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financial statements12

# financial statements12 - rate will remain at 40 percent If...

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MVA Answer: c Diff: E i . Byrd Lumber has 2 million shares of common stock outstanding and its stock price is \$15 a share. On the balance sheet, the company has \$40 million of common equity. What is the company’s Market Value Added (MVA)? a. -\$80,000,000 b. -\$20,000,000 c. -\$10,000,000 d. \$20,000,000 e. \$80,000,000 Medium: Rate of interest Answer: c Diff: M ii . A firm has notes payable of \$1,546,000, long-term debt of \$13,000,000, and total interest expense of \$1,300,000. If the firm pays 8 percent interest on its long-term debt, what interest rate does it pay on its notes payable? a. 8.2% b. 13.1% c. 16.8% d. 18.0% e. 15.3% Calculating change in net income Answer: c Diff: M R iii . Garfield Industries is expanding its operations throughout the Southeast United States. Garfield anticipates that the expansion will increase sales by \$1,000,000 and increase operating costs (excluding depreciation and amortization) by \$700,000. Depreciation and amortization expenses will rise by \$50,000, interest expense will increase by \$150,000, and the company’s tax

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Unformatted text preview: rate will remain at 40 percent. If the company’s forecast is correct, how much will net income increase or decrease, as a result of the expansion? a. No change b. \$ 40,000 increase c. \$ 60,000 increase d. \$100,000 increase e. \$180,000 increase i . MVA Answer: c Diff: E MVA = (Shares outstanding)(Stock Price) - Total common equity. MVA = (2,000,000)(\$15) - \$40,000,000 MVA = -\$10,000,000. ii . Rate of interest Answer: c Diff: M Long-term interest = (\$13,000,000)(0.08) = \$1,040,000. Short-term interest = \$1,300,000 - \$1,040,000 = \$260,000. Short-term interest rate = \$260,000/\$1,546,000 = 16.82% ≈ 16.8%. iii . Calculating change in net income Answer: c Diff: M R Set up an income statement: Sales \$1,000,000 Operating costs excl. dep. and amort. 700,000 EBITDA \$ 300,000 Depreciation and amortization 50,000 EBIT \$ 250,000 Interest 150,000 EBT \$ 100,000 Taxes (40%) 40,000 Taxes = 0.4(\$100,000) = \$40,000. Net income \$ 60,000...
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financial statements12 - rate will remain at 40 percent If...

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