Question

1. Kendall Corners Inc. recently reported net income of $3.9 million and depreciation of $585,000. What was its net cash flow? Assume it had no amortization expense. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000.

2. In its most recent financial statements, Del-Castillo Inc. reported $30 million of net income and $910 million of retained earnings. The previous retained earnings were $904 million. How much in dividends did the firm pay to shareholders during the year? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000.

3.

The Shrieves Corporation has $15,000 that it plans to invest in marketable securities. It is choosing among AT&T bonds, which yield 8.5%, state of Florida muni bonds, which yield 4% (but are not taxable), and AT&T preferred stock, with a dividend yield of 7%. Shrieves' corporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax rates of return on all three securities. Round your answers to two decimal places.

After-tax rate of return on AT&T bond	%
After-tax rate of return on Florida muni bonds	%
After-tax rate of return on AT&T preferred stock	%

4.

The Moore Corporation had operating income (EBIT) of $700,000. The company's depreciation expense is $140,000. Moore is 100% equity financed, and it faces a 40% tax rate.

What is the company's net income?

Assuming no changes to any of the Balance Sheet accounts, what is its net cash flow?

Answer 1

1) Net cash flow = Net income + Depriciation

Here,

Net income (given) = $3.9 million or $3,900,000

Depriciation (given) = $585,000

Now,

Net cash flow = $3,900,000 + $585,000

Net cash flow = $4,485,000

2) Dividend = Net income - (Retained earnings current year - Retained earnings last year)

Here,

Net income = $30 million

Retained earnings current year = $910 million

Retained earnings last year = $904 million

Now,

Dividend = $30 million - ($910 million - $904 million)

Dividend = $30 million - $6 million

Dividend = $24 million or $24,000,000

3) After tax rate of return = Net income after tax / Investment

i) AT&T bond : (fully taxable)

Net income after tax = ( Investment * Yield) * (1 - Tax rate)

Here, Investment (given) = $15,000

Yield = 8.5% or 0.085

Tax rate = 35% or 0.35

Now

Net income after tax = ($15,000 * 0.085) * (1 - 0.35)

Net income after tax = $1,275 * 0.65

Net income after tax = $828.75

Put the values into after tax rate of return formula,

After tax rate of return = $828.75 / $15,000

After tax rate of return = 0.0553 or 5.53%

ii) Florida muni bond : (not taxable)

Net income after tax = Investment * Yield

Here,

Investment (given) = $15,000

Yield = 4% or 0.04

Now,

Net income after tax = $15,000 * 0.04

Net income after tax = $600

Put the values into after tax rate of return formula,

After tax rate of return = $600 / $15,000

After tax rate of return = 0.04 or 4%

iii) AT&T preferred stock : (Only 30% taxable)

Net income after tax = Taxable 30% + Non taxable 70%

Net income after tax = (Net income * Yield * 30%) * (1 - Tax rate) + (Net income * Yield * 70%)

Here,

Investment (given) = $15,000

Yield = 7% or 0.07

Tax rate = 35%

Now,

Net income after tax = ($15,000 * 0.07 * 30%) * (1 - 0.35) + ($15,000 * 0.07 * 70%)

Net income after tax = ($315 * 0.65) + $735

Net income after tax = $204.75 + $735

Net income after tax = $939.75

Put the values into after tax rate of return formula,

After tax rate of return = $939.75 / $15,000

After tax rate of return = 0.0627 or 6.27%

Conclusion : AT&T preferred stock is to be choosen due to its higher after tax rate of return than others.

4) i) Net income = (EBIT - Interest) * (1 - Tax rate)

Here,

EBIT (given) = $700,000

Interest = Nil as no debt outstanding.

Tax rate = 40% or 0.40

Now,

Net income = ($700,000 - 0) * (1 - 0.40)

Net income = $700,000 * 0.60

Net income = $420,000

ii) Net cash flow = Net income + Depriciation

Here,

Net income (as calculated above) = $420,000

Depriciation (given) = $140,000

Now,

Net cash flow = $420,000 + $140,000

Net cash flow = $560,000