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CHAPTER 1 Question 4 Sarbanes-Oxley (LO4) In response to the Sarbanes-Oxley Act, many small firms in the United States have opted to “go dark” and delist their stock. Why might a company choose this route? What are the costs of “going dark”? Answer The reason many firms have decided to “go dark” due to SOX is that it can be very costly to firms to remain complaint to the many requirements. Also, by going dark is allows companies to avoid the disclosure requirements of SOX and allows them to keep their financials private. However, by going dark this does eliminate the use of raising capital easily through the open market by issuing stock. This also can deter investors from investing for concerns that financial figures could be hidden or miss represented. Question 6 Goal of Financial Management (LO2) What goal should always motivate the actions of a firm’s financial manager? Answer The goal that should always motivate the actions of a firm’s financial manager is to maximize the current value per share of existing stock. If the company does not trade stock, then the goal is to increase the owners’ equity. Either way is to maximize the existing owners’ equity in the firm. Question 12 Ethics and Firm Goals (LO2) Can our goal of maximizing the value of the stock conflict with other goals, such as avoiding unethical or illegal behavior? In particular, do you think subjects like customer and employee safety, the environment, and the general good of society fit in this framework, or are they essentially ignored? Think of some specific scenarios to illustrate your answer. Answer Yes, the goal of maximizing the value of the stock can conflict with other goals, such as avoiding unethical or illegal behavior. These reasons are the cause for the government to create regulations like OSHA and SOX. Greed is the biggest contributor to this. Management tries to work in the best interest of its owners, but management will either work at times for their best interest or the best interest of its shareholders without concern. Management may create unsafe work environments to decrease cost and increase profits. This then can help to increase managements compensation. I think as we have evolved that companies have tried to include customers, employee safety, the environment and the general good of society in their framework. I think part of this is social media can hurt companies that may not adhere to these areas. Companies today try to have a better presence in the world. To show that they care and are making a difference in society. Disney for example donates millions to children’s hospitals around the world. Other companies are working to reduce their carbon footprint because it’s better for the environment even though regulation is not requiring it. CHAPTER 2 1 Problem 2 Building an Income Statement (LO1) Billy’s Extermination, Inc., has sales of $817,000, costs of $343,000, depreciation expense of $51,000, interest expense of $38,000, and a tax rate of 35 percent. What is the net income for this firm? Answer Billy's Exterminators Inc. Income Statement Net Sales Cost of Goods Sold Depreciation Earnings before interest and taxes Interest Income Before Tax Taxes 35% Net Income $817,000.00 $343,000.00 $51,000.00 $423,000.00 $38,000.00 $385,000.00 $134,750.00 $250,250.00 Problem 3 Dividends and Retained Earnings (LO1) Suppose the firm in Problem 2 paid out $95,000 in cash dividend. What is the addition to retained earnings? Answer Billy's Exterminators Inc. Income Statement Net Sales Cost of Goods Sold Depreciation Earnings before interest and taxes Interest Income Before Tax Taxes 35% Net Income Dividends Paid Retained Earnings $817,000.00 $343,000.00 $51,000.00 $423,000.00 $38,000.00 $385,000.00 $134,750.00 $250,250.00 $95,000.00 $155,250.00 Problem 5 Calculating Taxes (LO3) The Dyrdek Co. had $267,000 in 2014 taxable income. Using the rates from Table 2.3 in the chapter, calculate the company’s 2014 Income taxes. Answer 2 The Dyrdek Co Taxes Tax Rate Total Tax Taxable Income $50,000.00 15% $7,500.00 $25,000.00 25% $6,250.00 $25,000.00 34% $8,500.00 $100,000.00 39% $39,000.00 $67,000.00 34% $22,780.00 $267,000.00 29% $84,030.00 Problem 7 Calculate OCF (LO4) Ridiculousness, Inc., has sales of $43,800, costs of $22,700, depreciation expense of $2,100, and interest expense of $1,600. If the tax rate is 35 percent, what is the operating cash flow, or OCF? Answer Ridiculousness, Inc Operating Cash Flow Earnings before interest and taxes Depreciation Taxes 35% Net Income $19,000.00 $2,100.00 $6,090.00 $15,010.00 CHAPTER 3 Problem 26 Calculating Financial Ratios (LO2) Find the following financial ratios for Smolira Golf Corp. (use year-end figures rather than average values where appropriate. 3 Answer Ratio Short-term solvency ratios: Current Ratio (Current Assets/Current Liabilities) Quick Ratio (Current Assets – Inventory/Current Liabilities) Cash Ratio (Cash/Current Liabilities) Asset utilization ratios: Total asset turnover (Sales/Total Assets) Inventory turnover (Cost of Goods Sold/Inventory) Receivables turnover (Sales/Accounts Receivable) Long-term solvency ratios: Total debt ratio (Total Assets – Total Equity/Total Assets) Debt-equity ratio (Total Debt/Total Equity) Equity multiplier (Total Assets/Total Equity) Times interest earned ratio (EBIT/Interest) Cash coverage ratio (EBIT + Depreciation/Interest) Profitability ratios: Profit margin (Net Income/Sales) Return on assets (Net Income/Total Assets) Return on equity (Net Income/Total Equity) 2014 2015 1.10 0.65 0.43 1.15 0.68 0.42 0.88 8.93 23.09 0.37 0.41 1.58 0.38 0.41 1.60 5.73 7.99 11.94% 10.53% 16.85% CHAPTER 5 Problem 2 Calculating Future Values (LO1) For each of the following, compute the future value: Answer 4 Present Value $1,975 $6,734 $81,346 $192,050 Years 11 7 14 8 Interest % 13.00% 9.00% 12.00% 6.00% Future Value $7,575.83 $12,310.02 $397,547.04 $306,098.52 𝑭𝑽 = 𝑷𝑽 𝒙 (𝟏 + 𝒓)𝒕 Problem 3 Calculating Present Value (LO2) For each of the following, compute the present value. Answer Present Value $5,039.79 $39,332.59 $1,730.78 $3.37 Years 13 4 29 40 Interest % 9.00% 7.00% 24.00% 35.00% 𝑷𝑽 = Future Value $15,451 $51,557 $886,073 $550,164 𝑭𝑽 (𝟏 + 𝒓)𝒕 Problem 4 Calculating Interest Rates (LO3) Solve for the unknown interest rate in each of the following: Answer Present Value $181 $335 $48,000 $40,353 Years 4 18 19 25 𝒓=( Interest % 13.18% 6.72% 7.37% 10.86% Future Value $297 $1,080 $185,382 $531,618 𝑭𝑽 𝟏 )^ 𝒕 − 𝟏 𝑷𝑽 Problem 5 Calculating the Number of Periods (LO4) Solve for the unknown number of years for each of the following. Answer Present Value $560 $810 $18,400 Years 15.59 9.40 26.41 Interest % 6.00% 9.00% 11.00% Future Value $1,389 $1,821 $289,715 5 $21,500 24.52 13.00% 𝒏= $430,258 𝑭𝑽 𝒍𝒏 (𝑷𝑽) 𝒍𝒏(𝟏 + 𝒊) Problem 8 Calculating Interest Rates (LO3) According to the Census Bureau, in January 2013, the average house price in the United States was $306,900. In January 2000, the average price was $200,300. What was the annual increase in selling price? Answer 𝒓=( 𝒓=( 𝑭𝑽 𝟏 )^ 𝒕 − 𝟏 𝑷𝑽 𝟏 𝟑𝟎𝟔, 𝟗𝟎𝟎 𝟏𝟑 )^ − 𝟏 𝟐𝟎𝟎, 𝟑𝟎𝟎 𝒓 = 𝟑. 𝟑𝟒% EZ Calculator App Bond Calculator: Bond Price = 200,300, Face Value = 306,900, YTM = 13 Annual Yield = 3.3368% CHAPTER 6 Problem 16 Calculating Future Values (LO1) What is the future value of $2,400 in 17 years assuming an interest rate of 7.9 percent compounded semiannually? Answer 𝑭𝑽 = 𝑷𝑽 𝒙 (𝟏 + 𝒓/𝟐)𝒕∗𝟐 𝑭𝑽 = 𝟐, 𝟒𝟎𝟎 𝒙 (𝟏 + 𝟎. 𝟎𝟕𝟗/𝟐)𝟏𝟕∗𝟐 6 𝑭𝑽 = $𝟖, 𝟗𝟓𝟖. 𝟔𝟖 EZ Calculator App Bond Calculator: Bond Price = 2,400 YTM = 17, Annual Yield = 7.9% Face Value = 8,958.68 Problem 17 Calculating Future Values (LO1) Fowler Credit Bank is offering 6.7 percent compounded daily on its savings accounts. If you deposit $7,000 today, how much will you have in the account in 5 years? In 10 years? In 20 Years? Answer Present Value $7,000 $7,000 $7,000 Years 5 10 20 Interest % 6.70% 6.70% 6.70% Future Value $9,785.28 $13,678.82 $26,730.02 𝑭𝑽 = 𝑷𝑽 𝒙 (𝟏 + 𝒓/𝟑𝟔𝟓)𝒕∗𝟑𝟔𝟓 Problem 18 Calculating Present Value (LO1) An investment will pay you $65,000 in 10 years. If the appropriate discount rate is 7 percent compounded daily, what is the present value? Answer 𝑷𝑽 = 𝑷𝑽 = 𝑭𝑽 (𝟏 + 𝒓/𝟑𝟔𝟓)𝒕∗𝟑𝟔𝟓 𝟔𝟓, 𝟎𝟎𝟎 (𝟏+. 𝟎𝟕/𝟑𝟔𝟓)𝟏𝟎∗𝟑𝟔𝟓 7 𝑷𝑽 = $𝟑𝟐, 𝟐𝟖𝟎. 𝟐𝟏 EZ Calculator App Bond Calculator: Face Value = 65,000, YTM = 10, Annual Yield = 7% Bond Price = 32,280.21 CHAPTER 7 Problem 3 Valuing Bonds (LO2) Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value 1,000, 23 years to maturity, and a coupon rate of 5.8 percent paid annually. If the yield to maturity is 4.7 percent, what is the current price of the bond? Answer 𝑷𝑽 𝑩𝒐𝒏𝒅 = 𝑪 𝟏 𝟏 𝑭𝑽 𝑿( − )+ 𝒏 𝒙 𝟐 𝒊 𝟐 𝒊 𝒊 𝒊 𝒏𝒙𝟐 ( ) 𝒙 (𝟏 + ) (𝟏 + 𝟐 𝟐 𝟐 𝟐) 8 PV = $1,152.66 EZ Calculator App Bond Calculator: Face Value = 1,000, YTM = 23, Annual Yield = 4.7% Annual Coupon Payment = 58 Bond Price = 1,152.66 Problem 4 Bond Yields (LO2) A Japanese company has a bond outstanding that sells for 91.53 percent of the 100,000 par value. The bond has a coupon rate of 3.4 percent paid annually and matures in 16 years. What is the yield to maturity of this bond? Answer EZ Calculator App Bond Calculator: Bond Price = 91,530, Face Value = 100,000, YTM = 16, Annual Coupon Payment = 3,400 Annual Yield = 4.1341% Problem 5 Coupon Rates (LO2) Essary Enterprises has bonds on the market making annual payments, with eight years to maturity, a par value of $1,000, and selling for $948. At this price, the bonds yield 5.9 percent. What must the coupon rate be on the bonds? Answer EZ Calculator App Bond Calculator: Bond Price = 948, Face Value = 1,000, YTM = 8, Annual Yield = 5.9 % Annual Coupon Payment = 50.659 Coupon rate = 5.0659% 9 Problem 6 Bond Prices (LO2) Sqeekers Co. issued 15-year bonds a year ago at a coupon rate of 4.1 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 4.5 percent, what is the current bond price? Answer EZ Calculator App Bond Calculator: Face Value = 1,000, YTM = 15, Annual Yield = 4.5% Annual Coupon Payment = 41 Bond Price = 956.71 Problem 9 Zero Coupon Bonds (LO2) You find a zero-coupon bond with a par value of $10,000 and 17 years to maturity. If the yield to maturity on this bond is 4.9 percent, what is the price of the bond? Assume semiannual compounding periods. Answer EZ Calculator App Bond Calculator: Face Value = 10,000, YTM = 17, Annual Yield = 4.9% Annual Coupon Payment = 0 Bond Price = 4,391.30 CHAPTER 8 Problem 4 Stock Values (LO1) Caan Corporation will pay a $3.56 per share dividend next year. The company pledges to increase its dividend by 3.75 percent per year indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company’s stock today? Answer 𝑷𝟎 = 𝑷𝟎 = 𝑫𝟏 𝒌−𝒈 𝟑. 𝟓𝟔 . 𝟏𝟏−. 𝟎𝟑𝟕𝟓 𝑷𝟎 = $𝟒𝟗. 𝟏𝟎 EZ Calculator App 10 Constant Growth Stock: D1 =3.56 Growth Rate = 3.75% Required Return = 11% Price = $49.10 Problem 5 Stock Valuation (LO1) Tell Me Why Co. is expected to maintain a constant 3.9 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 5.9 percent, what is the required return on the company’s stock? Answer R = Dividend Yield + Capital Gain R = 5.9% + 3.9% R = 9.8% Problem 6 Stock Valuation (LO1) Suppose you know that a company’s stock currently sells for $63 per share and the required return on the stock is 10.5 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it’s the company’s policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? Answer R = Dividend Yield + Capital Gain R = .0525 +.0525 𝑫𝟎 = 𝑫𝟎 = 𝑷𝟎 (𝒌 − 𝒈) 𝟏+𝒈 𝟔𝟑(. 𝟏𝟎𝟓−. 𝟎𝟓𝟐𝟓) 𝟏+. 𝟎𝟓𝟐𝟓 𝑫𝟎 = $𝟑. 𝟏𝟒 11 Problem 7 Stock Valuation (LO1) Estes Park Corp. pay a constant $7.80 dividend on its stock. The company will maintain this dividend for the next 13 years and will then cease paying dividends forever. If the required return on this stock is 11.2 percent, what is the current share price? Answer 𝑷𝟏𝟑 𝟏 𝟏−( ) (𝟏+. 𝟏𝟏𝟐)^𝟏𝟑 = 𝟕. 𝟖𝟎 𝑿 𝟎. 𝟏𝟏𝟐 𝑷𝟏𝟑 = $𝟓𝟐. 𝟏𝟐 Problem 8 Valuing Preferred Stock (LO1) Moraine, Inc., has an issue of preferred stock outstanding that pays a $3.50 dividend every year in perpetuity. If this issue currently sells for $85 per share, what is the required return? Answer 𝑹= 𝑹= 𝑫 𝑷 𝟑. 𝟓𝟎 𝟖𝟓 𝑹 = 𝟒. 𝟏𝟏% 12