Capital Budgeting and Ratio Analysis

(See attached file for full problem description)

On these questions I need some help showing the steps needed to finish the problems. Please make sure that you understand theses concepts and steps?

1 What is the present value of the following cash flows at
an 8% discount rate/required rate of return?

year cash flow
1 $1,000.00
2 -$1,000.00
3 $1,000.00
4 -$1,000.00

2 The internal rate of return (IRR) rule can be best stated as:

a. An investment is acceptable if its IRR is exactly equal to its net present
value (NPV)
b. An investment is acceptable if its IRR is exactly equal to zero.
c. An investment is acceptable if its IRR is less than the required return.
d. An investment is acceptable if its IRR exceeds the required return.

3 What is ABC Company's Weighed Average Cost of Capital given the following

Market value of equity $50 million
Market value of debt $30 million
Cost of equity 16%
Before tax cost of debt 8%
Tax rate 34%
4 You have a choice between 2 mutually exclusive investments. If you
require a 14% return, which investment should you choose?

Year Cash flows Cash flows
0 -$150,000 -$120,000
1 $50,000 $72,000
2 $90,000 $50,000
3 $70,000 $40,000

5 Of the following, which statement regarding agency costs is false?

a. An agency problem exists when there is a conflict of interest between the
stockholders and management of a firm.
b. An agency problem exists when there is a conflict of interest between a
principal and an agent.
c. An indirect agency cost occurs when firm management avoids risky projects
that would favorably affect the tock price because the managers are worried
about keeping their jobs.
d. A corporate expenditure that benefits stockholders but harms management
is an agency cost
e. If agency costs get too high in the eyes of shareholders, they can begin a
proxy fight to replace existing management.

6 An increase in the financial leverage of a firm as a result of an increase in
outstanding debt __________ the potential reward to stockholders while
_________ the risk of financial distress or bankruptcy.

a. decreases; decreasing
b. increases; decreasing
c. increases; increasing
d. decreases; increasing
e. does not affect; increasing

Use the information below to answer problems 7 through 10

Marble Comics Group
Balance Sheets
12/31/1999 and 12/31/2000
($ in millions)

1999 2000 1999 2000
Cash $75 $135 Accounts Payables $89 $110
Accounts Receivables $230 $214 Short term Notes Payable $227 $442
Inventory $240 $188
Long-term debt $615 $440
Fixed Assets $788 $890
Common Stock $55 $55
Retained Earnings $347 $380

Total Assets $1,333 $1,427 Total Liabilities + Equity $1,333 $1,427

Marble Comics Group
Income statement
Year Ended 12/31/2000
($ in millions)

Net Sales $905
Less: Cost of Goods Sold -$522
Less: General and Admin expenses -$93
Less: Depreciation (expense) -$110
EBIT $180
Less: Interest Paid (expense) -$61
Earnings before taxes $119
Less: Taxes -$30
Net Income $89

7 What is Marble Comics net working capital in 1999 and 2000?
8 What is the profit margin of Marble Comics Group (year ended 12/31/2000)?
9 What is the Debt ratio in 2000?
10 What is the ROE in 2000?


Solution Summary

The solution has various multiple choice questions relating to capital budgeting and ratio calculations for Marble Comics Group