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Exercises AFM

accounting

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24 views3 pages

Exercises AFM

accounting

Uploaded by

Bersabeh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Advanced Financial Management

Practical Exercises

1. Z-Score Jon Fulkerson has also received a credit application from Seether, LLC, a private
company. An abbreviated portion of the financial information provided by the company is
shown below:

Total assets $63,000

EBIT 7,900

Net working capital 4,200

Book value of equity 18,000

Accumulated retained earnings 16,000

Total liabilities 57,000

Required: What is the Z-score for this company?

2. Use the following income statements and balance sheets to calculate Garnet Inc.’s free cash
flow for 2011.

Garnet Inc.

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3. EMC Corporation has never paid a dividend. Its current free cash flow of $400,000 is
expected to grow at a constant rate of 5%. The weighted average cost of capital is WACC
= 12%. Calculate EMC’s value of operations.
4. The balance sheet of Hutter Amalgamated is shown below. If the 12/31/2010 value of
operations is $756 million, what is the 12/31/2010 intrinsic market value of equity?

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5. The Rogers Company is currently in this situation: (1) EBIT = $4.7 million; (2) tax rate, T =
40%; (3) value of debt, D = $2 million; (4) rd= 10%; (5) rs = 15%; (6) shares of stock
outstanding, n = 600,000; and stock price, P = $30. The firm’s market is stable and it
expects no growth, so all earnings are paid out as dividends. The debt consists of perpetual
bonds.
a. What is the total market value of the firm’s stock, S, and the firm’s total market value,
V?
b. What is the firm’s weighted average cost of capital?
6. Grant Grocers has sales of $1,000,000. The company’s fixed costs total $250,000, and its
variable costs are 60 percent of sales. What is the company’s degree of operating leverage?
If sales increased 20 percent, what would be the percentage increase in EBIT?
7. Arthur Johnson Inc.’s operating income is $500,000, the company’s interest expense is
$200,000, and its tax rate is 40 percent. What is the company’s degree of financial leverage?
If the company were able to double its operating income, what would be the percentage
increase in net income?
8. A company currently has $2 million in sales. Its variable costs equal 70 percent of its sales,
its fixed costs are $100,000, and its annual interest expense is $50,000.
a. What is the company’s degree of operating leverage?
b. If this company’s operating income (EBIT) rises by 10 percent, how much will its net
income increase?
c. If the company’s sales increase 10 percent, how much will the company’s net income
increase?

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