FM Final Review

Chapter 1
Cash Flow for Rasputin Corporation This problem will give you some practice working with
financial statements and figuring cash flow. Based on the following information for Rasputin
Corporation, prepare an income statement for 2022 and balance sheets for 2021 and 2022. Next,
following our U.S. Corporation examples in the chapter, calculate cash flow from assets for
Rasputin, cash flow to creditors, and cash flow to stockholders for 2022. Use a 21 percent tax rate
throughout. You can check your answers below. (See Problem 20.)

Chapter 3
Calculating Financial Ratios Find the following financial ratios for Smolira Golf (use year-end
figures rather than average values where appropriate):
Short-term solvency ratios
a. Current ratio ________________
b. Quick ratio ________________
c. Cash ratio ________________
Asset utilization ratios
d. Total asset turnover ________________
e. Inventory turnover ________________
f. Receivables turnover ________________
Long-term solvency ratios
g. Total debt ratio ________________
h. Debt–equity ratio ________________
i. Equity multiplier ________________
j. Times interest earned ratio ________________
k. Cash coverage ratio ________________
Profitability ratios
l. Profit margin ________________
m. Return on assets ________________
n. Return on equity ________________
Chapter 5
Comparing Cash Flow Streams You’ve just joined the investment banking firm of Dewey,
Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have
$90,000 per year for the next two years, or you can have $77,000 per year for the next two years,
along with a $20,000 signing bonus today. The bonus is paid immediately and the salary is paid in
equal amounts at the end of each month. If the interest rate is 7 percent compounded monthly,
which do you prefer?

Future Value and Multiple Cash Flows An insurance company is offering a new policy to its
customers. Typically, the policy is bought by a parent or grandparent for a child at the child’s
birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following
six payments to the insurance company:
First birthday: $ 800
Second birthday: $ 800
Third birthday: $ 900
Fourth birthday: $ 900
Fifth birthday: $1,000
Sixth birthday: $1,000
After the child’s sixth birthday, no more payments are made. When the child reaches age 65, he
or she receives $350,000. If the relevant interest rate is 10 percent for the first six years and 7
percent for all subsequent years, is the policy worth buying?

Chapter 9
Project Analysis McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for
$815 per set and have a variable cost of $365 per set. The company has spent $150,000 for a
marketing study that determined the company will sell 55,000 sets per year for seven years. The
marketing study also determined that the company will lose sales of 10,000 sets of its high priced
clubs, The high-priced clubs sell at $1,345 and have variable costs of $730. The company will also
increase sales of its cheap clubs by 12,000 sets. The cheap clubs sell for $445 and have variable
costs of $210 per set. The fixed costs each year will be $9.45 million. The company has also spent
$1 million on research and development for the new clubs. The plant and equipment required
will cost $39.2 million and will be depreciated on a straight-line basis. The new clubs will also
require an increase in net working capital of $1.85 million that will be returned at the end of the
project. The tax rate is 25 percent, and the cost of capital is 10 percent. Calculate the payback
period, the NPV, and the IRR.

Chapter 10
Arithmetic and Geometric Returns A stock has had the following year-end prices and dividends:

What are the arithmetic and geometric average returns for the stock?

Chapter 11
Returns and Standard Deviations Consider the following information:

a. Your portfolio is invested 30 percent each in A and C and 40 percent in B. What is the expected
return of the portfolio?
b. What is the variance of this portfolio? The standard deviation?

Portfolio Returns and Deviations Consider the following information on a portfolio of three
stocks:

a. If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the
portfolio’s expected return? The variance? The standard deviation?
b. If the expected T-bill rate is 3.4 percent, what is the expected risk premium on the portfolio?

Systematic versus Unsystematic Risk Consider the following information

on Stocks I and II:
The market risk premium is 7 percent, and the risk-free rate is 3.5 percent. Which stock has more
systematic risk? Which one has more unsystematic risk? Which stock is “riskier”? Explain.

Chapter 12
Finding the WACC Given the following information for Lightning Power Co., find the WACC.
Assume the company’s tax rate is 21 percent.
Debt: 12,000 bonds with a 4.6 percent coupons outstanding, $1,000 par value, 25 years to
maturity, selling for 105 percent of par; the bonds make semiannual payments.
Common stock: 575,000 shares outstanding, selling for $81 per share; beta is 1.04.
Preferred stock: 30,000 shares of 3.4 percent preferred stock outstanding, a $100 par value,
currently selling for $94 per share.
Market: 7 percent market risk premium and 3.2 percent risk free rate.

Calculating the WACC You are given the following information concerning Parrothead
Enterprises:
Debt: 15,000 5.9 percent coupon bonds outstanding, with 17 years to maturity and a quoted
price of 104. These bonds pay interest semiannually.
Common stock: 375,000 shares of common stock selling for $81.50 per share. The stock has a
beta of .95 and will pay a dividend of $3.80 next year. The dividend is expected to grow by 5
percent per year indefinitely.
Preferred stock: 10,000 shares of 4.2 percent preferred stock selling at $86 per share.
Market: 11 percent expected return, risk-free rate of 3.6 percent, and a 22 percent tax rate.
Calculate the company’s WACC.

Chapter 13
EBIT and Leverage Fujita, Inc., has no debt outstanding and a total market value of $222,000.
Earnings before interest and taxes, EBIT, are projected to be $18,000 if economic conditions are
normal. If there is strong expansion in the economy, then EBIT will be 25 percent higher. If there
is a recession, then EBIT will be 30 percent lower. The company is considering a $60,000 debt
issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock.
There are currently 7,400 shares outstanding. Ignore taxes for this problem.
a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt
is issued. Also, calculate the percentage changes in EPS when the economy expands or enters a
recession.
b. Repeat part (a) assuming that the company goes through with recapitalization. What do you
observe?