1) Company A has sales of $850,000, cost of goods sold of $425,000, depreciation expense of $50,000, interest expenses of $30,000 and a tax rate of 25%. What is the net income for Company A? What is the cash flow?

Ans.

2) Company A has an equity multiplier of 1.65, total asset turnover of 1.8 and a profit margin of 6 percent, what is the company's return on equity? What is the debt-equity ratio?
Ans. Equity multiplier = 1.65

Asset turn over= 1.8

Profit margin = 6%

Return on equity=?

Debt to equity=?

Asset turn over= sales/assets

Profit margin= net income/ sales

Equity multiplier= assets/ shareholder’s equity

Due to in suffient information, not possible to measure the return on equity and debt to equity.


3) Calculate the sustainable growth rate for Company A: Profit margin is 11%, Capital intensity ratio is .7, Debt Equity ratio is .6, Net income is $120,000, and Dividends are $35,000.
Ans.
Profit margin= 11%

Capital intensity= 0.7 = assets/ sales

Debt to equity ratio= 0.6= debt / equity

Net income= 120000

Dividend = 35000

SGR=?

Dividend payout ratio= dividend / net income= 35000/120000=0.29

Sales= 1090909

Assets= 763636

ROE= s/assets*net income/sales*dividend / equity

ROE= 1.42*0.11*0.6= 9.372%

SGR= Roe*(1-Dividend payout ratio)

SGR= 6.65%

4) Calculate the DuPont Identity for Company B. The relevant financial information is as follows:

Sales $300,000

Cost of Sales, $125,000

Depreciation $10,000

Interest Paid $2,000

Tax Rate 35%

Dividends $12,500

Retained Earnings $15,000

Ans. net income= 58000

After paying all its dividends, company also have enough income to bear all its expenses. But there is lack of information due to which company is unable to measure the ROE which show DuPont Identity for Company B.



5) You want to retire when you are 55 years old. You will need $2,000,000 in order to do so. Assume you are 22 years old now and the average rate of return is 9% per year. How much will you need to invest each year in order to retire?
Ans. for meeting the required limit of investment, you have to invest every year almost 3.5% returns, as 2000000*0.035=70000*30=2100000. Because 30 years more required to meet the limit of retirement.

6) based on problem 5, assume you have $50,000 to invest now. How much will that be worth when you are ready to retire?
Ans.  if annually we invest $50000 then we have to invest almost 3.5% return to meet the requirement of retirement in 30 years.


7) You want to purchase a new car when you graduate from college. The interest rate for graduates is 7.9%, the car costs $35,000 and the finance company requires that you pay 10% down when you purchase the car. Your loan will be for 5 years, payable monthly. What is your car payment?

Ans.

8) Company B has 7 percent coupon bonds on the market with nine years left to maturity. The bonds make annual payments. If the bonds currently sell for $1038.50, what is the yield to maturity?

9) Company A issued 20-year bonds one year ago. The coupon rate is 6.1 percent. The bonds make semiannual payments. If the yield to maturity is 5.3%, what is the current bond price?
Ans.
Current price= YTM*n*c

Current price= 5.3*20*6.1= $646

10) Company C has bonds on the market with 10.5 years to maturity, a yield to maturity of 8.4 percent and a current price of $945. The bonds make payments every six months. What is the coupon rate of the bond?
Ans. coupon rate= YTM*p/n

Coupon rate= 7.65%


11) Company A pays a dividend of $3.20 on its common stock. The dividend is paid at the end of the year. The finance department believes it can increase the dividend by 6% every year. If the market demands that this stock earn 12%, what is the current share price? 
Ans. current Price of share= D/r-g

Price of share= 3.20/12%-6%= $53.33


12) Company B has an EPS of $4.23 and the benchmark PE for this type of company is 22. Earnings are expected to grow at a 7 percent per year. What is your estimate for the current price of the stock? What is the target stock price in one year? Assuming no dividends, what is the implied return on the company's stock?
Ans. Stock price=?

EPS= 4.32

Price earnings ratio= 22

Growth= 7%

Stock price= PE/EPs= 22/4.32= 5.09

Target stock price = 6 due to growth in earning

Return on company stock = due to 7% growth rate, the eps, stock price and price earnings ratio everything is going to increase.


13) Company A wants to do a project. The project will provide an annual cash flow of $2,100 for 9 years and costs $8,000 today. The company requires a return of 7.5% on any project it does. Does this project meet its requirements? 
Ans. yes project meet its requirements as it give return in long term basis and give an annual cash flow more than the actual invested amount so it become profitable for the company.

14) Company B wants to establish a new division. According to its analysis, the division will provide a net cash flow of $109,000 for the first year. The net cash flow is projected to grow at a rate of 5.1% for the foreseeable future. The project requires an initial investment of $1,425,000. Company B's shareholders require a rate of return of 12%. Should the division be established? 
Ans. yes, this division can be establish as with the heavy investment, shareholders can get high amount of return. And the net cash flow also provides a suffient increase at annual basis.


15) Company P wants to develop a new product. The company paid for a marketing study. The study cost $120,000. The projected sales are $725,000 per year. The fixed costs are $187,000 per year. Variable costs are equal to 20% of sales. The company must buy new equipment, which costs $835,000. It will be depreciated for four years using the straight line method. Assume no salvage value. Company P is in the 40% tax bracket. The company has a policy that requires 13% return. What is the payback period, NPV, and IRR?
Ans. Payback period:

Payback period= investment/ net cash inflow

Net cash inflow= sales- all costs= 725000-187000-145000-208750-181250= 3000

Payback period= 835000/3000=278.3

NPV= R*1-(1-i^)-n /i- initial investment

NPV= 3000*1-(1-0.13)^-4 /0.13- 835000= -794718

IRR is less than required return , at this level the /npv is consider as zero.


16) You own a portfolio equally invested in a risk-free asset and two stocks. If one stock has a beta of 1.42 and the total portfolio is equally as risky as the market, what is the beta for the other stock in your portfolio?
Ans. due to same risk option, the second stock beta is same as 1.42 according to equal risky market conditions.


17) You have $250,000 to invest in a stock portfolio. Your choices are Stock A with an expected return of 13.5%, Stock B with an expected return of 9.8%. If your goal is to create a portfolio with an expected return of 11.4%, how much will you invest in each stock?
Ans. if you want to get expected return of 11.4% from each stock than you have to invest equal amount in all stock portfolio and get the same expected return from both stocks. $125000 amount almost consider for the investment.


18) Company B has the following capital structure: 

Debt: 10,000 bonds paying 6.9%. 15 years left to maturity. Quoted price of 104. The interest is paid semiannually.

Common Stock: 270,000 shares selling for $68.50 per share. The stock has a beta of .85 and will pay a dividend of $3.25 next year. The dividend will grow by 5%.

Preferred Stock: 8,000 shares of 4.9% preferred stock selling at $94 per share.

Market: 12% expected return, risk free rate of 3.5% and 35% tax bracekt.

What is the Weighted Average Cost of Capital??

Ans. WACC= E/E+D+P*re+D/E+D+P*(1-t)*rd+P/E+D+P*rp

Where re= rf+b*(rm-rf)

Re= 78.3%

Rd= 44.85%

Rp= 4.9%

WACC= 68.50/266.5*0.783+104/266.5*0.4485+94/266.5*0.049

WACC= 39.3%



19) Big Bank B offers your company $20,000,000 loan with an interest rate of 7%. The bank requires that you hold 4% of the borrowed amount in a non interest earning account at the bank. What is the effective annual interest rate?
Ans. amount that hold in account = $800000

Amount of loan = $20000000
the effective annual interest rate= almost 5% against the amount of loan.

20) Company B has annual credit sales of $25,600,000. The average collection period is 45 days. What is the average balance in Accounts Receivable?