Chapter 3 Questions

(3-1) Personal After-Tax Yield 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?

9%(1 ' 0.36) = 5.76% or 5.8%

(3-3) Income Statement 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.]

EBIT = 6000000, Taxes = .4, Pre-tax income = net income/ (1-tax)

X = 3000000/.6 = 5000000

Interest expense= EBIT ' pretax income = 6000000 ' 5000000

Interest expense = $1 million

(3-4) Income Statement Pearson Brothers recently reported an EBITDA of $7.5 million and net income of $1.8 million. It had $2.0 million of interest expense, and its corporate tax rate was 40%. What was its charge for depreciation and amortization?

EBIT = 7500000, Tax = .4, Net income = 1800000, interest expense = 2000000,

Pretax = 1800000/.6 = 3000000

2000000 = 7500000 ' 3000000

DA = 7500000- 3000000 ' 2000000

Depreciation and amortization = 2500000 = $2.5 million

(3-5) Income Statement 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.

Net cash flow = Net income + Depreciation and amortization

Net Inc. = 3100000, Depreciation = 500000

NCF = 3100000 + 500000

NCF = 3600000 = $3.6 million

(3-6) Statement of Retained Earnings In its most recent financial statements, Newhouse Inc. reported $50 million of net income and $810 million of retained earnings. The previous retained earnings were $780 million. How much in...