Given a 3 percent interest rate, compute the year 6 future value of deposits made in years 1, 2, 3, and 4 of $1,700, $1,900, $1,900, and $2,200, respectively.
In: Finance
3.
Quantitative Problem: Rosnan Industries' 2013 and 2012 balance sheets and income statements are shown below.
| Balance Sheets: | |||
| 2013 | 2012 | ||
| Cash and equivalents | $100 | $85 | |
| Accounts receivable | 275 | 200 | |
| Inventories | 375 | 250 | |
| Total current assets | $750 | $635 | |
| Net plant and equipment | 2,000 | 1,490 | |
| Total assets | $2,750 | $2,125 | |
| Accounts payable | $150 | $85 | |
| Accruals | 75 | 50 | |
| Notes payable | 150 | 75 | |
| Total current liabilities | $375 | $210 | |
| Long-term debt | 450 | 290 | |
| Common stock | 1,225 | 1,225 | |
| Retained earnings | 700 | 400 | |
| Total liabilities and equity | $2,750 | $2,125 | |
| Income Statements: | |||
| 2013 | 2012 | ||
| Sales | $2,000 | $1,500 | |
| Operating costs excluding depreciation | 1,250 | 1,000 | |
| EBITDA | $750 | $500 | |
| Depreciation and amortization | 100 | 75 | |
| EBIT | $650 | $425 | |
| Interest | 62 | 45 | |
| EBT | $588 | $380 | |
| Taxes (40%) | 235 | 152 | |
| Net income | $353 | $228 | |
| Dividends paid | $53 | $48 | |
| Addition to retained earnings | $300 | $180 | |
| Shares outstanding | 160 | 160 | |
| Price | $ 27.78 | $ 25.28 | |
| WACC | 9.00 % | ||
Using the financial statements above, what is Rosnan's 2013 market value added (MVA)? Round your answer to the nearest dollar. Do not round intermediate calculations.
Using the financial statements given earlier, what is Rosnan's 2013 economic value added (EVA)? Round your answer to the nearest cent. Do not round intermediate calculations.
In: Finance
You are given the following set of data:
| Year | NYSE | Stock X |
|
1 |
-26.5% | -14% |
| 2 | 37.2 | 23.0 |
| 3 | 23.8 | 17.5 |
| 4 | -7.2 | 2.0 |
| 5 | 6.6 | 8.1 |
| 6 | 20.5 | 19.4 |
| 7 | 30.6 | 18.2 |
a. Determine Stock X beta coefficient
b. determine the arithmetic average rates of return for stock X and NYSE over the period given. Calculate the standard deviations of returns for both X and NYSE
c. assume the situation during years 1 to 7 is expected to prevail in the future. Also assume stock X is in equilibrium that is, its plots on the SML. What is the risk-free rate?
In: Finance
You win the lottery! Your choices are
a) If the interest rate is 0.1% compounded annually, which would you prefer?
b) If the interest rate is 4% compounded annually, which would you prefer?
c) At what annual interest rate would you be indifferent between the two?
use equation to solve!
In: Finance
2. Income statement
The income statement, also known as the profit and loss (P&L) statement, provides a snapshot of the financial performance of a company during a specified period of time. It reports a firm’s gross income, expenses, net income, and the income that is available for distribution to its preferred and common shareholders.
The income statement is prepared using the generally accepted accounting principles (GAAP) that match the firm’s revenues and expenses to the period in which they were incurred, not necessarily when cash was received or paid. Investors and analysts use the information given in the income statement and other financial statements and reports to evaluate the company’s financial performance and condition.
Consider the following scenario:
Cold Goose Metal Works Inc.’s income statement reports data for its first year of operation. The firm’s CEO would like sales to increase by 25% next year.
| 1. | Cold Goose is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before interest and taxes (EBIT). |
| 2. | The company’s operating costs (excluding depreciation and amortization) remain at 75% of net sales, and its depreciation and amortization expenses remain constant from year to year. |
| 3. | The company’s tax rate remains constant at 25% of its pre-tax income or earnings before taxes (EBT). |
| 4. | In Year 2, Cold Goose expects to pay $300,000 and $1,172,601 of preferred and common stock dividends, respectively. |
Complete the Year 2 income statement data for Cold Goose, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar.
|
Cold Goose Metal Works Inc. |
||
|---|---|---|
|
Income Statement for Year Ending December 31 |
||
| Year 1 | Year 2 (Forecasted) | |
| Net sales | $15,000,000 | |
| Less: Operating costs, except depreciation and amortization | 11,250,000 | |
| Less: Depreciation and amortization expenses | 600,000 | 600,000 |
| Operating income (or EBIT) | $3,150,000 | |
| Less: Interest expense | 315,000 | |
| Pre-tax income (or EBT) | 2,835,000 | |
| Less: Taxes (25%) | 708,750 | |
| Earnings after taxes | $2,126,250 | |
| Less: Preferred stock dividends | 300,000 | |
| Earnings available to common shareholders | 1,826,250 | |
| Less: Common stock dividends | 956,813 | |
| Contribution to retained earnings | $869,437 | $1,133,180 |
Given the results of the previous income statement calculations, complete the following statements:
| • | In Year 2, if Cold Goose has 25,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive in annual dividends. |
| • | If Cold Goose has 200,000 shares of common stock issued and outstanding, then the firm’s earnings per share (EPS) is expected to change from in Year 1 to in Year 2. |
| • | Cold Goose’s earnings before interest, taxes, depreciation and amortization (EBITDA) value changed from in Year 1 to in Year 2. |
| • | It is to say that Cold Goose’s net inflows and outflows of cash at the end of Years 1 and 2 are equal to the company’s annual contribution to retained earnings, $869,437 and $1,133,180, respectively. This is because of the items reported in the income statement involve payments and receipts of cash. |
In: Finance
Financial information for Powell Panther Corporation is shown below:
Powell Panther Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)
| 2019 | 2018 | |||
| Sales | $ | 1,320.0 | $ | 1,100.0 |
| Operating costs excluding depreciation and amortization | 990.0 | 935.0 | ||
| EBITDA | $ | 330.0 | $ | 165.0 |
| Depreciation and amortization | 36.0 | 33.0 | ||
| Earnings before interest and taxes (EBIT) | $ | 294.0 | $ | 132.0 |
| Interest | 29.0 | 24.2 | ||
| Earnings before taxes (EBT) | $ | 265.0 | $ | 107.8 |
| Taxes (25%) | 106.0 | 43.1 | ||
| Net income | $ | 159.0 | $ | 64.7 |
| Common dividends | $ | 143.1 | $ | 51.8 |
Powell Panther Corporation: Balance Sheets as of December 31 (Millions of Dollars)
| 2019 | 2018 | |||
| Assets | ||||
| Cash and equivalents | $ | 15.0 | $ | 13.0 |
| Accounts receivable | 190.0 | 165.0 | ||
| Inventories | 277.0 | 231.0 | ||
| Total current assets | $ | 482.0 | $ | 409.0 |
| Net plant and equipment | 363.0 | 330.0 | ||
| Total assets | $ | 845.0 | $ | 739.0 |
| Liabilities and Equity | ||||
| Accounts payable | $ | 138.0 | $ | 110.0 |
| Accruals | 83.0 | 66.0 | ||
| Notes payable | 26.4 | 22.0 | ||
| Total current liabilities | $ | 247.4 | $ | 198.0 |
| Long-term bonds | 264.0 | 220.0 | ||
| Total liabilities | $ | 511.4 | $ | 418.0 |
| Common stock | 298.3 | 301.6 | ||
| Retained earnings | 35.3 | 19.4 | ||
| Common equity | $ | 333.6 | $ | 321.0 |
| Total liabilities and equity | $ | 845.0 | $ | 739.0 |
Write out your answers completely. For example, 25 million should be entered as 25,000,000. Round your answers to the nearest dollar, if necessary. Negative values, if any, should be indicated by a minus sign.
What was net operating working capital for 2018 and 2019? Assume the firm has no excess cash.
2018: $
2019: $
What was the 2019 free cash flow?
$
How would you explain the large increase in 2019 dividends?
-Select-IIIIIIIVVItem 4
In: Finance
3. Income statement
The income statement, also known as the profit and loss (P&L) statement, provides a snapshot of the financial performance of a company during a specified period of time. It reports a firm’s gross income, expenses, net income, and the income that is available for distribution to its preferred and common shareholders.
The income statement is prepared using the generally accepted accounting principles (GAAP) that match the firm’s revenues and expenses to the period in which they were incurred, not necessarily when cash was received or paid. Investors and analysts use the information given in the income statement and other financial statements and reports to evaluate the company’s financial performance and condition.
Consider the following scenario:
Cute Camel Woodcraft Company’s income statement reports data for its first year of operation. The firm’s CEO would like sales to increase by 25% next year.
| 1. | Cute Camel is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before interest and taxes (EBIT). |
| 2. | The company’s operating costs (excluding depreciation and amortization) remain at 65% of net sales, and its depreciation and amortization expenses remain constant from year to year. |
| 3. | The company’s tax rate remains constant at 40% of its pre-tax income or earnings before taxes (EBT). |
| 4. | In Year 2, Cute Camel expects to pay $100,000 and $1,419,075 of preferred and common stock dividends, respectively. |
Complete the Year 2 income statement data for Cute Camel, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar.
|
Cute Camel Woodcraft Company Income Statement |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
For Year Ending December 31 |
||||||||||
| Year 1 | Year 2 (Forecasted) | |||||||||
| Net sales | $20,000,000 | |||||||||
| Less: Operating costs, except depreciation and amortization | 13,000,000 | |||||||||
| Less: Depreciation and amortization expenses | 800,000 | |||||||||
| Operating income (or EBIT) | $6,200,000 | |||||||||
| Less: Interest expense | 620,000 | |||||||||
| Pre-tax income (or EBT) | 5,580,000 | |||||||||
| Less: Taxes (40%) | 2,232,000 | |||||||||
| Earnings after taxes | $3,348,000 | |||||||||
| Less: Preferred stock dividends | 100,000 | |||||||||
| Earnings available to common shareholders | 3,248,000 | |||||||||
| Less: Common stock dividends | 1,171,800 | |||||||||
| Contribution to retained earnings | $2,076,200 |
Given the results of the previous income statement calculations, complete the following statements:
|
||||||||
In: Finance
KFA is considering investing in a new drone technology costing $12 million. It has a 5 year life (no salvage value) and will save KFA $3.5 million/year in pre-tax operating costs. It will need an up-front working capital investment of $300,000. KFA's cost of capital is 8.0% and its tax rate is 21.0%. Their current technology has a $5 million book value but a $1 million salvage value. What are the NPV and IRR of the decision to replace the old technology?
| Output: | Year | |||||
| Start | 1 | 2 | 3 | 4 | 5 | |
| Cost | ||||||
| Operating: | ||||||
| Cost savings | ||||||
| Book loss: sale of old tech | ||||||
| Total operating | ||||||
| After-tax operating | ||||||
| Working capital | ||||||
| Cash flow | ||||||
| NPV | ||||||
| IRR | ||||||
In: Finance
KFA has issued a 100-year coupon bond with par of $1,000, and a 6.50% annual coupon paid semi-annually. Calculate its price for each of the following three YTM scenarios: 4.0%, 6.0%, and 8.0%.
| Input: | Output: | |
| Par ($) | 1,000.00 | |
| Years to maturity | 100 | |
| Annual coupon rate | 6.50% | |
| Coupons per year | 2 | Price |
| Yield to maturity | 4.0% | |
| Yield to maturity | 6.0% | |
| Yield to maturity | 8.0% |
KFA is evaluating a project with the following cash flows in the first 4 years: $4,000, $5,000, $6,000, and $7,000. Use an 8.0% discount rate to calculate the project's net present values (NPV) for three potential initial investments: $11,000 (scenario 1), $13,000 (scenario 2), and $15,000 (scenario 3). Assume no residual value.
| Input: | Output: | Scenario | ||||
| Cash Inflows: | 1 | 2 | 3 | |||
| Year 1 | 4,000.00 | Start | ||||
| Year 2 | 5,000.00 | Year 1 | ||||
| Year 3 | 6,000.00 | Year 2 | ||||
| Year 4 | 7,000.00 | Year 3 | ||||
| Discount rate | 8.0% | Year 4 | ||||
| Initial cost: | ||||||
| Scenario 1 | 11,000.00 | NPV | ||||
| Scenario 2 | 13,000.00 | |||||
| Scenario 3 | 15,000.00 | |||||
In: Finance
Suppose you inherited a building from your great aunt which you now own outright (e.g., you have complete ownership without any outstanding debt). If this building is 200,000 SF, rents for $12 per square foot per year, is expected to be on average 5% vacant, and costs $5 per occupied SF per year to operate, what is the expected Before-Tax Cash Flow for the building?
answer
$1,330,000
Now, you decide to complete some renovations on the building described in question 2. If the renovation costs $2,510,006, which you can finance with a 15-year FRM mortgage with payments due annually offered at 10% annual interest, how much more would you need to charge in rent for the Before-Tax Cash Flow to remain the same as it did in question 2?
Group of answer choices
~$1.74 /sf/year more
~$2.24 /sf/year more
~$3.03 /sf/year more
~$2.09/sf/year more
In: Finance
Describe the different types of indirect investments available to investors. Explain why this type of investment is a better alternative for some investors than buying securities directly.
In: Finance
A bank has issued a six-month, $2.0 million negotiable CD with a
0.50 percent quoted annual interest rate (iCD,
sp).
a. Calculate the bond equivalent yield and the EAR
on the CD.
b. How much will the negotiable CD holder receive
at maturity?
c. Immediately after the CD is issued, the
secondary market price on the $2 million CD falls to $1,998,500.
Calculate the new secondary market quoted yield, the bond
equivalent yield, and the EAR on the $2.0 million face value
CD.
Use 365 days in a year
In: Finance
You are bullish on Amazon’s stock (AMZN) which is currently selling for $1596.50. You have decided to buy a 6-month call option with a strike price of $1,625. It costs $50.60 per share to buy the option. Assume the 6-month risk-free rate is 1% per annum with continuous compounding. a.Draw the profit and payoff function for the long call option at expiration? (Provide labels for the axes and label a point on the functions above, below and at the strike) b.Note each contract is for 100 call options. Calculate what the payoff and profit at expiration is if the spot price is _______.
i.$1,550
ii.$1,700
iii.$1,675.60
c.Draw the profit and payoff function for the short call option at expiration? (Provide labels for the axes and label a point on the functions above, below and at the strike)
In: Finance
Martin Enterprises needs someone to supply it with 133,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost you $950,000 to install the equipment necessary to start production; you’ll depreciate this cost straight-line to zero over the project’s life. You estimate that, in five years, this equipment can be salvaged for $109,000. Your fixed production costs will be $525,000 per year, and your variable production costs should be $18.15 per carton. You also need an initial investment in net working capital of $106,000. If your tax rate is 23 percent and you require a return of 11 percent on your investment.
A. Assuming the price per carton is $27.60, what is the NPV of this project?
B. Assuming the price per carton is $27.60, find the quantity of cartons per year you can supply and still break even.
C. Assuming the price per carton is $27.60, find the highest level of fixed costs you could afford each year and still break even.
In: Finance
The current spot price of Amazon stock is $1,823 the current 1-year forward price is $1,944. The current 1-year risk free rate is 6.5% per annum with semiannual compounding. If there is a $20 transaction fee for the combination of all transactions made, paid today, can you make an arbitrage profit with 100 shares? If there is an arbitrage how much would you make? Otherwise prove that there is not an arbitrage.
In: Finance