The Day Company and the Knight Company are identical in every respect except that Day is not levered. Financial information for the two firms appears in the following table. All earnings streams are perpetuities, and neither firm pays taxes. Both firms distribute all earnings available to common stockholders immediately. Projected operating income Year-end interest on debt Market value of stock Market value of debt Day $ 1,100,000 $ 4,300,000 Knight $ 1,100,000 $ 114,000 $ 2,650,000 $ 1,900,000 a-1 What will the annual cash flow be to an investor who purchases 5 percent of Knight's equity? (Do not round intermediate calculations. Round your answer to the nearest whole number, e.g., 32.) Cash flow $ 49300 a-2 What is the annual net cash flow to the investor if 5 percent of Day's equity is purchased instead? Assume that borrowing occurs so that the net initial investment in each company is equal. The interest rate on debt is 6 percent per year. (Do not round intermediate calculations. Round your answer to the nearest whole number, e.g., 32.) Net cash flow $ b. Given the two investment strategies in (a), which will investors choose? Knight Day

The Day Company and the Knight Company are identical in every respect except that Day is not levered. Financial information for the two firms appears in the following table. All earnings streams are perpetuities, and neither firm pays taxes. Both firms distribute all earnings available to common stockholders immediately. Projected operating income Year-end interest on debt Market value of stock Market value of debt Day $ 1,100,000 $ 4,300,000 Knight $ 1,100,000 $ 114,000 $ 2,650,000 $ 1,900,000 a-1 What will the annual cash flow be to an investor who purchases 5 percent of Knight's equity? (Do not round intermediate calculations. Round your answer to the nearest whole number, e.g., 32.) Cash flow $ 49300 a-2 What is the annual net cash flow to the investor if 5 percent of Day's equity is purchased instead? Assume that borrowing occurs so that the net initial investment in each company is equal. The interest rate on debt is 6 percent per year. (Do not round intermediate calculations. Round your answer to the nearest whole number, e.g., 32.) Net cash flow $ b. Given the two investment strategies in (a), which will investors choose? Knight Day

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter15: Financial Statement Analysis

Section: Chapter Questions

Problem 20BEA: The income statement, statement of retained earnings, and balance sheet for Somerville Company are...

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The Veblen Company and the Knight Company are identical in every respect except that Veblen is not levered. The market value of Knight Company's 5 percent bonds is $2.00 million. Financial information for the two firms appears here. All earnings streams are perpetuities. Neither firm pays taxes. Both firms distribute all earnings available to common stockholders immediately. Firms and individuals can borrow and lend at the same rate. Projected operating income Year-end interest on debt Market value of stock Market value of debt Veblen $ 1,200,000 4,500,000 Knight $1,200,000 100,000 O Investor should invest in Knight because strategy 1) gives larger annual payoff. Investor should invest in Knight because strategy 2) gives larger annual payoff. O Investor should invest in Veblen because strategy 2) gives larger annual payoff. O Investor should invest in Veblen because strategy 1) gives larger annual payoff. O None of the above. 2,250,000 2,000,000 Compare two trading strategies: 1)…
Assume you are given the following relationships for the Haslam Corporation: Sales/total assets 1.9 Return on assets (ROA) 3% Return on equity (ROE) 5% Calculate Haslam's profit margin and liabilities-to-assets ratio. Do not round intermediate calculations. Round your answers to two decimal places. Profit margin: % Liabilities-to-assets ratio: % Suppose half of its liabilities are in the form of debt. Calculate the debt-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places.
Define what a Dividend Payout ratio is. Define what a retention ratio is. Calculate the dividend payout ratio AND the retention ratio based on the data below: (hint: Dividend payout ratio is dividends/net income , Retention ratio is addition to retained earnings/net income) Rosegarten Corporation (income statement) Sales $1,000 Costs 833 Taxable Income $ 167 Taxes (21%) 35 Net Income $ 132 Dividends $44 Addition to Retained Earnings $88 Explain what your ratio's mean.......
Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): Book-Value Balance Sheet Debt $ 55 45 Equity $ 100 Net working capital Long-term assets Market-Value Net working capital Long-term assets. Balance $ 55 210 $ 265 Sheet Debt a. PV tax shield b. WACC c. New value of the firm Equity $75 25 $100 Assume that MM's theory holds except for taxes. There is no growth, and the $75 of debt is expected to be permanent. Assume a 21% corporate tax rate. $75 190 $265 a. How much of the firm's value is accounted for by the debt-generated tax shield? Note: Enter your answer in million rounded to 2 decimal places. b. What is United Frypan's after-tax WACC if rDebt = 7.3% and rEquity = 15.7%? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. Now suppose that Congress passes a law that eliminates the deductibility of interest for tax purposes after a grace period of 5 years. What will be the new…
Assume the following data for Cable Corporation and Multi-Media Incorporated. Multi-Media Incorporated Cable Corporation $ 39,800 352,000 409,000 $ 190,000 2,170,000 966,000 234,000 545,000 175,000 421,000 Net income Sales Total assets Total debt Stockholders' equity a. 1. Compute return on stockholders' equity for both firms. Note: Input your answers as a percent rounded to 2 decimal places. Cable Corporation Multi-Media, Incorporated 2. Which firm has the higher return? Return on Stockholders' Equity % %
1. SLM, Inc., with sales of $1,000, has the following balance sheet: SLM, Incorporated Balance Sheet as of 12/31/X0 Labilities and Equit Trade accounts payable Long-term debt Equity Assets Accounts receivable $ 200 Inventory 400 Plant 800 $1,400 $ 200 600 600 $1,400 It earns 10 percent on sales (after taxes) and pays no dividends. a. Determine the balance sheet entries for sales of $1,500 using the per- cent of sales method of forecasting. b. Will the firm need external financing to grow to sales of $1,500? e. Construct the new balance sheet and use newly issued long-term br to cover any financial deficiency, EXINC
A firm had the following values for the four debt ratios discussed in the chapter: Liabilities to Assets Ratio: less than 1.0 Liabilities to Shareholders Equity Ratio: equal to 1.0 Long-Term Debt to Long-Term Capital Ratio: less than 1.0 Long-Term Debt to Shareholders Equity Ratio: less than 1.0 a. Indicate whether each of the following independent transactions increases, decreases, or has no effect on each of the four debt ratios. (1) The firm issued long-term debt for cash. (2) The firm issued short-term debt and used the cash proceeds to redeem long-term debt (treat as a unified transaction). (3) The firm redeemed short-term debt with cash. (4) The firm issued long-term debt and used the cash proceeds to repurchase shares of its common stock (treat as a unified transaction). b. The text states that analysts need not compute all four debt ratios each year because the debt ratios are highly correlated. Does your analysis in Requirement a support this statement? Explain.
The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows: Includes both state and federal taxes. Refer to the information for Somerville Company on the previous pages. Also, assume that the price per common share for Somerville is 8.10. Required: Compute the price-earnings ratio. (Note: Round the answer to two decimal places.)
The income statement, statement of retained earnings, and balance sheet for Santiago Systems are as follows: Includes both state and federal taxes. Refer to the information for Santiago Systems above. Required: Note: Round answers to four decimal places. 1. Calculate the average common stockholders equity. 2. Calculate the return on stockholders equity.
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Analyze and compare Bank of America and Wells Fargo Bank of America Corporation (BAC) and Wells Fargo Company (WFC) are two large financial services companies. The following data (in millions) were taken from a recent years financial statements for both companies: a. Compute the earnings per share for both companies. Round to the nearest cent. a. Which company appears to be more profitable on an earnings-per-share basis? b. Which company would you expect to have the larger quoted market price?
The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows: Includes both state and federal taxes. Refer to the information for Somerville Company on the previous pages. Required: Note: Round answers to two decimal places. 1. Compute the number of common shares. 2. Compute earnings per share.