Problem Set 1
Complete the following problem sets from the “Problems” section in Chapters 2-4 of Financial Management: Theory and Practice.
1. Chapter 2: 2-3, 2-5, and 2-6
2. Chapter 3: 3-2, 3-4, 3-5, 3-8, 3-9, and 3-10
3. Chapter 4: 4-6, 4-10, 4-14, 4-25, and 4-26
APA format is not required, but solid academic writing is expected.
Income Statement-2-3. Molteni Motors Inc. recently reported $6million of net income. Its EBIT was $13million, 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 $6 million 1−T=0.6 to find the pre-tax income. The difference between EBIT and taxable income must be the interest expense. Use this procedure to work some of the other problems.)
Net Cash Flow-2-5. Kendall Corners Inc. recently reported net income of $3.1million and depreciation of $500,000. What was its net cashflow? Assume it had no amortization expense.
Statement of Retained Earnings-2.6. In its most recent financial statements, Del-Castillo Inc. reported $70million of net income and $900million of retained earnings. The previous retained earnings were $855million. How much in dividends did the firm pay to shareholders during the year?
Debt Ratio-Chapter 3:
3-2. Vigo Vacations has $200 million in total assets, $5million in notes payable, and $25million in long-term debt. What is the debt ratio?
Price/Earnings Ratio-3.4. Reno Revolvers has an EPS of $1.50, a cashflow per share of $3.00, and a price/cashflow ratio of 8.0. What is its P/E ratio?
ROE-3.5. Needham Pharmaceuticals has a profit margin of 3% and an equity multiplier of 2.0. Its sales are $100 million and it has total assets of $50million. What is its ROE?
Profit Margin/Debt Ratio 3.8 Assume you are given the following relationships for the Haslam Corporation:
Sales/total assets 1.2
Return on assets (ROA) 4%
Return on equity( ROE) 7%
Current and Quick Ratio 3.9 The Nelson Company has $1,312,500 in current assets and $525,000 in current liabilities. Its initial inventory level is $375,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can Nelson’s short-term debt (notes payable) increase without pushing its current ratio below 2.0? What will be the firm’s quick ratio after Nelson has raised the maximum amount of short-term funds?
Times-Interest earned Ratio 3.10 The Morris Corporation has $600,000 of debt outstanding, and it pays an interest rate of 8% annually. Morris’s annual sales are $3million, it saves rage tax rate is 40%, and its net profit margin on sales is 3%. If the company does not maintain a TIE ratio of at least 5 to 1, then its bank will refuse to renew the loan and bankruptcy will result. What is Morris’s TIE ratio?
4.6 What is the future value of a 7%, 5-year ordinary annuity that pays $300 each year? If this were an annuity due, what would its future value be?
4.10 Use both the TVM equations and a financial calculator to find the following values. See the Hint for Problem 4-9.
a. An initial $500 compounded for 10 years at 6%
b. An initial $500 compounded for 10 years at 12%
c. The present value of $500 due in 10 years at a 6% discount rate
d. The present value of $500 due in 10 years at a 12% discount rate
4.14 Find the present values of the following cashflow streams. The appropriate interest rate is 8%. (Hint: It is easy to work this problem dealing with the individual cashflows. However, if you have a financial calculator, read the section of the manual that describe show to enter cashflows 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 cashflow 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 ToolKit.)
Year Cash Stream A Cash Stream B
1 $ 100 $ 300
2 400 400
3 400 400
4 400 400
5 300 100
b. What is the value of each cashflow stream at a 0% interest rate?
4.25 While Mary Corens was a student at the University of Tennessee, she borrowed $12,000 in student loans at an annual interest rate of 9%. If Mary repays $1,500 per year, then how long (to the nearest year) will it take her to repay the loan?
4.26 You need to accumulate $10,000. To do so, you plan to make deposits of $1,250 per year—with the first payment being made a year from today—into a bank account that pays 12% annual interest. Your last deposit will be less than $1,250 if less is needed to round out to $10,000. How many years will it take you to reach your $10,000 goal, and how large will the last deposit be?