Question 1 Use the data from the following financial statements to answer questi

Question

Question 1

Use the data from the following financial statements to answer question 1:

Partial Income Statement Year Ending 2011 Sales Revenue $350,000 COGS $140,000 Fixed Costs $ 43,000 SG&A Expenses $ 28,000 Depreciation $ 46,000

Partial Balance Sheet 12/31/2010

Assets:   Liabilities: Cash $ 16,000 Notes Payable $ 14,000 Accounts Rec. $ 28,000 Accounts Payable $ 19,000 Inventories $ 48,000 Long-Term Debt $190,000 Fixed Assets $368,000 Owners’ Equity: Acc. Depreciation $142,000 Retained Earnings $ ??????? Intangible Assets $ 82,000 Common Stock $130,000

Partial Balance Sheet 12/31/2011

Assets:   Liabilities: Cash $ 26,000 Notes Payable $ 12,000 Accounts Rec. $ 19,000 Accounts Payable $ 24,000 Inventories $ 53,000 Long-Term Debt $162,000 Fixed Assets $448,000 Owners’ Equity: Acc. Depreciation $ ??????? Retained Earnings $ ?????? Intangible Assets $ 82,000 Common Stock $180,000

a) Complete the partial income statement if the company paid interest expense of $18,000 for 2011 and had an overall tax rate of 40% for 2011. b) What are the net fixed assets for the years 2010 and 2011?  
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Question 2

Your dreams of becoming rich have just come true. You have won the State of Tranquility’s Lottery. The State offers you two payment plans for the $5,000,000 advertised jackpot. You can take annual payments of $250,000 for the next twenty years or $2,867,480 today.

a) If your investment rate over the next twenty years is 8%, which payoff will you choose? b) If your investment rate over the next twenty years is 5%, which payoff will you choose? c) At what investment rate will the annuity stream of $250,000 be the same as the lump sum payment of $2,867,480?

Question 3

Using Yahoo! Finance (http://finance.yahoo.com/) and ticker symbol PEP, find PepsiCo’s historical dividend payment and current price. Historical dividends are available in the historical price section. Use these payments to find the annual dividend growth rate. (If you have a quarterly pattern be sure to annualize this quarterly growth rate.) Now, find the required rate of return for this stock, assuming that the future dividend growth rate will remain the same and the company has an infinite horizon. Does this return seem reasonable for PepsiCo?

Question 4

Royal Seattle Investment Club has $100,000 to invest in the equity market. Frasier advocates investing the funds in KSEA Radio with a beta of 1.3 and an expected return of 16%. Niles advocates investing the funds in Northwest Medical with a beta of 1.1 and an expected return of 14%. The club is split 50/50 on the two stocks. You are the deciding vote, and you cannot pick a split of $50,000 for each stock. Before you vote, you look up the current risk-free rate (the 1 year U.S. Treasury bill with a yield of 3.75%). Which stock do you select?

Question 5

Given the discount rates and the future cash flows of each project, which projects should the company accept using profitability index?

Explanation / Answer

Solution:-

Question 1.

Part 1:-

a.

Part 2:-

b.

To complete the balance sheet for 2010 add up all the asset accounts and subtract off the accumulated depreciation (contra asset account) for a total of $400,000. Now balance the balance sheet by determining the total liabilities and owner’s equity accounts ($353,000) and filling in the difference between this total and Total Assets as the balance in Retained Earnings, i.e. $47,000.

Do the same for the year 2011 but now we must first find accumulated depreciation total. The prior year was $142,000 and the current year’s depreciation from the income statement is $46,000 so the accumulated depreciation for 2007 is $188,000. Now balance the balance sheet by finding the Retained Earnings that makes the total liabilities and the owner’s equity equal $440,000.

Question 2.

Part 3:-

a. Find the present value of the annuity stream at an 8% discount rate:-

PV = $250,000 × (1 – 1/1.0820) / 0.08 = $250,000 × 9.8181 = $2,454,536.85

Take the lump sum of $2,867,480.

Part 4:-

b. Find the present value of the annuity stream at a 5% discount rate:-

PV = $250,000 × (1 – 1/1.0520) / 0.05 = $250,000 × 12.4622 = $3,115,552.59

Take the annuity stream of $250,000.

Part 5:-

c. Find the interest rate that sets the PV of $2,867,480 equal to a twenty year annuity stream of$250,000:-

$2,867,480 = $250,000 x [1-1/(1+ R)^20]/R

This implies that PVIFA is

PVIFA = [1 -1/(1 + R)^20]/R = $2,867,480/$250,000 =11.4699

Looking up this value on Table A-3 for N = 20 we find the value in column 6%.

Or on the calculator

So at 6% investment rate over the next twenty years you would be indifferent between the two payoff choices.

Note:- As per chegg guidelines if more than one questioin is posted than we liable to answet only first four part.

Please Rate or comment if you have any doubt regarding this solution.

Income Statement for the Year Ending 12/31/2011 Sales Revenue $350,000 COGS $140,000 Fixed Costs $ 43,000 SG&A Expenses $ 28,000 Depreciation $ 46,000 EBIT $ 93,000 Interest Expense $ 18,000 Taxable Income $ 75,000 Taxes @ 40% $ 30,000 Net Income $ 45,000

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