Subject: Business / Finance
QuestionYou must show your work for all questions.1. Kruger Equipment has $9 million in sales. Its ROE is 12% and its total assets turnover is 3. The company is 80% equity financed. What is the company’s net income? *Round to the nearest dollar. (4 points)2. Last year Jiffy Park Inc. had $155,000 of assets, $305,000 of sales, $20,000 of net income, and a debt-to-assets ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000. Assets, sales, and the debt ratio would not be affected. (5 points)a. How much will this cost reduction improve Jiffy Park’s ROE?b. Is this significant? Why or why not?______________________________________________________________________________________________________________________________________________________________________________3. Brandt-Leland’s assets are $900,000, and its total debt outstanding is $450,000. The new CFO wants to establish a debt/assets ratio of 65%. The size of the firm does will not change. How much debt must the company add or subtract to achieve the new target debt ratio? (4 points)4. Suppose you want to purchase a car for $30,000 when you graduate in two years. At that time you will take out a 5-year loan at your bank with an APR of 5%, and monthly payments. Based on your estimated earnings, you think you’ll be able to afford loan payments of $450 per month. You plan to save up the difference between the cost of the car and the amount you’ll borrow by making monthly deposits over the next two years in a bank account that pays an annual rate of 4%. How large must your savings deposits be for you to achieve your desired down payment amount? (Round to the nearest dollar) Hint: This problem will involve a couple of steps to solve correctly. (5 points)5. David Puddy has decided that he would like to retire in 30 years. In order to maintain his current standard of living, he decides that he will withdraw $120,000 each year (at the end of the year) during retirement. Puddy’s financial planner advised him that he should plan to live 25 years in retirement and use an annual return of 8.5%; Puddy is following that advice. Given these assumptions and the fact that Puddy already has $75,000 saved for retirement; how much does Puddy need to save each year to reach his retirement goals? (5 points)6. After graduation, you plan to work for 6 years and then spend a year back-packing through Europe. You believe that $30,000 will be enough for you to reasonably enjoy this year abroad. You feel confident that you will be able to save the following amounts at the end of the following years: (5 points)$3,200 at the end of years 1 and 2$3,800 at the end of years 3 and 4$4,200 at the end of years 5 and 6a. How much will you have saved in 6 years if you are able to earn an annual return of 5.5 %?b. Is this enough for you to be able to spend the year back-packing through Europe as you so desire? _________7. Suppose the real risk-free rate is 2.25%. Inflation is expected to be 2.5% for the next 2 years, rise to 3.25% per year in years 3 and 4 and rise to 4% every year thereafter. The maturity risk premium can be found using the equation 0.1% * (t – 1), where t = number of years to maturity. What is the yield on an 8-year treasury security? (4 points)8. Suppose a 5-year Treasury bond has a 3.5% yield while a 10-year Treasury bond has a 5.5% yield. A 10-year corporate bond has a 9% yield. The market expects that inflation will average 2.75% over the next 10 years (IP10 = 2.75%). The maturity risk premium is equal to 0.1(t – 1)%, where t = the number of years at the bond’s maturity. Assume that the annual real risk-free rate of interest, r*, will remain constant over the next 10 years. (5 points)a. What does the market expect that inflation will average over the next five years?b. A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described above. What is the yield on this 5-year corporate bond?