Question

1. Your grandparents would like to establish a trust fund that will pay you and your heirs $185,000 per year forever with the first payment 8 years from today. If the trust fund earns an annual return of 3.6 percent, how much must your grandparents deposit today?

2. Smashed Pumpkins Co. paid $152 in dividends and $582 in interest over the past year. The company increased retained earnings by $486 and had accounts payable of $618. Sales for the year were $16,335 and depreciation was $728. The tax rate was 38 percent. What was the company's EBIT?

           

3. Roger has just lost a lawsuit and has agreed to make equal annual payments of $18,300 for the next 5 years with the first payment due today. The value of this liability today is $77,000. What is the interest rate on the payments?

4. Use the following information to answer this question.
   

Windswept, Inc. 2017 Income Statement ($ in millions)
Net sales	$	10,500
Cost of goods sold		7,950
Depreciation		370
Earnings before interest and taxes	$	2,180
Interest paid		100
Taxable income	$	2,080
Taxes		624
Net income	$	1,456

Windswept, Inc. 2016 and 2017 Balance Sheets ($ in millions)
		2016			2017				2016			2017
Cash	$	370		$	390		Accounts payable	$	1,910		$	1,800
Accounts rec.		1,110			1,010		Long-term debt		1,070			1,530
Inventory		1,880			1,770		Common stock		3,360			3,140
Total	$	3,360		$	3,170		Retained earnings		650			900
Net fixed assets		3,630			4,200
Total assets	$	6,990		$	7,370		Total liab. & equity	$	6,990		$	7,370

What were the total dividends paid for 2017?

           

Answer 1

Amount to be deposited by grandfather is:

Formula used

=-PV(C4,C8,,C5)

Grandfather is required to deposit $4,011,907.76 today to make it $5,138,888.89 by the end of seven years. Fund will earn $185,000 each year from eight year onwards and distribution is made from the ending of eighth year.

Second question:

Net income = Net increase in retained earnings + dividends

= $486 + $152 = $638

Earnings before tax = Net income / (1-tax rate) = $638/ (1-38%) = $1,029.032

Earnings before interest and tax (EBIT)= Earnings before tax + interest = $1,029.032 + $582 = $1,611.032

Third question:

Interest rate is calculated using excel goal seek funtion at interest rate cell:

	Annuity payment from today=	P/ [{ [1- (1+r)-(n-1) ]/r }+1]
P=	Present value	77,000.00
r=	Rate of interest per period
	Rate of interest per annum	9.454%
	Payments per year	1.00
	Rate of interest per period	9.454%
n=	number of payments:
	Number of years	5
	Payments per year	1.00
	number of payments	5
	Annuity payment=	77000/ [{ (1- (1+0.09454)^-(5-1))/0.09454 }+1]
	Annuity payment=	18,299.80

At 9.454% interest rate, annuity payment equals $18,300.

Fourth question:

Dividends paid = Net income - net increase in retained earnings

= $1,456 - ($900 - $650) = $1,206

Explanation: out of $1,456 net income $1,206 is paid as dividend and balance $250 increased retained earnings.

Please rate. Please comment before negatively rating. Thank you.