Chapter 3

Ex 3.1: Bear Tracks, Inc., has current assets of $2,030, net fixed assets of $9,780, current
liabilities of $1,640, and long-term debt of $4,490. What is the value of the shareholders’
equity account for this firm? How much is net working capital?

Ex 3.2: Pharrell, Inc., has sales of $634,000, costs of $328,000, depreciation expense of
$73,000, interest expense of $38,000, and a tax rate of 35 percent. What is the net income
for this firm?

Ex 3.4: Hailey, Inc., has sales of $38,530, costs of $12,750, depreciation expense of
$2,550, and interest expense of $1,850. If the tax rate is 35 percent what is the operating
cash flow, or OCF?
Ex 3.5: The Ellicott City Ice Cream Company management has just completed an
assessment of the company’s assets and liabilities and has obtained the following
information. The firm has total current assets worth $625,000 at book value and $519,000
at market value. In addition, its long-term assets include plant and equipment valued at
market for $695,000, while their book value is $940,000.
The company’s total current liabilities are valued at market for $543,000, while their
book value is $495,000. Both the book value and the market value of long-term debt is
$350,000. If the company’s total assets are equal to a market value of $1,214,000 (book
value of $1,565,000), what are the book value and market value of its stockholders’
equity?

Ex 3.6: You are given the following information about Clarkesville Plumbing Company.
Revenues last year totaled $896, depreciation expenses $75, costs of goods sold $365,
and interest expenses $54. At the end of the year, current assets were $121 and current
liabilities were $107. The company has an average tax rate of 34 percent.
Ex 3.7: During 2011, Towson Recording Company increased its investment in
marketable securities by $36,845, funded fixed assets acquisitions of $109,455, and had
marketable securities of $14,215 mature. What is the net cash used in investing activities?

Ex 3.8: You are given the following information about Clarkesville Plumbing Company.
Revenues last year totaled $896, depreciation expenses $75, costs of goods sold $365,
and interest expenses $54. At the end of the year, current assets were $121 and current
liabilities were $107. The company has an average tax rate of 34 percent.
1. Calculate its net income by setting up an income statement.
2. Compute the cash flows to investors from operating activity.

Ex 3.9 During 2011, Towson Recording Company increased its investment in marketable
securities by $36,845, funded fixed assets acquisitions of $109,455, and had marketable
securities of $14,215 mature. What is the net cash used in investing activities?

Ex 3.10 Mukhopadhya Network Associates has a current ratio of 1.60, where the current
ratio is defined as follows: Current ratio = current assets/current liabilities.
The firm’s current assets are equal to $1,233,265, its accounts payables are $419,357, and
its notes payables are $351,663. Its inventory is currently at $721,599. The company
plans to raise funds in the short-term debt market and invest the entire amount in
additional inventory. How much can notes payable increase without the current ratio
falling below 1.50?
 Description Formula
Balance sheet
3.1 Total assets = Total liabilities + Total stockholders equity
identity
Net working Net working capital = Total current assets − Total current
3.2
capital liabilities
Income Statement
3.3 Net income = Revenues − Expenses
identity
Cash flow from
3.4 CFOA = EBIT − Current taxes + Noncash expenses
operating activity
Cash flow invested
3.5 in net working CFNWC = NWCcurrent period − NWCprevious period
capital
Cash flow invested
CFLTA = Long-term assets current period − Long-term assets
3.6 in long-term
previous period
assets
Cash flow to
3.7 CFI = CFOA − CFNWC − CFLTA
investors
Chapter 4

Ex 4.2 Let’s continue with our analysis of Ron’s jewelry store, introduced in exercise 4.1.
Brother-in-law Dennis has been asked to analyze the company’s financials. He decides to use the
DuPont system of analysis as a framework. He arranges the critical information as follows:

Financial Ratios Ron’s Store Competitor

ROE 13.13% 13.14%
ROA 3.75% 8.76%
Net profit margin 2.50% 5.84%
Asset turnover 1.5 1.5
Equity multiplier 3.5 1.5
Debt-to-equity ratio 2.5 0.5
Net sales $ 240.0 $ 300.0
Net income $ 6.0 $ 17.5
Given the above financial ratios, what recommendations should Dennis make regarding
Ron’s jewelry store and its management?

Ex 4.3: Trademark Corp.’s financial manager collected the following information

for its peer group to compare its performance against that of its peers.

Ratios Trademark Peer Group

DSO 33.5 days 27.9 days
Total assets turnover 2.3 3.7
Inventory turnover 1.8 2.8
Quick ratio 0.6 1.3
a) Explain how Trademark is doing relative to its peers.
b) How do the industry ratios help Trademark’s management?
Ex 4.4: Rockwell Jewelers has announced net earnings of $6,481,778 for this year. The
company has 2,543,800 shares outstanding, and the year-end stock price is $54.21. What
are the company’s earnings per share and P/E ratio?

Ex 4.5: Chisel Corporation has 3 million shares outstanding at a price per share of $3.25.
If the debt-to-equity ratio is 1.7 and total book value of debt equals $12,400,000, what is
the market-to-book ratio for Chisel Corporation?

Ex 4.6: Lambda Corporation has current liabilities of $450,000, a quick ratio of 1.8,
inventory turnover of 5.0, and a current ratio of 3.5. What is the cost of goods sold for
Lambda Corporation?
Ex 4.7: Norwood Corp. currently has accounts receivable of $1,223,675 on net sales of
$6,216,900. What are its accounts receivable turnover ratio and days’ sales outstanding
(DSO)?

Ex 4.8: Nugent, Inc., has a gross profit margin of 31.7 percent on sales of $9,865,214 and
total assets of $7,125,852. The company has a current ratio of 2.7 times, accounts
receivable of $1,715,363, cash and marketable securities of $315,488, and current
liabilities of $870,938.

a) What is Nugent’s total current assets?

b) How much inventory does the firm have? What is the inventory turnover ratio?
c) What is Nugent’s days’ sales outstanding?
d) If management wants to set a target DSO of 30 days, what should Nugent’s
accounts receivable be?
Ex 4.9: Recreational Supplies Co. has net sales of $11,655,000, an ROE of 17.64
percent, and a total asset turnover of 2.89 times. If the fi rm has a debt-to-equity ratio of
1.43, what is the company’s net income?
4.1 Liquidity Ratio Current ratio Current assets
Current liabilities

4.2 Current assets —Inventory

Liquidity Ratio Quick Current liabilities

Efficiency Ratio Inventory turnover Cost of goods sold

Invento
4.4 Efficiency Ratio Day’s sales in inventory 365 Days
Inventory
4.5
Efficiency Ratio Accounts receivable turnover Net sales
Accounts receivable

4.6 Efficiency Day’s sales outstanding 365 Days

4.7 Accounts receivable
Ratio Total asset turnover = turnover
Net sales
Efficiency Fixed asset turnover = Total assets
Ratio Net sales
Net fixed assets
Efficiency Ratio
4.9 Total debt
Leverage Ratio Total debt ratio — Total assets
4.10 Leverage Ratio Debt-to—equity ratio Total debt
Total equity
4.11 Leverage Ratio Equity multiplier Total assets
Total equity
4 12 EBIT
Leverage Ratio Times interest earned = Interest expense

4 13 EBITDA
Leverage Ratio Cash coverage = Interest expense

4.14
Profitability Ratio Gross profit margin — Net sales — Cost oJ goods sold
Net
4.15 EBIT
Profitability Ratio Operating profit margin Net sales

4 16 Profitability Ratio Net profit margin Net income

Net sales

4 17 Profitability Ratio EBIT return on assets (EROA) EBIT

Total assets

4.18 Profitability Ratio Return on assets (ROA) Net income

Total assets
4.19 Profitability Ratio Return on equity (ROE) Net income
Total equity
Net. inCome
4 20 Market Value Earning per share Shares outstanding
Indicator
Price per share
4 21 Market Value Price-earnings ratio Earnings per share
Indicator
4 22 Market value of equity per share
Market Value Market-to-book ratio = Book value of equity per share
Indicator
4 23 4 25 ROA Breakdown ROE Breakdown DuPont Equation
4.24
R Net profit margin • Total asset turnover ROE
O = = ROA Equity multiplier
A ROE = Net profit margin • Total asset turnover •
Equity multiplier
4.26 DuPont Equation
ROE= Net income Net sales
Net sales X Total assets X
Total assets
Total equity
Chapter 5

Ex 5.1: Amit Patel is planning to invest $10,000 in a bank certificate of deposit (CD) for
five years. The CD will pay interest of 9 percent. What is the future value of Amit’s
investment?

Ex 5.2: Megan Gaumer expects to need $50,000 as a down payment on a house in six
years. How much does she need to invest today in an account paying 7.25 percent?

Ex 5.3: Kelly Martin has $10,000 that she can deposit into a savings account for five
years. Bank A pays compounds interest annually, Bank B twice a year, and Bank C
quarterly. Each bank has a stated interest rate of 4 percent. What amount would Kelly
have at the end of the fifth year if she left all the interest paid on the deposit in each
bank?
Ex 5.4: You have an opportunity to invest $2,500 today and receive $3,000 in three years.
What will be the return on your investment?

Ex 5.5: Suppose that you would like to purchase a new cross-country motorcycle to ride
on dirt trails near campus. The motorcycle dealer will finance the bike that you are
interested in if you make a down payment of $1,175. Right now you only have $1,000. If
you can earn 5 percent by investing your money, how long will it take for your $1,000 to
grow to $1,175?

Ex 5.6: Emily Smith deposits $1,200 in her bank today. If the bank pays 4 percent simple
interest, how much money will she have at the end of five years? What if the bank pays
compound interest? How much of the earnings will be interest on interest?
Ex 5.7: Hannah, an industrial relations major, is writing a term paper and needs an
estimate of how fast the world population is growing. In her almanac, she finds that the
world’s population was an estimated 6.9 billion people in 2010. The United Nations
estimates that the population will reach 9 billion people in 2054. Calculate the annual
population growth rate implied by these numbers. At that growth rate, what will be the
world’s population in 2015?

Ex 5.8: You have $2,500 you want to invest in your classmate’s start-up business. You
believe the business idea to be great and hope to get $3,700 back at the end of three years.
If all goes according to the plan, what will be your return on investment?
Ex 5.9: You have $12,000 in cash. You can deposit it today in a mutual fund earning 8.2
percent semiannually; or you can wait, enjoy some of it, and invest $11,000 in your
brother’s business in two years. Your brother is promising you a return of at least 10
percent on your investment. Whichever alternative you choose, you will need to cash in
at the end of 10 years. Assume your brother is trustworthy and that both investments
carry the same risk. Which one will you choose?
 Description Formula

Future value of an n-period investment

5.1 FVn = PV × (1 + i)n
with annual compounding

Future value with compounding more

5.2 FVn = PV × (1 + i/m)m × n
than annually
Future value with continuous
5.3 FV∞ = PV × ei × n
compounding

5.4 Present value of an n-period investment

5.5 Rule of 72

5.6 Future value with general growth rate FVn = PV × (1 + g)n

Chapter 6

Ex 6.1: You have just won a lottery that promises an annual payment of $118,312
beginning immediately. You will receive a total of 10 payments. If you can invest the
cash flows in an investment paying 7.0 percent annually, what is th present value of this
annuity?

Ex 6.2: Your grandfather has agreed to deposit a certain amount of money each year into
an account paying 7.25 percent annually to help you go to graduate school. Starting next
year, and for the following four years, he plans to deposit $2,250, $8,150, $7,675, $6,125,
and $12,345 into the account. How much will you have at the end of the five years?
Ex 6.3: Mike White is planning to save up for a trip to Europe in three years. He will
need $7,500 when he is ready to make the trip. He plans to invest the same amount at the
end of each of the next three years in an account paying 6 percent. What is the amount he
will have to save every year to reach his goal of $7,500 in three years?

Ex 6.4: Becky Scholes has $150,000 to invest. She wants to be able to withdraw $12,500
every year forever without using up any of her principal. What interest rate would her
investment have to earn in order for her to be able to so?
Ex 6.5: Dynamo Corp. is expecting annual payments of $34,225 for the next seven years
from a customer. What is the present value of this annuity if the discount rate is 8.5
percent?

Ex 6.6: You have just won a lottery that promises an annual payment of $118,312
beginning immediately. You will receive a total of 10 payments. If you can invest
the cash flows in an investment paying 7.0 percent annually, what is the present
value of this annuity?