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# Financial Decision Making

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1. Assume the following facts about a company:

Capital (000's) EBIT (000's) \$1,000
Debt ? Less Interest Expense ?
Equity \$3,000 EBT \$1,000
Total Capital \$3,000 Taxes @ 40% 400
Shares @ \$10 = 300 Earnings after Tax \$ 600

What will be the company's new EPS if it borrows money at 10% interest and uses it to retire stock until capital is 40% debt? The stock can be purchased at its book value of \$10 per share.

a. \$3.33
b. \$4.89
c. \$2.93
d. none of the above

2. If you invest the \$10,000 you receive at graduation (age 22) in a mutual fund which averages a 12% annual return, how much will you have at retirement in 40 years?
a. \$909,090
b. \$930,510
c. \$783,879
d. \$510,285

3. If Andre and Leslie set aside \$10,000 for college tuition when their daughter is 13, how much will be available when she starts college at 18 if the account in which the money is deposited pays 12 percent compounded monthly?
a. \$17,623.42
b. \$18,170
c. \$16,105.10
d. \$16,122.26

4. You want to purchase a Car that costs \$40,000. You want to finance as much of the purchase as possible with a 5-year bank loan at 12% compounded monthly, but can only afford loan payments of \$750 per month. How much will you need as a down payment to buy the boat? (Round to the nearest dollar)
a. \$3,523
b. \$4,637
c. \$5,147
d. \$6,284

5. One year ago a \$1,000 face value 6% coupon bond was selling for \$918.93. Since then, the market return decreased by two percentage points. The bond pays interest semiannually and now has four years to maturity. The bond's price today is:
a. \$1,035.46
b. \$1,053.27
c. \$1,000.00
d. \$932.67

6. Financial leverage is a direct function of the ratio of:
a. EAT to sales.
b. EBIT to sales.
c. interest expense to EBIT.
d. EAT to the number of shares of common stock.

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#### Solution Preview

1. Assume the following facts about a company:

Capital (000's) EBIT (000's) \$1,000
Debt ? Less Interest Expense ?
Equity \$3,000 EBT \$1,000
Total Capital \$3,000 Taxes @ 40% 400
Shares @ \$10 = 300 Earnings after Tax \$ 600

What will be the company's new EPS if it borrows money at 10% interest and uses it to retire stock until capital is 40% debt? The stock can be purchased at its book value of \$10 per share.

a. \$3.33
b. \$4.89
c. \$2.93
d. none of the above

Debt 40% = 3,000 x 40% = ...

#### Solution Summary

This solution is comprised of a detailed explanation to answer what will be the company's new EPS if it borrows money at 10% interest and uses it to retire stock until capital is 40% debt, how much will you have at retirement in 40 years, how much will be available when she starts college at 18 if the account in which the money is deposited pays 12 percent compounded monthly, how much will you need as a down payment to buy the boat, and the bond price.

\$2.49