Financial

CHAPTER TWO PROBLEMS

1. Last year Rattner Robotics had $5 million in operating income (EBIT). The company had net depreciation expense of $1 million and an interest expense of $1 million; its corporate tax rate was 40 percent. The company has $14 million in current assets and $4 million in non-interest-bearing current liabilities; it has $15 million in net plant and equipment. It estimates that it has an after-tax cost of capital of 10 percent. Assume that Rattner’s only non-cash item is depreciation.

a. What was the company’s net income for the year?

$2.4 million

b. What was the company’s net cash flow?

$3.4 million

c. What was the company’s net operating profit after taxes (NOPAT)?

$3.0 million

d. What was the company’s operating cash flow?

$4.0 million

e. If operating capital in the previous year was $24 million, what was the company’s free cash flow (FCF) for the year?

$2.0 million

f. What was the company’s economic value added?

$500,000

2. As an institutional investor paying a marginal tax rate of 46%, your after-tax dividend yield on preferred stock with a 16% before-tax dividend yield would be:

14.9%

3. A 7% coupon bond issued by the state of New York sells for $1,000 and thus provides a 7% yield to maturity. For an investor in the 40% tax bracket, what coupon rate on a Carter Chemical Company bond that also sells at its $1,000 par value would cause the two bonds to provide the investor with the same after-tax rate of return?

11.67%

4. A corporation with a marginal tax rate of 46% would receive what AFTER-TAX YIELD on a 12% coupon rate preferred stock bought at par?

Answer: 11.172%

5. You have just received financial information for the past two years for Powell Panther Corporation:

Income Statements Ending December 31...