Financial Management

The Modern Language Corporation earned $1.6 million on net assets of $20 million. The cost of capital is 11.5%. Calculate the net ROI and EVA. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter “EVA” answer in millions rounded to 1 decimal place.)

 

  ROI %
  EVA $ million

 

Select the missing words:

“A project’s economic income for a given year equals the project’s (Click to select) Cash flow Investment less its (Click to select) Book Economic depreciation. New projects may take several years to reach full profitability. In these cases book income is (Click to select) less more than economic income early in the project’s life and (Click to select) lesser greater than economic income later in its life.”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The table below shows a condensed income statement and balance sheet for Androscoggin Copper’s Rumford smelting plant (figures in $ millions). Assume the cost of capital is 9%.

 

  Income Statement for 2013   Assets, December 31, 2013
  Revenue $ 56.66   Net working capital $ 7.08
  Raw materials cost 18.72
  Operating cost 21.09   Investment in plant and equipment 69.33
  Depreciation 4.50   Less accumulated depreciation 21.01
  Pretax income 12.35   Net plant and equipment 48.32
  Tax at 35% 4.32
  Net income $ 8.03   Total assets $ 55.40

 

a. Calculate the plant’s EVA. (Enter your answer in millions rounded to 2 decimal places.)

 

  EVA $ million

 

b. The table above shows, the plant is carried on Androscoggin’s books at $48.32 million. However, it is a modern design, and could be sold to another copper company for $95 million. How should this fact change your calculation of EVA? (Negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 2 decimal places.)

 

  EVA $ million

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ev: 06_21_2014_QC_47979

a. If a lender ranks behind the firm’s general creditors in the event of default, his or her loan is said to be (Click to select) floating rate warrant convertible preferred stock common stock subordinated senior .
b. Interest on many bank loans is based on a (Click to select) warrant preferred stock subordinated convertible floating rate senior common stock of interest.
c. A(n) (Click to select) common stock convertible senior warrant floating rate preferred stock subordinated bond can be exchanged for shares of the issuing corporation.
d. A(n) (Click to select) floating rate preferred stock convertible warrant senior subordinated common stock gives its owner the right to buy shares in the issuing company at a predetermined price.
e. Dividends on (Click to select) floating rate convertible common stock warrant preferred stock subordinated senior cannot be paid unless the firm has also paid any dividends on its (Click to select) warrant senior common stock floating rate subordinated preferred stock convertible .

 

In 2011 Beta Corporation earned gross profits of $760,000.

 

a. Suppose that it is financed by a combination of common stock and $1 million of debt. The interest rate on the debt is 10%, and the corporate tax rate is 35%. How much profit is available for common stockholders after payment of interest and corporate taxes? (Enter your answer in nearest dollars not in millions.)

 

  Profit $

 

b. Now suppose that instead of issuing debt Beta is financed by a combination of common stock and $1 million of preferred stock. The dividend yield on the preferred is 8% and the corporate tax rate is still 35%. How much profit is now available for common stockholders after payment of preferred dividends and corporate taxes? (Enter your answer in nearest dollars not in millions.)

 

  Profit $

 

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