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 Stewarts 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 companys tax rate
is 35 percent. What is Carbondales TIE ratio? (9 points)
FIN 370Homework 1Chapter 3 & 4Easy: 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 Stewarts 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 companys tax rate
is 35 percent. What is Carbondales TIE ratio? (9 points)