Exercise 1: Time Value of Money-The basic (Chapter 5 ) Name: ID: Sec: Date: 1. To what amount will the following investments accumulate? a. $5,000 invested for 10 years at 10 percent compounded annually b. $8,000 invested for 7 years at 8 percent compounded annually c. $775 invested for 12 years at 12 percent compounded annually d. $21,000 invested for 5 years at 5 percent compounded annually 2. Liza Mayors recently sold her Porsche, placed $10,000 in savings account paying annual compound interest of 6 percent. a. Calculate the amount of money that will accumulate if Liza leaves the money in the bank for 1, 5, and 15 years. b. What if Liza moves her money into an account that pays 8 percent or one that pays 10 percent. Rework part (a) using 8 percent and 10 percent. c. What conclusions can you draw about relationship between interest rates, time, and future sums from the calculations you just did? 3. You just received a $5,000 bonus. a. Calculate the future value of $5,000, given that it will be held in the bank for five years and earn an annual rate of 6 percent. b. Recalculate part (a) using a compounding period that is (1) semiannual and (2) bimonthly. 4. How many years will the following take? (Solving for n) a. $500 to grow to $1,039.50 if it s invested at 5 percent compounded annually b. $35 to grow to $53.87 if it s invested at 9 percent compounded annually 5. What is the present value of the following amounts? a. $800 to be received 10 years from now discounted back to the present at 10 percent b. $300 to be received 5 years from now discounted back to the present at 5 percent c. $1,000 to be received 8 years from now discounted back to the present at 3 percent d. $1,000 to be received 8 years from now discounted back to the present at 20 percent 6. If you were offered $1,079.50 ten years from now in return for an investment of $500 currently, what annual rate of interest would you earn if you took the offer? 7. You have a choice of borrowing money from a finance company at 24 percent compounded monthly or borrowing money from a bank at 26 percent compounded annually, Which alternative is the most attractive?
Exercise 2: Time Value of Money-Annuity (Chapter 6 ) Name: ID: Sec: Date: 1. What is the future value of each of the following streams of payments? a. $500 a year for 10 years compounded annually at 5 percent b. $100 a year for 5 years compounded annually at 10 percent c. $35 a year for 7 years compounded annually at 7 percent d. $25 a year for 3 years compounded annually at 2 percent 2. What is the present value of the following annuities? a. $2,500 a year for 10 years discounted back to the present at 7 percent b. $70 a year for 3 years discounted back to the present at 3 percent c. $280 a year for 7 years discounted back to the present at 6 percent d. $500 a year for 10 years discounted back to the present at 10 percent 3. Emily Clarks purchased a new house for $150,000. She paid $30,000 up front and agreed to pay the rest over the 25 years in 25 equal annual payments that included principal payments plus 10 percent compound interest on the unpaid balance. What will these equal payment be? 4. To pay for your education. You ve taken out $25,000 in student loans. If you make monthly payments over 15 years at 7 percent compounded monthly, how much are your monthly student loan payments? 5. How long will it take to pay off a loan of $55,000 at an annual rate of 10 percent compounded monthly if you make monthly payment of $600? 6. Determine the present value of an annuity due of $1,000 per year for 10 years discounted back to the present at an annual rate of 10 percent. What would be the present value of this annuity due if it were discounted at an annual rate of 15 percent?
7. What is the present value of the following? a. A $1000 perpetuity discounted back to the present at 12 percent b. A $95 perpetuity discounted back to the present at 5 percent 8. What is the present value of a perpetuity stream of cash flows that pays $50,000 at the end of Year 1 and then grows at a rate of 6 percent per year indefinitely? The rate of interest used to discount cash flows is 10 percent? 9. Ryan Raynolds has signed a contract that will pay him $80,000 at the end of each year for the next six years, plus an additional $100,000 at the end of Year 6. If 8 percent is the appropriate discount rate what is the present value of this contract? 10. Brad Pitt has signed has signed a contract that will pay him $80,000 at the beginning of each year for the next six years, plus an additional $100,000 at the end of Year 6. If 8 percent is the appropriate discount rate what is the present value of this contract?
Exercise 3: Financial Statements (Chapter 3 ) Name: ID: Sec: Date: 1. At the end of its third year of operations, the Sandifer Manufacturing Co. had $4,500,000 in revenues; $3,375,000 in cost of goods sold; $450,000 in operating expenses, which included depreciation expense of $150,000; and had a tax liability equal to 35 percent of the firm s taxable income. a. What is the net income of the firm for the year? b. Sandifer plans to reinvest $50,000 of its earnings back in the firm. What does this plan leave for the payment of a cash dividend to Sandifer s stockholders? 2. If True company earned $500,000 in net income and paid a cash dividend of $300,000 to its stockholders, what are the firm s earning per share if the firm has 100,000 shares of stock outstanding? 3. Kangaroo company is selling seeds of tomatoes. At the end of the most recent year, the firm had current assets of $50,000, net fixed assets of $250,000, current liabilities of $30,000, and long term debt of $100,000. a. Calculate Kangaroo s stockholders equity. b. What is the firm net working capital? c. If Kangaroo s current liabilities consist of $20,000 in account payable and $10,000 in short term debt (note payable). What is the firm net working capital?
4. Prepare a balance sheet for Warner company from the following scrambled list of items: Depreciaiton expense $66,000 Cash 225,000 Long-term debt 334,000 Sales 573,000 Account payable 102,000 General and Administrative expense 79,000 Building and equipment 895,000 Notes payable 75,000 Account receiveable 167,500 Interest expense 4,750 Accrued expenses 7,900 Common stock 289,000 Costs of good sold 297,000 Inventory 99,300 Taxes 50,500 Accumulated depreciation 263,000 Taxes payable 53,000 Retained earnings 262,900 a. Prepare an income statement for the Warner Company. b. Prepare a balance sheet for the Warner Company. c. What can you say about the financial condition based on these financial statements?
5. Scuba Company is an internet firm that has experienced a period of very rapid growth in revenues over the period 2013-2016. The cash flow statements of Scuba Company are as follows: 12 Months Ending In Millions of U.S. Dollas 12/31/2016 12/31/2015 12/31/2014 12/31/2013 Net income $4,000 $3,000 $1,500 $400 Depreciaiton expense 1000 600 300 150 Changes in working capital 600 50 50 (250) Cash from operating activities $5,600 $3,650 $1,850 $300 Capital expenditures $(3,600) $(7,000) $(3,300) $(2,000) Cash from investing activities $(3,600) $(7,000) $(3,300) $(2,000) Interest and financing cash flow items $ 400 $ 600 $ 0 $ 5 Total cash dividends paid 0 0 0 0 Issuance (retirement) of stock 24 2,400 4,400 1,200 Issuance (retirement) of debt 0 0 (2) (5) Cash from financing activities $ 424 $3,000 $4,398 $1,200 Net change in cash $2,424 $(350) $2,948 $(500) a. Is Scuba company generating positive cash flow from its operations? b. How much did Scuba invest in new capital expenditures over the last four years? c. Describe Scuba s sources of financing in the financial markets over the last four years.
Exercise 4: Financial Analysis (Chapter 4 ) Name: ID: Sec: Date: 1. The King Carpet Company has $3,000,000 in cash and a total of $12,000,000 in current assets. The firms current liabilities equal $6,000,000 such that the firm s current ratio equals 2. The company s managers want to reduce the firm s cash holdings down to $1,000,000 by paying $500,000 in cash to expand the firm s truck fleet and using $1,500,000 in cash to retire a shortterm note. If they carry this plan through, what will happen to the firm s current ratio? 2. The Allen Corp. had sales in 2013 of $65 million, total assets of $42 million, and total liabilities of $20 million. The interest rate on the company s debt is 6 percent, and its tax rate is 35 percent. The operating profit margin is 12 percent. a. Compute the firm s 2013 net operating income and net income. b. Calculate the firm s operating return on assets and return on equity. (Hint: You can assume that interest must be paid on all of the firm s liabilities.) 3. Alis Industries has credit sales of $150 million a year. Alis s management reviewed its credit policy and decided that it wants to maintain an average collection period of 40 days. a. What is the maximum level of accounts receivable that Alis can carry and have a 40 day average collection period? b. If Alis s current accounts receivable collection period is 50 days, by how much would it have to reduce its level of accounts receivable in order to achieve its goal of 40 days? 4. Triangular Chemicals has total assets of $100 million, a return on equity of 40 percent, a net profit margin of 5 percent, and an equity multiplier of 2.5. How much are the firm s sales?
5. Bryley,Inc. earned a net profit margin of 5 percent last year and had an equity multiplier of 3. If its total assets are $100 million and its sales are $150 million, what is the firm s return on equity? 6. Last year the Rondoelea Products Company had $140 million in annual sales and a net profit margin of 10 percent. In addition, Rondoelea s average tax rate was 30 percent. If Rondoelea had $40 million of debt outstanding with an average interest rate of 10 percent, what is the firm s times interest earned ratio? 7. The most recent balance sheet of Raconteurs, Inc. (in millions) is as follows: Current assets Current Liabilities Cash and marketable securities $10 Accrued wages and taxes $5 Account receivable 40 Account payable 35 Inventory 60 Notes payable 30 Total $110 Total $70 a. Calculate Reconteur current ratio and acid-test (quick) ratio. b. Benchmark ratio for the current and acid-test are 1.50 and 1.20, respectively. What can you say about the liquidity of this company s operations based on these two ratios? 8. Last year Triangular Resources earned $5 million in net operating income and had an operating profit margin of 20 percent. If the firm s total asset turnover ratio was 1.5, what was the firm s investment in total assets?
9. Lee Material s balance sheet lists total assets of $1 billion, $100 million in current liabilities, $400 million in long-term debt, $500 million in common equity, and 50 million shares of common stock. If Lee s current stock price in $50, what is the firm s market-to-book ratio? 10. The Mitchen Marble Company has a target current ratio of 2.0 but had experienced some difficulties financing its expanding sales in the past few months. At present the firm has the current ratio of 2.5 and current assets of $2.5 million. If Mitchen 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?
Exercise 5: Debt Valuation (Chapter 9) Name: ID: Sec: Date: 1. Calculate the value of a bond that matures in 12 years and has a $1,000 par value. The coupon interest rate is 8 percent and the market s required yield to maturity on a comparable-risk bond is 12 percent. 2. Calculate the value of bond that matures in 10 years and has a $1,000 par value. The annual coupon interest rate is 9 percent and market s required yield to maturity on a comparable-risk bond is 15 percent. What would be the value of this bond if it paid interest semiannually? 3. A bond s market price is $750. It has a $1,000 par value, will mature in eight years, and has a coupon interest rate of 9 percent annual interest, but make it interest payment semiannually. What is the bond s yield to maturity? What happens to the bond s yield to maturity if the bond matures in 16 years? What if it matures in four years? 4. Five years ago, XYZ International issued some 30-year zero-coupon bonds that were priced with a market s required yield to maturity of 8 percent. What did these bonds sell for when they were issued? Now that five years have passed and the market required yield to maturity on those bonds has climbed to 10 percent, what are they selling for? If the market s required yield to maturity had fallen to 6 percent, what would they have been selling for? 5. The seven-year $1,000 par bonds of Vail Inc. pay 9 percent interest. The market s required yield to maturity on a comparable-risk bond is 7 percent. The current market price for the bond is $1,100. a. Determine the yield to maturity. b. What is the value of the bond to you given the yield to maturity on a comparable-risk bond? c. Should you purchase the bond at the current market price?
Exercise 6: Stock Valuation (Chapter 10) Name: ID: Sec: Date: 1. Gilliland Motor Inc. paid a $3.50 dividend last year. At a constant growth rate of 5 percent, what is the value of common stock if the investor require a 20 percent rate of return? 2. Given that the firm s return on equity is 18 percent and management plans to retain 40 percent of earnings for investment purposes, what will be the firm s growth rate? The firm decides to increase its retention rate, what will happen to the value of common stock? 3. Wayne Inc. is currently selling their stock in the market for $33. Dividends of $2.30 per share were paid last year, return on equity is 20 percent, and its retention rate is 25 percent. a. What is the value of the stock to you, given a 15 percent required rate of return? b. Should you purchase this stock? 4. What is the value of a preferred stock where the dividend rate is 14 percent on a $100 par value, and the market required yield on similar shares is 12 percent? 5. HBO s preferred stock is selling at $54 on the market and pays an annual dividend of $4.20 per share. a. a. If an investor's required rate of return is 9%, what is the value of the stock for that investor? b. Considering the investor's required rate of return, does this stock seem to be a desirable investment?
Pre-Midterm Exercise 1. List 5 principles of finance. Give necessary example of each with relevant explanation. 2. Foods Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (r d ) is 4.75%, based on semiannual compounding. What is the bond s price? 3. MEME Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell? 4. You sold a house and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the house assuming an interest rate of 6.0%? Years: 0 1 2 3 4 CFs: $0 $1,000 $2,000 $2,000 $2,000 5. Southwest Cools had a profit margin of 5.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE? 6. Arch Corp.'s sales last year were $52,000, and its total assets were $22,000. What was its total assets turnover ratio (TATO)?
7. Papi Corp. has $410,000 of assets, and it uses no debt--it is financed only with common equity. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio? 8. Construct CF statements from following items: Increase in account payables $200,000 Increase in inventories 250,000 Issuing of commercial papers (short-term debt) 100,000 Repurchase of preferred stock 150,000 Increase in account receivables 200,000 Issuing of subordinated debentures (long-term debt) 300,000 Repurchase of common shares 300,000 Total accumulated depreciation as of December 31, 2014 300,000 Ending cash balance for 2014 500,000 Total accumulated depreciation as of December 31, 2015 800,000 Building of new plants & acquisition of new machines 1,000,000 Increase in retained earnings for the year 2015 1,100,000 Net income $1,500,000