Chapter Questions Financial Management Essay

Chapter Questions
2.1 An investor recently purchased a corporate bond that yields 9%. The investor is in the 36% combined federal and state tax bracket. What is the bond’s after tax yield?
The return on many investments including corporate bonds is often called yield. To calculate the after tax yield we need to multiply the pretax yield by the combined federal and state tax bracket data. This gives us the proportion of the pretax yield that will go to taxes. After subtracting this number from the pretax data we get the after tax (http://www.ehow.com/how_5016879_calculate-after-tax-yield.html#ixzz1o72GKTlZ).
For this particular example we have 9% pretax yield and 36% combined taxes .09 x .36 = .0324 (3%)
.09-.0324 = .0576 (6%)
2.2 The level of risk involving repayment of a debt determines the interest rate of a bond. Because of its tax exemptions municipal bonds tend to have a higher yield on investment than do corporate bonds (http://www.e-personalfinance.com/types-of-bonds/municipal-bonds-vs-corporate-bonds). In this particular case municipal bonds are of equal risk and yield 6%. An investor would prefer a rate that equals the municipal yield to the corporate after tax yield.
8% corporate yield
6% municipal yield
After Tax Yield = Taxable Interest Rate × (1 – tax rate) (http://allfinancialmatters.com/2006/10/20/how-to-calculate-tax-equivalent-yield/)

8% (1-tax rate) = after tax yield (6%)
8(8-tax rate) = 6
2= 8Tax rate
Tax rate = 2/8 = .25
2.5 Kendall Corners Inc recently reported net income of $ 3.1 million, and depreciation of $500,000. What was its net cash flow? Assume it had no amortization expense.
In order to calculate net cash flow we need to add the non cash expenses back to net profit (http://blog.arborinvestmentplanner.com/2011/05/what-is-net-cash-flow/)
Net cash flow = Net income + Depreciation
Net Income = 3100000, Depreciation = 500000
NCF = 3100000 + 500000
NCF = 3600000 = $3.6 million
3.1 Greene Sisters has a DSO of 20 days....