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father's 1. Your employer was just acquired, and he was given a severance payment of $397,500, which he invested at a 7.5% annual rate. He now plans to retire, and he wants to withdraw $35,000 at the end of each year, starting at the end of this year. How many years will it take to exhaust his funds, i.e., run the account down to zero? 27.19 24.55 26.13 21.38 26.40 Feedback: I/YR 7.5% PV $397,500 PMT $35,000 FV $0.00 N 26.40 Score: 1 of 1 2. Your uncle has $1,135,000 and wants to retire. He expects to live for another 25 years and to earn 7.5% on his invested funds. How much could he withdraw at the end of each of the next 25 years and end up with zero in the account? $98,766.96 $93,675.88 $92,657.67 $101,821.61 $120,149.50 N 25 I/YR 7.5% PV $1,135,000 FV $0.00 PMT $101,821.61 Score: 1 of 1 3. Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm's total-debt-to-total-assets ratio was 60.0%. Based on the DuPont equation, what was the ROE? 22.61% 17.86% 19.00% 23.18% 23.56% Sales $325,000 Assets $250,000 Net income $19,000 Debt ratio 60.0% Debt = Debt% Assets = $150,000 Equity = Assets - Debt = $100,000 Profit margin = NI / Sales = 5.85% TATO 1.30 Equity multiplier = Assets / Equity = 2.50 ROE 19.00% Score: 1 of 1 4. Suppose you inherited $870,000 and invested it at 8.25% per year. How much could you withdraw at the beginning of each of the next 20 years? $67,543.38 $76,715.94 $99,230.40 $83,386.89 $97,562.66 N 20 I/YR 8.25% PV $870,000 FV $0.00 PMT $83,386.89 Score: 1 of 1 5. Last year Jandik Corp. had $295,000 of assets, $18,750 of net income, and a debt-to-total-assets ratio of 37%. Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE? 2.63% 2.13% 1.69% 2.22% 1.90% Assets $295,000 Old debt ratio 37% Old debt = Assets Old debt% = $109,150 Old equity $185,850 New debt ratio 48% New debt = Assets New debt% = $141,600 New Equity = Assets - New debt = $153,400 Net income $18,750 New ROE = New income / New Equity 12.22% Old ROE = Old income / Old Equity 10.09% Increase in ROE 2.13% Score: 1 of 1 6. Edwards Electronics recently reported $11,250 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges, it had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%. How much was its net cash flow? $3,284.75 $3,457.63 $3,639.61 $3,831.17 $4,032.81 Bonds $ 3,500.00 Interest rate 6.25% Tax rate 35.00% Sales $11,250.00 Operating costs excluding depr'n $ 5,500.00 Depreciation $ 1,250.00 Operating income (EBIT) $ 4,500.00 Interest charges $ 218.75 Taxable income $ 4,281.25 Taxes $ 1,498.44 Net income $ 2,782.81 Net cash flow = Net income + deprn $ 4,032.81 Score: 1 of 1 7. Your father is about to retire, and he wants to buy an annuity that will provide him with $91,000 of income a year for 25 years, with the first payment coming immediately. The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity today? $1,248,843.27 $1,408,270.07 $1,474,697.91 $1,328,556.67 $1,169,129.87 BEGIN Mode N 25 I/YR 5.15% PMT $91,000 FV $0.00 PV $1,328,556.67 Score: 1 of 1 8. Han Corp's sales last year were $395,000, and its year-end receivables were $52,500. The firm sells on terms that call for customers to pay 30 days after the purchase, but some delay payment beyond Day 30. On average, how many days late do customers pay? Base your answer on this equation: DSO - Allowed credit period = Average days late, and use a 365-day year when calculating the DSO. 15.92 15.18 13.88 18.51 14.07 Sales $395,000 Sales/day = Sales / 365 = $1,082.19 Receivables $52,500 Company DSO = Receivables / Sales per day = 48.51 Credit period 30 DSO - Credit period = Days late 18.51 Score: 1 of 1 9. Brookman Inc's latest EPS was $2.75, its book value per share was $22.75, it had 280,000 shares outstanding, and its debt ratio was 44%. How much debt was outstanding? $4,704,700 $5,355,350 $5,205,200 $4,054,050 $5,005,000 EPS $2.75 BVPS $22.75 Shares outstanding 280,000 Debt ratio 44.0% Total equity = Shares outstanding BVPS = $6,370,000 Total assets = Total equity / (1 - Debt ratio) = $11,375,000 Total debt = Total assets - Equity = $5,005,000 Score: 1 of 1 10. Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets of $420,000. The debt-to-total-assets ratio was 17%, the interest rate on the debt was 7.5%, and the firm's tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt ratio. Assume that sales, operating costs, total assets, and the tax rate would not be affected, but the interest rate would rise to 8.0%. By how much would the ROE change in response to the change in the capital structure? 1.95% 1.99% 1.70% 1.48% 1.80% Old New Interest rate 7.5% 8.0% Tax rate 35% 35% Assets $420,000 $420,000 Debt ratio 17% Debt = Assets Debt ratio = 50% $71,400 $210,000 Equity = Assets - Debt = $348,600 $210,000 Sales $500,000 $500,000 Operating costs 450,000 450,000 EBIT = Sales - Operating costs = $50,000 $50,000 Interest paid = Interest rate Debt = 5,355 16,800 Taxable income $44,645 $33,200 Taxes 15,626 Net income $29,019 $21,580 ROE 8.32% Change in ROE Score: 0 of 1 11,620 10.28% 1.95% 11. Last year Ann Arbor Corp had $300,000 of assets, $305,000 of sales, $20,000 of net income, and a debtto-total-assets ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the ROE? 5.34% 5.82% 6.59% 8.67% 6.93% Assets $300,000 Debt ratio 37.5% Debt = Assets Debt% = $112,500 Equity = Assets - Debt = $187,500 Sales $305,000 Old net income $20,000 New net income $33,000 New ROE = New NI / Equity = 17.600% Old ROE = Old NI / Equity = 10.667% Increase in ROE = New ROE - Old ROE 0 = 6.93% Score: of 1 12. Last year Kruse Corp had $355,000 of assets, $403,000 of sales, $28,250 of net income, and a debt-tototal-assets ratio of 39%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $252,500. Sales, costs, and net income would not be affected, and the firm would maintain the same debt ratio (but with less total debt). By how much would the reduction in assets improve the ROE? 5.67% 5.30% 4.40% 4.18% 5.98% Original New Assets $355,000 $252,500 Sales $403,000 $403,000 Net income $28,250 $28,250 Debt ratio 39.00% Debt = Assets debt% = 39.00% $138,450 $98,475 Equity = Assets - Debt = $216,550 $154,025 ROE = NI / Equity = 13.045% 18.341% Increase in ROE 5.30% Score: 0 of 1 13. Last year Kruse Corp had $275,000 of assets, $403,000 of sales, $28,250 of net income, and a debt-tototal-assets ratio of 39%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $252,500. Sales, costs, and net income would not be affected, and the firm would maintain the same debt ratio (but with less total debt). By how much would the reduction in assets improve the ROE? 1.50% 1.23% 1.85% 1.13% 1.19% Original New Assets $275,000 $252,500 Sales $403,000 $403,000 Net income $28,250 $28,250 Debt ratio 39.00% 39.00% Debt = Assets debt% = $107,250 $98,475 Equity = Assets - Debt = $167,750 $154,025 ROE = NI / Equity = 16.841% 18.341% Increase in ROE 1.50% Score: 0 of 1 14. Tibbs Inc. had the following data for the year ending 12/31/07: Net income = $300; Net operating profit after taxes (NOPAT) = $400; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,300. What was its return on invested capital (ROIC)? 14.91% 15.70% 16.52% 17.39% 18.26% NOPAT $400 Total operating capital $2,300 ROIC = NOPAT/ Total operating capital ROIC = $400/$2,300 ROIC = 17.39% Score: 1 of 1 15. Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $300,000, operating costs to be $265,000, assets to be $200,000, and its tax rate to be 35%. Under Plan A it would use 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but under a contract with existing bondholders the TIE ratio would have to be maintained at or above 4.5. Under Plan B, the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure? 2.72% 2.59% 2.96% 3.22% 3.14% Work down the Plan A column, find the Max Debt, then use it to complete Plan B and the ROEs. Plan A Plan B Interest rate 8.80% 8.80% Tax rate 35% 35% Assets $200,000 $200,000 Debt ratio: Plan A given, Plan B calculated 25% 44.2 Debt $50,000 $88,384 Equity $150,000 $111,616 Sales $300,000 $300,000 Operating costs 265,000 265,000 EBIT $35,000 $35,000 Interest 4,400 7,778 Taxable income $30,600 $27,222 Taxes 10,710 9,528 Net income $19,890 $17,694 ROE = NI / Equity = 13.26% 15.85% TIE = EBIT/Interest = 7.95 Minimum TIE 4.50 $ of Interest consistent with $7,778 minimum TIE = EBIT/Min TIE = Max debt = Interest/interest rate = Change in ROE $88,384 2.59% Score: 0 of 1 16. Sam was injured in an accident, and the insurance company has offered him the choice of $49,000 per year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum be to leave him as well off financially as with the annuity? $437,070.42 $576,560.98 $506,815.70 $427,771.05 $464,968.53 N 15 I/YR 7.5% PMT $49,000 FV $0.00 PV $464,968.53 Score: 1 of 1 17. Last year Tiemann Technologies reported $10,500 of sales, $6,250 of operating costs other than depreciation, and $1,300 of depreciation. The company had no amortization charges, it had $5,000 of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $750. By how much will net after-tax income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes. -463.13 -487.50 -511.88 -537.47 -564.34 Change in depreciation $750 Tax rate 35% Reduction in net income -$487.50 We can also get the answer a longer way, which explains things more clearly: Item Old New Change Bonds $ 5,000.00 $ 5,000.00 $ 0.00 Interest rate 6.5% 6.5% 0.0% Tax rate 35% 35% 0% Sales $10,500.00 $10,500.00 $ 0.00 Operating costs excluding depr'n $ 6,250.00 $ 6,250.00 $ 0.00 Depreciation $ 1,300.00$ 2,050.00$ 750.00 Operating income (EBIT) $ 2,950.00 $ 2,200.00 -$ 750.00 Interest charges $ 325.00$ 325.00$ 0.00 Taxable income $ 2,625.00 $ 1,875.00 -$ 750.00 Taxes $ 918.75$ 656.25 -$ 262.50 Net income $ 1,706.25$ 1,218.75-$ 487.50 Score: 1 of 1 18. Over the years, Janjigian Corporation's stockholders have provided $15,250 of capital, part when they purchased new issues of stock and part when they allowed management to retain some of the firm's earnings. The firm now has 1,000 shares of common stock outstanding, and it sells at a price of $42.00 per share. How much value has Janjigian's management added to stockholder wealth over the years, i.e., what is Janjigian's MVA? $21,788 $22,935 $24,142 $25,413 $26,750 Total book value of equity $15,250 Stock price per share $42.00 Shares outstanding 1,000 Market value of equity 42,000 MVA = 26,750 Score: 1 of 1 19. Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750. What was its return on total assets? 7.22% 7.58% 7.96% 8.36% 8.78% Total assets $315,000 Net income $22,750 ROA 7.22% Score: 1 of 1 20. What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $2,950 at the end of Year 4 if the interest rate is 5%? $11,133.74 $8,740.50 $10,405.36 $8,532.40 $12,590.49 Alternative setup: N 4 0 I/YR 5.0% $10,405.36 Score: 1 of 1 Back 75.00% 3 4 $3,000 $2,950 PV 2 $2,250 $2,250 $2,250 $2,250 PMT $2,250 FV 1 $2,250 $2,250 $2,250 $5,250 PV $10,405.36 = ... View Full Document