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- 1. PRINCIPLES OF MANAGERIALFINANCE BRIEF EDITION PMF PROBLEM SOLVER Index By Category Bond and Stock Valuation Cost of Capital Basic Bond Valuation After Tax Cost of Debt Book Value Cost of Common Stock Liquidation Value Cost of Preferred Stock P/E Multiplier Weighted Avg. Cost of Capital Constant Growth Weighted Mrg Cost of Capital Financial Statements Capital Budgeting All Ratios Net Present Value Liquidity Internal Rate of Return Activity Payback Period Debt Annualized Net Present Value Profitability Initial Investment Time Value of Money General Budgeting PV - Single Amount Cash Budget PV - Mixed Stream PV - Annuity FV - Single Amount FV - Annuity Deposits to a Sum Printed: 01/20/2011 © 2003 by Addison Wesley Longman
- 2. Alphabetical Index Activity Initial Investment After Tax Cost of Debt Internal Rate of Return All Ratios Liquidation Value Annualized Net Present Value Liquidity Basic Bond Valuation Net Present Value Book Value P/E Multiplier Cash Budget Payback Period Constant Growth Profitability Cost of Common Stock PV - Annuity Cost of Preferred Stock PV - Mixed Stream Debt PV - Single Amount Deposits to a Sum Weighted Avg. Cost of Capital FV - Annuity Weighted Mrg Cost of Capital FV - Single Amount © 2003 by Addison Wesley Longman. Copyright © 2003 KMT Software, Inc. All Rights Reserved. Printed: 01/20/2011 © 2003 by Addison Wesley Longman
- 3. Basic Bond Valuation Par Value of the Bond $1,000 Years to Maturity 10 Required Rate of Return 12.000% Coupon Rate of Bond 10.000% Payment of interest: Annual Semi-annual Value of the bond is: $887.00 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 4. Book Value Total Assets $6,000,000 Total Liabilities $4,500,000 Number of Common Shares Outstanding 100,000 The book value per share is: $15.00 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 5. Price/Earnings (P/E) Multiple Average P/E Ratio for Firms in the Industry 7.0 Earnings per Share $2.60 The value per share is: $18.20 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 6. Liquidation Value Liquidation Value of Assets $5,250,000 Total Liabilities $4,500,000 Book Value of Preferred Stock 0 Number of Common Shares Outstanding 100,000 The liquidation value per share is: $7.50 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 7. Constant Growth Estimated Dividend per Share $1.50 Expected Annual Growth Rate of Dividends 7.00% Investor's Required Rate of Return 15.00% The value per share is: $18.75 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 8. Financial Ratios (All) Income Statement Revenue (Sales) $3,074 Less: Cost of goods sold 2,088 Gross profits $986 Less: Operating Expenses Selling expense $100 General and administrative 194 Lease expenses 35 Depreciation expense 239 Other Total operating expenses $568 Operating profits $418 Less: Interest expense 93 Net profits before taxes $325 Less: Taxes 94 Net profits after taxes $231 Less: Preferred stock dividends 10 Earnings available for common stockholders $221 Balance Sheet Assets Current assets Cash $363 Marketable securities 68 Accounts receivable 503 Inventories 289 Other Total current assets $1,223 Gross Fixed assets (at cost) Land and buildings $2,072 Machinery and equipment 1,866 Furniture and fixtures 358 Vehicles 275 Other 98 Total gross fixed assets $4,669 Less: Accumulated depreciation 2,295 Net fixed assets $2,374 Total assets $3,597 Liabilities and Stockholders' Equity Current liabilities Accounts payable $382 Notes payable 79 Accruals 159 Other Total current liabilities $620 Long-term debts $1,023 Total liabilities $1,643 Stockholders' equity Preferred stock $200 Common stock 191 Paid-in capital 428 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 9. Retained earnings $1,135 Total stockholders' equity $1,954 Total liabilities and stockholders' equity $3,597 Additional Data Needed for Ratios Principal Payments made during period $71 Lease Payments made during period $35 Tax Rate 29% Common Shares Outstanding (in 000s) 76 Market Price per Share of Common Stock $32.25 Liquidity Analysis and Ratios Net Working Capital $603 Current Ratio 1.97 Quick Ratio 1.51 Activity Ratios Inventory Turnover 7.22 Average Collection Period 58.91 Fixed Asset Turnover 1.29 Total Asset Turnover 0.85 Debt Ratios Debt Ratio 45.7% Debt-equity Ratio 52.4% Times Interest Earned 4.5 Fixed-payment Coverage Ratio 1.9 Profitability Ratios Gross Profit Margin 32.1% Operating Profit Margin 13.6% Net Profit Margin 7.5% Return on Assets (ROA) 6.4% Return on Equity (ROE) 11.8% Earnings Per Share (EPS) $2.90 Price/Earnings (P/E) Ratio 11.1 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 10. Liquidity Analysis andRatios Net Working Capital Current Assets $1,223,000 Current Liabilities $620,000 The net working capital is: $603,000 Current Ratio Current Assets $1,223,000 Current Liabilities $620,000 The current ratio is: 1.97 Quick Ratio Current Assets $1,223,000 Inventory $289,000 Current Liabilities $620,000 The quick ratio is: 1.51 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 11. Activity Ratios Inventory Turnover Cost of Goods Sold $2,088,000 Inventory $289,000 The inventory turnover is: 7.22 Average Collection Period Accounts Receivable $503,000 Annual Sales $3,074,000 The average collection period is: 58.91 Average Payment Period Accounts Payable $382,000 Annual Purchases $1,461,600 Days in year 360 The average payment period is: 94.09 Total Asset Turnover Sales $3,074,000 Total Assets $3,597,000 The total asset turnover is: 0.85 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 12. Debt Ratios Debt Ratio Total Liabilities $1,643,000 Total Assets $3,597,000 The debt ratio is: 45.7% Debt-equity Ratio Long-term debt $1,023,000 Stockholders' Equity $1,954,000 The debt-equity ratio is: 52.4% Times Interest Earned Earnings Before Interest and Taxes $418,000 Interest Expense $93,000 The times interest earned ratio is: 4.5 Fixed-payment Coverage Ratio Earnings Before Interest and Taxes $418,000 Interest Expense $93,000 Principal Payments $71,000 Lease Payments $35,000 Total Preferred Dividends $10,000 Tax Rate 29% The fixed-payment coverage ratio is: 1.87 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 13. Profitability Ratios Gross Profit Margin Sales $3,074,000 Cost of Goods Sold $2,088,000 The gross profit margin is: 32.1% Operating Profit Margin Operating profit $418,000 Sales $3,074,000 The operating profit margin is: 13.6% Net Profit Margin Net Profits After Taxes $231,000 Sales $3,074,000 The net profit margin is: 7.5% Return on Assets (ROA) Net Profits After Taxes $231,000 Total Assets $3,597,000 The return on assets is: 6.4% Return on Equity (ROE) Net Profits After Taxes $231,000 Stockholders' Equity $1,954,000 The return on equity is: 11.8% Earnings Per Share (EPS) Earnings Available to Common Stockholders' $221,000 Common Shares Outstanding 76,262 The earnings per share are: $2.90 Price/Earnings (P/E) Ratio Market Price per Share of Common Stock $32.25 Earnings Per Share $2.90 The price/earnings ratio is: 11.1 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 14. Present Value -Single Amount Future Amount (at the end of n periods) $1,700.00 Number of Periods (n) 8 Interest Rate Per Period (per n periods) 8.00% The present value is: $918.46 Calculating an Interest Rate Future Amount (at the end of n periods) $1,700.00 Present Value $918.46 Number of Periods (n) 8 The interest rate per period is: 8.00% Calculating the Number of Periods Future Amount (at the end of n periods) $1,700.00 Present Value $918.46 Interest Rate Per Period (per n periods) 8.00% The number of periods are: 8 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 15. Present Value ofa Mixed Stream Periodic Discount Rate 9.00% Cash Period (n) Flow 1 400 2 800 3 500 4 400 5 300 6 7 8 9 10 The present value is: $1,904.76 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 16. Present Value ofan Annuity Choose one of the following options: Ordinary Annuity Annuity Due Payment Per Period $700.00 Number of Periods 5 Interest Rate Per Period (per n periods) 8.00% The present value of the annuity is: $2,794.90 Calculating an Interest Rate Payment Per Period $700.00 Present Value $2,794.90 Number of Periods (n) 5 The interest rate per period is: 8.00% Calculating the Number of Periods Payment Per Period $700.00 Present Value $2,794.90 Interest Rate Per Period (per n periods) 8.00% The number of periods is: 5 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 17. Future Value -Single Amount Compounding Choices (select one): þÿAnnual þÿSemi-annual þÿQuarterly þÿBi-monthly þÿMonthly þÿContinuous Present Value $100.00 Number of Periods (n) 2 Interest Rate Per Period (per n periods) 8.00% The future value is: $116.64 Calculating an Effective Interest Rate Compounding Frequency (select one): þÿ Nominal Interest Rate 8.00% Number of Years 2 The effective rate per period (per n periods) is: 8.16% Calculating the Number of Periods Present Value $100.00 Future Value $116.64 Interest Rate Per Period (per n periods) 8.00% The number of periods is: 2 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 18. Future Value ofan Annuity Choose one of the following options: Ordinary Annuity Annuity Due Payment Per Period $1,000.00 Number of Periods 5 Interest Rate Per Period (per n periods) 7.00% The future value of the annuity is: $5,750.74 Calculating an Interest Rate Payment Per Period $1,000.00 Future Value $5,750.74 Number of Periods (n) 5 The interest rate per period is: 7.00% Calculating the Number of Periods Payment Per Period $1,000.00 Future Value $5,750.74 Interest Rate Per Period (per n periods) 7.00% The number of periods is: 5.00 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 19. Deposits to aSum Select the type of annuity: Ordinary Annuity Annuity Due Amount to be Accumulated $100,000 Number of years 10 Annual Interest Rate 9.00% The periodic deposit is: $6,582.01 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 20. After Tax Costof Debt Par value of bond $1,000 Cash inflow from sale (per bond) $960 Coupon rate 9.00% Number of periods to maturity 20 Tax rate 40.0% The approximate cost is: 9.39% The after tax cost is: 5.63% File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 21. Cost of Common Constant Growth Model Current per Share Market Value of Stock $50.00 Dividend per Share 4 Projected Growth Rate of Dividends 5.00% The cost of common stock is: 13.00% Capital Asset Pricing Model Risk Free Rate of Return 7.00% Market Rate of Return 11.00% Beta 1.50 The cost of common stock is: 13.00% Cost of New Issue Current per Share Market Value of Stock $50.00 Dividend per Share $4.00 Growth Rate of Dividends 5.00% Flotation Cost per Share $5.50 The cost of common stock is: 13.99% File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 22. Cost of PreferredStock Annual Preferred Stock Dividend $8.70 Net Proceeds from Sale of Preferred Stock $82.00 The cost of preferred stock is: 10.61% File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 23. Weighted Average Costof Capital Long-term debt proportion 40.00% Preferred stock proportion 10.00% Common stock/Equity proportion 50.00% Cost of debt 5.60% Cost of preferred stock 10.60% Cost of equity/stock 13.00% The weighted average cost of capital is: 9.80% File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 24. Weighted Marginal Costof Capital Long-term debt proportion 40.00% Preferred stock proportion 10.00% Common stock/Equity proportion 50.00% Range of New Financing Lower Upper Source of Weighted Bound Bound Capital Cost Cost $0 $600,000 Debt 5.60% 2.24% Preferred 10.60% 1.06% Common 13.00% 6.50% Weighted average cost of capital 9.80% Lower Upper Source of Weighted Bound Bound Capital Cost Cost $600,000 $1,000,000 Debt 5.60% 2.24% Preferred 10.60% 1.06% Common 14.00% 7.00% Weighted average cost of capital 10.30% Lower Upper Source of Weighted Bound Bound Capital Cost Cost $1,000,000 and beyond Debt 8.40% 3.36% Preferred 10.60% 1.06% Common 14.00% 7.00% Weighted average cost of capital 11.42% File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 25. Net Present Value Initial Investment (enter as positive number) $50,000,000 Discount Rate 10% Years Cash Flows 1 6,750,000 2 7,031,250 3 7,312,500 4 7,593,750 5 7,875,000 6 8,156,250 7 8,437,500 8 8,718,750 9 9,000,000 10 9,281,250 11 9,562,500 12 9,843,750 13 - 14 - 15 - The net present value is: $4,402,138 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 26. Internal Rate ofReturn Years Cash Flows 0 Initial Investment --> ($45,000) 1 28,000 2 12,000 3 10,000 4 10,000 5 10,000 6 7 8 9 10 11 12 13 14 15 The internal rate of return is: 21.65% File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 27. Payback Period Years Cash Flows 0 Initial Investment --> ($45,000) 1 1,000 2 1,000 3 1,000 4 1,000 5 1,000 6 1,000 7 40,000 8 6,000 9 10 11 12 13 14 15 The payback period is: 6.975 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 28. Annualized Net PresentValue Discount Rate 10.00% Number of years 6 Years Cash Flows 0 Initial Investment enter as negative --> ($85,000) 1 35,000 2 30,000 3 25,000 4 20,000 5 15,000 6 10,000 7 8 9 10 11 12 13 14 15 The net present value is: $17,285 The annualized NPV is: $3,969 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 29. Initial Investment Cost of new asset $380,000 Installation costs 20,000 After-tax proceeds from sale of old asset 280,000 Tax on sale of present machine 84,160 Change in net working 17,000 The initial investment is: $221,160 File: copiadepmfproblemsolver-110119192910-phpapp02.xls Addison Wesley Longman © 2003 by Printed: 01/20/2011
- 30. Cash Budget (all numbers in $000) Oct Feb Mar Apr May Jun Total cash receipts $210 $320 $340 Less: Total cash disbursements 213 418 305 Net cash flow ($3) ($98) $35 Add: beginning cash $50 $47 ($51) Ending cash $47 ($51) ($16) Less: Minimum cash balance 25 25 25 Required total financing $0 $76 $41 Excess cash balance $22 File: copiadepmfproblemsolver-110119192910-phpapp02.xls © 2003 by Addison Wesley Longman Printed: 01/20/2011