Problem List Click on a Problem number to

Problem List Click on a Problem number to jump to the slide. Click on Return to Problem List to select a different Problem. Chapter 1 Concept Review 5 Concept Review 8 Concept Review 11 Chapter 2 Problem 6 Problem 12 Problem 19 Chapter 3 Problem 5 Problem 7 Problem 9 Problem 25 Chapter 4 Problem 8 Problem 11 Problem 12 Problem 18 Chapter 5 Problem 7 Problem 9 Problem 14 Chapter 6 Problem 3 Problem 5 Problem 6 Problem 12

Ross Westerfield Jordan Essentials of Corporate Finance Third Edition

Chapter 1 Introduction to Financial Management

Concept Review 1 -5 What goals should always motivate the actions of the firm’s financial manager? To maximize the current market value (share price) of the equity of the firm (whether it’s publicly traded or not). Return to Problem List

Concept Review 1 -8 What does it mean when we say the New York Stock Exchange is an auction market? How are auction markets different from dealer markets? What kind of market is Nasdaq? In auction markets like the NYSE, brokers and agents meet at a physical location (the exchange) to buy and sell their assets. Dealer markets like Nasdaq consist of dealers operating at dispersed locales who buy and sell assets themselves, usually communicating with other dealers either electronically or literally over-the-counter. Return to Problem List

Concept Review 1 -11 Would our goal of maximizing the value of stock be different if we were thinking about financial management in a foreign country? Why or why not? The goal will be the same, but the best course of action toward that goal may require adjustments due to different social, political, and economic climates. Return to Problem List

Chapter 2 Financial Statements, Taxes, and Cash Flow

Problem 2 -2 Taco Swell, Inc. , has sales of $375, 000, costs of $195, 000, depreciation expense of $25, 000, interest expense of $16, 000 and a tax rate of 35 percent. What is the net income for this firm?

Sales Costs Depreciation EBIT Interest Taxable income Taxes (35%) Net income $375, 000 195, 000 25, 000 155, 000 16, 000 139, 000 48, 650 $ 90, 350 Return to Problem List

Problem 2 -6 The Gonas Co. had $245, 000 in 2000 taxable income. Using the tax rates from Table 2. 3 in the chapter, calculate the company’s 2000 income taxes. Taxes = 0. 15 ($50, 000) + 0. 25 ($25, 000) + 0. 34 ($25, 000 K) + 0. 39 ($245, 000 – 100, 000 K) $78, 800 Return to Problem List

Problem 2 -12 The December 31, 1999, balance sheet of Pearl Jelly, Inc. , showed $300, 000 in the common stock account and $4. 6 million in the additional paid-in surplus account. The December 31, 2000 balance sheet showed $350, 000 and $5. 0 million in the same two account, respectively. If the company paid out $100, 000 in cash dividends during 2000, what was cash flow to stockholders for the year?

CFS = Dividends paid – Net new equity CFS = $100, 000 – [(Commonend + APISend) – (Commonbeg + APISbeg)] CFS = $100, 000 – [($350, 000 + $5 M) – ($300, 000 + $4. 6 M)] CFS = $100, 000 – [$5. 35 M – $4. 9 M] CFS = –$350, 000 Return to Problem List

Problem 2 -19 During 2000, Belyk Paving Co. had sales of $2, 000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $1, 200, 000, $300, 000, and $400, 000, respectively. In addition, the company had interest expense of $150, 000 and a tax rate of 35 percent. (Ignore any tax loss carry-back or carry-forward provisions. ) a. What is Belyk’s net income for 2000? b. What is its operating cash flow? c. Explain your results in (a) and (b).

a. Sales Cost of goods sold Other expenses Depreciation EBIT Interest Taxable income Taxes (35%) Net income $2, 000 1, 200, 000 300, 000 400, 000 150, 000 ($50, 000) 0 ( $50, 000)

b. OCF = EBIT + Depreciation – Taxes OCF = $100, 000 + 400, 000 – 0 OCF = $500, 000 c. Net income was negative because of the tax deductibility of depreciation and interest expense. However, the actual cash flow from operations was positive because depreciation is a non-cash expense and interest is a financing, not an operating, expense. Return to Problem List

Chapter 3 Working with Financial Statements

Problem 3 -5 Walker’s Cay Charters, Inc. has a total debt ratio of. 28. What is its debt-equity ratio? What is its equity multiplier? Total debt ratio =. 28 = TD/TA = TD/(TD + E) solving for D/E: . 28(TD + E) = TD. 28 E =. 72 TD TD/E =. 28/. 72 =. 39 Equity multiplier = 1 + D/E = 1. 39 Return to Problem List

Problem 3 -7 If Roten Rooters, Inc. , has an equity multiplier of 1. 90, total asset turnover of 1. 30, and a profit margin of 14 percent, what is ROE? ROE = (PM)(TAT)(EM) ROE = (. 14)(1. 30)(1. 9) ROE =. 3458 or 34. 58% Return to Problem List

Problem 3 -9 For the past year, BDJ, Inc. , had a cost of goods sold of $9, 541. At the end of the year, the accounts payable balance was $1, 800. How long on average did it take the company to pay off its suppliers during the year? What might a large value for this ratio imply? Payables turnover = COGS/Payables turnover = $9, 451 / $1, 800 Payables turnover = 5. 30 times Days’ sales in payables = 365 days / Payables turnover Days’ sales in payables = 365 / 5. 30 = 68. 86 days

The company left its bills to suppliers outstanding for 68. 86 days on average. A large value for this ratio could imply that either (1) the company is having liquidity problems, making it difficult to pay off its short-term obligations, or (2) that the company has successfully negotiated lenient credit terms from its suppliers. Return to Problem List

Problem 3 -25 Bob’s Billiards has total assets of $10, 000, and a total asset turnover of 3. 2 times. If the return on assets is 10%, what is Bob’s profit margin? TAT = Sales/TA = 3. 2 = Sales/$10, 00 Sales = $32, 000 ROA = NI/TA =. 10 = NI/$10, 000 NI = $1, 000

Profit margin = NI/Sales Profit margin = $1, 000/$32, 000 Profit margin =. 0313 or 3. 13% Return to Problem List

Chapter 4 Introduction to Valuation: The Time Value of Money

Problem 4 -8 You are offered an investment that requires you to put up $10, 000 today in exchange for $50, 000 15 years from now. What is the annual rate of return on this investment? FV = $50, 000 = $10, 000(1 + r)15 $50, 000/$10, 000 = (1 + r)15 ($50, 000/$10, 000)1/15 – 1 = r r =. 1133 or 11. 33% Return to Problem List

Problem 4 -11 You have just received notification that you have won the $2 million first prize in the Millennium Lottery. However, the prize will be awarded on your 100 th birthday (assuming you’re around to collect), 80 years from now. What is the present value of your windfall if the appropriate discount rate is 14 percent PV = FV / (1 + r)t PV = $2, 000 / (1 +. 14)80 PV = $56. 06 Return to Problem List

Problem 4 -12 Your coin collection contains 50 1952 silver dollars. If your parents purchased them for their face value when they were new, how much will you collection be worth when you retire in 2050, assuming that they appreciate at a 3. 5 percent annual rate? FV = PV(1 + r)t FV = $50(1 +. 035)98 FV = $50(29. 1175) FV = $1, 455. 88 Return to Problem List

Problem 4 -18 You have just made your first $2, 000 contribution to your individual retirement account. Assuming that you earn an 11 percent rate of return and make no additional contributions, what will your account be worth when you retire in 45 years? What if you wait 10 years before contributing? (Does this suggest a retirement strategy? )

FV = PV(1 + r)t Deposit now: FV = $2, 000(1 +. 11)45 = $2, 000(109. 5302) FV = $219, 060. 48 Wait 10 years: FV = $2, 000(1 +. 11)35 = $2, 000(38. 57485) FV = $77, 149. 70 START SAVING EARLY!!!! Return to Problem List

Chapter 5 Discounted Cash Flow Valuation

Problem 5 -5 If you put up $10, 000 today in exchange for an 8. 5 percent, 12 -year annuity, what will the annual cash flows be? PVA = C{[1 – 1/(1+r)t]/r} $10, 000 = C [1 – 1/1. 08512]/. 085 $10, 000 = C (7. 34469) C = $1, 361. 53 Return to Problem List

Problem 5 -7 If you deposit $2, 000 at the end of each of the next 20 years into an account paying 9. 5 percent interest, how much money will you have in the account in 20 years? How much will you have if you make deposits for 40 years? Deposit for 20 years: FVA = C [(1 + r)t – 1]/r FVA = $2, 000[(1. 095)20 – 1]/. 095 FVA = $2, 000(54. 1222) FVA = $108, 244. 47

Deposit for 40 years: FVA = C [(1 + r)t – 1]/r FVA = $2, 000[(1. 095)40 – 1]/. 095 FVA = $2, 000(386. 51999) FVA = $770, 039. 98 Return to Problem List

Problem 5 -9 Biktimirov’s Bank offers you a $25, 000, seven-year term loan at 12 percent annual interest. What will your annual loan payments be? PVA = C{[1 – 1/(1+r)t]/r} $25, 000 = C [1 – 1/1. 127]/. 12 $25, 000 = C (4. 56376) C = $5, 477. 94 Return to Problem List

Problem 5 -14 First National Bank charges 10. 5 percent compounded quarterly on its business loans. First United Bank charges 10. 6 percent compounded semiannually. As a potential borrower, which bank would you go to for a new loan? EAR = (1 + Quoted rate/m)m – 1 First National Bank EAR = (1 +. 105/4)4 – 1 =. 1092 or 10. 92 % First United Bank EAR = (1 +. 106/2)2 – 1 =. 1088 or 10. 88 % Return to Problem List

Chapter 6 Interest Rates and Bond Valuation

Problem 6 -3 ULJ, Inc. , has 7 percent coupon bonds on the market that have 12 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 8 percent, what is the current bond price? P = $1, 000/(1+r)t + C{[1 – 1/(1+r)t]/r} P = $1, 000/(1. 08)12 + $70[(1 – 1/1. 0812)/. 08] P = $1, 000/(2. 51817) + $70(7. 53608) P = $924. 64 Return to Problem List

Problem 6 -5 Merton Enterprises has bonds on the market making annual payments, with 13 years to maturity, and selling for $850. At this price, the bonds yield 8. 2 percent. What must the coupon rate be on Merton’s bonds? P = $1000/(1+r)t + C{[1 – 1/(1+r)t]/r} $850 = $1, 000/(1. 082)13 + C [(1 – 1/1. 08213)/. 082] $491. 04 = C(7. 81757) C = $62. 81/$1, 000 =. 0628 or 6. 28% Return to Problem List

Problem 6 -6 Mullineaux Co. issued 11 -year bonds one year ago at a coupon rate of 8. 25 percent. The bonds make semiannual payments. If the YTM on these bonds is 9. 2 percent, what is the current bond price? P = $1000/(1+r)t + C{[1 – 1/(1+r)t]/r} P = $1, 000/(1. 046)20 + $41. 25[(1 – 1/1. 04620)/. 046] P = $1, 000/(2. 45829) + $41. 25(12. 89595) P = $938. 74 Return to Problem List

Problem 6 -12 Say you own an asset that had a total return last year of 12 percent. If the inflation rate last year was 6 percent, what was your real return? (1 + R) = (1 + r)(1 + h) (1 +. 14) = (1 + r)(1 +. 06) 1. 0755 = 1 + r r =. 0755 or 7. 55% Return to Problem List