Question

1.      Holmes Inc. has a quick ratio of 0.70, current liabilities of $21,500, net working capital of $1200, and sales of $14,500. How much does it have in inventory?

2.      Watson Co. has net income of $235,000, a return on assets of 12.5%, and a debt-equity ratio of 0.52. What is its return on equity?

3.      Lestrade Plc. has net income of $16,000 and a profit margin of 8%. It also had costs (including depreciation) of $154,000 and a tax rate of 21%. What is the firm’s times interest earned ratio? (Hint: you will need to construct Lestade’s income statement to do this problem).

4.      The Mycroft Inquiries Group has a price-earnings ratio of 17.5, net income of $194,000, a book value per share of $22.22, and 70,000 shares of stock outstanding. What is its market to book ratio?

5.      Moriarity Ltd has adopted a policy whereby it will maintain a constant debt-equity ratio. Given this, what is its maximum growth rate if it has net income of $9,600, total equity of $66,000, total assets of $150,000 and a 30% dividend payout ratio?

6.      McCann’s Pizza forecasts sales of $1,000,000 in 2020. The owner, Bryan McCann, will re-invest 40% of 2020 net income into buying a new pizza oven, and will keep the remaining 60% as a dividend. McCann would like to earn $100,000 as dividend. What net profit margin is required for McCann to invest in the oven and make his target dividend?

7.      Please fill in the blanks in the following table:

         Present                Future                   Interest                   Time to

         Value                   Value                      Rate                     Maturity

         $20,000                                               6%                      34 years

                                   $200,000                    7%                      12 years

         $55,000          $111,419.91                                             18 years

         $90,000          $207,408.40                11%                           

        

8.   Occasionally, pieces of art sell for fantastic prices. For example, Vincent Van Gogh’s painting, “Sunflowers”, sold at auction in 1987 for $36 million. Its original price, in 1889, was $125. Suppose the painting been in one family for the entire period. What was their average annually compounded rate of return?

9.   Suppose you have invested the following sums on the last day of each year in a mutual fund with front-end loads of 4% and management fees of 0.4%. The fund earned 11% per year. How much will you have at the end of year 10?

Year                Cash Flow

    0                      $1600

    1                      $2500

    2                      $3000

10. If you invested $100,000 today in exchange for a 10%, 15 year annuity, what annual cash flow will you receive?

11. You are car shopping.

a. You have $20,000 you can use as a down payment. Your bank is offering 3.6% (Annual Percentage Rate) financing over 3 years. After constructing your budget, you determine that you can afford monthly car payments of $1250. What is the most you can spend on the car?

b. Unfortunately, from the perspective of your budget, you have your eyes on a Tesla roadster that costs a mere $90,229. You banker says, ok, but your APR is going to be 4.4%. How long will it take you to pay off the car assuming your payment remains the same at $1250 per month?            

12. What is the present value of $3,300 per year received annually at the end of years 14 to 66 and the interest rate is 8%?

13. A father wants to create a trust fund for his daughter. He would like the fund to distribute $20,000 per year for 20 years. The father will set aside all of the funds for the trust today in an account that pays 8% APR on average. The first withdrawal from the trust will be in exactly 25 years. The funds in the trust will remain in the investment account as they are withdrawn. How much should the father set aside today?

Answer 1

Answer to Question 1.
Net Working Capital = Current Assets – Current Liabilities
$1,200 = Current Assets - $21,500
Current Assets = $22,700

Quick Ratio = (Current Assets – Inventory) / Current Liabilities
0.70 = ($22,700 – Inventory) / $21,500
0.70 * $21,500 = $22,700 – Inventory
$15,050 = $22,700 – Inventory
Inventory = $7,650

Answer to Question 2.
Equity Multiplier = 1 + Debt – Equity Ratio
Equity Multiplier = 1 + 0.52
Equity Multiplier = 1.52

Return on Equity = Return on Assets * Equity Multiplier
Return on Equity = 12.50% * 1.52
Return on Equity = 19.00%

Answer to Question 3.
Profit Margin = Net Income / Sales * 100
8 = $16,000 / Sales * 100
Sales = $200,000

EBIT = Sales – Costs
EBIT = $200,000 - $154,000
EBIT = $46,000

Income before Taxes = Net Income / (1 – Taxes)
Income before Taxes = $16,000 / (1 – 0.21)
Income before Taxes = $20,253.16

Interest Expense = EBIT - Income before Taxes
Interest Expense = $46,000 - $20,253.16
Interest Expense = $25,746.84

Times Interest earned ratio = EBIT / Interest Expense
Times Interest earned ratio = $46,000 / $25,746.84
Times Interest earned ratio = 1.79 times