Short Answer Questions
1 Gitman Corp's total assets are $1.2 million, while their total assets turnover is 2.35. Total debt is $600,000. The company's return on equity is 14.1%. What is the company's profit margin?
2 What is the value of any productive asset based on (equal to)?
3 Franklin Enterprises has just borrowed $150,000 from the TD Bank. The interest rate on the loan is 6.25% and Franklin has agreed to repay the loan on a monthly basis over five years. Payments will include both principal and interest. What are Franklin's monthly payments?
4 Wal-Smart Technology is considering the construction of a new plant. The land on which the plant will be constructed was purchased eight years ago for $835,000 but a recent appraisal indicates that the land is currently worth $2.2 million. The plant will cost $8.4 million to construct. Two years ago, Wal-Smart paid a consulting company $300,000 to complete an environmental impact study on the new plant. Many pieces of equipment will be required for the plant. One of the pieces of equipment that will be used in the new plant was purchased two years ago for $875,000. The equipment was never used and depreciation was never charged on the equipment. The piece of equipment is now worth $475,000. Based on this data, what cost figure should Wal-Smart Technology use as the relevant cost of the new plant?
5 You are considering making a common equity investment in a private company. The company's beta is estimated to be 1.8. The risk-free rate of return is expected to be 4.5%. Historically, the market risk premium has been 6%. Over the coming years, the company hopes to generate average yearly returns on equity of 16%. What is your required rate of return on the equity investment in the company? Should you make the investment? Explain.
6 Ray Connolly is considering becoming an organic farmer. His cost of capital is 12%. The incremental after-tax operating earnings that will be generated from the organic farm are provided below. What is the present value of this stream of operating earnings?
Year 1: cash outflow of $250,000
Year 2: cash outflow of $150,000
Year 3: cash outflow of $100,000
Years 4 to 50: cash inflow of $ 90,000 each year.
7 During the most recent year, Epson Inc. paid common dividends of $1.60 per share. Financial analysts following Epson expect the company will grow their dividends by 13.8% for the next two years. It is expected that growth will then fall to 10% and remain at that level indefinitely. If investors require a 14% return on an investment in the common shares of Epson, calculate the value of Epson's common shares today using the DVM.
8 JetRed Manufacturing wishes to calculate the payback period for new production equipment. The equipment will cost $435,000 and is expected to have a life of four years. The equipment is expected to generate the following after-tax cash flows for the four years. What is the payback period for new production equipment?
|
Year
|
After-Tax Cash Flows
|
|
1
|
$178,000
|
|
2
|
$215,000
|
|
3
|
$168,000
|
|
4
|
$110,000
|
9 Quickware Computer's return on equity (ROE) for the 2003 fiscal year was 10%. The company wishes to calculate their ROE for the 2004 fiscal year using the DuPont system. The following financial information is available. Use this data to calculate the ROE for 2004 using the DuPont system.
|
Net income after tax
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$90,000.
|
|
Profit margin
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10%
|
|
Total assets
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$750,000
|
|
Debt ratio
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60%
|
Now, explain what could have happened to cause the change in ROE between 2003 and 2004.