FINANCE CHAPTER TWO PROBLEMS

CHAPTER TWO PROBLEMS1. Your corporation has the following cash flows:Operating income$250,000Interest received10,000Interest paid45,000Dividends received20,000Dividends paid50,000If the applicable tax table is as follows:Taxable IncomeRate—————-$ 0 – 25,00016%25 – 50,0001950 – 75,0003075 -100,00040over 100,00046What is the corporation’s tax liability?$80,5302.Last year Rattner Robotics had $5 million in operating income (EBIT). The companyhad net depreciation expense of $1 million and an interest expense of $1 million; itscorporate tax rate was 40 percent. The company has $14 million in current assets and$4 million in non-interest-bearing current liabilities; it has $15 million in net plant andequipment. It estimates that it has an after-tax cost of capital of 10 percent. Assumethat Rattners only non-cash item is depreciation.a.What was the companys net income for the year?$2.4 millionb.What was the companys net cash flow?$3.4 millionc.What was the companys net operating profit after taxes (NOPAT)?$3.0 milliond.What was the companys operating cash flow?$4.0 millione.If operating capital in the previous year was $24 million, what was the companysfree cash flow (FCF) for the year?$2.0 millionf.What was the companys economic value added?$500,0003.As an institutional investor paying a marginal tax rate of 46%, your after-tax dividendyield on preferred stock with a 16% before-tax dividend yield would be:14.9%4.A 7% coupon bond issued by the state of New York sells for $1,000 and thus provides a7% yield to maturity. For an investor in the 40% tax bracket, what coupon rate on aCarter Chemical Company bond that also sells at its $1,000 par value would cause thetwo bonds to provide the investor with the same after-tax rate of return?11.67%5.A corporation with a marginal tax rate of 46% would receive what AFTER-TAX YIELD ona 12% coupon rate preferred stock bought at par?Answer: 11.172%6.You have just received financial information for the past two years for Powell PantherCorporation:Income Statements Ending December 31(millions of dollars)2000Sales$1,200.0Operating Costs (excluding depreciation)1,020.0Depreciation30.0Earnings before interest and taxes$ 150.0Less Interest expense21.7Earnings before taxes$ 128.3Less taxes (40%)51.3Net income available to common equity$ 77.0Common dividends$ 0.6051999$1,000.0850.025.0$ 125.020.2$ 104.841.9$ 62.9$ 0.464Balance Sheets Ending December 31(millions of dollars)2000199910.0150.0200.0250.0$ 610.0Cash and marketable securitiesAccounts receivableInventoriesNet plant and equipmentTotal Assets$12.0180.0180.0300.0$ 672.0$Accounts payableNotes payableAccrualsLong-term bondsCommon stock (50 million shares)Retained earningsTotal liabilities and equity$ 108.067.072.0$ 150.050.0225.0$ 672.0$90.051.560.0$ 150.050.0208.5$ 610.0a.What is the net operating profit (NOPAT) for 2000?$90,000,000b.What are the amounts of net operating working capital for 1999 and 2000?$210,000,000 and $192,000,000c.What are the amounts of total operating capital for 1999 and 2000?$460,000,000 and $492,000,000d.What is free cash flow for 2000?$58,000,000e.How much did the firm reinvest in itself over the accounting period?$16,500,000f.At the present time (12/31/2000), how large a check could the firm write without itbouncing?$12,000,0007.A firm’s operating income (EBIT) was $400 million, their depreciation expense was $40million, and their increase in net investment in operating capital was $70 million.Assuming that the firm is in the 40% tax bracket, what was their free cash flow?$170 million8.In its recent income statement, Smith Software Inc. reported $23 million of net income,and in its year-end balance sheet, Smith reported $401 million of retained earnings. Theprevious year, its balance sheet showed $389 million of retained earnings. What were the totaldividends paid to shareholders during the most recent year?$11.0 million9.Cox Corporation recently reported an EBITDA of $58 million and $7 million of netincome. The company has $12 million interest expense and the corporate tax rate is40.0% percent. What was the company’s depreciation and amortization expense?$34.33 million10.Ravings Incorporated recently reported net income of $5.4 million. Its operating income(EBIT) was $15 million, and its tax rate was 40 percent. What was the companysinterest expense?$6 million11.In its recent income statement, Smith Software Inc. reported paying $10 million individends to common shareholders, and in its year-end balance sheet, Smith reported$419 million of retained earnings. The previous year, its balance sheet showed $404million of retained earnings. What was the firms net income during the most recentyear?$25.0 million12.Casey Motors recently reported net income of $19 million. The firm’s tax rate was 40.0%and interest expense was $6 million. The company’s after-tax cost of capital is 14.0%and the firm’s total investor supplied operating capital employed equals $95 million.What is the company’s EVA?$9.30 million13.Brooks Sisters’ operating income (EBIT) is $194 million. The company’s tax rate is40.0%, and its operating cash flow is $148.4 million. The company’s interest expense is$39 million. What is the company’s net cash flow? (Assume that depreciation is the onlynon-cash item in the firm’s financial statements.)$125.0 million14.Valuable Incorporateds stock currently sells for $45 per share. The firm has 20 millionshare of common outstanding. The firms total debt equals $600 million and its commonequity equals $400 million. What is the firms market value added?$500 million