# Net Tax Calculator Cyprus - DOC by nos76406

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```									           Practice Problems for Chapter 1, Chapter 2 and Chapter 3
Summer 2009

Chapter 2

1.
A savings account was established with \$36,000 exactly 7 years ago. The account earns 4.3%
compounded annually. Otherwise, the account has been left alone. When the annual interest is
credited to the account today, how much interest is credited?
a. \$2,918 b. \$2,411 c. \$1,993 d. \$2,652 e. \$2,192

PV=-\$36000; N=7: I/Y= 4.3; PMT= 0; FV= ? = 48,338.44
PV=-\$36000; N=6: I/Y=4.3; PMT=0; FV= ? = 46,345.86
Thus Interest earned this year is the difference, which is \$1992.86.

2.
A savings account was established with \$36,000 exactly 7 years ago. The account earns 4.3%
compounded annually. Otherwise, the account has been left alone. Next year, how much interest-
on-interest will the account earn?
a. \$482 b. \$438 c. \$584 d. \$642 e. \$531

Same information for this problem. (Interest+principal) or future value after 7 years is
\$48,338.44.
Principal = \$36,000.
Thus interest on interest for next year is interested accumulated so far times interest rate.
Thus interest on interest = (48,338.44-36,000)*.043 = \$530.55.

3.
A deposit exactly 11 years ago of \$1,400 earns 10.9% annual interest compounded      annually.
There have been no other deposits or withdrawals. How much is in the account right now?
a. \$5,286 b. \$4,806 c. \$4,369 d. \$3,972 e. \$5,815

N=11; PV=-\$1400; I/Y=10.9; PMT=0; FV= ? = \$4,368.93.

4.
A deposit exactly 11 years ago of \$1,400 earns 10.9% annual interest compounded annually.
There have been no other deposits or withdrawals. As of today, how much total interest has
accumulated on the deposit?
a. \$3,592 b. \$3,266 c. \$2,454 d. \$2,969 e. \$2,699

\$4,368.93 – \$1,400 = \$2,968.93

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5.
A deposit exactly 11 years ago of \$1,400 earns 10.9% annual interest compounded annually.
There have been no other deposits or withdrawals. As of today, how much total interest has
accumulated on the deposit?
b. \$3,592 b. \$3,266 c. \$2,454 d. \$2,969 e. \$2,699

\$4,368.93 – 1,400 = \$2,968.93

6.
A deposit exactly 11 years ago of \$1,400 earns 10.9% annual interest compounded annually.
There have been no other deposits or withdrawals. As of today, how much total interest-on-
interest has accumulated?
a. \$1,290 b. \$1,173 c. \$1,561 d. \$1,717 e. \$1,419

Interest on interest = Total interest – simple interest = \$2,968.93 - \$1,678.60 = \$1,290.33.

7.
An account was established 10 years ago with an initial deposit. Today the account is credited
with annual interest of \$487. The interest rate is 6.9% compounded annually. No other deposits
or withdrawals have been made. How much is the end-of-day balance?
a. \$6,856 b. \$6,233 c. \$8,296 d. \$7,542 e. \$9,126

Try to solve this problem

8.
An account was established 10 years ago with an initial deposit. Today the account is credited
with annual interest of \$487. The interest rate is 6.9% compounded annually. No other deposits
or withdrawals have been made. How much was the initial deposit?
a. \$3,870 b. \$4,257 c. \$4,683 d. \$5,666 e. \$5,151

We need to know today’s value (that is, FV) first.
Amount last time period*interest rate = recent interest amount
So, Amount last time period*0.069 = \$487
Amount last time period = \$7,057.97.
Today’s value = Amount last time period + Interest on that amount
Today’s value = \$7057.97 + \$487 = \$7,544.97.
Now, FV = \$7,544.97; I/Y = 6.9; N =10; PMT = 0; Initial Value = PV = ? = -\$3,871.51

9.
There is a house that today costs \$196,000 and, for peculiar reasons, in exactly 5 years you want
to buy the house. You expect that because of inflation the house price will increase 7.4% per
year. How much must you deposit today into an account that earns 10.8% per year such that the
future purchase is perfectly financed?
a. \$152,471 b. \$126,009 c. \$138,610 d. \$167,718 e. \$184,489

Price of the house after 5 years = \$196,000(1+.074)^5 = \$280,077.

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You have to have this amount to buy the house after 5 years when you consider the inflation.
So, FV = \$280,077; N=5; I/Y = 10.8; PMT=0; PV =? = - \$167,717.60.

10.
Today you sell your stock fund for \$75,100. You bought it 12 years ago and otherwise the
account has been left alone. The stocks have earned a 16.8% average annual rate of return. How
much did you buy the stocks for?
a. \$14,096 b. \$12,815 c. \$15,506 d. \$11,650 e. \$17,057

FV = 75,100; N=12; I/Y=16.8; PMT=0; PV= ? = - \$11,650

11.
In exactly 20 months a bill of \$5,270 is due. Today you deposit money such that if the account
earns 0.86% per month, the bill is perfectly financed. How much do you deposit?
a. \$4,885 b. \$6,501 c. \$4,440 d. \$5,373 e. \$5,910

FV=\$5270; N=20; I/Y=.86; PMT=0; PV= ? = - \$4440.49

12.
You are trying to choose whether today you should buy investment A or B. With investment A,
you’ll receive \$5,000 in 12 years. With investment B, you’ll pay \$5,293 today and receive
\$8,000 in 8 years. If your sole objective is to choose the investment that promises the largest
annual rate of return, which statement is most accurate?
a. Investment A is best if A costs anything less than \$3308
b. Investment B is best if A costs anything less than \$2206
c. Investment B is best if A costs the same as B.
d. Investment A is best if A costs anything more than \$3308
e. Investment B is best if A costs anything more than \$2206

You do not have to calculate anything. If the costs are same, you will always invest in B. Because
B has less time horizon and more return.

13.
Today you purchase some international mutual funds for \$7,700. You read that they should earn
a 12.4% average annual rate of return throughout the foreseeable future. If you leave the account
alone, how many years should it take to accumulate funds worth \$50,000?
a. 13 b. 16 c. 11 d. 15 e. 12

PV=- \$7,700; I/Y=12.4; FV=\$50,000; PMT= 0; N =? = 16.00 years.

14.
A newspaper reports that a mid-level manager today has stocks worth \$60,800. The person
bought the stocks with \$5,400 from a summer job while in college. No other purchases or sales
have been made. The stocks have earned an average annual return of 13.6%. How many years
ago did she buy the stocks?

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a. 21 b. 19 c. 18 d. 20 e. 22

15.
Today your account was credited with its annual interest of \$22,250. The account was
established some time ago with a \$30,950 initial deposit. No other deposits or withdrawals have
been made. The account earns 10.6% annual interest. How many years ago was the account
established?
a. 22 b. 19 c. 23 d. 21 e. 20

16.
Some time ago a \$73,600 initial deposit opened an account. No other deposits or withdrawals
have been made. Today the annual interest was credited to the account. Total lifetime interest
now equals \$131,145. The account earns 8.9% annual interest. How many years ago was the
account established?
a. 11 b. 12 c. 10 d. 13 e. 14

Do it on your own. Calculate FV as initial deposit plus interest earned.

17.
Exactly 5 years ago you put \$7,150 in an investment account. No other deposits or withdrawals
have been made. Today the account was credited with its annual interest so that its balance now
is \$9,704. What is the annual average rate of return for the account?
a. 4.73% b. 4.30% c. 6.30% d. 5.73% e. 5.21%

Straight forward question. You can do it. Just find I/Y.

18.
Today you are buying some stocks for \$8,780. In 13 years you would like the account to have
accumulated \$26,920. What is the desired annual average rate of return for the account?
a. 9.00% b. 6.76% c. 6.15% d. 7.44% e. 8.18%

Same as before.

19.
Exactly 14 years ago an investor purchased a classical painting for \$8,640. Today the painting
probably can be sold for \$34,090. What is the annual average rate of return on the investment?
a. 10.30% b. 9.36% c. 11.33% d. 8.51% e. 12.46%

Same as before.

20.
A sum of money doubles in 17 years. What is the annual average rate of return?

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a. 5.54% b. 4.58% c. 5.04% d. 4.16% e. 6.09%

Consider any amount as PV (negative) and the doubled amount as FV and then find I/Y.

21.
Today your account was credited with its annual interest of \$645, thereby bringing the balance to
\$7,300. What is the account’s annual interest rate?
a. 14.20% b. 11.74% c. 9.70% d. 12.91% e. 10.67%

Amount last period = \$7300 – \$645 =\$ 6655. Interest rate = 645/6655 = .0969 = 9.70% approx.

22.
In exactly 18 months a bill of \$14,480 is due. Today you deposit money such that if the account
earns a target rate of return of 0.98% per month, the bill is perfectly financed. Unfortunately,
your account does not actually earn the target rate of return, and when the bill is due you lack
\$877. What was the actual monthly rate of return?
a. 0.47% b. 0.52% c. 0.63% d. 0.43% e. 0.57%

You need \$14,480 in 18 months. PV of that is \$12,148.76.
You lack 877 finally. So the FV = \$14480 – \$877= \$13603.
Now enter N = 18; PMT= 0; PV=- \$12,148.76; FV= \$13,603; I/Y= ? = .6301.

23.
In exactly 23 months a bill of \$4,120 is due. Today you deposit money such that if the account
earns a target rate of return of 0.85% per month, the bill is perfectly financed. No other deposits
or withdrawals have been made. Your account actually accumulates \$3,900. What was the actual
average monthly rate of return?
a. 0.50% b. 0.61% c. 0.46% d. 0.55% e. 0.42%

Do it in two steps. First find the PV of \$4,120 and then enter the values in your calculator and
find I/Y.

24.
A deposit exactly 10 years ago of \$2,600 earns 7.6% annual interest compounded quarterly.
There have been no other deposits or withdrawals. How much is in the account right now?
a. \$6,072 b. \$5,520 c. \$5,018 d. \$4,147 e. \$4,562

N=10*4=40; I/Y= 7.6/4= 1.9; PV= -\$2,600; PMT= 0; FV= ? = \$5520.02

25.
A deposit exactly 10 years ago of \$2,600 earns 7.6% annual interest compounded quarterly.
There have been no other deposits or withdrawals. As of today, how much total interest has
accumulated on the deposit?
a. \$2,920 b. \$2,413 c. \$2,194 d. \$2,655 e. \$3,212

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26.
Today you invest \$2,600 in a bond fund that promises to pay 7.3% per year compounded
semiannually. You instruct the fund to reinvest the semiannual interest so that it remains in the
account. The account sits there accumulating interest, otherwise ignored. After 25 years you
check the account balance. How much total interest-on-interest has accumulated?
a. \$10,002 b. \$9,093 c. \$11,002 d. \$12,103 e. \$8,266

FV when compounding semiannually = \$15,611.28
Total interest = \$15,611.28 – \$2600 = \$13,011.28.
Simple interest = \$2600*.073*25 = \$4745.
Therefore, interest on interest = \$13,011.28 – \$4745 = \$8,266.28

27.
An account was established 7 years ago with an initial deposit. Today the account is credited
with its periodic interest of \$79.00. The annual interest rate is 10.6% compounded monthly. No
other deposits or withdrawals have been made. How much is the end-of-day balance?
a. \$6,778 b. \$7,456 c. \$9,924 d. \$9,022 e. \$8,202

Last month’s interest = \$79.
Monthly interest rate = 10.6/12 = .8833% = .008833
Balance of last month * interest rate = \$79
Balance last month = 79/ 0.008833 = \$8943.39
Now balance = 8943.9 + 79 = \$9,022.39

28.
In 9 years you must transfer \$6,600 to associates. Today you invest sufficient money such that if
it earns 13.4% per annum, compounded semiannually, you’ll accumulate the required funds.
How much do you invest?
a. \$2,054 b. \$3,007 c. \$2,485 d. \$2,734 e. \$2,259

FV = \$6,600
I/Y = 13.4/2 = 6.7
N = 9 *2 = 18
PMT = 0
PV = ? = -\$2,053.92

29.
A sum of money earns sufficient interest such that the balance doubles in 14 years. Given that it
is compounded monthly, what is the annual percentage rate?
a. 4.96% b. 3.73% c. 5.46% d. 4.51% e. 4.10%

Do on your own [Hint: monthly rate .4134%
So APR= .4134 *12 = 4.9613%]

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30.
A sum of money earns sufficient interest such that the balance doubles in 14 years. Given that it
is compounded monthly, what is the effective annual rate?
a. 6.14% b. 5.58% c. 4.19% d. 4.61% e. 5.08%

EAR = [1+ .049613/12] 12 – 1 = .0508 = 5.08%

31.
What is the effective annual rate (EAR) for a credit card whose annual percentage rate is 18.50%
compounded monthly?
a. 24.38% b. 22.17% c. 26.82% d. 18.32% e. 20.15%

EAR = [1 + .1850/12] 12 – 1 = 20.15%

32.
You invest \$1,380 today. One year from today you invest \$1,680. Finally, two years from today
you invest \$730. There are no other deposits or withdrawals. Your account earns 7.1% annual
interest (compounded annually). How much is in the account immediately after the last deposit?
a. \$6,021 b. \$4,112 c. \$4,976 d. \$5,473 e. \$4,523

FV of cash flows=1380 (1.071)2 + 1680 (1.071) + 730 (1)
= 1,582.92 + 1,799.28 + 730
=\$ 4112.20

33.
What is the PV of the cash flows in Question 32?

PV = 730/1.071^2 + 1680/1.071 + 1380 = 636.42+1568.63+1380 = \$3,585.05.
In we can go back to FV again –
PV = - \$3,585.05, I/Y= 7.1, N= 2; PMT= 0; FV= ? = \$4112.20

34.
You invest \$1,380 today. One year from today you invest \$1,680. Finally, two years from today
you invest \$730. There are no other deposits or withdrawals. Your account earns 7.1% annual
interest (compounded annually). How much is in the account three years from today?
a. \$3,309 b. \$4,845 c. \$4,404 d. \$3,640 e. \$4,004

FV = 1380 (1.071) 3 + 1680 (1.071)2 + 730 (1.071)
= 1695.30 + 1,927.02 + 781.83
= \$4404.15

35.
You invest \$1,380 today. One year from today you invest \$1,680. Finally, two years from today
you invest \$730. There are no other deposits or withdrawals. Your account earns 7.1% annual
interest (compounded annually). Immediately after the last deposit is made, how much total
interest will the account have earned?

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a. \$354 b. \$322 c. \$390 d. \$293 e. \$266

36.
Questions from the book (answers are given to the even number problems at the end of the text
book).
Problems 2.10, 2.12, 2.14, 2.16, 2.18, 2.20, 2.24, 2.28, and 2.34.

37.
All lecture note problems/examples covered in the class.

Chapter 1
1. Which of the following statements is most correct?

a. One advantage of forming a corporation is that you have limited liability.
b. Corporations face fewer regulations than sole proprietorships.
c. One disadvantage of being a sole proprietor is that you have to pay corporate taxes,
even though you don’t realize the benefits of being a corporation.
d. Statements b and c are correct.
e. None of the statements above is correct.

2. Which of the following statements is most correct?

a. Corporations generally face fewer regulations than sole proprietor-ships do.
b. Corporate shareholders have unlimited liability.
c. It is usually easier to transfer ownership in a corporation than it is to transfer ownership
in a sole proprietorship.
d. All of the above statements are correct.
e. None of the above statements is correct

3. The primary goal of a publicly-owned firm interested in serving its stockholders should be to

a.   Maximize expected total corporate profit.
b.   Maximize expected EPS.
c.   Minimize the chances of losses.
d.   Maximize the stock price per share.
e.   Maximize expected net income.

4. Which of the following actions are likely to reduce agency conflicts between stockholders and managers?

a.   Paying managers a large fixed salary.
b.   Increasing the threat of corporate takeover.
c.   Placing restrictive covenants in debt agreements.
d.   All of the statements above are correct.
e.   Statements b and c are correct.

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5. Which of the following statements is most correct?

a. Corporations are taxed more favorably than sole proprietorships.
b. Corporations have unlimited liability.
c. Because of their size, large corporations face fewer regulations than smaller corporations and
sole proprietorships.
d. Reducing the threat of corporate takeover increases the likelihood that managers will act in
shareholders’ interest.
e. Bond covenants are designed to reduce potential conflicts between stockholders and
bondholders.

6. Number of partners in S-Corporation is less than or equal to 75.
a. True
b. False

7. Corporations have double taxation.
a. True
b. False

8. CFO is in charge of producing and selling of company products.
a. True
b. False

9. If stock price is too low, hostile takeover may take place.
a. True
b. False

10. Now stock holders have more power than before.
a. True
b. False

11. A corporation is a legal entity and separate from its owners and managers.
a. True
b. False

12. In equilibrium, a share’s actual market price must equal its intrinsic value.
a. True
b. False

13. A financial analyst can precisely measure a share’s intrinsic value.
a. True
b. False

Chapter 3

1. Which of the following items is included as part of a company’s current assets?

a. Accounts payable.
b. Inventory.

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c. Accounts receivable.
d. Statements b and c are correct.
e. All of the statements above are correct.

2. All else equal, which of the following actions will increase the amount of cash on a company’s
balance sheet?

a.   The company issues new common stock.
b.   The company repurchases common stock.
c.   The company pays a dividend.
d.   The company purchases a new piece of equipment.
e.   All of the statements above are correct.

3. Assume that a company currently depreciates its fixed assets over 7 years. Which of the
following would occur if a tax law change forced the company to depreciate its fixed assets over
a.   The company’s tax payment would increase.
b.   The company’s cash position would increase.
c.   The company’s net income would increase.
d.   Statements a and c are correct.
e.   Statements b and c are correct.

4. Net working capital is defined as current assets minus current liabilities.
a. True
b. False

5. Stockholders’ equity equals to
a. common stock only.
b. retained earnings only.
c. both a and b.

6. The balance sheet is a snapshot of the firm’s financial position at a specific point in time.

a. True.
b. False.

7. Under GAAP company must report the value of its assets at market price.
a. True.
b. False.

8. Historical price of an asset minus its accumulated depreciation is called
a. Market value.
b. Book value.
c. Market price.
d. None of the above.

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9. Method of depreciation does not have any impact on net income.
a. True.
b. False.

10. Book value of the company’s common equity is simply the
a. Reported book value of the assets minus the book value of the liabilities.
b. Reported book value of the assets plus the book value of the liabilities.
c. Market price of assets.
d. All of the above.

11. Amortization is a noncash charge similar to depreciation.
a. True.
b. False.

12. Depreciation is a cash outlay.
a. True.
b. False.

13. An analyst has collected the following information regarding Gilligan Grocers:

   Earnings before interest and taxes (EBIT) = \$700 million.
   Earnings before interest, taxes, depreciation and amortization (EBITDA) = \$850
million.
   Interest expense = \$200 million.
   The corporate tax rate is 40 percent.
   Depreciation is the company’s only non-cash expense or revenue.

What is the company’s net cash flow?

a. \$850 million
b. \$650 million
c. \$570 million
d. \$450 million
e. \$500 million

EBT = 700 – 200 = 500
NI = 500(1 -.4) = 300
NCF = NI + Depreciation = 300 + 150 = \$450 million.

14. Casey Motors recently reported the following information:

   Net income = \$600,000.
   Tax rate = 40%.
   Interest expense = \$200,000.
   Total investor-supplied operating capital employed = \$9 million.
   After-tax cost of capital = 10%.

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What is the company’s EVA?

a.   -\$300,000
b.   -\$180,000
c.    \$ 0
d.    \$200,000
e.    \$400,000

EVA = EBIT (1 - T) -  Total investor-supplied  cost of capital .
    capital employed    
After-tax

                                                

Note that EBIT = Earnings before taxes plus interest expense.

Given that NI = 600,000, you have to go backward in the income statement to find EBIT.
,
\$600 000
Earnings before taxes = EBT =               = \$1,000,000.
0 .6

EBIT = \$1,000,000 + \$200,000 = \$1,200,000.

EVA = \$1,200,000(1-0.4) - \$9,000,000(0.10)
= -\$180,000.

15. Whitehall Clothiers had \$5,000,000 of retained earnings on its balance sheet at the end of 2001.
One year later, Whitehall had \$6,000,000 of retained earnings on its balance sheet. Whitehall
has one million shares of common stock outstanding, and it paid a dividend of \$0.80 per share in
2002. What was Whitehall’s earnings per share in 2002?

a.   \$0.80
b.   \$1.00
c.   \$1.80
d.   \$5.00
e.   \$6.00

Retained Earnings for 2002 = \$6 mill – \$5 mill = \$1 mill
Dividends paid = 1 million shares * dividend per share = \$800,000.
NI = Retained Earnings + Dividends paid = \$1,800,000.
Earnings per share = NI/# of shares = \$1.8

16. New Mexico Lumber recently reported that its earnings per share were \$3.00. The company
has 400,000 shares of common stock outstanding, its interest expense is \$500,000, and its
corporate tax rate is 40 percent. What is the company’s operating income (EBIT)?

a. \$ 980,000
b. \$1,220,000
c. \$2,000,000
d. \$2,500,000
e. \$3,500,000
EPS = 3.00. NI = EPS* # of shares

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NI = \$1,200,000.
Now go backward in the income statement.
EBT = \$1,200,000/(1-0.4)= \$2,000,000.
EBIT = EBT + Interest = \$2,000,000 + \$500,000 = \$2,500,000.

(The following information applies to the next four problems.)

You have just obtained financial information for the past 2 years for Sebring Corporation.

SEBRING CORPORATION: INCOME STATEMENTS FOR YEAR ENDING DECEMBER 31
(MILLIONS OF DOLLARS)

2002 2001
Sales                                                                      \$3,600.0          \$3,000.0
Operating costs (excluding depreciation and amortization)                   3,060.0           2,550.0
EBITDA                                                                     \$ 540.0           \$ 450.0
Depreciation and amortization                                                  90.0              75.0
Earnings before interest and taxes                                         \$ 450.0           \$ 375.0
Interest                                                                       65.0              60.0
Earnings before taxes                                                      \$ 385.0           \$ 315.0
Taxes (40%)                                                                   154.0             126.0
Net income available to common stockholders                                 \$ 231.0           \$ 189.0
Common dividends                                                            \$ 181.5            \$ 13.2

SEBRING CORPORATION: BALANCE SHEETS FOR YEAR ENDING DECEMBER 31
(MILLIONS OF DOLLARS)
2002 2001
Assets:
Cash and marketable securities                      \$ 36.0    \$ 30.0
Accounts receivable                                   540.0     450.0
Inventories                                           540.0     600.0
Total current assets                              \$1,116.0 \$1,080.0
Net plant and equipment                               900.0     750.0
Total assets                                       \$2,016.0 \$1,830.0

Liabilities and equity:
Accounts payable                                                            \$ 324.0           \$ 270.0
Notes payable                                                                 201.0             155.0
Accruals                                                                      216.0             180.0
Total current liabilities                                                  \$ 741.0           \$ 605.0
Long-term bonds                                                               450.0             450.0
Total debt                                                                \$1,191.0          \$1,055.0
Common stock (50 million shares)                                              150.0             150.0
Retained earnings                                                             675.0             625.0
Total common equity                                                        \$ 825.0           \$ 775.0
Total liabilities and equity                                               \$2,016.0          \$1,830.0

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17.   What is Sebring’s net operating profit after taxes (NOPAT) for 2002?

a.   \$100,000,000
b.   \$150,000,000
c.   \$225,000,000
d.   \$270,000,000
e.   \$375,000,000

NOPAT = EBIT(1-Tax rate) = 450*0.6 = \$270 mill.

18.   What is Sebring’s net operating working capital for 2002?

a.   \$ 540,000,000
b.   \$ 576,000,000
c.   \$ 750,000,000
d.   \$ 985,000,000
e.   \$1,116,000,000

NOWC = Current Assets – Non-interest bearing Current Liabilities
= \$1,116 – (\$324 + \$216) = \$576 mill.

19.   What is Sebring’s amount of total investor-supplied operating capital for 2002?

a.   \$ 576,000,000
b.   \$ 888,000,000
c.   \$ 900,000,000
d.   \$1,275,000,000
e.   \$1,476,000,000

Total Working Capital = NOWC + Net Fixed Assets = \$576 + \$900 = \$1,476 mill.

20.   What is Sebring’s free cash flow for 2002?

a.   \$ 85,000,000
b.   \$146,000,000
c.   \$174,000,000
d.   \$255,000,000
e.   \$366,000,000

Free Cash Flow = [EBIT(1 –T) + Dep. and Amort.] – [Capital Expenditure + Change in
NOWC]
First part is = \$270 + \$90 = \$360.
Capital Expenditure = Change in plants + Depreciation = (\$900 -\$750) + \$90 = \$240.
NOWC for 2001 = (\$30+\$450+\$600) – (\$270+\$180) = \$630

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Change in NOWC = \$576 – \$630 = -\$54.
Now plug numbers in the formula for FCF.
FCF = (\$360 – [\$240 + (-\$54]) = \$174 mill.

21. Problem 3.10 of the text.

NOPAT = EBIT(1-Tax Rate) = 4 billion*(1-.4) = \$2,400,000,000.
Net CF = NI + Depreciation and Amortization = 1.5 bill + 3 bill = \$4,500,000,000.
Operating CF = NOPAT + Dep. and Amort. = 2.4 bill + 3 bill = \$5,400,000,000.
Free CF = Operating CF – Investment in Operating Capital
FCF = 5.4 bill – (1.3 bill + 3 bill) = 1,100,000,000.

22. Tiger Inc.’s 2008 income statement lists the following income and expenses (in thousand):
EBIT = \$900, Interest expenses = 85, and Net Income = 570. What is the 2008 tax reported on
the income statement?
a. \$245,000.
b. \$330,000.
c. \$815,000.
d. There is not enough information.

EBT = \$815,000
Net Income = \$570,000
Therefore, Taxes = \$245,000.

23. You are evaluating the balance sheet of Cyprus Corporation. From the balance sheet you find
the following information: Cash and equivalent = 600, Accounts receivables = 800, Inventory =
500, Accrued wages and taxes = 50, Accounts payable = 200, and Notes payable = 1,000. What
is Cyprus’s net working capital?

a. \$152.
b. \$ 650.
c. \$1,900.
d. \$2,500.

Net Working Capital = CA – CL = \$1,900 – \$1,250 = \$650.

24. Cypress Inc.’s market value of equity is \$500,000 and book value of equity is \$450,000.
What is Market Value Added (MVA)?
a. \$50,000.
b. \$950,000.
c. There is not enough information.

MVA = MV of equity – BV of equity = \$50,000

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25. The City Corporation has EBIT of \$750,000 and depreciation expenses of \$200,000. It is 100
percent equity financed (i.e., no debt) and its corporate tax rate is 40%. What are net income,
net cash flow and operating cash flow?
a. \$450,000, \$650,000 and \$650,000.
b. \$450,000, \$650,000 and \$950,000.
c. \$450,000, \$950,000 and \$650,000.

EBIT = \$750,000
Interest = 0 (because no debt)
So, EBT = \$750,000.
Tax = \$300,000
NI = \$450,000.
NCF = \$450,000 + \$200,000 = \$650,000
OCF = EBIT(1-Tax rate) + Depreciation = \$650,000.

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