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# Various Finance Questions

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1. Refer to the financial statements to answer the following questions.

How profitable was ABC Company when comparing their Gross Margin to total sales? (Answer as a percentage)

How profitable was ABC Company when comparing their Net Income to total sales? (Answer as a percentage)

What was ABC Company's Earnings Per Share?

What was ABC Company's Price to Earnings Ratio on 12/31/06?

What was ABC Company's EBIT (Earnings Before Interest and Taxes)?

What was ABC Company's Current Ratio?

What was ABC Company's Acid Test Ratio?

What percentage of ABC Company's assets is financed by debt?

What percentage of ABC Company's assets is fully paid for?

What was ABC Company's Return on Equity? (Answer as a percentage)

2. Find MNO's Weighted Average Cost of capital given the following information:
Tax Bracket: 30%
Percent of Company financed By Stock: 60%
Percent of Company financed by Bonds: 25%
Percent of Company financed by Preferred Stocks: 15%
Stock Required Rate of Return: 15%
Bond Yield: 7%
Preferred Stock Yield: 11%

3. Refer to the XYZ Stocks price data below:

Jan. 1, 2003 \$10.00
Jan. 1, 2004 \$6.00
Jan. 1, 2005 \$9.00
Jan. 1, 2006 \$13.50

This stock does not pay a dividend

What are XYZ's three holding period returns? (Find a percentage for the HPRs)

HPR 1 =

HPR 2 =

HPR 3 =

What is XYZ's average return?

What is XYZ's Geometric Mean Return?

4. Your daughter has a lawn mower business. She is considering either fixing her current lawn mower or buying a new "Super Duper Gas Saver" mower. It will cost \$600 to fix her current lawn mower and \$1,000 to buy the new lawn mower. In 4 years when she goes to college, she won't be able to sell her lawn mower. It will not have any market value. However, she should be able to sell the "Super Duper Gas Saver" mower for \$400. The savings for each alternative is as follows:

Repair Lawn | Replace with
Mower Alternative |"Super Duper Gas Saver"
Year 1 gas savings \$300 | \$400
Year 2 gas savings \$300 | \$400
Year 3 gas savings \$200 | \$400
Year 4 gas savings \$200 | \$300

Your daughter has a 10% required rate of return

What is the payback for the "Repair Alternative"?

What is the payback for the "Replace Alternative"?

What is the Net Present Value for the "Repair Alternative"?

What is the Net Present Value for the "Replace Alternative"?

What is the Internal Rate of Return for the "Repair Alternative"?

What is the Internal Rate of Return for the "Replace Alternative"?

Which alternative should your daughter choose and why?

#### Solution Preview

1. Refer to the financial statements to answer the following questions.

How profitable was ABC Company when comparing their Gross Margin to total sales? (Answer as a percentage)

Gross Margin = (Sales - Manufacturing costs and other costs of sales)/Sales
= (27,973-18,990)/27,973 = 32.1%

How profitable was ABC Company when comparing their Net Income to total sales? (Answer as a percentage)

Net Margin = Net Income/Sales
= 1,152/27,973 = 4.12%

What was ABC Company's Earnings per Share?

Earnings per share = Net Income/Number of shares
=1,152/600 = \$1.92

What was ABC Company's Price to Earnings Ratio on 12/31/06?

Price to Earnings = Market Price/EPS
=15.50/1.92 = 8.1 times

What was ABC Company's EBIT (Earnings before Interest and Taxes)?

EBIT = Net Sales - Manufacturing costs and other cost of sales - Selling General and Administrative expenses - Depreciation Expense
EBIT = 27,973-18,990 - 4,715-2,308 = \$1,960

What was ABC Company's Current Ratio?

Current Ratio = Current Assets/Current Liabilities
= 11,319/7,995 = 1.42

What was ABC Company's Acid Test Ratio?

Acid test ratio = (total current assets - inventories)/current liabilities
= (11,319-5,473)/7,995 = 0.73

What percentage of ABC ...

#### Solution Summary

The solution has various finance questions relating to ratio calculation, WACC, holding period, return, payback, NPV and IRR calculation.

\$2.19

## Answers to Various Financial Questions

Jenny just married Tim. Jenny remains to work as a cashier for a restaurant, and her monthly income has averaged \$2,840 a month over the past year. Tim is working as a computer programmer and earns \$3,000 a month. Their shared monthly income let them to live comfortably. Yet they have been unable to save any money for urgent situation.
According to Tim, "It's hard to believe, but we don't even have a savings account because we spend almost everything we make." Every month, they deposit each of their paychecks in separate checking accounts. Tim pays the rent and makes the car payment. Pam buys the groceries and pays the utilities. They use the money left over to purchase new clothes and the other "necessities" for enjoying life.
In an effort to make wise use of credit, the Turner have examined various sources that could serve their current and future financial needs. In the assessment process, they compared the APR along with various fees and potential charges.
Tim and Jenny are also learning about various actions that might be useful if they encounter credit troubles. Their discussions with friends and money management advisers provided expanded knowledge of credit counseling and bankruptcy alternatives.
Life Situation Financial Data
Recently Married
Pam, 26
Josh, 28
Renting an Apartment Monthly income \$5,840
Living expenses \$3,900
Assets \$13,500
Liabilities \$4,800
Emergency fund \$1,000

Q1. What is the minimum amount that the Turner should have in an emergency fund? What actions might be taken to increase the amount in this fund?

1. Lucy lacks cash to pay for a \$720 dishwasher. She could buy it from the store on credit by making 12 monthly payments of \$65. The total cost would then be \$780. Instead, Lucy decides to deposit \$60 a month in the bank until she has saved enough money to pay cash for the dishwasher. One year later, she has saved \$770.40—\$720 in deposits plus interest. When she goes back to the store, she finds the dishwasher now costs \$849.60. Its price has gone up 18 percent, the current rate of inflation.
From the financial standpoint, was postponing her purchase a good trade-off for Lucy?

Yes ___
No ___

2. Malou is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now Malou is living at home and works in a shoe store, earning a gross income of \$3250 per month. Her employer deducts a total of \$150 for taxes from her monthly pay. Malou also pays \$100 on credit card debt each month. The loan she needs for chiropractic school will cost an additional \$140 per month.
Calculate her debt payments-to-income ratio without college loan. Remember to convert your answer to a percentage!

3. Sally is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now Sally is living at home and works in a shoe store, earning a gross income of \$2990 per month. Her employer deducts a total of \$200 for taxes from her monthly pay. Sally also pays \$100 on credit card debt each month. The loan she needs for chiropractic school will cost an additional \$100 per month.
Calculate her debt payments-to-income ratio with college loan. Don't forget to convert your answer to a percentage.