Question

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Milk Inc. had operating income of $2.3 million, depreciation of $1.20 million, and a tax rate of 25% on its most recent financial statement.  Milk spent $700,000 on new fixed and current assets, but increased current liabilities by $100,000 too. What was Milk's free cash flow, in millions?

	a.	$2.44
	b.	$2.325
	c.	$1.96
	d.	$2.22
	e.	$2.06

Frank Corp. bonds have a market price of $1,250, a par value of $1,000, and have 15 years to maturity. The bonds currently pay 10.5% annual in coupons. However, the bonds can be called in 5 years at $1,100. Will the bonds be called?

	a.	No, because the YTC is 6.28% which is greater than the YTM.
	b.	None of the above.
	c.	No, because the YTC is 6.28% which is less than the YTM.
	d.	Yes, because the YTC is 6.28% which is less than the YTM.
	e.	Yes, because the YTC is 6.28% which is greater than the YTM.

Answer 1

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Answer:

1)

Free cash flow = Operating Income*(1-Tax rate) + Depreciation - Capital Expenditure + Increase in current liabilities

= 2.3(1-25%)+1.20 - 0.7 + 0.1

= $2.325 million

2)

Calculation of YTM :

= Coupon+ (maturity value - spot price)/life ÷ average of maturity value and spot price

= 1000×10.5% + (1000 - 1250)/15 ÷ (1000+1250)/2

= 7.85%

YTC = 6.28%

Yes, because the YTC is 6.28% which is less than the YTM.