# Accounting Three Problems Set 2015

September 28, 2018

Problem
1
Comfort Corp. (SCC) has \$1 billion of capital invested in several
telecommunication projects, which are expected to generate a pre-tax operating
profit of \$170 million next year.SCC has an estimated
pre-tax cost of capital of 15 percent.
Show
a.
What is the pre-tax economic value added (EVA) that SCC is
expected to
generate next year? Calculate EVA first based on pre-tax operating profit and
then based on expected return on invested capital.
b.
SCC is considering five possible actions, which should improve
its expected pre-
tax EVA.These are as follows:
1.
A \$10 million reduction in operating expenses that should not
affect revenue.
2. A \$60
million reduction in invested capital that should not affect operatingprofit.
3.
A re-examination of its capital structure (debt-to-equity ratio) that
could lower its pre-tax cost of capital to 14 percent.
4.
The sale of assets at their book value of \$100 million. These
assets are expected to generate a pre-tax operating profit of \$10 million next
year.
5.
The acquisition of assets of \$100 million.These
assets are expected to generate a pre-tax operating profit of
\$10 million next year.

Problem
2

a proposed project, which lasts three years and has an initial investment of
\$200,000. The after-tax operating cash flows (OCFs) are estimated at \$60,000
for year one, \$120,000 for year two, and \$135,000 for year three.The
firm has a target debt/equity ratio of 1.2. The firm’s cost of equity is 14
percent and its cost of debt is 9 percent.The tax rate is 34

a. Calculate the net
present value. Should the firm accept the project?

b. Calculate the profitability index. Should the firm accept the project?

c. Calculate the payback
method.Should the firm accept the project?

Problem
3

Charles-Baker,
International, Inc.expects sales to increase to \$36 million next year
from \$27 million this year.Its current assets are \$9
million, accounts payable is \$2.7
million, fixed assets are \$9 million, long-term debt is \$3.6 million, owners’
equity is \$11
million, and the earnings after tax-to-sales ratio is 5 percent.Current
assets and
accounts payable can be assumed to increase in the same proportion as sales.
Other
current liabilities are expected to stay at the same level.Net
fixed assets will increase
by \$1 million and the firm plans to pay \$800,000 as dividends.

a. What are Charles-Baker,International,
Inc.’s total financing needs for next year?

b. How much money would
the firm have to borrow to finance its needs?

Get a 30 % discount on an order above \$ 100
Use the following coupon code:
RESEARCH
Positive SSL