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 70% 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, Cute Camel expects to pay $100,000 and $1,281,375 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.
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Cute Camel Woodcraft Company |
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Income Statement for Year Ending December 31 |
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| Year 1 | Year 2 (Forecasted) | |
| Net sales | $15,000,000 | |
| Less: Operating costs, except depreciation and amortization | 10,500,000 | |
| Less: Depreciation and amortization expenses | 600,000 | 600,000 |
| Operating income (or EBIT) | $3,900,000 | |
| Less: Interest expense | 390,000 | |
| Pre-tax income (or EBT) | 3,510,000 | |
| Less: Taxes (25%) | 877,500 | |
| Earnings after taxes | $2,632,500 | |
| Less: Preferred stock dividends | 100,000 | |
| Earnings available to common shareholders | 2,532,500 | |
| Less: Common stock dividends | 1,053,000 | |
| Contribution to retained earnings | $1,479,500 | $1,822,062 |
Given the results of the previous income statement calculations, complete the following statements:
| • | In Year 2, if Cute Camel has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive $20.00 in annual dividends. |
| • | If Cute Camel has 400,000 shares of common stock issued and outstanding, then the firm’s earnings per share (EPS) is expected to change from $8.78 in Year 1 to $10.68 in Year 2. |
| • | Cute Camel’s earnings before interest, taxes, depreciation and amortization (EBITDA) value changed from in Year 1 to in Year 2. |
| • | It is to say that Cute Camel’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, $1,479,500 and $1,822,062, respectively. This is because of the items reported in the income statement involve payments and receipts of cash. |
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Does a correlation exist between volume and performance level? Explain.
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If you borrow $40,000 today and agree to repay the loan in 24 annual payments, how much do you owe every year? Assume this is an amortized loan with 10% interest rate, compounded annually?
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I have 8 million at 9% per annum payable over next five years . The tax rate is 28%. How do I determine the value of the tax shield?
I am doing corporate finance/Finance for decision makers
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2.Assume that the export price of a Toyota Corolla from Osaka, Japan is ¥1,950,000. The exchange rate is ¥110/$. The forecast rate of inflation in the United States is 2.0% per year and is 0.0% per year in Japan. Use this data to answer the following questions on exchange rate pass-through. |
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a. What was the export price for the Corolla at the beginning of the year expressed in U.S. dollars? |
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b. Assuming purchasing power parity holds, what should the exchange rate be at the end of the year? |
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c. Assuming 100% pass-through of exchange rate, what will be the dollar price of a Corolla at the end of the year? |
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d. Assuming 75% pass-through, what will be the dollar price of a Corolla at the end of the year? |
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Alternative Dividend Policies
Boehm Corporation has had stable earnings growth of 7% a year for the past 10 years, and in 2019 Boehm paid dividends of $2 million on net income of $5 million. However, net income is expected to grow by 30% in 2020, and Boehm plans to invest $3.5 million in a plant expansion. This one-time unusual earnings growth won't be maintained, though, and after 2020 Boehm will return to its previous 7% earnings growth rate. Its target debt ratio is 33%. Boehm has 1 million shares of stock.
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East Side Corporation is expected to pay the following dividends over the next four years: $16, $12, $11, and $6.50. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 12 percent, what is the current share price?
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4.UIA .Susan Prescott, using the same values and assumptions as in the previous question, now decides to seek the full 2.600% return available in US dollars by not covering her forward dollar receipts -- an uncovered interest arbitrage (UIA) transaction. Assess this decision. |
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Assumptions |
Value |
SFr. Equivalent |
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Arbitrage funds available |
$1,000,000 |
SFr.994,000 |
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Spot exchange rate (SFr./$) |
.9940 |
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3-month forward rate (SFr./$) |
.9910 |
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Expected spot rate in 90 days (SFr./$) |
.9940 |
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U.S. dollar 3-month interest rate |
2.600% pa |
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Swiss franc3-month interest rate |
1.600% pa |
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3.CIA Susan Prescott is a foreign exchange trader for a bank in New York. She has $1 million (or its Swiss franc equivalent) for a short term money market investment and wonders if she should invest in U.S. dollars for three months, or make a covered interest arbitrage (CIA) investment in the Swiss franc. She faces the following quotes: |
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Assumptions |
Value |
SFr. Equivalent |
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Arbitrage funds available |
$1,000,000 |
SFr. 994,000 |
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Spot exchange rate (SFr./$) |
.9940 |
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3-month forward rate (SFr./$) |
.9910 |
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U.S. dollar 3-month interest rate |
2.600% pa |
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Swiss franc3-month interest rate |
1.600% pa |
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What should Susan do?
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Given a 4% required return, what is a $100 cash flow today, a $1,000 cash flow at the end of 1 year, and a $100,000 cash flow at the end of five years, worth to you TODAY? Referring to the question above, what would those same cash flows be worth to you at the end of five years?
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| Use the following information for Taco Swell, Inc., (assume the tax rate is 21 percent): |
| 2017 | 2018 | |||||
| Sales | $ | 25,049 | $ | 19,278 | ||
| Depreciation | 2,546 | 2,654 | ||||
| Cost of goods sold | 6,540 | 6,901 | ||||
| Other expenses | 1,462 | 1,263 | ||||
| Interest | 1,195 | 1,410 | ||||
| Cash | 8,761 | 9,757 | ||||
| Accounts receivable | 11,658 | 13,992 | ||||
| Short-term notes payable | 1,844 | 1,811 | ||||
| Long-term debt | 29,570 | 35,654 | ||||
| Net fixed assets | 73,160 | 78,120 | ||||
| Accounts payable | 6,371 | 7,150 | ||||
| Inventory | 20,713 | 22,032 | ||||
| Dividends | 2,829 | 2,484 | ||||
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For 2018, calculate the cash flow from assets, cash flow to creditors, and cash flow to stockholders. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
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Problem 2-21 Financial Statements [LO1]
| Use the following information for Taco Swell, Inc., (assume the tax rate is 21 percent): |
| 2017 | 2018 | |||||
| Sales | $ | 16,073 | $ | 15,636 | ||
| Depreciation | 1,751 | 1,826 | ||||
| Cost of goods sold | 4,429 | 4,797 | ||||
| Other expenses | 991 | 869 | ||||
| Interest | 840 | 971 | ||||
| Cash | 6,202 | 6,736 | ||||
| Accounts receivable | 8,130 | 9,697 | ||||
| Short-term notes payable | 1,260 | 1,237 | ||||
| Long-term debt | 20,590 | 24,861 | ||||
| Net fixed assets | 51,086 | 54,543 | ||||
| Accounts payable | 4,528 | 4,914 | ||||
| Inventory | 14,436 | 15,378 | ||||
| Dividends | 1,400 | 1,708 | ||||
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Prepare a balance sheet for this company for 2017 and 2018. (Do not round intermediate calculations.) |
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Prepare an income statement for this company for 2017 and 2018. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16. Input all answers as positive values.) |
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Problem 2-17 Accounting Values versus Cash Flows [LO2]
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During 2018, Raines Umbrella Corp. had sales of $710,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $500,000, $125,000, and $170,000, respectively. In addition, the company had an interest expense of $60,000 and a tax rate of 21 percent. (Ignore any tax loss carryforward provisions and assume interest expense is fully deductible.) |
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Suppose the company paid out $60,000 in cash dividends. If net capital spending and net working capital was zero, and if no new stock was issued during the year, what is the net new long-term debt? (Do not round intermediate calculations.) |
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