Molteni motors inc. recently reported

1.

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Problem 2-3 Income statement

Molteni Motors Inc. recently reported $2.25 million of net income. Its EBIT was $5.25 million, and its tax rate was 40%. What was its interest expense? (Hint: Write out the headings for an income statement and then fill in the known values. Then divide $2.25 million net income by 1 − T = 0.6 to find the pre-tax income. The difference between EBIT and taxable income must be the interest expense.) Round your answer to the nearest dollar. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000.

Answer:

We have the following info:

EBIT

5.25

Interest

x

Tax

0.40*(5.25-x)

NI

2.25

Tax = PBT*0.40

PBT=5.25-x

Hence 5.25-x-(2.1-0.4x) =2.25

5.25-x-2.1+0.4x=2.25

3-x-2.1=-0.4x

0.9-x=-0.4x

0.9=0.6x

x=1.5

Hence interest =$1.5 million or $1,500,000

2

Kendall Corners Inc. recently reported net income of $2.4 million and depreciation of $456,000. What was its net cash flow? Assume it had no amortization expense. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000.

Answer:

Net income = 2,400,000

Depreciation = 456,000

Amortization = 0

Net cash flow = Net income + depreciation + amortization

= 2,400,000 + 456,000

= 2,856,000

3.

In its most recent financial statements, Del-Castillo Inc. reported $50 million of net income and $850 million of retained earnings. The previous retained earnings were $843 million. How much in dividends did the firm pay to shareholders during the year? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000.

Answer:

Ending retain earning = opening retain earning + net profit of the year - dividend paid

Therefore, dividend paid = opening retain earning + net profit of the year -ending retain earning

Therefore, div paid = 843,000,000 +50,000,000 -850,000,000

= 43,000,000

4.

Vigo Vacations has $195 million in total assets, $5.4 million in notes payable, and $22.5 million in long-term debt. What is the debt ratio? Round your answer to two decimal places.

Answer:

Total liabilities includes both short term and long term debt

= (5.4 +22.5) = 27.9 million

Debt ratio = Total Debt (liabilities) /Total asset

= 27.9 / 195

= 0.14 or 14% 14.3%

REDO THIS PROBLEM WITH THESE NUMBERS:

Vigo Vacations has $197 million in total assets, $4.9 million in notes payable, and $25.5 million in long-term debt. What is the debt ratio? Round your answer to two decimal places.

5.

Reno Revolvers has an EPS of $1.10, a cash flow per share of $4.85, and a price/cash flow ratio of 10.0. What is its P/E ratio? Round your answer to two decimal places.

Answer:

Price / Cash Flow Ratio of 10.0 = Price Per Share / $4.85

Price Per Share = 10 X $4.85 = $48.5

Use the Price to Earnings Equation for the final computation:

P/E Ratio = Market Value Per Share/ EPS = $48.5/$1.10

= 40.09

REDO THIS PROBLEM WITH THE EQUATION BELOW

Reno Revolvers has an EPS of $1.70, a cash flow per share of $3.45, and a price/cash flow ratio of 10.0. What is its P/E ratio? Round your answer to two decimal places.

6.

Needham Pharmaceuticals has a profit margin of 2.5% and an equity multiplier of 1.9. Its sales are $100 million and it has total assets of $40 million. What is its Return on Equity (ROE)? Round your answer to two decimal places.

Answer:

Prof Margin = 2.5%

Equity Multiplier = 1.9

Sales = 100,000,000

Total assets = 40,000,000

What is RoE?

ROE = Profit margin *Total assets turnover * Equity multiplier

ROE = Profit margin*(Sales/TA)* Equity multiplier

ROE = 2.5 %*( 100M/40M)*1.9 = 10.56

ROE = 10.56

REDO WITH THE FOLLOWING EQUATION

Needham Pharmaceuticals has a profit margin of 5% and an equity multiplier of 2.5. Its sales are $110 million and it has total assets of $58 million. What is its Return on Equity (ROE)? Round your answer to two decimal places.

7.

Assume you are given the following relationships for the Haslam Corporation:

Sales/total assets

2.2

Return on assets (ROA)

4%

Return on equity (ROE)

5%

1. Calculate Haslam's profit margin. Do not round intermediate calculations. Round your answer to two decimal places.

Profit margin = Return on assets (ROA)/(Sales/total assets)

Profit margin = 4%/2.2 %

2. Calculate Haslam's liabilities-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places.

Haslam's liabilities-to-assets ratio = 1- ROA/ROE

Haslam's liabilities-to-assets ratio = 1- 4/5 %

3. Suppose half of Haslam's liabilities are in the form of debt. Calculate the debt-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places.

Debt-to-assets ratio = Haslam's liabilities-to-assets ratio*1/2

Debt-to-assets ratio = 20%*1/2 %

8.

The Nelson Company has $1,080,000 in current assets and $400,000 in current liabilities. Its initial inventory level is $200,000, and it will raise funds as additional notes payable and use them to increase inventory.

1. How much can Nelson's short-term debt (notes payable) increase without pushing its current ratio below 1.3? Round your answer to the nearest cent.

$1,866,666.67

2. What will be the firm's quick ratio after Nelson has raised the maximum amount of short-term funds? Round your answer to two decimal places. 0.39

9.

The Morris Corporation has $350,000 of debt outstanding, and it pays an interest rate of 9% annually. Morris's annual sales are $1.75 million, its average tax rate is 30%, and its net profit margin on sales is 3%. If the company does not maintain a TIE ratio of at least 3 to 1, its bank will refuse to renew the loan and bankruptcy will result. What is Morris's TIE ratio? Do not round intermediate calculations. Round your answer to two decimal places.

Answer:

Interest amount = 350,000*.09 = 31500

Net profit = 3% of 1.75 million = 52500

Net profit + tax = profit before tax = 52500/.40 = 105,000

Profit before tax + interest = earnings before interest and tax = 105,000+31500 = 136500

TIE ratio = EBIT/Interest = 136500/31500 = 4.33

REDO WITH THE FOLLOWING EQUATION

The Morris Corporation has $850,000 of debt outstanding, and it pays an interest rate of 8% annually. Morris's annual sales are $3.4 million, its average tax rate is 40%, and its net profit margin on sales is 4%. If the company does not maintain a TIE ratio of at least 3 to 1, its bank will refuse to renew the loan and bankruptcy will result. What is Morris's TIE ratio? Do not round intermediate calculations. Round your answer to two decimal places.

10.

What is the future value of a 6%, 5-year ordinary annuity that pays $600 each year? Round your answer to the nearest cent. $

If this were an annuity due, what would its future value be? Round your answer to the nearest cent. $

REDO WITH THE FOLLOWING EQUATION

What is the future value of a 4%, 5-year ordinary annuity that pays $800 each year? Round your answer to the nearest cent. $

If this were an annuity due, what would its future value be? Round your answer to the nearest cent. $

Use both the TVM equations and a financial calculator to find the following values. Round your answers to the nearest cent. (Hint: Using a financial calculator, you can enter the known values and then press the appropriate key to find the unknown variable. Then, without clearing the TVM register, you can "override" the variable that changes by simply entering a new value for it and then pressing the key for the unknown variable to obtain the second answer. This procedure can be used in parts b and d, and in many other situations, to see how changes in input variables affect the output variable.)

a. An initial $500 compounded for 10 years at 6.9 percent. $ 974.4

b. An initial $500 compounded for 10 years at 13.8 percent. $ 1821.3

c. The present value of $500 due in 10 years at a 6.9 percent discount rate. $ 256.56

d. The present value of $500 due in 10 years at a 13.8 percent discount rate. $ 137.26

11

a. Find the present values of the following cash flow streams. The appropriate interest rate is 6%. Round your answers to the nearest cent. (Hint: It is fairly easy to work this problem dealing with the individual cash flows. However, if you have a financial calculator, read the section of the manual that describes how to enter cash flows such as the ones in this problem. This will take a little time, but the investment will pay huge dividends throughout the course. Note that, when working with the calculator's cash flow register, you must enter CF0 = 0. Note also that it is quite easy to work the problem with Excel, using procedures described in the Chapter 4 Tool Kit.)

Year

Cash Stream A

Cash Stream B

1

$100

$300

2

 400

 400

3

 400

 400

4

 400

 400

5

 300

 100

b. Stream A = $ 1,327.20 Stream B = $ 1,366.43

c. What is the value of each cash flow stream at a 0% interest rate? Round your answers to the nearest cent. Stream A = $ 1,600 Stream B = $ 1,600

12

While Mary Corens was a student at the University of Tennessee, she borrowed $11,000 in student loans at an annual interest rate of 8%. If Mary repays $1,800 per year, then how long (to the nearest year) will it take her to repay the loan? Do not round intermediate calculations. Round your answer to the nearest whole number.

 year(s)

REDO WITH THE FOLLOWING EQUATION

While Mary Corens was a student at the University of Tennessee, she borrowed $9,000 in student loans at an annual interest rate of 7%. If Mary repays $1,200 per year, then how long (to the nearest year) will it take her to repay the loan? Do not round intermediate calculations. Round your answer to the nearest whole number.

13.

You need to accumulate $10,000. To do so, you plan to make deposits of $1,800 per year - with the first payment being made a year from today - into a bank account that pays 9.47% annual interest. Your last deposit will be less than $1,800 if less is needed to round out to $10,000. How many years will it take you to reach your $10,000 goal? Round your answer up to the nearest whole number. year(s)

How large will the last deposit be? Round your answer to the nearest cent.

$987.51

14

LL Incorporated's currently outstanding 11% coupon bonds have a yield to maturity of 13%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is LL's after-tax cost of debt? Round your answer to two decimal places.

 %

REDO WITH THE FOLLOWING EQUATION

You need to accumulate $10,000. To do so, you plan to make deposits of $2,000 per year - with the first payment being made a year from today - into a bank account that pays 7.3% annual interest. Your last deposit will be less than $2,000 if less is needed to round out to $10,000. How many years will it take you to reach your $10,000 goal? Round your answer up to the nearest whole number. year(s)

How large will the last deposit be? Round your answer to the nearest cent. $

20

10

3382.26

4185.19

8.72

5

8.45

1.81

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