# The Following Free Cash Flows (FCFs) During The Next 3 Years, After Which FCF Is Expected To Grow At A Constant 7% Rate

**BA 350 Week 8 Final Exam Sum ( 100% Correct Solution + Steps by Steps Calculation with details *****)**

**2-4 – (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?

**2-7 – (Corporate Tax Liability)**

The Talley Corporation had a taxable income of $365,000 from operations after all operating costs but before (1) interest charge of $50,000, (2) dividends received of $15,000, (3) dividends paid of $25,000, and (4) income taxes. What are the company’s marginal and average tax rates on taxable income?

**Chapter 3 Problem 3-8, 3-10**

**3-8 – (Profit Margin and Debt Ratio)**

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% Calculate Clayton’s profit margin and debt ratio.

**3-10 – (Times-interest-earned ratio)**

The Manor Corporation has $500,000 of debt outstanding, and it pays an interest rate of 10% annually: Manor’s annual sales are $2 million, its average tax rate is 30%, and its net profit margin on sales is 5%. If the company does not maintain a TIE ratio of at least 5 to 1, then its bank will refuse to renew the loan and bankruptcy will result. What is Manor’s TIE ratio?

**Chapter 12 Problem 12.1 12-4**

**12.1 – (AFN Equation)**

Baxter Video Product’s sales are expected to increase by 20% from $5 million in 2010 to $6 million in 2011. Its assets totaled $3 million at the end of 2010. Baxter is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2010, current liabilities were$1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals. The after-tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 70%. Use the AFN equation to forecast Baxter’s additional funds needed for the coming year.

**12-4 – (Sales Increase)**

Bannister Legal Services generated $2,000,000 in sales during 2010, and its year-end total assets were $1,500,000. Also, at year-end 2010, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accruals. Looking ahead to 2011, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 5%, and its payout ratio will be 60%. How large a sales increase can the company achieve without having to raise funds externally; that is, what is its self-supporting growth rate?

**Chapter 13 Problem 13-6, 13-7, 13-8**

**13-6:**

Brooks Enterprises has never paid a dividend. Free cash flow is projected to be

$80,000 and $100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 8%. The company’s weighted average cost of capital is 12%.

**a.**What is the terminal, or horizon, value of operations? (Hint: Find the value of all free cash flows beyond Year 2 discounted back to Year 2.)

b. Calculate the value of Brooks’s operations.

**13- 7**

Dozier Corporation is a fast growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 7% rate. Dozier’s weighted average cost of capital is WACC = 13%.

YEAR

1 2 3

Free Cash Flow ($millions) -$20 $30 $40

a.) What is Dozier’s terminal, or horizon, value? (Hint: Find the value of all free cash flows beyond year 3 discounted back to Year 3.)

b.) What is the current value of operations for Dozier?

c.) Suppose Dozier has $10 million in marketable securities, $100 million in debt, and 10 million shares of stock. What is the intrinsic price per share?

**13.8**

The balance sheet of Hutter Amalgamated is shown below. If the 12/31/2010 value of operations is $756 million, what is the 12/31/2010 intrinsic market value of equity?

Assets Liabilities and Equity

Cash $20.0 Accounts Payable $19.0

Marketable securities 77.0 Notes Payable 151.0

Accounts receivable 100.0 Accruals 51.0

Inventories 200.0 Total current liabilities $221.0

Total current assets $397.0 Long term bonds 190.0

Net Plant and equipment 279.0 Preferred stock 76.0

Common stock

(par plus PIC) 100.0

Retained earnings 89.0

Common equity $189.0

Total Assets $676.0 Total liabilities $676.0

**Chapter 4 Problem 4-4, 4-5, 4-20, 4-22**

**4-4:**

If you deposit money today in an account that pays 6.5% annual interest, how long will it take to double your money?

**4-5:**

You have $42,180.53 in a brokerage account, and you plan to deposit an additional $5,000 at the end of every future year until your account totals $250,000. You expect to earn 12% annually on the account. How many years will it take to reach your goal?

**4-20:**

a. Set up an amortization schedule for a $25,000 loan to be repaid in equal instalments at the end of each of the next 5 years. The interest rate is 10%.

b. How large must each annual payment be if the loan is for $50,000? Assume that the interest rate remains at 10% and that the loan is still paid off over 5 years.

c. How large must each payment be if the loan is for $50,000, the interest rate is 10%, and the loan is paid off in equal installments at the end of each of the next 10 years? This loan is for the same amount as the loan in part b, but the payments are spread out over twice as many periods. Why are these payments not half as large as the payments on the loan in part b?

**4-22:**

Washington-Pacific invested $4 million to buy a tract of land and plant some young pine trees. The trees can be harvested in 10 years, at which time W-P plans to sell the forest at an expected price of $8 million. What is W-P’s expected rate of return?

**Chapter 5 Problem 5-15, 5-21**

**5**

**-15;**

Absalom Motors’s 14% coupon rate, semiannual payment, $1,000 par value bonds that mature in 30 years are callable 5 years from now at a price of $1,050. The bonds sell at a price of $1,353.54, and the yield curve is flat. Assuming that interest rates in the economy are expected to remain at their current level, what is the best estimate of the nominal interest rate on new bonds?

**5-21:**

Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10% coupon rate, and semiannual interest payments.

a. Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6%. At what price would the bonds sell?

b. Suppose that, 2 years after the initial offering, the going interest rate had risen to 12%. At what price would the bonds sell?

c. Suppose, as in part a, that interest rates fell to 6%, 2 years after the issue date. Suppose further that the interest rate remained at 6% for the next 8 years. What would happen to the price of the bonds over time?

**Chapter 6 Problem 6-4, 6-10**

**6-4:**

A stock’s returns have the following distribution:Demand for Probability of Rate of return

Company’s this Demand if this demand

Products Occuring Occurs

Weak 0.1 (50%)

Below Average 0.2 (5)

Average 0.4 16

Above average 0.2 25

Strong 0.1 60

1.0

Calculate the stock’s expected return, standard deviation, and coefficient of variation.

**6-10:**

You have a $2 million portfolio consisting of a $100,000 investment in each of 20different stocks. The portfolio has a beta of 1.1. You are considering selling $100,000 worth of one stock with a beta of 0.9 and using the proceeds to purchase another stock with a beta of 1.4. What will the portfolio’s new beta be after these…

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