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BA325, Corporate Finance
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There are 10 problems.
1. Assume the expected inflation rate to be 9%. If the current real rate of interest is 5%, what would you expect the nominal rate of interest to be?
2. You want to invest your savings of $30,000 in government securities for the next two years. At the present, you can invest either in a security that pays interest of 8% per year for the next two years or in a security that matures in one year and pays 10 percent interest. If you make the latter choice, then reinvest your savings at the end of the first year for another year. What should be the minimum return for the second year?
3. Prepare a balance sheet and income statement at December 31, 2008 for the Sabine Mfg. Co. from the scrambled list of items below. Ignore income taxes and interest expense.
Accounts receivable $150,000
Machinery and equipment 700,000
Accumulated depreciation 236,000
Notes payable—current 90,000
Net sales 900,000
Accounts payable 90,000
Long-term debt 160,000
Cost of goods sold 550,000
Operating expenses 280,000
Common stock 320,000
Retained earnings—prior year ?
Retained earnings—current year ?
4. The R. M. Senchack Corporation earned an operating profit margin of 6% based on sales of $11 million and total assets of $6 million last year.
a. What was Senchack’s total asset turnover ratio?
b. For the coming year, the company president has set a goal of attaining a turnover of 2.5. How much must firm sales rise, other things being the same, for the goal to be achieved? (State your answer in both dollars and percentage increase in sales.)
c. What was Senchack’s operating return on assets last year? Assuming the firm’s operating profit margin remains the same, what will the operating return on assets be next year if the total asset turnover goal is achieved?
5. Compute the free cash flows and financing cash flows for Cramer, Inc., for the year 2008. What were the firm’s primary sources and uses of cash?
Cash $76,000 $82,500
Receivables 100,000 91,000
Inventory 168,000 163,000
Prepaid expenses 11,500 13,500
Total current assets $355,500 $350,000
Gross fixed assets 325,500 450,000
Accumulated depreciation (94,500) (129,000)
Patents 61,500 52,500
Total assets $648,000 $723,500
Accounts payable $123,000 $93,500
Short-term notes payable 97,500 105,000
Current liabilities $220,500 $198,500
Mortgage payable 150,000 —
Preferred stock — 231,000
Common stock 225,000 225,000
Retained earnings 52,500 69,000
Total liabilities and equity $648,000 $723,500
1. The only entry in the accumulated depreciation account is the depreciation expense for the period.
2. The only entries in the retained earnings account are for dividends paid in the amount of $20,000 and for the net income for the year.
3. Expenses include a $9,000 amortization of patents and $7,500 in interest expenses.
4. The income statement for 2008 is as follows:
Sales (all credit) $190,000
Cost of goods sold 86,000
Gross profit $104,000
Operating expenses 43,500
Provisions for taxes 24,000
Net income $36,500
(Cost of goods sold included depreciation expense of $34,500)
6. Stefani Moore purchased a new house for $150,000. She paid $30,000 down and agreed to pay the rest over the next 25 years in 25 equal annual payments that included principal payments plus 10% compound interest on the unpaid balance. What will these equal payments be?
7. The annual sales for Salco, Inc., were $5,000,000 last year. The firm’s end-of-year balance sheet appeared as follows:
Current assets $500,000 Liabilities $1,000,000
Net fixed assets $1,500,000 Owners’ equity $1,000,000
The firm’s income statement for the year was as follows:
Less: Cost of goods sold (3,000,000)
Gross profit $2,000,000
Less: Operating expenses (1,500,000)
Operating income $500,000
Less: Interest expense (100,000)
Earnings before taxes $400,000
Less: Taxes (40%) (160,000)
Net income $240,000
a. Calculate Salco’s total asset turnover, operating profit margin, and operating return on assets.
b. Salco plans to renovate one of its plants, which will require an added investment in plant and equipment of $1 million. The firm will maintain its present debt ratio of .5 when financing the new investment, and expects sales to remain constant, whereas the operating profit margin will rise to 13%. What will be the new operating return on assets for Salco after the plant renovation?
c. Given that the plant renovation in part b occurs and Salco’s interest expense rises by $40,000 per year, what will be the return earned on the common stockholders’ investment? Compare this rate of return with that earned before the renovation.
8. The Allendale Office Supply Company has a target current ratio of 2.0 but has experienced some difficulties financing its expanding sales in the past few months. At present, the firm has a current ratio of 2.75 with current assets of $3.0 million. If Allendale expands its receivables and inventories using its short-term line of credit, how much additional short-term funding can it borrow before its current ratio standard is reached?
9. How much do you have to deposit today so that beginning 11 years from now you can withdraw $10,000 a year for the next 5 years (periods 11 through 15) plus an additional amount of $15,000 in that last year (period 15)? Assume an interest rate of 7%.
10. Ellen Denis, a sophomore mechanical engineering student, receives a call from an insurance agent, who believes that Ellen is an older woman ready to retire from teaching. He talks to her about several annuities that she could buy that would guarantee her an annual fixed income. The annuities are as follows:
Initial Payment into Duration Annuity Amount of Money of Annuity Annuity (at t = 0) Received per year (Years)
A $50,000 $8500 12
B $60,000 $7000 25
C $70,000 $8000 20
If Ellen could earn 12% on her money by placing it in a savings account, should she place it instead in any of the annuities? Which ones, if any? Why?
|Due By (Pacific Time)||06/03/2013 09:00 am|
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