In: Finance
Q.6) The vice president (VP) can
improve the current ratio by increasing current asset or by
decreasing current liabilities or both. For this purpose, he can
raise money by issuing equity or long term debt or selling fixed
assets.
Specific example: In this case, the VP can sell the mailing machine
& receive cash of $211,400 so VP can increase the current
ratio.
Q.7) Issue price of the bond = Face
value/[(1+yield)^20year] = 1000/[(1+0.095)^20] = 1000/[1.095^20] =
1000/6.1416121 = $162.82
Minumim number of bonds to sell = Amount to be raised/Issue price
of the bond = $6.2million/$162.82 = 38,079 bonds
Q.8) Present worth = Deposit*{1- [1/(1+r)^n]}/r = 10000*{1- [1/(1+0.075)^4]}/0.075 = 10000*{1- [1/(1.075^4)]}/0.075 = 10000*{1- [1/1.33546914]}/0.075 = 10000*{1- 0.7488}/0.075 = 10000*0.2512/0.075 = $33,493.33
Q.9) EPS = Net earnings/Shares outstanding = $1,200,000/500,000 = $2.4
Q.10) Dividend at the end of 1st
year = Last dividend*(1+growth rate) = $2*(1+0.1) = $2*1.1 =
$2.2
Dividend at the end of 2nd year = Dividend in year 1*(1+growth
rate) = $2.2*(1+0.1) = $2.2*1.1 = $2.42
Dividend at the end of 3rd year = Dividend in year 2*(1+growth
rate) = $2.42*(1+0.1) = $2.42*1.1 = $2.662
Dividend at the end of 4th year = Dividend in year 3*(1+growth
rate) = $2.662*(1+0.1) = $2.662*1.1 = $2.9282
Terminal value at the end of year 4 = Dividend in year 5/required
return = $2.9282/0.12 = $24.40 (Note: After 4years dividend is
assumed as constant forever)
Present value of the stock = Year 1 dividend/(1+required return) +
Year 2 dividend/[(1+required return)^2] + Year 3
dividend/[(1+required return)^3] + [Year 4 dividend+year 4 terminal
value]/[(1+required return)^4] = 2.2/(1+0.12) + 2.42/[(1+0.12)^2] +
2.662/[(1+0.12)^3] + [2.9282+24.4]/[(1+0.12)^4] = [2.2/1.12] +
[2.42/(1.12^2)] + [2.662/(1.12^3)] + [27.3282/(1.12^4)] =
1.9643+1.9292+1.8948+17.3676 = $23.1559