3 1 An investor recently purchased a corporate bond which yields 9%. The investor is in the 36% combined federal and state tax bracket. What is the bond s after tax yield?
3 2 Corporate bonds issued by Johnson Corporation currently yield 8%. Municipal bonds of equal risk currently yield 6%. At what tax rate would an investor be indifferent between these two bonds?
3 3 Little Books Inc. recently reported $3 million of net income. Its EBIT was $6 million, and its tax rate was 40%. What was its interest expense? [Hint: Write out the headings for an income statement and then fill in the known values. Then divide $3 million net income by (1 T) _ 0.6 to find the pre tax income. The difference between EBIT and taxable income must be the interest expense. Use this same procedure to work some of the other problems.]
3 4 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.
4 7 Ace Industries has current assets equal to $3 million. The company s current ratio is 1.5, and its quick ratio is 1.0. What is the firm s level of current liabilities? What is the firm s level of inventories?
4 8 Assume you are given the following relationships for the Clayton Corporation: Sales/total assets 1.5_ Return on assets (ROA) 3% Return on equity (ROE) 5% Calculate Clayton s profit margin and debt ratio.
4 9 The Nelson Company has $1,312,500 in current assets and $525,000 in current liabilities. Its initial inventory level is $375,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can Nelson s shortterm debt (notes payable) increase without pushing its current ratio below 2.0? What will be the firm s quick ratio after Nelson has raised the maximum amount of short term funds?
4 10 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, its average tax rate is 30%, and its net profit margin on sales is 5%. If the company does not maintain a TIE ratio of at least 5 times, its bank will refuse to renew the loan, and bankruptcy will result. What is Manor s TIE ratio?