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Question: Daddi Mac, Inc., doesn’t face any

Daddi Mac, Inc., doesn’t face any taxes and has $350 million in assets, currently financed entirely with equity. equity is worth $37 per share, and book value of equity is equal to market value of equity. Also, let’s assume that the firm’s expected values for EBIT are dependent upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows:
Daddi Mac, Inc., doesn’t face any taxes and has $350 million in assets, currently financed entirely with equity. equity is worth $37 per share, and book value of equity is equal to market value of equity. Also, let’s assume that the firm’s expected values for EBIT are dependent upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows:
The firm is considering switching to a 20 percent debt capital structure, and has determined that they would have to pay an 8 percent yield on perpetual debt regardless of whether they change their capital structure. What will be the standard deviation in EPS if they switch to the proposed capital structure?
The firm is considering switching to a 20 percent debt capital structure, and has determined that they would have to pay an 8 percent yield on perpetual debt regardless of whether they change their capital structure. What will be the standard deviation in EPS if they switch to the proposed capital structure?





Transcribed Image Text:

STATE Probability of state RECESSION AVERAGE BOOM 0.55 0.25 0.20 Expected EBIT in state $5 million s10 million S17 million



> Which of the following activities result in an increase (decrease) in a firm’s cash?

> What is the difference between current liabilities and long-term debt?

> Which specific item of a pro forma income statement should be most expected to vary proportionately with sales? Why?

> What does the Sarbanes-Oxley Act require of firm managers?

> What is earnings management?

> Carnival Corp. (CCL) provides cruises to major vacation destinations. Carnival operates 99 cruise ships in North America, Europe, Australia, and Asia. The company also operates hotels, sightseeing motor coaches and rail cars, and luxury day boats. These

> What are free cash flows for a firm? What does it mean when a firm’s free cash flow is negative?

> What is the difference between cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities?

> Why do financial managers and investors find cash flows to be more important than accounting profit?

> The income statement is prepared using GAAP. How does this affect the reported revenue and expense measures listed on the balance sheet?

> How does the payment of interest on debt affect the amount of taxes the firm must pay?

> What is the difference between an average tax rate and a marginal tax rate?

> What do we mean by a progressive tax structure?

> From a firm manager’s or investor’s point of view, which is more important―the book value of a firm or the market value of the firm?

> What does a negative value for AFN mean?

> Why can the book value and market value of a firm differ?

> New York Times Co. (NYT) recently earned a profit of $1.21 per share and has a P/E ratio of 19.59. The dividend has been growing at a 7.25 percent rate over the past six years. If this growth rate continues, what would be the stock price in five years

> What are the costs and benefits of holding liquid securities on a firm’s balance sheet?

> How does the choice of accounting method used to record fixed asset depreciation affect management of the balance sheet?

> On which of the four major financial statements (balance sheet, income statement, statement of cash flows, or statement of retained earnings) would you find the following items?

> List and describe the four major financial statements.

> You are considering a stock investment in one of two firms (All Debt, Inc., and All Equity, Inc.), both of which operate in the same industry and have identical operating income of $12.5 million. AllDebt, Inc., finances its $25 million in assets with $24

> You are considering a stock investment in one of two firms (NoEquity, Inc., and NoDebt, Inc.), both of which operate in the same industry and have identical operating income of $32.5 million. NoEquity, Inc., finances its $65 million in assets with $64 mi

> Mr. Husker’s Tuxedos, Corp. began the year 2018 with $256 million in retained earnings. The firm earned net income of $33 million in 2018 and paid dividends of $5 million to its preferred stockholders and $10 million to its common stockholders. What is t

> In 2018, Usher Sports Shop had cash flows from investing activities of -$4,364,000 and cash flows from financing activities of -$5,880,000. The balance in the firm’s cash account was $1,615,000 at the beginning of 2018 and $1,742,000 at the end of the ye

> The Fitness Studio, Inc.’s 2018 income statement lists the following income and expenses: EBIT = $773,500, interest expense = $100,000, and taxes = $234,500. The firm has no preferred stock outstanding and 100,000 shares of common stock outstanding. Calc

> Everything else held constant, which will be greater: AFN for a firm with excess fixed- asset capacity, or AFN for a firm with no excess fixed-asset capacity? Why?

> Kellogg Co. (K) recently earned a profit of $2.52 per share and has a P/E ratio of 13.5. The dividend has been growing at a 5 percent rate over the past few years. If this growth rate continues, what would be the stock price in five years if the P/E rati

> The Fitness Studio, Inc.’s 2018 income statement lists the following income and expenses: EBIT = $538,000, interest expense = $63,000, and net income = $435,000. Calculate the 2018 taxes reported on the income statement.

> Rebecky’s Flowers 4U, Inc., had free cash flows during 2018 of $43 million, NOPAT of $85 million, and depreciation of $14 million. Using this information, fill in the blanks on Rebecky’s balance sheet below.

> You have been given the following information for Patty Cake’s Athletic Wear Corp. for the year 2018: a. Net sales = $38,250,000. b. Cost of goods sold = $22,070,000. c. Other operating expenses = $5,300,000. d. Addition to retained earnings = $1,195,500

> Listed below is the 2018 income statement for Tom and Sue Travels, Inc.

> Jamaica Tours, Inc., started the year with a balance of retained earnings of $1,780 million. The company reported net income for the year of $284 million and paid dividends of $17 million to the preferred stockholders and $59 million to common stockholde

> Thelma and Louie, Inc., started the year with a balance of retained earnings of $543 million and ended the year with retained earnings of $589 million. The company paid dividends of $35 million to the preferred stockholders and $88 million to common stoc

> The 2018 income statement for Egyptian Noise Blasters shows that depreciation expense is $85 million, NOPAT is $246 million. At the end of the year, the balance of gross fixed assets was $655 million. The change in net operating working capital during th

> The 2018 income statement for Duffy’s Pest Control shows that depreciation expense was $197 million, EBIT was $494 million, and the tax rate was 30 percent. At the beginning of the year, the balance of gross fixed assets was $1,562 million and net operat

> Dogs 4 U Corporation has net cash flow from financing activities for the last year of $34 million. The company paid $178 million in dividends last year. During the year, the change in notes payable on the balance sheet was $39 million, and change in comm

> Chris’ Outdoor Furniture, Inc., has net cash flows from operating activities for the last year of $340 million. The income statement shows that net income is $315 million and depreciation expense is $46 million. During the year, the change in inventory o

> A firm does not pay a dividend. It is expected to pay its first dividend of $0.25 per share in two years. This dividend will grow at 10 percent indefinitely. Using an 11.5 percent discount rate, compute the value of this stock.

> Can the procedure described in this chapter for adjusting for seasonality apply to periods longer than a year? How?

> Use the balance sheet and income statement below to construct a statement of cash flows for Valium’s Medical Supply Corporation. Valium's Medical Supply Corporation Balance Sheet as of December 31, 2018 and 2017 (in thousands of dol

> Use the balance sheet and income statement below to construct a statement of cash flows for Clancy’s Dog Biscuit Corporation. / Dividends per share (DPS) $0.60 $0.60 Book value per share (BVPS) $13.60 $11.20 Market value (price) pe

> Suppose that in addition to $17.85 million of taxable income, Texas Taco, Inc., received $1,105,000 of interest on state-issued bonds and $760,000 of dividends on common stock it owns in Arizona Taco, Inc. a. Use the tax schedule in Table 2.3 to calcula

> The Dakota Corporation had a 2018 taxable income of $33,365,000 from operations after all operating costs but before (1) interest charges of $8,500,000; (2) dividends received of $750,000; (3) dividends paid of $5,250,000; and (4) income taxes. a. Use t

> Consider a firm with an EBIT of $10,500,000. The firm finances its assets with $50,000,000 debt (costing 6.5 percent) and 10,000,000 shares of stock selling at $10.00 per share. The firm is considering increasing its debt by $25,000,000, using the procee

> Consider a firm with an EBIT of $1,000,000. The firm finances its assets with $4,500,000 debt (costing 8 percent) and 200,000 shares of stock selling at $16.00 per share. To reduce risk associated with this financial leverage, the firm is considering red

> You have been given the following information for Moore’s HoneyBee Corp.: a. Net sales = $32,000,000. b. Gross profits = $18,700,000. c. Other operating expenses = $2,500,000. d. Addition to retained earnings = $4,700,000. e. Dividends paid to preferred

> You have been given the following information for Corky’s Bedding Corp.: a. Net sales = $11,250,000. b. Cost of goods sold = $7,500,000. c. Other operating expenses = $250,000. d. Addition to retained earnings = $1,000,000. e. Dividends paid to preferred

> Value Ava’s Spin Ball Corp. lists fixed assets of $12 million on its balance sheet. The firm’s fixed assets have recently been appraised at $16 million. Ava’s Spin Ball Corp.’s balance sheet also lists current assets at $5 million. Current assets were ap

> Muffin’s Masonry, Inc’s balance sheet lists net fixed asset as $14 million. The fixed assets could currently be sold for $19 million. Muffin’s current balance sheet shows current liabilities of $5.5 million and net working capital of $4.5 million. If all

> If a firm needs to keep a minimum cash balance on hand and faces both cash inflows and outflows, which of the cash management models discussed in this chapter would be more appropriate for it to use?

> Glen’s Tobacco Shop has total assets of $91.8 million. Fifty percent of these assets are financed with debt of which $28.9 million is current liabilities. The firm has no preferred stock but the balance in common stock and paid-in surplus is $20.4 millio

> Brenda’s Bar and Grill has total assets of $15 million of which $5 million are current assets. Cash makes up 10 percent of the current assets and accounts receivable makes up another 40 percent of current assets. Brenda’s gross plant and equipment has a

> Use the following information to find dividends paid to common stockholders during 2018.

> Tater and Pepper Corp. reported free cash flows for 2018 of $39.1 million and investment in operating capital of $22.1 million. Tater and Pepper incurred $13.6 million in depreciation expense and paid $28.9 million in taxes on EBIT in 2018. Calculate Tat

> You are considering an investment in Fields and Struthers, Inc., and want to evaluate the firm’s free cash flow. From the income statement, you see that Fields and Struthers earned an EBIT of $62 million, had a tax rate of 30 percent, and its depreciatio

> Ramakrishnan Inc. reported 2018 net income of $15 million and depreciation of $2,650,000. The top part of Ramakrishnan, Inc.’s 2018 and 2017 balance sheets is listed below (in millions of dollars).

> Hunt Taxidermy, Inc., is concerned about the taxes paid by the company in 2018. In addition to $42.4 million of taxable income, the firm received $2,975,000 of interest on state-issued bonds and $1,000,000 of dividends on common stock it owns in Oakdale

> Oakdale Fashions, Inc., had $245,000 in 2018 taxable income. Using the tax schedule in Table 2.3, calculate the company’s 2018 income taxes. What is the average tax rate? What is the marginal tax rate?

> A firm does not pay a dividend. It is expected to pay its first dividend of $0.20 per share in three years. This dividend will grow at 11 percent indefinitely. Using a 12 percent discount rate, compute the value of this stock.

> What’s the source of firm-specific risk? What’s the source of market risk?

> Consider a firm with an EBIT of $550,000. The firm finances its assets with $1,000,000 debt (costing 5.5 percent) and 200,000 shares of stock selling at $12.00 per share. The firm is considering increasing its debt by $900,000, using the proceeds to buy

> Consider a firm with an EBIT of $850,000. The firm finances its assets with $2,500,000 debt (costing 7.5 percent) and 400,000 shares of stock selling at $5.00 per share. To reduce firm’s risk associated with this financial leverage, the firm is consideri

> What is the theoretical minimum value for MAPE?

> You own $15,000 of Opsware, Inc. stock that has a beta of 3.8. You also own $10,000 of Lowe’s Companies (beta = 1.6) and $10,000 of New York Times (beta = 0.8). Assume that the market return will be 12 percent and the risk-free rate is 6 percent. What is

> Casello Mowing & Landscaping’s year-end 2018 balance sheet lists current assets of $435,200, fixed assets of $550,800, current liabilities of $416,600, and long-term debt of $314,500. Calculate Casello’s total stockholders’ equity.

> You are evaluating the balance sheet for Goodman’s Bees Corporation. From the balance sheet you find the following balances: cash and marketable securities = $400,000, accounts receivable = $1,200,000, inventory = $2,100,000, accrued wages and taxes = $5

> Vinny’s Overhead Construction had free cash flow during 2018 of $25.4 million. The change in gross fixed assets on Vinny’s balance sheet during 2018 was $7.0 million and the change in net operating working capital was $8.4 million. Using this information

> Shown below are partial financial statements for Garners’ Platoon Mental Health Care, Inc. Fill in the blanks on the four financial statements. Garners’ Platoon Mental Health Care, Inc. Statement of Cash Flows for Yea

> A firm has an ROE of 20 percent. The industry average ROE is 12 percent. Is this a good or poor sign about the management of the firm?

> What is the difference between time series analysis and cross-sectional analysis?

> Paychex Inc. (PAYX) recently paid an $0.84 dividend. The dividend is expected to grow at a 15 percent rate. At a current stock price of $40.11, what is the return shareholders are expecting?

> Why is it important to know a firm’s accounting rules before making any conclusions about its performance from ratios analysis?

> What information does time series and cross-sectional analysis provide for firm managers, analysts, and investors?

> What is the difference between the internal growth rate and the sustainable growth rate?

> A firm has an ROE of 10 percent. The industry average ROE is 15 percent. How can the DuPont system of analysis help the firm’s managers identify the reasons for this difference?

> What approach should be used to forecast sales if a firm believes that sales will increase over time?

> Why is the DuPont system of analysis an important tool when evaluating firm performance?

> A firm has a debt ratio of 20 percent. The industry average debt ratio is 65 percent. Is this a good or poor sign about the management of the firm’s financial leverage?

> A firm has an average collection period of 10 days. The industry average ACP is 25 days. Is this a good or poor sign about the management of the firm’s accounts receivable?

> Explain the meaning and significance of the following ratios

> For each of the following actions, determine what would happen to the current ratio. Assume nothing else on the balance sheet changes and that net working capital is positive.

> Ecolap, Inc. (ECL) recently paid a $0.46 dividend. The dividend is expected to grow at a 14.5 percent rate. At a current stock price of $44.12, what is the return shareholders are expecting?

> Classify each of the following ratios according to a ratio category (liquidity ratio, asset management ratio, debt management ratio, profitability ratio, or market value ratio).

> What does it mean when a firm window dresses its financial statements?

> You are evaluating the balance sheet for Patty Cake’s Corporation. From the balances heet you find the following balances: cash and marketable securities = $400,000; accounts receivable = $1,200,000; inventory = $2,100,000; accrued wages and taxes = $500

> Using the ratios from question 3-30 for Lake of Egypt Marina, Inc. and the industry, what can you conclude about Lake of Egypt Marina’s financial performance for 2018.

> Calculate the internal and sustainable growth rate for Lake of Egypt Marina, Inc.

> What is the optimal length of time over which to take an average of historic sales when using the average approach?

> Construct the DuPont ROA and ROE breakdowns for Lake of Egypt Marina, Inc.

> Dogs R Us reported a profit margin of 10.5 percent, total asset turnover of 0.75 times, debt-to-equity of 0.80 times, net income of $500,000, and dividends paid to common stockholders of $200,000. The firm has no preferred stock outstanding. What is Dogs

> You are thinking of investing in Nikki T’s, Inc. You have only the following information on the firm at year-end 2018: net income is $250,000, total debt is $2.5 million, and debt ratio is 55 percent. What is Nikki T’s ROE for 2018?

> You have the following information on Els’ Putters, Inc.: sales to working capital is 4.6 times, profit margin is 20 percent, net income available to common stockholders is $5 million, and current liabilities are $6 million. What is the firm’s balance of

> Financial analysts forecast Limited Brands’ (LTD) growth rate for the future to be 12.5 percent. LTD’s recent dividend was $0.60. What is the value of Limited Brands’ stock when the required return is 14.5 percent?

> Brenda’s Bar and Grill has current liabilities of $15 million. Cash makes up 10 percent of the current assets and accounts receivable makes up another 40 percent of current assets. Brenda’s current ratio is 2.1 times. Calculate the value of inventory li

> Last year, Lakesha’s Lounge Furniture Corporation had an ROE of 17.5 percent and a dividend payout ratio of 20 percent. What is the sustainable growth rate?

> Last year, Lakesha’s Lounge Furniture Corporation had an ROA of 7.5 percent and a dividend payout ratio of 25 percent. What is the internal growth rate?

> Last year, Hassan’s Mad hatter, Inc. had an ROA of 7.5 percent, a profit margin of 12 percent, and sales of $25 million. Calculate Hassan’s Mad hatter’s total assets.

> If Silas 4-Wheeler, Inc. has an ROE of 18 percent, equity multiplier of 2, and a profit margin of 18.75 percent, what is the total asset turnover and the capital intensity?

> Dudley Hill Golf Club’s market-to-book ratio is currently 2.5 times and the PE ratio is 6.75 times. If Dudley Hill Golf Club’s common stock is currently selling at $22.50 per share, what is the book value per share and earnings per share?

2.99

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