Corporate Finance I

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BUS 330a: CORPORATE FINANCE I FALL 2012, AUBG Quiz 1(b) Solution Guide Problem 1 (5 points) The Moor Corporation has operating income (EBIT) of $750,000. The company depreciation expense is $200,000. Moore is 100% equity financed, and it faces a 40% tax rate. What is the company’s net income? What is the company’s net cash flow? Solution: EBIT = $750,000; DEP = $200,000; 100% Equity; T = 40% NI = ?; NCF = ? First, determine net income by setting up an income statement: EBIT $750,000 Interest 0 EBT $750,000 Taxes (40%) 300,000 NI $450,000 Next, find NCF: NCF = NI + DEP = $450,000 + $200,000 = $650,000. Problem 2 (5 points) The Manor Corporation has $500,000 of debt outstanding, and it pays an interest rate of 10% annually. Manor’s annual sales are $2 million, average tax rate is 30%, and it Net profit margin on sales is 5%. If the company doesn't maintain a TIE ratio of at least 5 to 1, than its bank will refuse to renew the loan and bankruptcy will result. What is Manor’s TIE ratio? (Note: find first EBIT, and then compute TIE = EBIT/INT) Solution: TIE = EBIT/INT, so find EBIT and INT. Find first EBIT: Interest = $500,000 ( 0.10 = $50,000. Net income = $2,000,000 ( 0.05 = $100,000. Pre-tax income = $100,000/(1 - T) = $100,000/0.7 = $142,857. EBIT = $142,857 + $50,000 = $192,857. Next, compute TIE: TIE = $192,857/$50,000 = 3.86(. Problem 3 (10 points) The most recent financial statements for Maritin, Inc. are shown below: |Income Statement |Balance sheet | |Sales |$19,200 |Assets |$93,000 |Debt |$20,400 | |Cost |$15,550 | |

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