CORPORATE FINANCE (BPMM 6053) TAKE HOME ASSIGNMENT CHAPTER 2 QUESTION 11 (PAGE 37)

Cash Flows. Ritter Corporations accountants prepared the following nancial statements for year-end 2010. a. Explain the change in cash during the year 2010. The cash was increase from 2009 to 2010 from $ 35 to $ 50. This is due to

b. Determine the change in net working capital in 2010. Net working capital 2009 = Current Assets Current Liabilities = ( 35 + 140 ) 95 = $ 80 Net working capital 2010 = Current Assets Current Liabilities = ( 50 + 155 ) 85 = $ 120 According to the Balance Sheets, it shows that the company has increased the Net working capital on 2010. Both year, the Current Assets are greater than Current Liabilities and it turns the Net working capital to positive. And on 2010 the liabilities was reduce which will increase the NWC.

c. Determine the cash ow generated by the rms assets during the year 2010.

CHAPTER 2 QUESTION 19 (PAGE 38) Net Income and OCF. During 2010, Raines Umbrella Corp. had sales of $740,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $610,000, $105,000, and respectively. In addition, the company had an interest expense of $70,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions). a. What is Raines net income for 2010? Income Statement Sales Cost of goods sold Other expenses Depreciation EBIT Interest Taxable income Taxes (35%) 0 Net income 740,000 610,000 105,000 140,000 ---------115,000 70,000 ---------$175,000 0 ---------$175,000

The taxes are zero since we are ignoring any carryback or carryforward provisions.

b. What is its operating cash flow?

OCF = EBIT + Depreciation Taxes OCF = $115,000 + 140,000 0 OCF = $25,000

c. Explain your results in (a) and (b). Net income was negative because of the tax deductibility of depreciation and interest expense. However, the actual cash flow from operations was positive because depreciation is a non-cash expense and interest is a financing, not an operating, expense.

CHAPTER 3 QUESTION 1 (PAGE 78) Du Pont Identity. If Roten, Inc. has an equity multiplier of 1.35, total asset turnover of 2.15, a profit margin of 5.8 percent, what is its ROE? ROE = = = (Profit Margin) ( Total Asset Turnover ) ( Equity Multiplier ) ( 0.058 ) ( 2.15 ) ( 1.35 ) 0.1683 or 16.83%

CHAPTER 3 QUESTION 13 (PAGE 80) External Funds Needed. The Optical Scam Company has forecast a 20 percent sales growth rate for next year. The current financial statements are shown here: Income Statement 30,400,000 26,720,000 3,680,000 1,288,000 2,392,000 956,800 1,435,200

Sales Costs Taxable income Taxes Net income Dividends Addition to retained earnings

Balance Sheet Assets Current Assets Fixed Assets 7,200,000 17,600,000 Liabilities and Equity Short-term debt 6,400,000 Long-term debt 4,800,000 Common Stock 3,200,000 Accumulated retained 10,400,000 earnings Total equity 13,600,000 Total Liabilities and 24,800,000 equity

Total Assets

24,800,000

a. Using the equation from the chapter, calculate the external funds needed for next year. b. Construct the firms pro forma balance sheet for next year and confirm the external funds needed that you calculated in part (a). c. Calculate the sustainable growth rate for the company. d. Can optical scam eliminate the need for external funds by changing its dividend policy? What other options are available to the company to meet its growth objectives?

CHAPTER 3 QUESTION 15 (PAGE 81) Ratios and Fixed Assets. The Le Bleu Company has a ratio of long-term debt to total assets of 0.40 and current ratio of 1.30. Current liabilities are $ 900, sales are $ 5,320 profit margin is 9.4 percent, and ROE is 18.2 percent. What is the amount of the firms net fixed assets? Current Ratio 1.30 = = Current Assets / Current Liabilities Current Assets / $ 900 $ 1,170

*Current Assets =

Profit Margin

Net Income / Sales Net Income / $ 5,320 $ 500.08 Net Income / Total Equity $ 500.08 / Total Equity $ 2,747.692

0.094 = *Net Income ROE = = 0.182 = *Total Equity =

Long-term Debt = = = =

( Long-term Ratio x Total Equity ) / ( 1 Long-term Ratio ) ( 0.40 x $ 2,747.692 ) / ( 1 0.40 ) ( 1099.077 ) / 0.60 $ 1,831.795

Total Debt

= = =

Current Liabilities + Long-term Debt $ 900 + $ 1,831.795 $ 2,731.795

Total Assets

= = =

Total Debt + Total Equity $ 2,731.795 + $ 2,747.692 $ 5,479.642 Total Assets Current Assets $ 5,479.642 - $ 1,170 $ 4,309.64

Net Fixed Assets= = =

CHAPTER 3 QUESTION 17 (PAGE 81) Cost of Goods Sold. Guthrie Corp. has current liabilities of $ 270,000, a quick ratio of 1.1, inventory turnover of 4.2, and a current ratio of 2.3. What is the cost of goods sold for the company. Current Ratio 2.3 = = Current Assets / Current Liabilities Current Assets / $ 270,000 $ 621,000

Current Assets =

Quick Ratio 1.1 *Inventory

= = = =

( Current Assets Inventory )/ Current Liabilities ( $ 621,000 Inventory ) / $270,000 $ 621,000 - $ 297,000 $ 324,000

Inventory Turnover 4.2 Cost of Goods Sold

= = =

Cost of Goods Sold / Inventory Cost of Goods Sold / $ 324,000 $ 1,360,800

CHAPTER 4 QUESTION 2 (PAGE 123) Calculating Future Values. Compute the future value of $ 1,000 compounded annually for a. 10 years at 6 percent FV = PV ( 1 + r)t = $ 1,000 ( 1.06)10 = $ 1,000 (1.790848) = $ 1,791 b. 10 years at 9 percent FV = PV ( 1 + r)t = $ 1,000 ( 1.09)10 = $ 1,000 ( 2.367 ) = $ 2,367 c. 20 years at 6 percent FV = PV ( 1 + r)t = $ 1,000 ( 1.06)20 = $ 1,000 ( 3.207 ) = $ 3,207 d. Why is the interest earned in part (c) not twice the amount earned in part (a)?

CHAPTER 4 QUESTION 7 (PAGE 124) Calculating Present Values. Imprudential, Inc., has an unfunded pension liability of $ 750 million that must be paid in 20 years. To assess the value of the firms stock, financial analysts want to discount this liability back to present. If the relevant discount rate is 8.2 percent, what is the present value of this liability? PV = FV / ( 1 + r)t = $ 750,000,000 / ( 1.082)20 = $ 750,000,000 / 4.837 = $ 155,054,786.02

CHAPTER 4 QUESTION 12 (PAGE 125) Present Value and Multiple Cash flows. Investment X offers to pay you $ 5,500 per year for nine years, whereas Investment Y offers to pay you $ 8,000 per year for five years. Which of these cash flow streams has the higher present value if the discount rate is 5 percent? If the discount rate is 22 percent?

PVA = C({1 [1/(1 + r)]t } / r ) At a 6 percent interest rate: X@5%: PVA = $5,500{[1 (1/1.05)9 ] / .05 } = $37,409.31 Y@5%: PVA = $8,000{[1 (1/1.05)5 ] / .05 } = $33,698.91 And at a 22 percent interest rate: X@22%: PVA = $5,500{[1 (1/1.22)9 ] / .22 } = $20,824.57 Y@22%: PVA = $8,000{[1 (1/1.22)5 ] / .22 } = $22,909.12 Notice that the PV of Investment X has a greater PV at a 5 percent interest rate, but a lower PV at a 22 percent interest rate. The reason is that X has greater total cash flows. At a lower interest rate, the total cash flow is more important since the cost of waiting (the interest rate) is not as great. At a higher interest rate, Y is more valuable since it has larger annual payments. At a higher interest rate, getting these payments early are more important since the cost of waiting (the interest rate) is so much greater.

CHAPTER 4 QUESTION 13 (PAGE 125) Calculating Annuity Present Value. An investment offers $ 4,300 per year for 15 years, with the first payment occurring one year from now. If the required return is 9 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years? Forever? PVA = C({1 [1/(1 + r)]t } / r ) PVA@15 yrs: PVA = $4,300{[1 (1/1.09)15 ] / .09} = $36,424.82 PVA@40 yrs: PVA = $4,300{[1 (1/1.09)40 ] / .09} = $55,301.52 PVA@75 yrs: PVA = $4,300{[1 (1/1.09)75 ] / .09} = $57,656.48 To find the PV of a perpetuity, we use the equation: PV = C / r PV = $4,300 / .09 PV = $47,777.78 Notice that as the length of the annuity payments increases, the present value of the annuity approaches the present value of the perpetuity. The present value of the 75-year annuity and the present value of the perpetuity imply that the value today of all perpetuity payments beyond 75 years is only $121.30.

CHAPTER 4 QUESTION 23 (PAGE 126) Calculating Annuities. You are planning to save for retirement over the next 30 years. To do this, you will invest $ 700 a month in a stock account and $ 300 a month in a bond account. The return of the stock account is expected to be 10 percent, and the bond account will pay 6 percent. When you retire, you will combine your money into an account with an account with an 8 percent return. How much can you withdraw each month from your account assuming a 25 year withdrawal period?

Years to save = 30 years Monthly stock = $ 700 Monthly bond = $ 300 Stock return = 10% Bond return = 6% Retirement = 8% Retirement years = 25 years

FV = C{[(1 + r)t 1] / r} + PV(1 + r)t FV = $9,000{[(1 + .075)10 1] / .075} + $150,000(1 + .075)10 FV = $436,478.52 The total value of the stock account at retirement will be the future value of a lump sum, so: FV = PV(1 + r)t FV = $450,000(1 + .115)10 FV = $1,336,476.07 The total value of the account at retirement will be: Total value at retirement = $436,478.52 + 1,336,476.07 Total value at retirement = $1,772,954.59 This amount is the present value of the annual withdrawals. Now we can use the present value of an annuity equation to find the annuity amount. Doing so, we find the annual withdrawal will be: PVA = C({1 [1/(1 + r)]t } / r) $1,772,954.59 = C[{1 [1 / (1 + .0675)]25}/ .0675] C = $148,727.69

CHAPTER 4 QUESTION 52 (PAGE 129) Annuities. You are saving for the college education of your two children. They are two years apart in age; one will begin college 15 years from today and the other will begin 17 years from today. You estimate your childrens college expenses to be $ 35,000 per year per child, payable at the beginning of each school year. The annual interest rate is 8.5 percent. How much money must your deposit in an account each year to fund your childrens education? Your deposits begin one year from today. You will make your last deposit when your oldest child enters college. Assume four years of college.