FIN 500 / Assignment 1 / Maggie Jones

FIN500 Assignment 1 (individual work) Total points: 16 Part I. Multiple choice questions/problems 1. Financial management involves decisions about which of the following: D. All of these. (p. 6) 2. When determining a form of business organization, all of the following are considered EXCEPT: D. The physical location of the business. (p. 11) 3. The practice generally known as double taxation is due to D. corporate incomes being taxed at the corporate level, then again at the shareholder level when corporate profits are paid out as dividends. (p. 12) 4. For corporations, maximizing the value of owner's equity can also be stated as E. maximizing the stock price. (p. 15) 5. If a company reports a large amount of net income on its income statement during a year, the firm will have D. any of these scenarios are possible. (p. 42) 6. Income Statement Barnyard, Inc.'s 2008 income statement lists the following income and expenses: EBIT = $500,000, Interest expense = $50,000, and Net income = $315,000. What is the 2008 Taxes reported on the income statement? A. $135,000 (p. 34) 7. Balance Sheet You are evaluating the balance sheet for Cypress Corporation. From the balance sheet you find the following balances: Cash and marketable securities = $600,000, Accounts receivable = $800,000, Inventory = $500,000, Accrued wages and taxes = $50,000, Accounts payable = $200,000, and Notes payable = $1,000,000. What is Cypress's net working capital? B. $650,000 (p. 31) 8. Which of these statements is true? C. In general, the higher the total asset turnover and the lower the capital intensity ratio, the more efficient the overall asset management of the firm will be. (p. 74) 9. DuPont Analysis You observe that a firms profit margin is below the industry average, its debt ratio is below the industry average, and its return on equity exceeds the industry average. What can you conclude? B. Total assets turnover is above the industry average. (p. 83) 10. Internal Growth Rate Leash N Collar reported a profit margin of 8%, total asset turnover ratio of 1.5 times, debt-to-equity ratio of 0.75 times, net income of $400,000,

FIN 500 / Assignment 1 / Maggie Jones and dividends paid to common stockholders of $200,000. The firm has no preferred stock outstanding. What is Leash N Collar's internal growth rate? D. 6.383% (p. 87) 11. Solving for Rates What annual rate of return is earned on a $5,000 investment when it grows to $7,000 in six years? Assuming annual compounding. C. 5.77% (p. 125) 12. Solving for Time How many years will it take $100 to grow to $1,000 with an annual interest rate of 8 percent? Assuming annual compounding. C. 29.92 years (p. 126) Part II. Problems. 1. Corporate Taxes Landscaping, Inc. is concerned about the taxes paid by the company in 2008. In addition to $250,000 of taxable income, the firm received $1,000 of interest on state-issued bonds and $6,000 of dividends on common stock it owns in Sprinklers, Inc. Using the tax schedule from Table 2-3, what is Scuba's tax liability, average tax rate, and marginal tax rate, respectively? (1.5 points)

$250,000 of taxable income puts Landscaping, Inc. in the 39 percent marginal tax bracket. Thus Tax liability = tax on base amount + tax rate(amount over base) = $22,250 + .39($250,000 - $100,000) Tax liability = $80,750 Average tax rate Average tax rate = Tax Liability/ Taxable income = $80,750/$250,000 = 32.3%

If Landscaping, Inc. earned $1 more of taxable income, it would pay 39 cents more in taxes. Thus, the firms marginal tax rate is 39%. 2. DuPont Analysis and sustainable growth rate You have located the following information on Rock Company: debt ratio = 40%, capital intensity ratio = 2.25 times, profit margin = 8%, and dividend payout ratio = 25%.

FIN 500 / Assignment 1 / Maggie Jones Equity multiplier ratio = total assets/ common stockholders equity a. What is the return on equity for Rock? (1 point) ROE = profit margin x total asset turnover x equity multiplier = profit margin x 1/ capital intensity ratio x 1/(1-debt ratio) = .08 x 1/2.25 x 1/(1-.4) = .08 x .44 x 1.67 = 5.878%

b. What is the sustainable growth rate for Rock? (1 point) RR = 1 Dividend payout ratio = 1 - .25 = .75 Sustainable growth rate = ROE x RR/ [1 (ROE x RR)] = (.0588 x .75)/ [1 (.0588 x .75)] = .0441/(1-.0441) = 4.61% 3. Future Value At age 20 you invest $1,000 that earns 7 percent each year. At age 30 you invest $1,000 that earns 10 percent per year. In which case would you have more money at age 60? (1 point) Plan 1: Invest $1,000 at 7% interest for 40 years FV = PV * (1 + i)N = $1,000 * (1 + .07)40 = $14,974.46 Plan 2: Invest $1,000 at 10% interest for 30 years FV = PV * (I + i)N = $1,000 * (1 + .1)30 = $17,449.40 I would have more money at age 60 if I invested $1,000 at age 30 at 10% interest. 4. Annuity due As a young graduate, you have plans on buying your dream car in three years. You believe the car will cost $50,000. You have two sources of money to reach your goal of $50,000. First, you will save money for the next three years in a money market fund that will return 8% annually. You plan on making $5,000 annual payments to this fund. You will make yearly investments at the BEGINNING of the year. The second source of money will be a car loan that you will take out on the day you buy the car. You anticipate the car dealer to offer you a 6% APR loan with monthly compounding for a term of 60 months, the car loan is repaid at the beginning of each month. Cash Flow $5,000 $5,000 $5,000

FIN 500 / Assignment 1 / Maggie Jones

Period 0

8%

3 years

a. What is the future value of your savings in three years? (1 point) FVA due = PMT x [(1 + i)N 1]/I x (1 + i) = $5,000 x [(1 + .08)3 1]/.08 x (1+.08) = $5,000 x 3.2464 x 1.08 = $17,530.56 b. What is the value of your car loan? (0.5 point) Value of car loan = $50,000 17,530.56 = $32,469.44 c. What will be your monthly car loan repayment? (1 point) PMT = PV x i/[1 (1/(1+i)N)] = $32,469.44 x .005/[1 (1/(1+.005)60)] = $32,469.44 x .019333 = $627.73 5. Effective Annual Rate John Smith has shopped around for the best interest rates for his investment of $10,000 over the next year. He has found the following: Stated Rate Compounding 5.00% Semi Annual 4.95% Quarterly 4.90% Monthly Calculate the effective annual rate for each investment option decide which one to choose. (1.5 points) For 5% compounded semi-annually: EAR = [1+(APR/m)]m 1 = [1+(.05/2)]2 1 = 5.063% For 4.95% compounded quarterly: EAR = [1+(.0495/4)]4 1 = 5.043% For 4.9% compounded monthly: EAR = [1+(.049/12)]12 1 = 5.012% John should choose to invest at 5% compounded semi-annually as this provides the highest effective annual rate. 6. Moving Cash Flow You are scheduled to receive a $800 cash flow in one year, a $950 cash flow in two years, and pay a $1,000 payment in three years. If interest rates are 8 percent per year, what is the combined present value of these cash flows? (1.5 points)

FIN 500 / Assignment 1 / Maggie Jones Cash Flow Period 0 500 1 8% 1000 2 -800 3 years

PV of $800 in year 0 = 500/(1+0.08) = 740.74 PV of $950 in year 0 = 950/(1+0.08)2 = 814.47 PV of -$800 in year 0 = -800/(1+0.08)3 = -635.07 Sum of cash flows = 740.74 + 814.47 635.07 = 920.15 The combined present value of these cash flows is $920.15