Question

1. A company reported $15,000 of sales, $5,000 of operating costs other than depreciation, and $1,000 of depreciation. It had $4,000 of bonds that carry a 5% interest rate, and its tax rate was 40%. How much was its net cash flow? a. $6,280 b. $4,208 C. $5,280 Last year a company had sales of $400,000, operating costs of $300,000, and year-end assets of $200,000. The debt-to-total-assets ratio was 30%, the interest rate on the debt was 6%, and the tax rate was 40%. The new CFO wants to see how the ROE would have been affected if the firm had used a 40% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant. How much would the ROE change in terms of percentage points in response to the change in the capital structure? a. 6.29% increase b. 22% decrease c. 6.29% decrease 3. A business is expected to pay a dividend of $2.00 per share at the end of the year, and that dividend is expected to grow at a constant rate of 3% per year in the future. The company's beta is 0.75, the market return is 6%, and the risk-free rate is 3%. What is the current stock price? 4. Use the following information to compute the AFN. Dollars are in millions. $300 10% $500 4.00% Last year's A/P Last year's N/P Last year's accruals Target payout ratio $40 $50 $30 40% Last year's sales = So Sales growth rate = g Last year's total assets = A* Last year's profit margin = PM a. $35.08 b. $108.2 C. $119.9 5. A company has no debt in its capital structure and has $200 million in assets. Its sales revenues last year were $100 million with a net income of $10 million. The company distributed $2 million as dividends to its shareholders last year. What is the firm's self-supporting growth rate? a. 2.31% b. 4.17% c. 1.08%

Answer 1

Calculate the net cash flows as follows:

А. В 7 Particulars Amount 8 Sales $15,000 9 Operating cost $5,000 10 Depreciation $1,000 11 Interest $200 12 EBIT $8,800 13 Tax @ 40% $3,520 14 Net income $5,280 15 Depreciation $1,000 16 Net cash flows $6,280

Formulas:

А. В 7 Particulars Amount 8 Sales 15000 9 Operating cost 5000 10 Depreciation 1000 11 Interest =4000*5% 12 EBIT =B8-B9-B10-B11 13 Tax @ 40% =B12*40% 14 Net income =B12-B13 15 Depreciation =B10 16 Net cash flows =B14+B15