Question

A 7-year municipal bond yields 4.80%. Your marginal tax rate (including state and federal taxes) is 36.00%. What interest rate on a 7-year corporate bond of equal risk would provide you with the same after-tax return? (Round your final answer to two decimal places.)

	a.	6.45%
	b.	6.08%
	c.	9.08%
	d.	9.30%
	e.	7.50%

Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)
Assets		2018
Cash and securities		$3,000
Accounts receivable		15,000
Inventories		18,000
Total current assets		$36,000
Net plant and equipment		$24,000
Total assets		$60,000
Liabilities and Equity
Accounts payable		$18,630
Accruals		8,370
Notes payable		6,000
Total current liabilities		$33,000
Long-term bonds		$9,000
Total liabilities		$42,000
Common stock		$5,040
Retained earnings		12,960
Total common equity		$18,000
Total liabilities and equity		$60,000
Income Statement (Millions of $)		2018
Net sales		$84,000
Operating costs except depreciation		78,120
Depreciation		1,680
Earnings before interest and taxes (EBIT)		$4,200
Less interest		900
Earnings before taxes (EBT)		$3,300
Taxes		1,320
Net income		$1,980
Other data:
Shares outstanding (millions)		500.00
Common dividends (millions of $)		$693.00
Int rate on notes payable & L-T bonds		6%
Federal plus state income tax rate		40%
Year-end stock price		$47.52

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Refer to Exhibit 4.1. What is the firm's total assets turnover?  Do not round your intermediate calculations.

	a.	1.51
	b.	1.40
	c.	1.15
	d.	1.06
	e.	1.71

The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)
Assets		2018
Cash and securities		$3,000
Accounts receivable		15,000
Inventories		18,000
Total current assets		$36,000
Net plant and equipment		$24,000
Total assets		$60,000
Liabilities and Equity
Accounts payable		$18,630
Accruals		8,370
Notes payable		6,000
Total current liabilities		$33,000
Long-term bonds		$9,000
Total liabilities		$42,000
Common stock		$5,040
Retained earnings		12,960
Total common equity		$18,000
Total liabilities and equity		$60,000
Income Statement (Millions of $)		2018
Net sales		$84,000
Operating costs except depreciation		78,120
Depreciation		1,680
Earnings before interest and taxes (EBIT)		$4,200
Less interest		900
Earnings before taxes (EBT)		$3,300
Taxes		1,320
Net income		$1,980
Other data:
Shares outstanding (millions)		500.00
Common dividends (millions of $)		$693.00
Int rate on notes payable & L-T bonds		6%
Federal plus state income tax rate		40%
Year-end stock price		$47.52

​

​

Refer to Exhibit 4.1. What is the firm's EPS?  Do not round your intermediate calculations.

	a.	$3.96
	b.	$3.84
	c.	$3.72
	d.	$4.20
	e.	$3.80

The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)
Assets		2018
Cash and securities		$3,000
Accounts receivable		15,000
Inventories		18,000
Total current assets		$36,000
Net plant and equipment		$24,000
Total assets		$60,000
Liabilities and Equity
Accounts payable		$18,630
Accruals		8,370
Notes payable		6,000
Total current liabilities		$33,000
Long-term bonds		$9,000
Total liabilities		$42,000
Common stock		$5,040
Retained earnings		12,960
Total common equity		$18,000
Total liabilities and equity		$60,000
Income Statement (Millions of $)		2018
Net sales		$84,000
Operating costs except depreciation		78,120
Depreciation		1,680
Earnings before interest and taxes (EBIT)		$4,200
Less interest		900
Earnings before taxes (EBT)		$3,300
Taxes		1,320
Net income		$1,980
Other data:
Shares outstanding (millions)		500.00
Common dividends (millions of $)		$693.00
Int rate on notes payable & L-T bonds		6%
Federal plus state income tax rate		40%
Year-end stock price		$47.52

​

​

Refer to Exhibit 4.1. What is the firm's EPS?  Do not round your intermediate calculations.

	a.	$3.96
	b.	$3.84
	c.	$3.72
	d.	$4.20
	e.	$3.80

Answer 1

For answer 7.

Before-tax return to equate the tax free return = After-tax return*100(100-Tax rate)

Required after tax return= 4.8%

Tax rate= 36%

So Before tax= 4.8*100(100-36)

=7.50%(option e)

For calculating total asset turnover formula is = Net sales/Average total assets

Net sales= $84000

Total assets = $60000

Total asset turnover = 1.40( option b)

For calculating the EPS formula is = Net income/Common shares outstanding

Net income= $1980

Common shares outstanding(mn)= 500

EPS= $3.96