2
II.
Problem solving: (Please show all your detailed calculations/steps to
earn the full credit)
7.
Last year XYZ Corp had $145,000 of assets, $315,000 of sales, $22,000
of net income, and a debt-to-total-assets ratio of 36%.
The new CFO
believes a new computer program will enable it to reduce costs and thus
raise net income to $32,500.
Assets, sales, and the debt ratio would
not be affected.
By how much would the cost reduction improve the ROE?
8.
Jordan Inc has the following balance sheet and income statement data:
Cash
$ 14,000
Accounts payable
$ 32,000
Receivables
70,000
Other current liab.
28,000
Inventories
270,000
Total CL
$ 60,000
Total CA
$354,000
Long-term debt
140,000
Net fixed assets
126,000
Common equity
280,000
Total assets
$480,000
Total liab. and equity
$480,000
Sales
$280,000
Net income
$21,000
The new CFO thinks that inventories are excessive and could be lowered
sufficiently to cause the current ratio to equal the industry average,
2.87, without affecting either sales or net income.
Assuming that
inventories are sold off and not replaced to get the current ratio to
the target level, and that the funds generated are used to buy back
common stock at book value, by how much would the ROE change?
9.
You agree to make $1650 at the beginning of each quarter into a bank
account.
At the end of the 24th month, you will have $14,000 in your
account.
If the bank compounds interest quarterly, what nominal annual
interest rate will you be earning?
10. John and Mary are saving for their daughter Hellen's college education.
Hellen just turned 11 at (t = 0), and she will be entering college 7
years from now (at t = 7).
College tuition and expenses at State U. are
currently $15,500 a year, but they are expected to increase at a rate of
3% a year.
Hellen should graduate in 4 years--if she takes longer or
wants to go to graduate school, she will be on her own.
Tuition and
other costs will be due at the beginning of each school year (at t = 7,
8, 9, and 10).
So far, John and Mary have accumulated $17,000 in their college
savings account (at t = 0).
Their long-run financial plan is to add an
additional $4,000 in each of the next 3 years (at t = 1, 2, and 3).
Then they plan to make 3 equal annual contributions in each of the
following years, t = 4, 5, and 6.
They expect their investment account
to earn 9.5%.
How large must the annual payments at t = 4, 5, and 6 be
to cover Hellen's anticipated college costs?
11.
XYZ Corp has a beta of 1.25 and is currently in equilibrium.
The
required rate of return on the stock is 12.50% versus a required return
on an average stock of 11.00%.
Now the required return on an average
stock increases by 40.0% (not percentage points).
Neither betas nor
the risk-free rate change.
What would XYZ's new required return be?