Question

1) Quick Foods has sales of $238,900, total assets of $217,000, total equity of $121,300, net income of $18,700, and dividends paid of $6,000. What is the internal growth rate?

2) What is the NPV of the following set of cash flows at a discount rate of zero percent? What if the discount rate is 15 percent?

3) There is an investment opportunity with the following set of cash flows;

a) What is the internal rate of return (IRR)?
b) At a required rate of return of 18%, would you accept this investment? Why?


4) China Importers would like to spend $221,000 to expand its warehouse. However, the company has a loan outstanding that must be repaid in 2.5 years and thus will need the $221,000 at that time. The warehouse expansion project is expected to generate cash inflows of $58,000 in the first year, $139,000 in the second year, and $210,000 a year for the following 2 years. Should the firm expand at this time? Why or why not?


5) Peter's Motor Works has total assets of $689,400, long-term debt of $299,500, total equity of $275,000, net fixed assets of $497,800, and sales of $721,500. The profit margin is 4.6 percent. What is the current ratio?


6) An investment has an initial cost of $300,000 and a life of four years. This investment will be depreciated by $60,000 a year and will generate the net income shown below. Should this project be accepted based on the average accounting rate of return (AAR) if the required rate is 9.5 percent?

7) What is the value today of $3,600 received at the end of each year for seven years if the first payment is paid at the end of year 3 and the discount rate is 12 percent?


8) Ben invested $5,000 twenty years ago with an insurance company that has paid him 5 percent simple interest on his funds. Charles invested $5,000 twenty years ago in a fund that has paid him 5 percent interest, compounded annually. How much more interest has Charles earned than Ben over the past 20 years?


9) Standards Life Insurance offers indefinite annual payments of $100,000. This contract sells for $2,750,000 today. What is the interest rate?

Answer 1

Answer to Question 1:

Return on Assets = Net Income / Total Assets
Return on Assets = $18,700 / $217,000
Return on Assets = 0.086175 or 8.6175%

Payout Ratio = Dividends / Net Income
Payout Ratio = $6,000 / $18,700
Payout Ratio = 0.320856

Retention Ratio = 1 - Payout Ratio
Retention Ratio = 1 - 0.320856
Retention Ratio = 0.679144

Internal Growth Rate = [Return on Assets * Retention Ratio] / [1 - Return on Assets * Retention Ratio]
Internal Growth Rate = [0.086175 * 0.679144] / [1 - 0.086175 * 0.679144]
Internal Growth Rate = 0.0585252 / 0.9414748
Internal Growth Rate = 0.0622 or 6.22%