Question 1 (Income Statement, Operating Cash Flow, and Sustainable Growth Rate):

During the year, the Senbet Discount Tire Company has gross sales of $1.3million. The firm's cost of goods sold and the selling expenses were $450,000 and $225,000, respectively. Senbet also has interest expenses of $150,000. Depreciation was $110,000. Senbet's tax rate was 35 percent. The company has a total equity of $2 million.

a. What was Senbet's net income?
b. What was Senbet's operating cash flow?
c. If the company paid out $100,000 as dividends, what was the dividend payout ratio, retention ratio?
d. What was Senbet's ROE?
e. What was Senbet's sustainable growth rate?

Question 2 (Annuities):

You have recently won the super jackpot in the Washington State Lottery. On reading the fine print, you discover that you have the following two options:

a. You will receive 31 annual payments of $175,000, with the first payment being delivered one year from today. The income will be taxed at a rate of 28 percent. Tax will be withheld when the checks are issued.

b. Beginning today, you will receive $125,000 each year for 30 years. The cash flow from this annuity will be taxed at 28 percent. You will also receive $530,000 at the end of year 30 which you will not have to pay tax on this amount.

Using a discount rate of 10 percent, which option should you select?

Question 3 (Comparing Investment Criteria):

Mario Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as an interactive CD-ROM, but not both. Consider the following cash flows of the two mutually exclusive projects for Mario Brothers. Assume the discount rate for Mario Brothers is 8 percent.

a. Based on the payback period rule, which project should be chosen?

b. Based on the NPV, which project should be chosen?

c. Based on the IRR, which project should be chosen?

Question 4 (Calculating Nominal Cash Flow):

Etonic Inc. is considering an investment of $300,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $200,000 and $50,000, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 3 percent. Etonic will use the straight-line method to depreciate its asset to zero over five years. Depreciation is a nominal cash flow, so it does not need to be adjusted for inflation in nominal cash flow analysis. The salvage value of the asset is estimated to be $20,000 in nominal terms at that time. The one-time net working capital investment of $20,000 is required immediately and will be recovered at the end of the project. All corporate cash flows are subject to a 40 percent tax rate.

a. What is the after tax salvage value?
b. What is the project's total nominal cash flow from assets for each year?
c. Given the discount rate of 10%, what is the NPV of the project?

Question 5 (Bond Yields):

Pembroke Co. wants to issue new 20-year bonds for some much needed expansion projects. The company currently has 8 percent coupon bonds on the market that sell for $983, making annual payments, and mature in 20 years. What coupon rate should the company set on its new bonds if it wants to sell them to sell at par?