1. C.F. Lee Inc. has the following income statement. How much after tax operatin

Question

1. C.F. Lee Inc. has the following income statement. How much after tax operating income does the firm have? Show your work to get full credit. (8pts) Sales $3,100.00 Costs $1,850.00 Depreciation 192.00 _______________________ EBIT $1,058.00 Interest Expense 285.00 _______________________ EBT $773.00 Taxes(35%) 270.55 ________________________ Net Income $502.45 2. Amit Patel is planning to invest $10,000 in a bank certificate of deposit (CD) for five years. The CD will pay interest of 9%. What is the future value of Amit’s investment? Show your work. (5pts) 3. What is the purpose of using common size balance sheets and common size income statements? 23. You purchased the stock of Sargent Motors at a price of $75.75 one year ago today. If you sell the stock today for $89.00, what is your holding period return? a. 35% b. 17.5% c. 12.5% d. 25% 6. Megn Gaumer expects to need $50,000 as a down payment on a house in six years. How much does she need to invest today in an account paying 7.25 percent? Show your work. (6pts 4. Using the following information for McDonovan, Inc’s stock, calculate their expected return and standard deviation. Show your work. (10pts) State Probability Return Boom 20% 40% Normal 60% 15% Recession 20% (-20%) 17. Which of the following best represents cash flow to investors? a. Cash flow from operating activities, plus cash flow generated from net working capital b. Earnings before interest and taxes times 1 minus the firm’s tax rate c. Net income minus dividends paid to preferred stockholders. d. Cashflow from operating activity minus cash flow invested in net working capital minus cash flow invested in long-term assets.

Explanation / Answer

1. $687.70

Soultion:

Sales $3,100.00
Costs 1,850.00
Depreciation 192.00
EBIT $1,058.00
Interest expense 285.00
EBT $773.00
Taxes : rate = 35% 270.55
Net income $502.45

EBIT $1,058.00
Tax rate 35%

Hence,
EBIT(1 - T) = $687.70 ......Answer

2.

Soultion:

Given,

Present value of Investment (PV) = $10,000

Interest rate (i) = 9%

Number of years (n) = 5

As per the formula;

FVn = PV(1 + i)n

Hence,

FV5 = 10,000(1 + 0.09)5

= $ 15,386.24 ......Answer

3. The purpose of using common size balance sheets and common size income statements is to understand expression as a percentage of total assets in balance sheets with expression as percentage of total revenue in income statements.

4. b. 17.5%

5.

Solution:

Given,

Amount needed after 6 years (FV) = $50,000

Number of years (n) = 6

Interest rate (i) = 7.25%

PV = ?

According to formula;

PV = FVn/(1 + i )n

PV = 50000 / (1 + 0.0725)6

= $32,853.85 .....Answer

6.

Expected return and standard deviation

Soultion:

Lets keep the given values in below formula

Ki = (Ki)(Pi)

= (.20)(40%) + (.60)(15%) + (.20)(-20%) ....... (recession to be subtracted)
= 8% + 9% - 4%

= 13% ..... Answer

Let's use the following formula for STandard Deviation

i = ((Ki - K)2Pi).5

Hence after keeping values
i = ((40%-13%)2(.2) + (15%-13%)2 (.6) + (-20%-13%)2 (.2)).5

= 19.13% .....Answer

7. D.

Cash flow representation to investors : Cash flow from operating activity - cash flow invested in working capital - Cash flow invested in long term assets

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