoll, Inc., (assume the tax rate is 35 percent): 2016 2017 $ 40,743 $ 43,277 Sales 5,853 Depreciation 5,858 Cost of goods sold 14,020 15,912 Other expenses
Draw up an income statement and balance sheet for this company for 2016 and 2017.Use the following information for Ingersoll, Inc., (assume the tax rate is 35 percent): 2016 2017 $ 40,743 $ 43,277 Sales 5,853 Depreciation 5,858 Cost of goods sold 14,020 15,912 Other expenses 3,322 2,776 Interest
The most recent financial statements for Cornell, Inc., are shown here:Assets and costs are proportional to sales. Debt and equity are not. A dividend of $2,600 was paid, andthe company wishes to maintain a constant payout ratio. Next year€™s sales are projected to be $50,310.What is the
Quinn Company has a debt–equity ratio of .75. Return on assets is 8.6 percent, and total equity is $975,000. What is the equity multiplier? Return on equity? Net income?
If Harley, Inc., has an equity multiplier of 1.35, total asset turnover of 2.15, and a profit margin of 6.08 percent, what is its ROE?
Do you think the company would have suffered the same fate if its product had been less popular? Why or why not?
You are researching Time Manufacturing and have found the following accounting statement of cash flows for the most recent year. You also know that the company paid $185 million in current taxes and had an interest expense of $96 million. Use the accounting statement of cash flows to construct the
During 2017, Raines Umbrella Corp. had sales of $809,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $549,000, $136,000, and $85,000, respectively. In addition, the company had an interest expense of $67,000 and a tax rate of 35 percent. (Ignore any tax
Corporation Growth has $79,500 in taxable income, and Corporation Income has $7,950,000 in taxable income.a. What is the tax bill for each firm?b. Suppose both firms have identified a new project that will increase taxable income by $10,000. How much in additional taxes will each firm pay? Why is
The following table presents the long-term liabilities and stockholders’ equity of Information Control Corp. one year ago:Long-term debt..........................................................$37,000,000Preferred
Busch Driving School’s 2016 balance sheet showed net fixed assets of $3.75 million, and the 2017 balance sheet showed net fixed assets of $4.45 million. The company’s 2017 income statement showed a depreciation expense of $395,000. What was the company’s net capital spending for 2017?
At 5.75 percent interest, how long does it take to double your money? To quadruple it?
After Dan€™s analysis of East Coast Yachts€™ cash flow (at the end of our previous chapter), Larissa approached Dan about the company€™s performance and future growth plans. First, Larissa wants to find out how East Coast Yachts is performing relative to its peers.
You want to buy a new sports car from Muscle Motors for $83,000. The contract is in the form of a 60-month annuity due at an APR of 4.89 percent, compounded monthly. What will your monthly payment be?
Suppose you are going to receive $17,500 per year for five years. The appropriate interest rate is 7.4 percent.a. What is the present value of the payments if they are in the form of an ordinary annuity? What is the present value if the payments are an annuity due?b. Suppose you plan to invest the
A 5-year annuity of 10 $6,500 semiannual payments will begin 9 years from now, with the first payment coming 9.5 years from now. If the discount rate is 9 percent compounded monthly, what is the value of this annuity five years from now? What is the value three years from now? What is the current
A local finance company quotes an interest rate of 16.6 percent on one-year loans. So, if you borrow $23,000, the interest for the year will be $3,818. Because you must repay a total of $26,818 in one year, the finance company requires you to pay $26,818/12, or $2,234.83, per month over the next 12
Given an interest rate of 6.4 percent per year, what is the value at t = 7 of a perpetual stream of $3,250 payments that begin at t = 15?
You have your choice of two investment accounts. Investment A is a 15-year annuity that features end-of-month $1,250 payments and has an interest rate of 6.15 percent compounded monthly. Investment B is a continuously compounded lump-sum investment with an interest rate of 7 percent also good for
A 15-year annuity pays $1,750 per month, and payments are made at the end of each month. If the interest rate is 11.4 percent compounded monthly for the first seven years, and 8.6 percent compounded monthly thereafter, what is the value of the annuity today?
The present value of the following cash flow stream is $5,800 when discounted at 8 percent annually. What is the value of the missing cash flow?YEAR..........................................CASH
What is the value today of $3,500 per year, at a discount rate of 7.6 percent, if the first payment is received 7 years from now and the last payment is received 30 years from now?
Consider a firm with a contract to sell an asset for $150,000 three years from now. The asset costs $102,000 to produce today. Given a relevant discount rate of 11 percent per year, will the firm make a profit on this asset? At what rate does the firm just break even?
You have just purchased a new warehouse. To finance the purchase, you’ve arranged for a 30-year mortgage loan for 80 percent of the $3.9 million purchase price. The monthly payment on this loan will be $18,250. What is the APR on this loan? The EAR?
You have just won the TVM Lottery. You will receive $1 million today plus another 10 annual payments that increase by $165,000 per year. Thus, in one year you receive $1.165 million. In two years, you get $1.33 million, and so on. If the appropriate interest rate is 7.5 percent, what is the value
You need a 30-year, fixed-rate mortgage to buy a new home for 225,000. Your mortgage bank will lend you the money at an APR of 5.1 percent. However, you can only afford monthly payments of $875, so you offer to pay off any remaining loan balance at the end f the loan in the form of a single
You want to borrow $105,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $2,025, but no more. Assuming monthly compounding, what is the highest APR you can afford on a 60-month loan?
You’re prepared to make monthly payments of $190, beginning at the end of this month, into an account that pays 8.75 percent interest compounded monthly. How many payments will you have made when your account balance reaches $25,000?
What is the relationship between the value of an annuity and the level of interest rates? Suppose you just bought a 15-year annuity of $5,250 per year at the current interest rate of 10 percent per year. What happens to the value of your investment if interest rates suddenly drop to 5 percent? What
Your job pays you only once a year, for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $75,000 and you plan to spend all of it. However, you want to start saving for retirement beginning next year. You have decided that one year from today you
Southern California Publishing Company is trying to decide whether or not to revise its popular textbook, Financial Psychoanalysis Made Simple. It has estimated that the revision will cost $135,000. Cash flows from increased sales will be $38,000 the first year. These cash flows will increase by
What is the future value in six years of $1,500 invested in an account with an annual percentage rate of 7.2 percenta. Compounded annually?b. Compounded semiannually?c. Compounded monthly?d. Compounded continuously?e. Why does the future value increase as the compounding period shortens?
One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of $450 per month. You will charge 1.3 percent per month interest on the overdue balance. If the current balance is $18,700, how long will it take for the account to be paid off?
First National Bank charges 15.7 percent compounded monthly on its business loans. First United Bank charges 16.2 percent compounded semiannually. As a potential borrower, which bank would you go to for a new loan?
Find the APR in each of the following cases: NUMBER OF TIMES COMPOUNDED Semiannually Monthly Weekly Infinite EAR APR 10.4% 8.9 11.6 15.4
An investment offers $5,500 per year for 15 years, with the first payment occurring one year from now. If the required return is 7.5 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years? Forever?
Compute the future value of $1,625 continuously compounded fora. Five years at an annual percentage rate of 14 percent.b. Three years at an annual percentage rate of 6 percent.c. Ten years at an annual percentage rate of 8 percent.d. Eight years at an annual percentage rate of 9 percent.
First City Bank pays 7 percent simple interest on its savings account balances, whereas Second City Bank pays 7 percent interest compounded annually. If you made a $4,800 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 10 years?
Use the sustainable growth rate equations from the previous problem to answer the following questions. Grendl, Inc., had total assets of $410,000 and equity of $265,000 at the beginning of the year. At the end of the year, the company had total assets of $460,000. During the year the company sold
In the chapter, we discussed one calculation of the sustainable growth rate as Sustainable growth rate = ROE × b / 1 - ROE × b.In practice, probably the most commonly used calculation of the sustainable growth rate is ROE × b. This equation is identical to the two sustainable growth rate
Dahlia, Inc., wishes to maintain a growth rate of 9 percent per year and a debt–equity ratio of .40. The profit margin is 7.2 percent, and the ratio of total assets to sales is constant at 2.25. Is this growth rate possible? To answer, determine what the dividend payout ratio must be. How do you
Investment X offers to pay you $4,850 per year for nine years, whereas Investment Y offers to pay you $6,775 per year for five years. Which of these cash flow streams has the higher present value if the discount rate is 5 percent? If the discount rate is 21 percent?
Machine Co. has identified an investment project with the following cash flows. If the discount rate is 5 percent, what is the present value of these cash flows? What is the present value at 13 percent? At 18 percent?YEAR............................CASH FLOW1......................................$
Because of the dramatic growth at East Coast Yachts, Larissa decided that the company should be reorganized as a corporation (see our Chapter1 Closing Case for more detail). Time has passed and, today, the company is publicly traded under the ticker symbol €œECY€.Dan Ervin was
Refer to the corporate marginal tax rate information in Table 2.3.a. Why do you think the marginal tax rate jumps up from 34 percent to 39 percent at a taxable income of $100,001, and then falls back to a 34 percent marginal rate at a taxable income of $335,001?b. Compute the average tax rate for a
Consider the following abbreviated financial statements for Weston Enterprises:WESTON ENTERPRISES2017 Income StatementSales.................................$15,690Costs.....................................3,739Depreciation........................1,339Interest paid...........................562a.
Blue Diamond Industries had the following operating results for 2017; sales = $44,600; cost of goods sold = $27,500; depreciation expense = $4,630; interest expense = $1,050; dividends paid = $2,275. At the beginning of the year, net fixed assets were $27,510,current assets were $6,840, and current
In the previous problem, suppose Raines Umbrella Corp. paid out $75,000 in cash dividends. Is this possible? If net capital spending and the change in net working capital were both zero, and if no new stock was issued during the year, what was the change in the firm’s long-term debt account?Data
Huang, Inc., is obligated to pay its creditors $11,600 very soon.a. What is the market value of the shareholders’ equity if assets have a market value of $15,100?b. What if assets equal $9,900?
Prepare a 2017 balance sheet for Jarrow Corp. based on the following information: cash = $168,000; patents and copyrights = $827,000; accounts payable = $429,000; accounts receivable = $237,000; tangible net fixed assets = $3,410,000; inventory = $385,000; notes payable = $171,000; accumulated
Given the following information for O’Hara Marine Co., calculate the depreciation expense: sales = $57,900; costs = $28,600; addition to retained earnings = $8,100; dividends paid = $5,200; interest expense = $2,050; tax rate = 35 percent.
Schwert Corp. shows the following information on its 2017 income statement: sales = $225,000; costs = $103,200; other expenses = $6,100; depreciation expense = $15,300; interest expense = $11,200; taxes = $31,227; dividends = $18,100. In addition, you’re told that the firm issued $6,000 in new
During the year, the Senbet Discount Tire Company had gross sales of $757,000. The company’s cost of goods sold and selling expenses were $249,800 and $146,000,respectively. The company also had debt of $675,000, which carried an interest rate of 6 percent. Depreciation was $87,000. The tax rate
The Stancil Corporation provided the following current information:Proceeds from long-term borrowing..................................$16,500Proceeds from the sale of common stock..............................2,700Purchases of fixed
Freeman, Inc., reported the following financial statements for the last two years. Construct the cash flow identity for the company. Explain what each number means.FREEMAN, INC.2017 Income StatementSales........................................................$703,100Cost of goods
Ritter Corporation€™s accountants prepared the following financial statements for year-ends.RITTER CORPORATION Income Statement 2017 Revenue................................$1,068 Expenses....................................745
Given the information for Maria’s Tennis Shop, Inc., in the previous two problems, suppose you also know that the firm’s net capital spending for 2017 was $640,000, and that the firm reduced its net working capital investment by $65,000. What was the firm’s 2017 operating cash flow, or OCF?
The 2016 balance sheet of Maria’s Tennis Shop, Inc., showed $540,000 in the common stock account and $5.6 million in the additional paid-in surplus account. The 2017 balance sheet showed $595,000 and $6.18 million in the same two accounts, respectively. If the company paid out $270,000 in cash
The 2016 balance sheet of Maria’s Tennis Shop, Inc., showed long-term debt of $2.4 million, and the 2017 balance sheet showed long-term debt of $2.53 million. The 2017 income statement showed an interest expense of $187,000. What was the firm’s cash flow to creditors during 2017?
Timsung, Inc., has sales of $30,700, costs of $11,100, depreciation expense of $2,100, and interest expense of $1,140. If the tax rate is 40 percent, what is the operating cash flow, or OCF?
The Alexander Co. had $328,500 in taxable income. Using the rates from Table 2.3 in the chapter, calculate the company€™s income taxes. What is the average tax rate? What is the marginal tax rate?Data from Table 2.3 TAXABLE INCOME TAX RATE 0-50,000 15% 50,001–75,000 25 75,001–100,000
Klingon Cruisers, Inc., purchased new cloaking machinery three years ago for $7 million. The machinery can be sold to the Romulans today for $5.3 million. Klingon’s current balance sheet shows net fixed assets of $3.9 million, current liabilities of $1.075 million, and net working capital of
Bradds, Inc., has sales of $528,600, costs of $264,400, depreciation expense of $41,700, interest expense of $20,700, and a tax rate of 35 percent. What is the net income for the firm? Suppose the company paid out $27,000 in cash dividends. What is the addition to retained earnings?
Burnett, Inc., has current assets of $6,800, net fixed assets of $29,400, current liabilities of $5,400, and long-term debt of $13,100. What is the value of the shareholders’ equity account for this firm? How much is net working capital?
Referring back to the Microsoft example used at the beginning of the chapter, note that we suggested that Microsoft’s stockholders probably didn’t suffer as a result of the reported loss. What do you think was the basis for our conclusion?
In 1969, Tom Warren founded East Coast Yachts. The company’s operations are located near Hilton Head Island, South Carolina, and the company is structured as a sole proprietorship. The company has manufactured custom midsize, high-performance yachts for clients, and its products have received
Critics have charged that compensation to top management in the United States is too high and should be cut back. For example, focusing on large corporations, Mario Gabelli of GAMCO Investors was been one of the best-compensated CEOs in the United States, earning about $88.5 million in 2015. Are
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