Corporate Finance - 1 CHAPTER TWO PROBLEMS 1. Last year...

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CHAPTER TWO PROBLEMS 1. Last year Rattner Robotics had $5 million in operating income (EBIT). The company had net depreciation expense of $1 million and an interest expense of $1 million; its corporate tax rate was 40 percent. The company has $14 million in current assets and $4 million in non-interest-bearing current liabilities; it has $15 million in net plant and equipment. It estimates that it has an after-tax cost of capital of 10 percent. Assume that Rattner’s only non-cash item is depreciation. a. What was the company’s net income for the year? $2.4 million b. What was the company’s net cash flow? $3.4 million c. What was the company’s net operating profit after taxes (NOPAT)? $3.0 million d. What was the company’s operating cash flow? $4.0 million e. If operating capital in the previous year was $24 million, what was the company’s free cash flow (FCF) for the year? $2.0 million f. What was the company’s economic value added? $500,000 2. As an institutional investor paying a marginal tax rate of 46%, your after-tax dividend yield on preferred stock with a 16% before-tax dividend yield would be: 14.9% 3. A 7% coupon bond issued by the state of New York sells for $1,000 and thus provides a 7% yield to maturity. For an investor in the 40% tax bracket, what coupon rate on a Carter Chemical Company bond that also sells at its $1,000 par value would cause the two bonds to provide the investor with the same after-tax rate of return? 11.67% 4. A corporation with a marginal tax rate of 46% would receive what AFTER-TAX YIELD on a 12% coupon rate preferred stock bought at par? Answer: 11.172% 5. You have just received financial information for the past two years for Powell Panther Corporation: 1
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Income Statements Ending December 31 (millions of dollars) 2000 1999 Sales $1,200.0 $1,000.0 Operating Costs (excluding depreciation) 1,020.0 850.0 Depreciation 30.0 25.0 Earnings before interest and taxes $ 150.0 $ 125.0 Less Interest expense 21.7 20.2 Earnings before taxes $ 128.3 $ 104.8 Less taxes (40%) 51.3 41.9 Net income available to common equity $ 77.0 $ 62.9 Common dividends $ 0.605 $ 0.464 Balance Sheets Ending December 31 (millions of dollars) 2000 1999 Cash and marketable securities $ 12.0 $ 10.0 Accounts receivable 180.0 150.0 Inventories 180.0 200.0 Net plant and equipment 300.0 250.0 Total Assets $ 672.0 $ 610.0 Accounts payable $ 108.0 $ 90.0 Notes payable 67.0 51.5 Accruals 72.0 60.0 Long-term bonds $ 150.0 $ 150.0 Common stock (50 million shares) 50.0 50.0 Retained earnings 225.0 208.5 Total liabilities and equity $ 672.0 $ 610.0 a. What is the net operating profit (NOPAT) for 2000? $90,000,000 b. What are the amounts of net operating working capital for 1999 and 2000?
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This note was uploaded on 09/04/2011 for the course FIN 3030 taught by Professor Houston during the Spring '11 term at Southeaster Oklahoma State University.

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Corporate Finance - 1 CHAPTER TWO PROBLEMS 1. Last year...

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