Download finance study notes very helpful and more Study notes Corporate Finance in PDF only on Docsity!
Handout Chapter 3
1. Debt-equity ratio of 78 percent, total asset turnover of 1.24, and a profit margin of 11 percent. The
total equity is $400,000. What is the amount of the net income?
D/E = 0.78, Then EM=TA/TE= 1.78, then TA= 1.78 x 400,000 = 712,
TAT = 1.24=S/TA = S/712,
S = 882,
PM=NI/S = 0.11 = NI/882,
NI = 97,116.
2. Debt-equity ratio of 50 percent, sales of $500,000, EBIT of $200,000, net income of $50,000, and total
debt of $250,000. What is the return on equity?
ROE = PM x TAT x EM
D/E 0.50 = 250,000/E, then E = 500,
EM = 1 + D/E = 1.
EM = 1.5 = TA/TE= TA/500,000 , then TA = 750,
PM = 50,000/500,000 = 0.
TAT = S/TA = 50 0 ,000/750,000 = 0.
ROE = 0.10 X 0.67 X 1.5 = 0.1 0
3. Net income of $200,000, dividends of $100,000, EBIT of $300,000, price-earnings ratio of 12.0, and
earnings per share of $1.50. How many shares of stock are outstanding?
EPS =NI/# of shares
1.5 = 200,000/ # of shares
# of shares = 133,333.
Handout Chapter 5
___D_____ 1. Cornerstone Bank pays interest of 3.5 percent compounded annually. Uptown Bank pays 3. percent simple interest. Which one of the following statements is true if you invest $1,000 in each bank for five years? a. Cornerstone Bank will pay you a total of $176.59 in interest over the five years. b. Uptown Bank will pay you $15.30 less interest over the five years than Cornerstone Bank will. c. Cornerstone Bank will pay you a total of $175.00 in interest over the five years. d. Uptown Bank will pay you $0.19 less interest than Cornerstone Bank over the five years.
____C____ 2. Rosa wants to have $50,000 in her investment account fifteen years from now. How much does she have to deposit today to achieve her goal if she can earn 9.5 percent compounded annually? a. $10,218.47 b. $12,524.76 c. $12,816.17 d. $13,726.
___A_____ 3. Carlos has $2,413 saved today. He wants to buy a different vehicle as soon as he has $2, saved. How long does he have to wait to get his vehicle if he earns 4.5 percent compounded annually? a. 2.55 years b. 2.67 years c. 2.78 years d. 3.09 years
____B____ 4. ABC Co. currently pays an annual dividend of $2.60 per share. At what rate must the company increase the dividend if they want to pay $3.20 a share four years from now? a. 5.27 percent b. 5.33 percent c. 5.41 percent d. 5.54 percent
___D_____ 5. Sun borrows $13,500 today at 7.90 percent compounded annually. The terms of the loan require him to repay the principal and interest in one lump sum three years from today. How much will he have to pay in three years? a. $16,528.28 b. $16,666.67 c. $16,874.16 d. $16,958.
____B____ 6. All else equal, the present value _____ as the period of time increases. a. increases b. decreases c. remains constant
___A_____ 7. You have been offered a business opportunity that will pay you $57,000 in six years if you invest $25,000 today. What is the expected rate of return on this investment? a. 14.72 percent b. 15.36 percent c. 15.78 percent d. 16.22 percent
____B____ 8. According to the Rule of 72, how long will it take to double your money if you can earn a 12 percent rate of return? a. 4 years b. 6 years c. 7.2 years d. 8 years
____C____ 9. Five years ago, Leslie had $23,460 in her savings account. Today, she deposited an additional $6,000. She plans to deposit another $6,000 into this account next year. How much money will she have in her account ten years from today if she earns 7.5 percent on her savings? a. $39,560.96 b. $73,084.18 c. $93,284.88 d. $104,921.
____B____ 10. One hundred years ago, your great-grandfather purchased a 300-acre farm for the princely sum of $2,500. Today, that farm is still owned by your family and is currently valued at $1.8 million. What rate of return has your family on this investment by your great-grandfather? a. 5.72 percent b. 6.80 percent c. 7.03 percent d. 7.47 percent
