财务管理双语课后练习答案.doc

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财务管理双语部分课后练习答案
2-7 a. Calculation of gross income:

2000
Salary $60,000
Dividend Income 10,000
Interest Income (IBM bonds only) 5,000
ST capital gains 1,000 = $22,000 - $21,000
Gross Income (excluding LT capital gains) $76,000

LT capital gains = $22,000 - $9,000 = 13,000
**LT Capital gains tax rate =20%.

Not taxed: $10,000 interest on Florida municipal bonds

Calculation of taxable income:

Gross Income $76,000
Exemption ( 2,750)
Deductions ( 5,000)
Taxable Income (excluding LT capital gains) $68,250

Personal tax = Tax on taxable income (excluding LT capital gains) + LT capital gains tax
= [$14,138.5 + ($68,250 - $62,450)(0.31) + $13,000(0.2)
= [$14,138.5+ $1,798] + $2,600
= $18,536.50

b. Marginal tax rate = 31%.

Average tax rate = $18,536.50/($ 68,250+$13,000)= 22.8%.

c. After-tax returns:

IBM = (0.11) - (0.31)(0.11) =7.59%
FLA = (0.09) - 0 = 9.00%

The Florida bonds provide a higher after-tax return.

d. 9% = 11%(1 - T). Now solve for T:
9% = 11% - 11%T
11%T = 2
T = 2/11 = 18.18%.

At a tax rate less than 18.2 percent, Margaret would be better off holding 11 percent taxable bonds, but at a tax rate over 18.2 percent, she would be better off holding tax-exempt municipal bonds. Given our progressive tax rate system, it makes sense for wealthy people to hold tax-exempt bonds, but not for those with lower incomes and consequently lower tax rates.

2-8 a. Salary and income:a
Donald’s salary $50,000.0
Interest from bonds 2,500.0
Income from rental property 42,000.0 = $3,500 x 12 months
Adjusted income $94,500.0

Expenses, exemptions, and deductions:
Exemptions = 2 x $2,750 $ 5,500.0
Interest on mortgagesb 18,000.0
Plumbing expensesc 1,250.0
Total expenses and deductions $24,750.0

Taxable income $69,750.0

Taxes = $6457.5 + ($69,750 - $43,050) x 0.28 = $13,933.50

a We could have included Maryanne’s salary in this section, but then we would have had to recognize the amount she earned as an expense associated with the rental property. Because the two items cancel each other, we need not include them here. Also, we ignore employment taxes in this problem.

b The amount of the interest and property taxes paid on both houses is tax deductible.

c Only the plumbing expense associated with the rental property is tax deductible because it was incurred in the generation of business revenues. Such personal expenses are not deductible.

b. Salary and income:
Donald’s salary $50,000.0
Interest from bonds 2,500.0
Adjusted income $52,500.0

Expenses, exemptions, and deductions:
Exemptions = 2 x $2,750 $ 5,500.0
Interest on mortgagesa 5,350.0
Total expenses and deductions $10,850.0

Taxable income $41,650.0

Taxes = $0 + $41,650 x (0.15) = $6,247.50

a Only the amount of interest and property taxes paid on the couple’s residence is applicable.

c. Expenses incurred to generate business income are tax deductible, but personal expenses are not. The cost of fixing the plumbing in the rental house would be considered a business expense, but the cost of fixing the plumbing in the Jefferson’s own house would be considered a personal expense.

3-2 a. Industry
Campsey Average
1.98x 2.0x
75.0 days 35.0 days
5.60x 5.6x
1.70x 3.0x
1.7% 1.2%
2.9% 3.6%
7.6% 9.0%
61.9% 60.0%
b. For Campsey, ROA = PM x TA turnover = 1.7% x 1.7 = 2.9%.
For the industry, ROA = 1.2% x 3.0 = 3.6%.

c. Campsey’s days sales outstanding is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While Campsey’s profit margin is higher than the industry average, its other profitability ratios are low compared to the industry—net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

d. If 2005 represents a period of supernormal growth for Campsey, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2005 ratios will be misled, and a return to normal conditions in 2006 could hurt the firm’s stock price.

3-4 a. Finnerty Industry
Furniture Average
2.73x 2.0x
30.00% 30.0%
11.00x 7.0x
4.15x 8.5x
29.89 days 24.0 days
5.41x 6.0 x
1.77x 3.0 x
3.40% 3.0%
6.00% 9.0%
8..57% 12.9%
b. ROA = Profit margin x Total assets turnover

Finnerty Industry Comment
Profit margin 3.4% 3.0% Good
Total assets turnover 1.8x 3.0 x Poor
Return on total assets 6.0% 9.0% Poor
c. Analysis of the Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low. Either sales should be increased at the present level of assets, or the current level of assets should be decreased to be more in line with current sales. Thus, the problem appears to be in the balance sheet accounts.

d. The comparison of inventory turnover ratios shows that other firms in the industry seem to be getting along with about half as much inventory per unit of sales as Finnerty. If Finnerty’s inventory could be reduced this would generate funds that could be used to retire debt, thus reducing interest charges and improving profits, and strengthening the debt position. There might also be some excess investment in fixed assets, perhaps indicative of excess capacity, as shown by a slightly lower than average fixed assets turnover ratio. However, this is not nearly as clearcut as the over-investment in inventory.

e. If Finnerty had a sharp seasonal sales pattern, or if it grew rapidly during the year, many ratios might be distorted. Ratios involving cash, receivables, inventories, and current liabilities, as well as those based on sales, profits, and common equity, could be biased. It is possible to correct for such problems by using average rather than endofperiod figures.

4-6 a. 5,000 units 12,000 units
Income ($45/unit) $225,000 $540,000
Variable costs ($20/unit) (100,000) (240,000)
Fixed costs (175,000) (175,000)
Gain (loss) $( 50,000) $125,000
b.
SOpBE = 7,000 x $45 = $315,000.

4-3 a.

b. DOL = 2.5; so for every 1 percent change in sales, EBIT will change by 2.5 percent. DFL = 3.0; so for every 1 percent change in EBIT, EPS will change by 3.0 percent. Combining these two leverages, we have DTL = 7.5; so for every 1 percent change in sales, EPS will change by 7.5 percent (2.5 x 3.0). For example, if Van Auken’s sales decrease by 2 percent, EBIT will decrease by 5 percent (operating leverage), and this 5 percent decline in EBIT will result in a 15 percent decrease in EPS (financial leverage). In combination, then, leverage will cause a 15 percent decrease in EPS when sales decrease by 2 percent, and vice versa.

c. Van Auken can reduce its total leverage by reducing the degree of operating leverage, the degree of financial leverage, or both. All else equal, the company can reduce its degree of operating leverage by reducing fixed operating costs, decreasing the variable cost ratio, or by increasing the selling prices of the products. The degree of financial leverage can be reduced by decreasing fixed financial costs, such as interest and preferred dividends.

4-5 a. 8,000 units 18,000 units
Sales ($25/watch) $200,000 $450,000
Variable costs ($15/watch) (120,000) (270,000)
Fixed costs (140,000) (140,000)
Gain (loss) ($ 60,000) $ 40,000
b.
SOpBE = Q x P = (14,000)($25) = $350,000.
FC = 140,000, SOpBE = 350,000, QOpBE = 14,000.
c.

d. If the selling price rises to $31, while the variable cost per unit remains fixed, P - V increases to $16.

SOpBE = Q x P = (8,750)($31) = $271,250.
The breakeven point drops to 8,750 units. The firm now has less operating leverage than under Parts a and b; hence, the variability in the firm’s profit stream has been decreased, but the opportunity for magnified profits has also been decreased.
e. If the selling price rises to $31 and the variable cost per unit rises to $23, P - V falls to $8.

SOpBE = Q x P = (17,500)($31) = $542,500.
The breakeven point increases to 17,500 units. The firm now has more operating leverage than under Parts a and b.

4-6 a. 5,000 units 12,000 units
Income ($45/unit) $225,000 $540,000
Variable costs ($20/unit) (100,000) (240,000)
Fixed costs (175,000) (175,000)
Gain (loss) $( 50,000) $125,000
b.
SOpBE = 7,000 x $45 = $315,000.
c. 4,000($45 - $20) = $100,000 which falls short of covering all fixed charges. However, the firm's cash flow covers cash fixed charges of $65,000 by a wide margin.
Creditors are advised to be willing to accept late payments from Dellva. The company generates sufficient cash to pay its cash fixed charges.

4-7 a. EBITFinBE = $2,000

EBIT $2,000
Interest (2,000)
Earnings before taxes 0
Taxes (40%) 0
Net income $ 0

EPS = $0/1,000 = $0

b.

Every 1 percent change in EBIT will result in a 1.8 percent change in EPS.

c.

EBIT $3,000
Interest (2,000)
Earnings before taxes 1,000
Taxes (40%) ( 400)
Net income $ 600
Preferred dividends ( 600)
Earnings available to common stockholders $ 0

EPS = $0/1,000 = $0

5-2 a. = 0.1(10%) + 0.2(12%) + 0.4(13%) + 0.2(16%) + 0.1(17%) = 13.5%.
b. To determine the fund's beta, ßF, the weight for the amount invested in each stock needs to be computed.

A = $160/$500 = 0.32
B = $120/$500 = 0.24
C = $80/$500 = 0.16
D = $80/$500 = 0.16
E = $60/$500 = 0.12

ßF = 0.32(0.5) + 0.24(2.0) + 0.16(4.0) + 0.16(1.0) + 0.12(3.0)
= 0.16 + 0.48 + 0.64 + 0.16 + 0.36 = 1.8.

c. kRF = 8% (given)

Therefore, the SML equation is

kF = kRF + (kM - kRF)ßF = 8% + (13.5% - 8%)ßF = 8% + (5.5%)ßF.

d. Use ßF = 1.8 in the SML determined in Part b:

= 8% + (13.5% - 8%)1.8 = 8% + 9.90% = 17.90%.

e. kN = Required rate of return on new stock = 8% + (5.5%)2.0 = 19%.

An expected return of 18 percent on the new stock is below the 19 percent required rate of return on an investment with a risk of ß = 2.0. Because kN = 19% > 18%, the new stock should not be purchased. The expected rate of return that would make McAlhany indifferent to purchasing the stock is 19 percent.

5-5 a. = 0.1(-35%) + 0.2(0%) + 0.4(20%) + 0.2(25%) + 0.1(45%) = 14%
= 12%
b. = (–10% – 12%)2(0.1) + (2% – 12%)2(0.2) + (12% – 12%)2(0.4)
+ (20% – 12%)2(0.2) + (38% – 12%)2(0.1) = 148.8

CVX = 12.20%/12% = 1.02

CVY = 20.35%/14% = 1.45.

5-8 1. Old portfolio beta = 1.12 = (0.05)ß1 + (0.05)ß2 +...+ (0.05)ß20

1.12 = (Σßj)(0.05)

Σßj = 1.12/0.05 = 22.4 = 20(1.12)

New portfolio beta = (22.4 - 1.0 + 1.75)/20 = 1.1575 = 1.16

2. Σßj excluding the stock with the beta equal to 1.0 is 22.4 – 1.0 = 21.4, so the beta of the portfolio excluding this stock is ß = 21.4/19 = 1.1263. The beta of the new portfolio is:

1.1263(0.95) + 1.75(0.05) = 1.1575 = 1.16

…
6-16 a. 0 1 2 3 4 16 17 18 19 20 Periods

-600 -600 -600 -600 -600 -600 -600 -600 -600

(1) Dealer’s “special financing package”

r = 4%/4 = 1%, t = 5 x 4 = 20,
PVA=600×(P/A,1%,20)=600×18.0456=10827.36
So Sarah must use $2,172.64 = $13,000 - $10,827.36 of the $3,000 in her checking account if the dealer's financing is used.

(2) Bank loan
r = 12%/4 = 3%, t = 5 x 4 = 20,
PVA=600×(P/A,3%,20)=600×14.8775=8926.48
The difference between this amount and the PVA of the dealer's “special financing package” is $1,900.86 = $10,827.36 - $8,926.50, so Sarah would have to negotiate a reduction in the sticker price equal to $1,901 to make the bank financing more attractive than the dealer’s financing.

6-17 Information given:
1. Janet will save for 40 years at 7 percent compounded annually, then retire.
2. When she retires, Janet wants to take a trip around the world at a cost of $120,000.
3. After the trip, Janet wants to receive payments equal to $70,000 per year, and these payments are expected to last for 20 years.
4. Upon retirement, Janet's funds will earn 5 percent compounded annually.
The cash flow time line for Janet is:

0 1 2 3 40
5%
7%
0 1 2 19 20

-PMT -PMT -PMT -PMT
120,000Trip
70,000 70,000 70,000 70,000

FVA40=70000×(P/A,5%,20)+120000
=7000×12.4622+120000
=992354
=A×(F/A,7%,40)
= A×199.64

A=4970.72≈4971
Janet needs to contribute $4,971 each year for 40 years to meet her retirement goals.

7-7 a. The coupon interest is 5% per year, and the original yield to maturity was 5 percent; so both bonds would have sold for par, or for $1,000, at the time of issue.

b. On January 1, 2005, the IBM bond had a remaining life of 9 years. Thus, its value is calculated as follows:

On January 1, 2005, the GM bond had a remaining life of 19 years. Thus, its value is calculated as follows:

c. The capital gains yields for the bonds are:

d. The current yield for both bonds was $50/$1,000 = 0.05 = 5.0%

e. Total returnIBM = 5% + (-18.75%) = –13.75%

Total returnGM = 5% + (-28.81%) = –23.81%

f. The IBM bond, which has the shorter term to maturity, lost less than the GM bond. The price of the shorter-term bond changes less with each change in interest rates (yields), so when the market rates increase, the prices for shorter-term bonds will dec