FINANCE ASSIGNMENT(SEE ATTACHMENT). #1
The primary operating goal of a publiclyowned firm interested in serving its stockholders should be to









#2
Free Cash Flows
Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)
2013  2012  
Sales  $7,475.0  $6,500.0  
Operating costs excluding depreciation  5,980.0  5,525.0  
Depreciation and amortization  211.0  176.0  
Earnings before interest and taxes  $1,284.0  $799.0  
Less: Interest  161.0  140.0  
Pretax income  $1,123.0  $659.0  
Taxes (40%)  449.2  263.6  
Net income available to common stockholders  $673.8  $395.4  
Common dividends  $606.0  $316.0 
Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)
2013  2012  
Assets  
Cash  $109.0  $91.0  
Shortterm investments  38.0  33.0  
Accounts receivable  1,073.0  975.0  
Inventories  1,248.0  1,040.0  
Total current assets  $2,468.0  $2,139.0  
Net plant and equipment  2,106.0  1,755.0  
Total assets  $4,574.0  $3,894.0  
Liabilities and Equity  
Accounts payable  $644.0  $585.0  
Accruals  312.0  260.0  
Notes payable  150.0  130.0  
Total current liabilities  $1,106.0  $975.0  
Longterm bonds  1,495.0  1,300.0  
Total liabilities  $2,601.0  $2,275.0  
Common stock  1,786.2  1,500.0  
Retained earnings  186.8  119.0  
Total common equity  $1,973.0  $1,619.0  
Total liabilities and equity  $4,574.0  $3,894.0 
Using Rhodes Corporation’s financial statements (shown above), answer the following questions.
a. What is the net operating profit after taxes (NOPAT) for 2013? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place. $______ million
b. What are the amounts of net operating working capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place. 2013 $______ million 2012 $______ million
c. What are the amounts of total net operating capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place. 2013 $______ million 2012 $ ______ million
d. What is the free cash flow for 2013? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place. $______ million
e. What is the ROIC for 2013? Round your answer to two decimal places. ______%
f. How much of the FCF did Rhodes use for each of the following purposes: aftertax interest, net debt repayments, dividends, net stock repurchases, and net purchases of shortterm investments? (Hint: Remember that a net use can be negative.) Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
Aftertax interest payment  $______ million 
Reduction (increase) in debt  $______ million 
Payment of dividends  $______ million 
Repurchase (Issue) stock  $______ million 
Purchase (Sale) of shortterm investments  $______ million 
#3
Comprehensive Ratio Analysis
The Jimenez Corporation’s forecasted 2014 financial statements follow, along with some industry average ratios.
Jimenez Corporation: Forecasted Balance Sheet as of December 31, 2014
Assets  
Cash  $ 72,000 
Accounts receivable  439,000 
Inventories  894,000 
Total current assets  $1,405,000 
Fixed assets  431,000 
Total assets  $1,836,000 
Liabilities and Equity  
Accounts payable  $ 332,000 
Notes payable  100,000 
Accruals  170,000 
Total current liabilities  $ 602,000 
Longterm debt  404,290 
Common stock  575,000 
Retained earnings  254,710 
Total liabilities and equity  $1,836,000 
Jimenez Corporation: Forecasted Income Statement for 2014
Sales  $4,290,000 
Cost of goods sold  3,580,000 
Selling, general, and administrative expenses  370,320 
Depreciation and amortization  159,000 
Earnings before taxes (EBT)  $ 180,680 
Taxes (40%)  72,272 
Net income  $ 108,408 
Per Share Data  
EPS  $ 4.71 
Cash dividends per share  $ 0.95 
P/E ratio  5.0 
Market price (average)  $ 23.57 
Number of shares outstanding  23,000 
Industry Financial Ratios (2013)*  
Quick ratio  1.0 
Current ratio  2.7 
Inventory turnover**  7.0 
Days sales outstanding***  32.0 days 
Fixed assets turn over**  13.0 
Total assets turnover**  2.6 
Return on assets  9.1% 
Return on equity  18.2% 
Profit margin on sales  3.5% 
Debttoassets ratio  21.0% 
Liabilitiestoassets ratio  50.0% 
P/E ratio  6.0 
Price/Cash flow ratio  3.5 
Market/Book ratio  3.5 
*Industry average ratios have been constant for the past 4 years.  
**Based on yearend balance sheet figures.  
***Calculation is based on a 365day year. 
Calculate Jimenez’s 2014 forecasted ratios, compare them with the industry average data, and comment briefly on Jimenez’s projected strengths and weaknesses. Round DSO to the nearest whole number. Round the other ratios to one decimal place.
Ratios  Firm  Industry  Strong or Weak? 
Quick ratio  ______  1.0  ______ 
Current ratio  ______  2.7  ______ 
Inventory turnover  ______  7.0  ______ 
Days sales outstanding  ______days  32 days  ______ 
Fixed assets turnover  ______  13.0  ______ 
Total assets turnover  ______  2.6  ______ 
Return on assets  ______%  9.1%  ______ 
Return on equity  ______%  18.2%  ______ 
Profit margin on sales  ______%  3.5%  ______ 
Debt ratio  ______%  21.0%  ______ 
Liabilitiestoassets  ______  50.0%  ______ 
EPS  $4.71  n.a.  — 
Stock Price  $23.57  n.a.  — 
P/E ratio  ______  6.0  ______ 
P/CF ratio  ______  3.5  ______ 
M/B ratio  ______  n.a.  — 
So, the firm appears to be well or badly managed.
#4
Growing Annuity Payments
You want to accumulate $3 millions by your retirement date, which is 25 years from now. You will make 25 deposits in your bank, with the first occurring today. The bank pays 7.76% interest, compounded annually. You expect to get an annual raise of 5%, which will offset inflation, and you will let the amount you deposit each year also grow by 5% (i.e., your second deposit will be 5% greater than your first, the third will be 5% greater than the second, etc.). How much must your first deposit be to meet your goal? Round your answer to the nearest cent.
$__________
Required Rate of Return
Stock R has a beta of 1.5, Stock S has a beta of 0.45, the expected rate of return on an average stock is 12%, and the riskfree rate is 7%. By how much does the required return on the riskier stock exceed the required return on the riskier stock exceed that on the less risky stock? Round your answer to two decimal places.
___ %
#5
CMS Corporation’s balance sheet as of today is as follows:
Longterm debt (bonds, at par)  $10,000,000 
Preferred stock  2,000,000 
Common stock ($10 par)  10,000,000 
Retained earnings  4,000,000 
Total debt and equity  $26,000,000 
The bonds have an 7.9% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm’s debt?
Select the correct answer.









#6
Required Rate of Return
Stock R has a beta of 1.5, Stock S has a beta of 0.45, the expected rate of return on an average stock is 12%, and the riskfree rate is 7%. By how much does the required return on the riskier stock exceed the required return on the riskier stock exceed that on the less risky stock? Round your answer to two decimal places.
_____%
#7 Nonconstant Growth Stock Valuation
Conroy Consulting Corporation (CCC) has been growing at a rate of 19% per year in recent years. This same nonconstant growth rate is expected to last for another 2 years (g0,1 = g1,2 = 19%).
a. If D0= $2.00, rs= 9% and gL = 7%, then what is CCC’s stock worth today? Round your answer to the nearest cent. Do not round your intermediate computations. $______ What is its expected dividend yield at this time? Round the answer to two decimal places. Do not round your intermediate computations. ______ % What is its capital gains yields at this time? Round the answer to two decimal places. Do not round your intermediate computations. ______ %
b. Now assume that CCC’s period of supernormal growth is to last another 5 years rather than 2 years (g0,1 = g1,2 = g2,3 = g3,4 = g4,5 = 19%). How would this affect its price, dividend yield, and capital gains yield? Select from the following: _______ I.Due to the longer period of supernormal growth, the value of the stock will be lower for each year. The total return as well as the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. II.Due to the longer period of supernormal growth, the value of the stock will be higher for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. III.Due to the longer period of supernormal growth, the value of the stock will be lower for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. IV.Due to the longer period of supernormal growth, the value of the stock will be higher for each year. The total return as well as the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. V.Due to the longer period of supernormal growth, the value of the stock will be higher for each year. The total return as well as the distribution between dividend yield and capital gains yield will remain the same for the duration of the supernormal growth period.
c. What will CCC’s dividend yield and capital gains yield be once its period of supernormal growth ends? (Hint: These values will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth, and the calculations are very easy.) Round the answers to two decimal places. Do not round your intermediate computations.
Dividend yield  ______ % 
Capital gains yield  ______ % 
d.
e. Of what interest to investors is the relationship over time between dividend yield and capital gains yield? Select from the following:______ I.It is of no interest to investors whether they receive dividend income or capital gains income, since taxes on both types of income can be delayed until the stock is sold. II.Some investors need cash dividends, while others would prefer growth. Also, investors must pay taxes each year on the dividends received during the year, while taxes on the capital gain can be delayed until the gain is actually realized. III.Some investors need cash dividends, while others would prefer growth. Also, investors must pay taxes each year on the capital gain during the year, while taxes on the dividends can be delayed until the stock is sold. IV.It is of no interest to investors whether they receive dividend income or capital gains income, since both types of income are always taxed at the same rate.V.It is of no interest to investors whether they receive dividend income or capital gains income, since taxes on both types of income must be paid in the current year.
#8
The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual riskfree rate is 6.0%, based on daily compounding. A 1year call option on the stock, with an exercise price of $22, is available. Based on the binomial model, what is the option’s value? (Hint: Use daily compounding.)









#9
Top of Form
Refer to Exhibit 9.1. What is the best estimate of the firm’s WACC?









Bottom of Form
#10
NPV and IRR Analysis
Cummings Products Company is considering two mutually exclusive investments whose expected net cash flows are as follows:
EXPECTED NET CASH FLOWS  
Year  Project A  Project B 
0  $300  $405 
1  387  134 
2  193  134 
3  100  134 
4  600  134 
5  600  134 
6  850  134 
7  180  134 
a. Construct NPV profiles for Projects A and B.
Select the correct graph.
The correct graph (A, B, C or D) _____
b. What is each project’s IRR? Round your answers to two decimal places. Project A _____% Project B _____%
c. Calculate the two projects’ NPVs, if you were told that each project’s cost of capital was 10%. Round your answers to the nearest cent. Project A $_____ Project B $_____ Which project, if either, should be selected? (A or B) _____ Calculate the two projects’ NPVs, if the cost of capital was 17%. Round your answers to the nearest cent. Project A $_____ Project B $_____ What would be the proper choice? (A or B?) _____
d. What is each project’s MIRR at a cost of capital of 10%? (Hint: Note that B is a 6year project.) Round your answers to two decimal places. Project A _____% Project B _____% What is each project’s MIRR at a cost of capital of 17%? (Hint: Note that B is a 6year project.) Round your answer to two decimal places. Project A _____% Project B _____%
e. What is the crossover rate? Round your answer to two decimal places. _____% What is its significance? Select from the following: _______ I.The crossover rate has no significance in capital budgeting analysis. II.If the cost of capital is greater than the crossover rate, both the NPV and IRR methods will lead to the same project selection. III.If the cost of capital is less than the crossover rate, both the NPV and IRR methods lead to the same project selections.
#11
Replacement Analysis
The Everly Equipment Company’s flangelipping machine was purchased 5 years ago for $100,000. It had an expected life of 10 years when it was bought and is being depreciated by the straightline method by $10,000 per year. As the older flangelippers are robust and useful machines, it can be sold for $20,000 at the end of its useful life.
A new highefficiency digitalcontrolled flangelipper can be purchased for $130,000, including installation costs. During its 5year life, it will reduce cash operating expenses by $45,000 per year, although it will not affect sales. At the end of its useful life, the highefficiency machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3year class life rather than its 5year economic life, so the applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%.
The old machine can be sold today for $55,000. The firm’s tax rate is 35%, and the appropriate WACC is 12%.
a. If the new flangelipper is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest whole dollar. $_______
b. What are the incremental net cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest whole dollar.
CF1  $_______ 
CF2  $_______ 
CF3  $_______ 
CF4  $_______ 
CF5  $_______ 
c. What is the NPV of this project? Round your answer to the nearest whole dollar. $_______ Should Everly replace the flangelipper? _______
#12
Puckett Inc. riskadjusts its WACC to account for project risk. It uses a WACC of 8% for belowaverage risk projects, 10% for averagerisk projects, and 12% for aboveaverage risk projects. Which of the following independent projects should Puckett accept, assuming that the company uses the NPV method when choosing projects?









#13
The capital intensity ratio is generally defined as follows:









#14
AFN Equation
Broussard Skateboard’s sales are expected to increase by 15% from $8 million in 2013 to $9.2 million in 2014. Its assets totaled $3 million at the end of 2013. Baxter is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2013, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The aftertax profit margin is forecasted to be 3%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar. $ _______
Why is this AFN different from the one when the company pays dividends? Select from the following: ______ I. Under this scenario the company would have a lower level of retained earnings which would reduce the amount of additional funds needed. II. Under this scenario the company would have a lower level of retained earnings but this would have no effect on the amount of additional funds needed. III. Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed. IV. Under this scenario the company would have a higher level of retained earnings which would increase the amount of additional funds needed. V. Under this scenario the company would have a higher level of retained earnings but this would have no effect on the amount of additional funds needed.
#17
Sanchez Company has planned capital expenditures that total $2,000,000. The company wants to maintain a target capital structure that is 35% debt and 65% equity. The company forecasts that its net income this year will be $1,800,000. If the company follows a residual dividend policy, what will be its total dividend payment?









#18
Stock Split
Fauver Enterprises declared a 4for1 stock split last year, and this year its dividend is $1.10 per share. This total dividend payout represents a 10% increase over last year’s presplit total dividend payout. What was last year’s dividend per share? Round your answer to the nearest cent.
$_____
#19
Based on the information below for Benson Corporation, what is the optimal capital structure?









#20
Capital Structure Analysis
Pettit Printing Company has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of 10% perpetual bonds now selling at par. The company’s EBIT is $11.04 million, and its tax rate is 35%. Pettit can change its capital structure either by increasing its debt to 75% (based on market values) or decreasing it to 25%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 14% coupon. If it decides to decrease its leverage, it will call in its old bonds and replace them with new 8% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change.
The firm pays out all earnings as dividends; hence, its stock is a zero growth stock. Its current cost of equity, rs, is 14%. If it increases leverage, rs will be 16%. If it decreases leverage, rs will be 13%.
Present situation (50% debt): What is the firm’s WACC? Round your answer to three decimal places. ______% What is the total corporate value? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to three decimal places. $______ million
75% debt: What is the firm’s WACC? Round your answer to two decimal places. ______ % What is the total corporate value? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to three decimal places. $______ million
25% debt: What is the firm’s WACC? Round your answer to two decimal places. ______% What is the total corporate value? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to three decimal places. $______ million