Question 1 Use the data from the following financial statements to answer questi
ID: 2571205 • Letter: Q
Question
Question 1
Use the data from the following financial statements to answer question 1:
Partial Income Statement Year Ending 2011
Sales Revenue
$350,000
COGS
$140,000
Fixed Costs
$ 43,000
SG&A Expenses
$ 28,000
Depreciation
$ 46,000
Partial Balance Sheet 12/31/2010
Assets:
Cash $ 16,000
Liabilities:
Notes Payable
$ 14,000
Accounts Rec. $ 28,000
Accounts Payable
$ 19,000
Inventories $ 48,000
Fixed Assets $368,000 Acc. Depreciation $142,000
Long-Term Debt Owners’ Equity: Retained Earnings
$190,000
$ ???????
Intangible Assets $ 82,000
Common Stock
$130,000
Partial Balance Sheet 12/31/2011
Assets:
Cash $ 26,000
Liabilities:
Notes Payable
$ 12,000
Accounts Rec. $ 19,000
Accounts Payable
$ 24,000
Inventories $ 53,000
Fixed Assets $448,000 Acc. Depreciation $ ???????
Long-Term Debt Owners’ Equity:
Retained Earnings
$162,000
$ ??????
Intangible Assets $ 82,000
Common Stock
$180,000
Complete the partial income statement if the company paid interest expense of $18,000 for 2011 and had an overall tax rate of 40% for 2011.
What are the net fixed assets for the years 2010 and 2011?
Question 2
Your dreams of becoming rich have just come true. You have won the State of Tranquility’s Lottery. The State offers you two payment plans for the $5,000,000 advertised jackpot. You can take annual payments of $250,000 for the next twenty years or $2,867,480 today.
If your investment rate over the next twenty years is 8%, which payoff will you choose?
If your investment rate over the next twenty years is 5%, which payoff will you choose?
At what investment rate will the annuity stream of $250,000 be the same as the lump sum payment of $2,867,480?
Question 3
Using Yahoo! Finance (http://finance.yahoo.com/) and ticker symbol PEP, find PepsiCo’s historical dividend payment and current price. Historical dividends are available in the historical price section. Use these payments to find the annual dividend growth rate. (If you have a quarterly pattern be sure to annualize this quarterly growth rate.) Now, find the required rate of return for this stock, assuming that the future dividend growth rate will remain the same and the company has an infinite horizon. Does this return seem reasonable for PepsiCo?
Question 4
Royal Seattle Investment Club has $100,000 to invest in the equity market. Frasier advocates investing the funds in KSEA Radio with a beta of 1.3 and an expected return of 16%. Niles advocates investing the funds in Northwest Medical with a beta of 1.1 and an expected return of 14%. The club is split 50/50 on the two stocks. You are the deciding vote, and you cannot pick a split of $50,000 for each stock. Before you vote, you look up the current risk-free rate (the 1 year
U.S. Treasury bill with a yield of 3.75%). Which stock do you select?
Sales Revenue
$350,000
COGS
$140,000
Fixed Costs
$ 43,000
SG&A Expenses
$ 28,000
Depreciation
$ 46,000
Partial Balance Sheet 12/31/2010
Assets:
Cash $ 16,000
Liabilities:
Notes Payable
$ 14,000
Accounts Rec. $ 28,000
Accounts Payable
$ 19,000
Inventories $ 48,000
Fixed Assets $368,000 Acc. Depreciation $142,000
Long-Term Debt Owners’ Equity: Retained Earnings
$190,000
$ ???????
Intangible Assets $ 82,000
Common Stock
$130,000
Partial Balance Sheet 12/31/2011
Assets:
Cash $ 26,000
Liabilities:
Notes Payable
$ 12,000
Accounts Rec. $ 19,000
Accounts Payable
$ 24,000
Inventories $ 53,000
Fixed Assets $448,000 Acc. Depreciation $ ???????
Long-Term Debt Owners’ Equity:
Retained Earnings
$162,000
$ ??????
Intangible Assets $ 82,000
Common Stock
$180,000
Explanation / Answer
Ques 1.
Balance sheet for 2010
Retained earnings= 47000 (balancing figure of the balance sheet)
Balance sheet for 2011
Accumulated Depreciation= 142000+46000=188000
Retained earnings= 62000 (balancing figure of the balance sheet)24
Ques 2.
Case 1. If investment rate is 8%
250000*Present Value annuity factor(20 periods,8%) = 250000*9.818147= 2454537
Actual amount received= $ 2867480
Decision: He should accept the lump sum amount of $ 2867480
Case 1. If investment rate is 5%
250000*Present Value annuity factor(20 periods,5%) = 250000*12.46221= $3115553
Actual amount received= $ 2867480
Decision: He should not accept the lump sum amount of $ 2867480
If 250000 is received annually,then solving by intrapolation method for calculating interest rae, IRR would be 6.19063%
Ques 3
Current price of PEP= 114.04
historical dividend average: 0.779
Annual dividend growth rate: (0.805-0.753)/0.753*100*2= 13.81%
By growth model, Price= Expected dividend/(Required return-Growth)
Putting the values, this implies, Required return= 14.61%
Ques 4
By calculating CAPPm return and comparing it with actual returns of the given securities, we have reached to the decision to choose KSEA radio for our investment.
Sales revenue 350000 COGS 140000 Fixed costs 43000 SG & A Expenditure 28000 Depreciation 46000 Profit before interest and tax 93000 Interest 18000 PBT 75000 Tax expense 30000 Profit after taxation 45000Related Questions
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