Homework 1
Financial Management, 2023
Due on 11/06/2023
1
Please use the income statement below to answer the selected questions.
Luther Corporation
Consolidated Income Statement
Year ended December 31 (in $millions)
2022
2021
Total sales
610.1
578.3
Cost of sales
-500.2
-481.9
Gross profit
109.9
96.4
Selling, general, and
administrative expenses
-40.5
-39.0
Research and development
-24.6
-22.8
Depreciation and amortization
-3.6
-3.3
Operating income
41.2
31.3
Other income
--Earnings before interest and taxes (EBIT)
41.2
31.3
Interest income (expense)
-25.1
-15.8
Pretax income
16.1
15.5
Taxes
-5.5
-5.3
Net income
10.6
10.2
Price per share
Sharing outstanding (millions)
Stock options outstanding (millions)
$16
10.3
0.4
$15
8.0
0.1
Stockholders' Equity
Total Liabilities and Stockholders' Equity
126.6
533.1
63.6
386.7
For the year ending December 31, 2022, (a) what is the Luther's earnings per share?
(b) Assuming that Luther has no convertible bonds outstanding, then for the year
ending December 31, 2022, what are the Luther's diluted earnings per share? (c) What
will be the effect on the income statement if a firm buys a new processing plant
through a new loan?
2
Consider the following prices from a McDonald's Restaurant:
Big Mac Sandwich $2.68
Large Coke
$1.45
Large Fries
$1.13
A McDonald's Big Mac value meal consists of a Big Mac sandwich, large Coke, and a
large size of fries. Assume that there is a competitive market for McDonald's food
items and that McDonald's sells the Big Mac value meal for $4.59. Does an arbitrage
opportunity exist and if so how would you exploit it and how much would you make
on one value meal?
3
Uptown Men's Wear has accounts payable of $2,214, inventory of $7,950, cash of
$1,263, fixed assets of $8,400, accounts receivable of $3,907, and long-term debt
1
of $4,200. What is the value of the net working capital to total assets ratio?
4
Suppose you want to buy a new house. You currently have $15,000, and you
figure you need to have a 10% down payment plus an additional 5% of the loan
amount for closing costs. Assume the type of house you want will cost about
$150,000 and you can earn 7.5% per year, how long will it be before you have
enough money for the down payment and closing costs?
5
You are considering two lottery payment options: Option A pays $20,000 today
and Option B pays $40,000 at the end of ten years. Assume you can earn 5 percent
on your savings. Which option will you choose if you base your decision on
present values? Which option will you choose if you base your decision on future
values? Explain why your answers are either the same or different.
6
Suppose you have a 1-year old son and you want to provide $75,000 in 17 years
towards his college education. You currently have $5,000 to invest. What interest
rate must you earn to have the $75,000 when you need it?
7
Ursula wants to buy a $19,000 used car. She has savings of $2,000 plus an $800
trade-in. She wants her monthly payments to be about $282. How long does she
can pay off her loan?
8
Under what situation can a zero-coupon bond be selling at a premium?
9
The Sisyphean Company has a bond outstanding with a face value of $1000 that
reaches maturity in five years. The bond certificate indicates that the stated
coupon rate for this bond is 8.5% and that the coupon payments are to be made
semiannually. Assuming that this bond trades for $1081.73, then what is the YTM
for this bond?
10 The Sisyphean Company has a bond outstanding with a face value of $1000 that
reaches maturity in 10 years. The bond certificate indicates that the stated coupon
rate for this bond is 8.0% and that the coupon payments are to be made
semiannually. Assuming the appropriate YTM on the Sisyphean bond is 11.1%,
then what is the price that this bond trades for?
2