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Apricot`s Net Income, and Investment of Market Interest Rate

1. The Apricot Company in 2001 had notes payable of $1,200, accounts payable of $2,400, and long-term debt of $3,000. The corresponding entries for 2002 are $1,600, $2,000, and $2,800. For assets, Apricot had in 2001 $800 in cash, $400 in marketable securities, and $1,800 of inventory. The corresponding entries for 2002 are $500, $300, and $2,000. Accounts receivable at the end of 2001 were $900 and $800 at the end of 2002. Apricot's net plant and equipment was $6,000 in 2001 and $8,000 in 2002. Construct Apricot Company's balance sheet for 2001 and 2002. What is total owners' equity for 2002?

2. Continuing the previous problem, Apricot Company had sales of $1,000 during 2002 cost of goods sold was $400, depreciation was $100, and paid $160 of interest. The tax rate is 35% and all taxes are paid currently. What is Apricot's net income for the year?

3. An investment today of $4500 is worth $17,000 in 9 years. What annual interest rate would the investment earn?

4. An investment offers cash flows of $300, -$200, -$125 each year starting at time zero. What is the net present value of this investment if the market rate of interest is 15%?

5. You just won $150,000 in the state lottery. Lottery rules do not allow a lump-sum payment. Instead, the lottery will pay you $5,000 per year for the next 10 years, followed by payments of $10,000 per year for the next ten years. How much are your winnings actually worth today? The appropriate interest rate is 8% per year.

6. The Chestnut Company has a level-coupon bond outstanding (face value = $1,000) that pays $120 per year and has 10 years to maturity. If the yield for similar bonds is currently 14%, what is the bond's value?

7. You earned a total return of 8% on Stock A this year, earned 7% last year, and earned 15% two years ago. Calculate both the three-year holding period return and the average three year return.

8. Calculate the expected return on the stock of Mitro Corporation. The beta is estimated to be 1.4, the market risk premium is 9% and the risk-free rate is 4%.

9. A portfolio exists containing stocks A, B, and C held in proportions 50%, 30%, and 20% respectively. The expected returns on the three stocks are given by 10%, 15%, and 16% respectively. Calculate the portfolio's expected return.

10. A project has a cost of $180. It will have a life of 3 years. The cost will be depreciated straight-line to a zero salvage value, and will be worth $40 at that time. Cash sales will be $200 per year and cash costs will run $110 per year. The firm will also need to invest $70 in net working capital at year 0. The appropriate discount rate is 8% (use for all flows), and the corporate tax rate is 40%. What are the cash flows in years 1, 2, and 3?

11. Calculate the WACC for the Uprite Door Corporation. The all equity cost of capital is 17% and the target debt to value ratio is 40%. The current cost of debt for a firm of this risk is 9% and the corporate tax rate is 34%.

12. Conlin Containers announces that on June 1, 1998, it will pay a dividend of $3.00 per share on July 15 to all holders on record as of June 30. The firm's stock price is currently at $50 per share. Assume that all investors are in the 28% tax bracket. Given that the ex-dividend date is June 26, what should happen to Conlin's stock price on June 26?

Solution Preview

Solution: - computation of total owners equity for 2002
First, we understand that
Total Assets = Total Liabilities + Owners' Equity
Therefore, with the given information, we will have the total assets and total liabilities. We can find the total owners' equity by subtracting total liabilities from total assets.
Apricot Company
Balance Sheet
December 31, 2001
Cash 800 Accounts Payable 2,400
Marketable securities 400 Notes Payable 1,200
Accounts Receivable 900 Total current liabilities 3,600
Inventory 1,800 Long-term debt 3,000
Total current assets 3,900 Total Liabilities 6,600
Plant and equipment 6,000 Owners' Equity 3,300
Total Assets 9,900 Total Liabilities and Owners' Equity 9,900

Apricot Company
Balance Sheet
December 31, 2002
Cash 500 Accounts Payable 2,000
Marketable securities 300 Notes Payable 1,600
Accounts Receivable 800 Total current liabilities 3,600
Inventory 2,000 Long-term debt 2,800
Total current assets 3,600 Total Liabilities 6,400
Plant and equipment 8,000 Owners' Equity 5,200
Total Assets 11,600 Total Liabilities and Owners' Equity 11,600

The total owners' equity for 2002 is equal to 5,200.

2. Continuing the previous problem, Apricot Company had sales of $1,000 during 2002 cost of goods sold was $400, depreciation was $100, and paid $160 of interest. The tax rate is 35% and all taxes are paid currently. What is Apricot's net income for the year?

Solution: - Computation of net income for the year

Particulars Amount
Sales Revenue $ 1,000
Less:- Cost of Goods Sold $ 400
Gross Income $ 600
Less:- Depreciation $ 100
EBIT $ 500
Less:- Interest $ 160
EBT $ 340
Less:- Tax 35% $ 119
Net Income $ 221

Hence the Net Income is $221

3. An investment today of $4500 is worth $17,000 in 9 years. What annual interest rate would the investment earn?

Solution: - Computation of annual interest rate would the investment earn
Given ...

Solution Summary

The solution examines Apricot`s net income and investment of market interest rates. The balance sheet for Apricot Company is constructed for 2001 and 2002.

$2.19