Build a Model

3-1

An investor recently purchased a corporate bond which yields 9%. The investor is in

the 36% combined federal and state tax bracket. What is the bond’s after-tax yield?

Corporate bonds issued by Johnson Corporation currently yield 8%. Municipal

bonds of equal risk currently yield 6%. At what tax rate would an investor be

indifferent between these two bonds

3-2

Corporate bonds issued by Johnson Corporation currently yield 8%. Municipal

bonds of equal risk currently yield 6%. At what tax rate would an investor be

indifferent between these two bonds

3-3

Little Books Inc. recently reported $3 million of net income. Its EBIT was $6 million,

and its tax rate was 40%. What was its interest expense? [Hint: Write out the

headings for an income statement and then fill in the known values. Then divide

$3 million net income by (1–T) _ 0.6 to find the pre-tax income. The difference

between EBIT and taxable income must be the interest expense. Use this same

procedure to work some of the other problems.]

3-5

Kendall Corners Inc. recently reported net income of $3.1 million and depreciation

of $500,000. What was its net cash flow? Assume it had no amortization expense.

4-7

Ace Industries has current assets equal to $3 million. The company’s current ratio

is 1.5, and its quick ratio is 1.0. What is the firm’s level of current liabilities? What

is the firm’s level of inventories

4-8

Assume you are given the following relationships for the Clayton Corporation:

Sales/total assets 1.5_

Return on assets (ROA) 3%

Return on equity (ROE) 5%

4-9

The Nelson Company has $1,312,500 in current assets and $525,000 in current liabilities.

Its initial inventory level is $375,000, and it will raise funds as additional

notes payable and use them to increase inventory. How much can Nelson’s shortterm

debt (notes payable) increase without pushing its current ratio below 2.0?

What will be the firm’s quick ratio after Nelson has raised the maximum amount...