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Hi Rachel, Here is the doc that did not trasmit...

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Hi Rachel, Here is the doc that did not trasmit on Dec 17th. Sorry. I had a crash and could not send anything to you. Thanks for all your help. I just wanted help with the calculator steps as I have the answers already. DuPont equation: basic calculation 2. Midwest Lumber had a profit margin of 5.1%, a total assets turnover of 1.6, and an equity multiplier of 1.8. What was the firm's ROE? a. 14.39% b. 14.69% c. 14.99% d. 15.29% e. 15.59% Solution: Profit margin 5.1% X TATO 1.60 X Equity multiplier 1.80=ROE 14.69% Calculator steps: Dividends and retained earnings 3. Fine Breads Inc. paid out $26,000 common dividends during 2008, and it ended the year with $150,000 of retained earnings. The prior year?s retained earnings were $145,000. What was the firm's 2008 net income? a. $30,000 b. $31,000 c. $32,000 d. $33,000 e. $34,000 Solution: 2004 retained earnings = 145,000 Dividends 2005=26,000 2005 retained earnings = 150,000 Change in retained earnings = 150,000 ? 145,000 = 5,000 Net income 2005 = change in retained earnings + dividends Net income = 5,000 + 26,000 = 31,000 Calculator steps: Income statement: net income 4. Miles Metals recently reported $9,000 of sales, $6,000 of operating costs other than depreciation, and $1,500 of depreciation. The company had no amortization charges, it had $4,000 of bonds that carry a 7% interest rate, and its federal-plus-state income tax rate was 40%. What was the firm's net income? The company uses the same depreciation for tax and stockholder reporting. a. $688 b. $701 c. $719 d. $732 e. $745 Solution: 9,000 ? 6,000 ? 1,500 = $1,500 EBIT $1,500 EBIT - $280 Interest = $1,220 Profit Before Tax $1,220 Profit Before Tax - $488 Tax = $732 Profit After Tax $732 Profit After Tax plus $1500 Depreciation = $2,232 Cash Flow Calculator steps: Max. debt ratio for a given TIE ratio 5. A new firm is developing its business plan. It will require $600,000 of assets, and it projects $435,000 of sales and $350,000 of operating costs (including depreciation) for the first year. The firm is quite sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. What is the maximum debt ratio the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.) a. 46.1% b. 47.2% c. 48.6% d. 50.5% e. 51.9% Solution: Assets $600,000 Sales $435,000 Operating costs $350,000 Operating income (EBIT) $85,000 TIE 4.0 Maximum interest expense $21,250 Interest rate 7.5% Maximum debt $283,333 Maximum debt ratio 47.2% Calculator steps: Profit margin and ROE 6. Burger Corp has $500,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $600,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would Burger need in order to achieve the 15% ROE, holding everything else constant? a. 8.00% b. 9.50% c. 11.00% d. 12.50% e. 14.00% Solution: Total assets = equity $500,000 Sales $600,000 Net income $25,000 Target ROE 15.00% Net income required to achieve target ROE $75,000 Profit margin needed to achieve target ROE 12.50% Calculator steps: Total assets turnover ratio (TATO) 7. Rangoon Corp's sales last year were $400,000, and its year-end total assets were $300,000. The average firm in the industry has a total assets turnover ratio (TATO) of 2.5. The new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average? a. $100,000 b. $110,000 c. $120,000 d. $130,000 e. $140,000 Solution: Sales $400,000 Total assets $300,000 Target TATO 2.50 Target assets = Sales / Target TATO $160,000 Asset reduction $140,000 Calculator steps: Statement of cash flows 8. Purcell Products Inc. had $625,000 in cash on the balance sheet at year-end 2007. At year-end 2008, the company had $575,000 in cash. We know cash flow from operating activities totaled $1,000,000, and cash flow from long-term investing activities totaled -$1,325,000. Furthermore, Purcell issued $150,000 in long-term debt last year to fund new projects, increase liquidity, and to buy back some common stock. If dividends paid to stockholders equaled $50,000, how much common stock did Purcell issue last year? (Assume that the only financing activities in which Purcell engaged involved long-term debt, payment of dividends, and common stock.) a. $ 50,000 b. $125,000 c. $175,000 d. $275,000 e. $325,000 Solution: confirmed with tutor Cash at the end of the year 625,000 Cash at the beginning of the year -575,000 Change in cash $-50,000 CF from operations + CF from investing + CF from financing =change in cash $1,000,000 + (-$1,325,000) + CF from financing = $ -50,000 $-325,000 +CF from financing =$ -50,000; CF from financing = -50,000+($325,000)=$275,000(this is where I am unsure) CF from financing=$275,000 LT debt +Change in Common stock ? Pymt. of common dividends = CF from financing $150,000 + Change in Common stock - $50,000 = $275,000; $100,000 + Change in Common stock = $275,000 Change in Common stock = $275,000-100,000=$-175,000 The negative change in common stock bc firm repurchased $175,000 worth of its common stock. Her solution: Cash at the end of the year: $575,000 Cash at the beginning of the year: 625,000 Change in cash: $-50,000 CF from operations + CF from investing + CF from financing = Change in cash $1,000,000 + (-$1,325,000) + CF from financing = $ -50,000 $-325,000 + CF from financing = $ -50,000; CF from financing = -50,000 + ($325,000) = $275,000 CF from financing = $275,000 Issuance of LT debt + Issuance of Common stock ? Payment. of common dividends = CF from financing $150,000 + Issuance of Common stock - $50,000 = $275,000; $100,000 + Issuance of Common stock = $275,000 Issuance of Common stock = $275,000-100,000 = $175,000 $175,000 worth of common stock was issued last year. Calculator steps: DSO and its effect on net income 9. Ingram Inc has the following balance sheet: Cash $10,000 Accounts payable $30,000 Receivables 50,000 Other current liabilities 20,000 Inventories 150,000 Long-term debt 50,000 Net fixed assets 90,000 Common equity 200,000 Total assets $300,000 Total liabilities & equity $300,000 Last year the firm had $15,000 of net income on $200,000 of sales. However, the new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.5, without affecting either sales or net income. Assume inventories are sold off and not replaced to get the current ratio to 2.5, and the funds generated are used to buy back common stock at book value without changing anything else. By how much will the ROE change? a. 4.70% b. 4.96% c. 5.28% d. 5.54% e. 5.91% Solution: Net income $15,000 ORIGINAL BALANCE SHEET Cash $10,000 Accounts payable $30,000 Receivables $50,000 Other current liabilities $20,000 Inventories $150,000 Long-term debt $50,000 Net fixed assets $90,000 Common equity $200,000 Total assets $300,000 Total liab. and equity $300,000 Actual current ratio 4.20 Target current ratio 2.50 Old ROE 7.50% Old current ratio 4.20 Req'd inv. to reach target $65,000 Req'd inventory reduction $85,000 = inventories + common equity decrease by this amount New Equity $115,000 New ROE 13.04% Change in ROE 5.54% Calculator steps: Income statement: FCF vs. net income 10. Hybrid Battery Systems recently reported $9,000 of sales, $6,000 of operating costs other than depreciation, and $500 of depreciation. The company had no amortization charges, it had $4,000 of bonds that carry a 7% interest rate, and its federal-plus-state income tax rate was 40%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make $800 of capital expenditures on new fixed assets and to invest $500 in net operating working capital. By how much did the firm's net income exceed its free cash flow? a. $596 b. $608 c. $620 d. $632 e. $644 Solutions: confirmed with tutor Bonds $4,000 Interest rate 7.00% Tax rate 40% Required capital expenditures $800 Required addition to net operating working capital (Change in Net Op. WC ) $500 Sales $9,000 Operating costs excluding depreciation $6,000 Depreciation $500 Operating income (EBIT) $2,500 Interest charges $280 Taxable income $2,220 Taxes $888 Net income after taxes $1,332 Net income = sales ? operating costs ? depreciation ? interest ? tax Net income =9000 ? 6000 ? 500 ? (4,000*7%) ? tax Net income =2500 ? 280 ? tax Net income =2220? tax Tax = 2220*40% (tax)=$888 Net income =2220? 888=1332 Net income=$1,332 Free Cash Flow= EBIT(1-T) + Depreciation ? Capital Expenditure ? Change in Net Operating Working Capital Free Cash Flow = 2,500(1-0.40) + 500 ? 800 ? 500 = $700 So, Net Income ? Flow Cash= $1,332 ? 700 = $632 Calculator steps:

 

Paper#2685 | Written in 18-Jul-2015

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