Finance-Mayflower’s current balance sheet shows total common equity of $7,835,000.

| January 31, 2017

Question
FIN 370

Homework 1

Chapter 3 & 4

Easy:

1. Mayflower’s current balance sheet shows total common equity of $7,835,000. The company has 287,000 shares of stock outstanding, and they sell at a price of $37.95 per share. By how much do the firm’s market and book values per share differ? (7 points)

2. Star River Co. Ltd. recently reported operating income of $3.25 million, depreciation of $1.90 million, and had a tax rate of 40%. The firm’s expenditures on fixed assets and net operating working capital totaled $0.8 million. How much was its free cash flow, in millions? (7 points)

3. Almond Electric recently reported $30,800 of sales, $13,780 of operating costs other than depreciation, and $2,950 of depreciation. It had $12,000 of bonds outstanding that carry a 8.0% interest rate, and its federal-plus-state income tax rate was 40%. How much was the firm’s earnings before taxes (EBT)? (7 points)

4. Precision Aviation had a profit margin of 10.45%, a total assets turnover of 1.35, and an equity multiplier of 2.5. What was the firm’s ROE? (7 points)

5. Mason Corp’s sales last year were $578,000, its operating costs were $434,500, and its interest charges were $15,800. What was the firm’s times-interest-earned (TIE) ratio? (7 points)

Medium:

6. Last year, Stewart-Stern Inc. reported $11,250 of sales, $4,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had $3,500 of bonds outstanding that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. During last year, the firm had expenditures on fixed assets and net operating working capital that totaled $2,000. These expenditures were necessary for it to sustain operations and generate future sales and cash flows. This year’s data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $725. By how much will the depreciation change cause (1) the firm’s net income and (2) its free cash flow to change? Note that the company uses the same depreciation for tax and stockholder reporting purposes. (8 points)

7. Stanley Corp’s sales last year were $778,000, and its year-end total assets were $605,000. The average firm in the industry has a total assets turnover ratio (TATO) of 1.8. The firm’s new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant? (8 points)

Challenging:

8. Stewart Corp. has the following data:

Assets $1,200,000

Profit margin 12.0%

Tax rate 40%

Debt ratio 40.0%

Interest rate 8.0%

Total assets turnover 3.5

What is Stewart’s EBIT? (9 points)

9. Carbondale Industry has total assets of $250 million. Its basic earning power is 28 percent, its return on assets (ROA) is 13 percent, and the company’s tax rate is 35 percent. What is Carbondale’s TIE ratio? (9 points)

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