Problem Set1 Cengage Finance. **Problem 2-3**

Income statement

Molteni Motors Inc. recently reported $2.25 million of net income. Its EBIT was $8 million, and its tax rate was 40%. What was its interest expense? (*Hint:*Write out the headings for an income statement and then fill in the known values. Then divide $2.25 million net income by 1 − T = 0.6 to find the pre-tax income. The difference between EBIT and taxable income must be the interest expense.) Round your answer to the nearest dollar. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000.

**Problem 2-5**

Net Cash Flow

Kendall Corners Inc. recently reported net income of $3.2 million and depreciation of $480,000. What was its net cash flow? Assume it had no amortization expense. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000.

**Problem 2-6**

Statement of Retained Earnings

In its most recent financial statements, Del-Castillo Inc. reported $35 million of net income and $930 million of retained earnings. The previous retained earnings were $920 million. How much in dividends did the firm pay to shareholders during the year? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000.

**Problem 3-2**

Debt Ratio

Vigo Vacations has $201 million in total assets, $4.6 million in notes payable, and $23.5 million in long-term debt. What is the debt ratio? Round your answer to two decimal places.

Debt ratio = total debts/ total assets

**Problem 3-4**

Price/Earnings Ratio

Reno Revolvers has an EPS of $2.00, a cash flow per share of $4.60, and a price/cash flow ratio of 7.0. What is its P/E ratio? Round your answer to two decimal places.

**Problem 3-5**

ROE

Needham Pharmaceuticals has a profit margin of 4.5% and an equity multiplier of 1.5. Its sales are $110 million and it has total assets of $48 million. What is its Return on Equity (ROE)? Round your answer to two decimal places.

**Problem 3-8**

Profit Margin and Debt Ratio

Assume you are given the following relationships for the Haslam Corporation:

Sales/total assets =1.4

Return on assets (ROA) =3%

Return on equity (ROE) =8%

1. Calculate Haslam’s profit margin. Do not round intermediate calculations. Round your answer to two decimal places.

2. Calculate Haslam’s liabilities-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places.

3. Suppose half of Haslam’s liabilities are in the form of debt. Calculate the debt-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places.

**Problem 3-9**

Current and Quick Ratios

The Nelson Company has $1,250,000 in current assets and $500,000 in current liabilities. Its initial inventory level is $400,000, and it will raise funds as additional notes payable and use them to increase inventory.

1. How much can Nelson’s short-term debt (notes payable) increase without pushing its current ratio below 1.7? Round your answer to the nearest cent.

2. What will be the firm’s quick ratio after Nelson has raised the maximum amount of short-term funds? Round your answer to two decimal places.

**Problem 3-10**

Times-Interest-Earned Ratio

The Morris Corporation has $500,000 of debt outstanding, and it pays an interest rate of 10% annually. Morris’s annual sales are $2.5 million, its average tax rate is 40%, and its net profit margin on sales is 4%. If the company does not maintain a TIE ratio of at least 6 to 1, its bank will refuse to renew the loan and bankruptcy will result. What is Morris’s TIE ratio? Round intermediate calculations to two decimal places. Round your answer to two decimal places.

**Problem 4-6**

Future Value: Ordinary Annuity versus Annuity Due

What is the future value of a 8%, 5-year ordinary annuity that pays $350 each year? Round your answer to the nearest cent.

If this were an annuity due, what would its future value be? Round your answer to the nearest cent.

**Problem 4-10**

Present and Future Values of Single Cash Flows for Different Interest Rates

Use both the TVM equations and a financial calculator to find the following values. Round your answers to the nearest cent. (*Hint:* Using a financial calculator, you can enter the known values and then press the appropriate key to find the unknown variable. Then, without clearing the TVM register, you can “override” the variable that changes by simply entering a new value for it and then pressing the key for the unknown variable to obtain the second answer. This procedure can be used in parts b and d, and in many other situations, to see how changes in input variables affect the output variable.)

a. An initial $300 compounded for 10 years at 5.6 percent.

b. An initial $300 compounded for 10 years at 11.2 percent.

c. The present value of $300 due in 10 years at a 5.6 percent discount rate.

d. The present value of $300 due in 10 years at a 11.2 percent discount rate.

**Problem 4-14**

Uneven Cash Flow Stream

a. Find the present values of the following cash flow streams. The appropriate interest rate is 6%. Round your answers to the nearest cent. (*Hint:* It is fairly easy to work this problem dealing with the individual cash flows. However, if you have a financial calculator, read the section of the manual that describes how to enter cash flows such as the ones in this problem. This will take a little time, but the investment will pay huge dividends throughout the course. Note that, when working with the calculator’s cash flow register, you must enter CF0 = 0. Note also that it is quite easy to work the problem with Excel, using procedures described in the Chapter 4 Tool Kit.)

**Year**

**Cash Stream A Cash Stream B**

1 $100 $300

2 400 400

3 400 400

4 400 400

5 300 100

b. What is the value of each cash flow stream at a 0% interest rate? Round your answers to the nearest cent.

**Problem 4-26**

Reaching a Financial Goal

You need to accumulate $10,000. To do so, you plan to make deposits of $1,350 per year – with the first payment being made a year from today – into a bank account that pays 10.97% annual interest. Your last deposit will be less than $1,350 if less is needed to round out to $10,000. How many years will it take you to reach your $10,000 goal? Round your answer up to the nearest whole number.

How large will the last deposit be? Round your answer to the nearest cent.

**Problem 4-25**

Repaying a Loan

While Mary Corens was a student at the University of Tennessee, she borrowed $12,000 in student loans at an annual interest rate of 7.90%. If Mary repays $1,500 per year, how long (rounded up to the nearest year) will it take her to repay the loan?