Firm’s fundamental value is its stock price.

The firm’s fundamental value is based on all relevant

information expect the future cash flow. To determine the actual market value it’s need to analysis
the firm’s financial information such as income statement, balance sheet, and cash flow within that
time.

The impact on Edmund Enterprise EPS this year decrease because the company make a large
investment that result in bigger expenses than normal. But this investment will likely increase the
stock price because the company will have significantly cost reduction with their new technology.
The intrinsic value would be increase because of the expectation that the investment will increase
the future cash flow through cost savings. Therefore the stock price will be increased as well.

2-4 Pearson Brothers recently reported an EBITDA of $7.5 million and net income of $1.8 million.
It had $2 million of interest expense, and its corporate tax rate was 40%. What was its
charge for depreciation and ammortization?

EBITDA $7.5 million

Depr & ammort $2.5 million

EBIT $5 million

Interest $2 million

EBT $3 million

Taxes $1.2 million

Net Income $1.8 million

Net Income = EBT – Taxes

1.8 = EBT – (40% x EBT)

1.8 = 0.6 EBT

EBT = $3 million

EBIT = EBT + Interest

= $3 + $2
 = $5 million

EBIT = EBITDA – Depr

$5 = $7.5 – Depr

Depr = $2.5 million

2-9 The Shrieves Corporation has $10,000 that it plans to invest in marketable securities. It is
choosing among AT&T bonds, which yield 7.5%, state of Florida muni bonds, which yield 5%
(but are not taxable), and AT&T preferred stock, with a dividend yield of 6%. Shrieves’s
corporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-
tax rates of return on all three securities.

AT&T bonds = 7.5% x $10,000

= $750

Taxes = 35% x $750

= $262.5

Yield AT&T bonds = [($750 - $262.5) / $10.000] x 100

= 4.875%

Muni bonds = 5% x $10,000

= $500

Yield muni bonds = [500 / $10.000] x 100

= 5%

AT&T preferred stock = 6% x $10,000

= $600

Tax exemption = 70% x $600

= $420

Taxable = $600 - $420

= $180

Taxes = 35% x $180

= $63

Yield AT&T preferred stock = [(600 - $63) / $10.000] x 100

= 5.37%
 Current conditions before additional notes payable

Current assets−Inventories
Quick ratio=
Current liabilities
$ 1,312,500−$ 375,000
Quick ratio=
$ 525,000
Quick ratio=1.79

Current assets
Current ratio=
Current liabilities
$ 1,312,500
Current ratio=
$ 525,000
Quick ratio=2.5

Additional notes payable

Current assets+ Notes payable

Minimum Quick ratio=
Current liabilities+ Notes payable
$ 1,312,500+ Notes payable
2=
$ 525,000+ Notes payable
Notes payable=$ 262,500

Current assets−Inventories
New quick ratio=
Current liabilities
($ 1,312,500+$ 262,500)−($ 375,000+ $ 262,500)
New quick ratio=
$ 525,000+ $ 262,500
New quick ratio=1.19

3-12 The Kretovich Company had a quick ratio of 1.4, a current ratio of 3.0, an inventory turnover
of 6 times, total current assets of $810,000 and cash and marketable securities of $120,000.
What were Kretovich’s annual sales and its DSO? Assume a 365-day-year

Current assets
Current ratio=
Current liabilities
 $ 810,000
3=
Current liabilities
Current liabilities=$ 270,000

Current assets−Inventories
Quick ratio=
Current liabilities
$ 810,000−Inventories
1.4=
$ 270,000
Inventories=$ 432,000

Sales
Inventory turnover ratio=
Inventories
Sales
6=
$ 432,000
Sales=$ 2,592,000

Receivables = Assets – Marketable securities – Inventories

= 810,000 – 120,000 – 432,000

= $258,000

Receivables Receivables
DSO= =
Average sales per day Sales /365
$ 258,000
DSO=
$ 2,592,000/365
DSO=36.33 days
Therefore, Kretovich’s annual sales is $2,592,000 and DSO is 36.33 days which is higher than
industry average

Known:
FV = $12 million

PV = $6 million

N =5

a. Interest
By using excel, we can calculate that
= RATE (5, 0, -6000000, 12000000, 0)
= 14.87%

b. It’s wrong because the value of money 5 years before and this year is different

Known:

FV = $10,000

PMT = $1,250

I = 12%

Year 1

FV = PV (1 + I)N

= 1,250 (1 + 0,12)1

= $1,400

Year 2

FV = PV (1 + I)N

= 1,250 (1 + 0,12)2

= $1,568

Year 3

FV = PV (1 + I)N

= 1,250 (1 + 0,12)3

= $1,756.16

Year 4
FV = PV (1 + I)N

= 1,250 (1 + 0,12)4

= $1,966.90

Year 5

FV = PV (1 + I)N

= 1,250 (1 + 0,12)5

= $2,202.93

Year 6

From year 1 to 5 the accumulated money is $8,893.99 therefore the last deposit have to be
$1,106.01 and it will take 6 years for accumulate $10,000