Price earning ratio-basic earning power

Problem 1: PRICE/EARNING RATIO A company has an EPS of \$2.00, a cash flow per share of \$3.00, and a price/cash flow ratio of 8.0x. What is its P/E ratio?

Problem 2: BASIC EARNING POWER Duval manufacturing recently reported the following information:

Net income            \$600,000
ROA                         \$ 8%
Interest expense    \$225,000

Duval’s tax rate is 35%. What is its basic earning power (BEP)?

Problem 3: FUTURE VALU: ANNUITY VERSUS ANNUITY DUE   what’s the future value of a 7%, 5-year ordinary annuity that pays \$300 each year? If this was an annuity due, what would its future value be?

Problem 4: EVALUATING LUMP SUMS AND ANNUITIES   Crissie just won the lottery, and she must choose between three award options. She can elect to receive a lump sum today of \$61 million, to receive 10 end-of-year payments of \$9.5 million, or to receive 30 end-of-year payments of \$5.5 million.

Problem 5: AMORTIZATION SCHEDULE WITH A BALLOON PAYMENT: you want to buy a house that cost \$100,000. You have \$10,000 for a down payment, but your credit is such that mortgage companies will not lend you the required \$90,000. However, the realtor persuades the seller to take a \$90,000 mortgage (called a seller take-back mortgage) at a rate of 7%, provided the loan is paid off in full in 3 years. You expect to inherit \$100,000 in 3 years; but right now all you have is \$10,000, and you can afford to make payments of no more than \$7,500 per year given your salary. (The loan would call for monthly payments, but assume end-of-year annual payments to simplify things.)

a. If the loan was amortized over 3 years, how large would each annual payment be? Could you afford those payments?

b. If the loan was amortized over 30 years, what would each payment be? Could you afford those payments?

c. To satisfy the seller, the 30-year mortgage loan would be written as a balloon note, which means that at the end of the third year, you would have to make the regular payment plus the remaining balance on the loan. What would the loan balance be at the end of Year 3, and what would the balloon payment be?

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