1. Talbot Enterprises recently reported an EBITDA of $8 million and net income of $2.4 million. It had $2.0 million of interest expense, and its corporate tax rate was 40%. What was its charge for depreciation and amortization?
2. Complete the balance sheet and sales information in the table that follows for J. White
Industries using the following financial data:
Total assets turnover: 1.5
Gross profit margin on sales: (Sales - Cost of goods sold)/Sales = 25%
Total liabilities-to-assets ratio: 40%
Quick ratio: 0.80
Days sales outstanding (based on 365-day year): 36.5 days
Inventory turnover ratio 3.75
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Partial Income
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Statement Information
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Sales
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Cost of Goods sold
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Balance Sheet
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Cash
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Account payable
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Accounts receivable
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Long-term debt
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50,000
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Inventories
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Common stock
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Fixed assets
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Retained earnings
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100,000
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Total assets
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$400,000
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Total liabilities and equity
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3. Broussard Skateboard's sales are expected to increase by 15% from $8 million in 2013 to $9.2 million in 2014. Its assets totaled $5 million at the end of 2013. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2013, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 6%, and the forecasted payout ratio is 40%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year.
4. Refer to Problem 3. What would be the additional funds needed if the company's year- end 2013 assets had been $7 million? Assume that all other numbers, including sales, are the same as in Problem 12-1 and that the company is operating at full capacity. Why is this AFN different from the one you found in Problem 12-1? Is the company's "capital intensity" ratio the same or different?
5. What are some actions an entrenched management might take that would harm shareholders?
How is it possible for an employee stock option to be valuable even if the firm's stock price fails to meet shareholders' expectations?
6. You want to buy a car, and a local bank will lend you $20,000. The loan would be fully amortized over 5 years (60 months), and the nominal interest rate would be 12%, with interest paid monthly. What is the monthly loan payment? What is the loan's EFF%?
7. Find the present value of the following ordinary.
a. $400 per year for 10 years at 10%
b. $200 per year for 5 years at 5%
c. $400 per year for 5 years at 0%
d. Now rework parts a, b, and c assuming that payments are made at the beginning of each year; that is, they are annuities due.
8. Sales for Hanehury Corporation's just-ended year were $12 million. Sales were $6 million 5 years earlier.
a. At what rate did sales grow?
b. Suppose someone calculated the sales growth for I lanebury in part a as follows: "Sales doubled in 5 years. This represents a growth of 100% in 5 years; dividing 100% by 5 results in an estimated growth rate of 20% per year." Explain what is wrong with this calculation.
9. The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year.
a. What will be the value of each of these bonds when the going rate of interest is (1) 5%, (2) 8%, and (3) 12%? Assume that there is only one more interest payment to be made on Bond S.
b. Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1 year)?
10. You just purchased a bond that matures in 5 years. The bond has a face value of $1,000 and has an 8% annual coupon. The bond has a current yield of 8.21%. What is the bond's yield to maturity?
11. The market and Stock J have the following probability distributions:
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Probability
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rm
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rj
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0.3
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15%
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20%
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0.4
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9
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5
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0.3
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18
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12
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a. Calculate the expected rates of return for the market and Stock J.
b. Calculate the standard deviations for the market and Stock J.
12. As an equity analyst you are concerned with what will happen to the required return to Universal Toddler Industries's stock as market conditions change. Suppose rRF = 5%, rM = 12%, and bun = 1.4.
a. Under current conditions, what is run, the required rate of return on UTI stock?
b. Now suppose rp (1) increases to 6% or (2) decreases to 4%. The slope of the SML remains constant. How would this affect rM and run?
c. Now assume rp remains at 5% but rM (1) increases to 14% or (2) falls to 11%. The slope of the SML does not remain constant. How would these changes affect run?
13. Kendra Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and $100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 8%. The company's weighted average cost of capital is 12%.
a. What is the terminal, or horizon, value of operations? (Hint: Find the value of all free cash flows beyond Year 2 discounted back to Year 2.)
b. Calculate the value of Kendra's operations.
14. Assume that you have been given the following information on Purcell Industries:
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Current stock price = $15
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Strike price of option = $15
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Time to maturity of option = 6 months
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Risk-free rate = 6%
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Variance of stock return = 0.12
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d1 = 0.24495
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N(d1) = 0.59675
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d2 = 0.00000
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N(d2) = 0.50000
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According to the Black-Scholes option pricing model, what is the option's value?
15. Shi Importers's balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi's tax rate is 40%, rd = 6%, rps = 5.8%, and rs = 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC?
16. Radon Homes's current EPS is $6.50. It was $4.42 Syears ago. The company pays out 40% of its earnings as dividends, and the stock sells for $36.
a. Calculate the historical growth rate in earnings. (Hint: This is a 5-year growth period.)
b. Calculate the next expected dividend per share, D1. (Hint: Do = 0.4($6.50) = $2.60.) Assume that the past growth rate will continue.
c. What is Radon's cost of equity, rs?