LaRue Wisener
Professor Xuejing Xing
FIN 601-01
May 22, 2025
Homework 1
Chapter 2:
1. Building a Balance Sheet—Bing, Inc., has current assets of $5,400, net fixed assets of
$28,100, current liabilities of $4,100, and long-term debt of $10,600. What is the value of the
shareholders’ equity account for this firm?
$18,000.00
•
How much is net working capital?
$1300.00
5. Calculating OCF—Graff, Inc., has sales of $49,800, costs of $23,700, depreciation expense
of $2,300, and interest expense of $1,800. If the tax rate is 22 percent, what is the operating cash
flow, or OCF?
$21,260.00
19. Calculating Cash Flows—Martinez Industries had the following operating results for 2021:
Sales = $38,072; Cost of goods sold = $27,168; Depreciation expense = $6,759; Interest expense
= $3,050; Dividends paid = $2,170. At the beginning of the year, net fixed assets were $22,790,
current assets were $8,025, and current liabilities were $4,511.
At the end of the year, net fixed assets were $28,053, current assets were $9,904, and current
liabilities were $5,261. The tax rate for 2021 was 22 percent.
a. What is the net income for 2021?
$854.00
b. What is the operating cash flow for 2021?
$10,663.00
c. What is the cash flow from assets for 2021?
-$2,488.00
•
Is this possible? Explain.
Cash flow from assets shows whether a company is bringing in or spending
money overall. Even though this company made a profit and had positive
operating cash flow, it spent a lot on equipment and working capital. Because of
that, it needed to raise $2,488 from investors or lenders to cover those costs.
d. If no new debt was issued during the year, what is the cash flow to creditors?
$3,050.00
•
What is the cash flow to stockholders?
-$5,538.00
•
Explain and interpret the positive and negative signs of your answers in parts (a)
through (d).
The company made a profit and had positive cash flow from its operations. But it
spent $1,129 on working capital and $12,022 on new equipment. To afford this, it
raised $7,708 by issuing new stock. It then paid out $2,170 in dividends and
$3,050 in interest. After those payments, it had $2,488 left, which it used to help
cover the investment costs.
Chapter 3:
2. Equity Multiplier and Return on Equity—Kodi Company has a debt-equity ratio of .63.
Return on assets is 8.4 percent, and total equity is $645,000.
•
What is the equity multiplier?
1.63
•
Return on equity?
13.69%
•
Net income?
$88,313.40
11. Return on Equity—Firm A and Firm B have debt-total asset ratios of 60 percent and 35
percent, respectively, and returns on total assets of 4.5 percent and 8 percent, respectively. Which
firm has a greater return on equity?
Firm B
Chapter 4:
7. Calculating Present Values—Imprudential, Inc., has an unfunded pension liability of $450
million that must be paid in 20 years. To assess the value of the firm’s stock, financial analysts
want to discount this liability back to the present. If the relevant discount rate is 5.2 percent, what
is the present value of this liability?
$163,266,738.60
12. Present Value and Multiple Cash Flows—Investment X offers to pay you $5,300 per year
for eight years, whereas Investment Y offers to pay you $7,300 per year for five years. Which of
these cash flow streams has the higher present value if the discount rate is 5 percent?
Investment X
•
If the discount rate is 15 percent?
Investment Y
13. Calculating Annuity Present Value—An investment offers $3,850 per year for 15 years,
with the first payment occurring one year from now. If the required return is 6 percent, what is
the value of the investment?
$37,392.16
•
What would the value be if the payments occurred for 40 years?
$57,928.24
•
For 75 years?
$63,355.02
•
Forever?
$64,166.67
15. Calculating EAR—Find the EAR in each of the following cases:
APR
7.8%
15.3%
12.4%
11.4%
Number of Times Compounded
Quarterly
Monthly
Daily
Infinite
EAR
8.03%
16.42%
13.20%
12.08%
19. Calculating Number of Periods—One of your customers is delinquent on his accounts
payable balance. You’ve mutually agreed to a repayment schedule of $500 per month. You will
charge 1.8 percent per month interest on the overdue balance. If the current balance is $18,000,
how long will it take for the account to be paid off?
58.53 months
25. Calculating Rates of Return—You’re trying to choose between two different investments,
both of which have up-front costs of $65,000. Investment G returns $125,000 in 6 years.
Investment H returns $205,000 in 10 years. Which of these investments has the higher return?
Investment H is higher than G at 12.17% versus 11.51% respectively.
Chapter 5:
1. Calculating Payback Period and NPV—Janina, Inc., has the following mutually exclusive
projects:
Year
0
1
2
3
Project A
Project B
-$20,000
$15,200
$5,900
$2100
-$23,000
$14,300
$8,100
$7,100
a. Suppose the company’s payback period cutoff is two years. Which of these two
projects should be chosen?
Project A because it’s payback period is 1.814 while Project B is 2.085.
b. Suppose the company uses the NPV rule to rank these two projects. Which project
should be chosen if the appropriate discount rate is 15 percent?
At 15% discount rate, Project B wins for having the higher NPV.
6. Calculating IRR—Compute the internal rate of return for the cash flows of the following two
projects:
Year
0
1
2
3
IRR
Project A
-$8,500
$4,250
$3,860
$2,890
15.11%
Project B
-$4,870
$2,360
$2,530
$1,920
19.52%
7. Calculating Profitability Index—Vince plans to open a self-serve grooming center in a
storefront. The grooming equipment will cost $365,000, to be paid immediately. Vince expects
aftertax cash inflows of $79,000 annually for 7 years, after which he plans to scrap the
equipment and retire to the beaches of Nevis. The first cash inflow occurs at the end of the first
year. Assume the required return is 13 percent. What is the project’s PI?
.957
•
Should it be accepted?
No, the PI is less than 1
Chapter 6:
1. Calculating Project NPV—Chauhan Restaurant is considering the purchase of a soufflé
maker that costs $8,600. The soufflé maker has an economic life of five years and will be fully
depreciated by the straight-line method. The machine will produce 1,100 soufflés per year, with
each costing $2.15 to make and priced at $5.95. The discount rate is 14 percent and the tax rate is
21 percent. Should the company make the purchase?
Yes, the company should purchase the soufflé maker, since the NPV is positive—$3,976.75.
7. Project Evaluation—Your firm is contemplating the purchase of a new $535,000 computerbased order entry system. The system will be depreciated straight-line to zero over its five-year
life. It will be worth $30,000 at the end of that time. You will save $165,000 before taxes per
year in order processing costs, and you will be able to reduce working capital by $60,000 (this is
a one-time reduction). If the tax rate is 24 percent, what is the IRR for this project?
16.18%
11. Calculating NPV—Medavoy Co. is considering a new project that complements its existing
business. The machine required for the project costs $3.7 million. The marketing department
predicts that sales related to the project will be $2.65 million per year for the next four years,
after which the market will cease to exist. The machine will be depreciated to zero over its four-
year economic life using the straight-line method. Cost of goods sold and operating expenses
related to the project are predicted to be 40 percent of sales. The company also needs to add net
working capital of $175,000 immediately. The additional net working capital will be recovered in
full at the end of the project’s life. The corporate tax rate is 25 percent and the required return for
the project is 13 percent. Should the company proceed with the project?
Yes, Medavoy Co. should proceed with the project because the Net Present Value (NPV) is
positive.
24. Calculating Project NPV—Market Top Investors, Inc., is considering the purchase of a
$425,000 computer with an economic life of five years. The computer will be fully depreciated
over five years using the straight-line method, at which time it will be worth $35,000. The
computer will replace two office employees whose combined annual salaries are $95,000. The
machine also will immediately lower the firm’s required net working capital by $40,000. This
amount of net working capital will need to be replaced once the machine is sold. The corporate
tax rate is 22 percent. Is it worthwhile to buy the computer if the appropriate discount rate is 9
percent?
It is not worthwhile to buy the computer because the NPV is negative.
Chapter 8:
1. Valuing Bonds—What is the price of a 25-year, zero-coupon bond paying $1,000 at maturity,
assuming semiannual compounding, if the YTM is:
a. 6 percent?
$228.11
b. 8 percent?
$140.71
c. 10 percent?
$87.20
5. Valuing Bonds—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 of €1,000, 27 years to maturity, and a coupon
rate of 3.6 percent paid annually. If the yield to maturity is 3.2 percent, what is the current price
of the bond in euros?
€1,071.60
6. Bond Yields—A Japanese company has a bond outstanding that sells for 96.318 percent of its
¥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?
3.71%
Chapter 9:
1. Stock Values—The RLX Co. just paid a dividend of $3.20 per share on its stock. The
dividends are expected to grow at a constant rate of 4 percent per year indefinitely. If investors
require a return of 10.5 percent on the company’s stock, what is the current price?
$51.20
•
What will the price be in three years?
$57.59
•
In 15 years?
$92.21
4. Stock Values—Five Star Corporation will pay a dividend of $3.04 per share 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?
$41.93
7. Stock Valuation—Hailey Corp. pays a constant $9.45 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 10.7 percent, what is the current share price?
$64.76
8. Valuing Preferred Stock—Fegley, Inc., has an issue of preferred stock outstanding that pays
a $3.80 dividend every year in perpetuity. If this issue currently sells for $93 per share, what is
the required return?
4.09%