Question 1-6.You are a shareholder in a C corporation. The corporation earns $2 per share before taxes.Once it has paid taxes it will distribute the rest of its earnings to

1-6.You are a shareholder in a C corporation. The corporation earns $2 per share before taxes.Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 40% and the personal tax rate on (both dividend andnon-dividend)income is 30%. How much is left for you after all taxes are paid?

2-10.See Table 2.5 showing financial statement data and share price data for Mydeco Corp.

a.What is Mydeco’s market capitalization at the end of each year?

b.What is Mydeco’smarket-to-bookratio at the end of each year?

c.What is Mydeco’s enterprise value at the end of each year?

2-13.See Table 2.5 showing financial statement data and share price data for Mydeco Corp.

a.By what percentage did Mydeco’s revenues grow each year from 2010 to 2013?

b.By what percentage did net income grow each year?

c.Why might the growth rates of revenues and net income differ?

2-15.See Table 2.5 showing financial statement data and share price data for Mydeco Corp. Suppose Mydeco had purchased additional equipment for $12 million at the end of 2010, and this equipment was depreciated by $4 million per year in 2011, 2012, and 2013. Given Mydeco’s tax rate of 35%, what impact would this additional purchase have had on Mydeco’s net income in years2010–2013?(Assume tha equipment is paid for out of cash and that Mydeco earns no interest on its cash balances).

The equipment purchase does not impact net income directly, however the increased depreciation expense and tax savings changes net income.

2-20.See Table 2.5 showing financial statement data and share price data for Mydeco Corp.

a.From 2009 to 2013, what was the total cash flow from operations that Mydeco generated?

b.What fraction of the total in (a) was spent on capital expenditures?

c.What fraction of the total in (a) was spent paying dividends to shareholders?

d.What was Mydeco’s total retained earnings for this period?

2-21.See Table 2.5 showing financial statement data and share price data for Mydeco Corp.

a.In what year was Mydeco’s net income the lowest?

b.In what year did Mydeco need to reduce its cash reserves?

c.Why did Mydeco need to reduce its cash reserves in a year when net income was reasonably high?

2-22.See Table 2.5 showing financial statement data and share price data for Mydeco Corp. Use the data from the balance sheet and cash flow statement in 2009 to determine the following:

a.How much cash did Mydeco have at the end of 2008?

b.What were Mydeco’s accounts receivable and inventory at the end of 2008?

c.What were Mydeco’s total liabilities at the end of 2008?

d.Assuming goodwill and intangibles were equal in 2008 and 2009, what was Mydeco’s net property, plant, and equipment at the end of 2008?

2-31.See Table 2.5 showing financial statement data and share price data for Mydeco Corp.

a.How did Mydeco’s accounts receivable days change over this period?

b.How did Mydeco’s inventory days change over this period?

c.Based on your analysis, has Mydeco improved its management of its working capital during this time period?

See Table 2.5 showing financial statement data and share price data for Mydeco Corp.

a.By how much did Mydeco increase its debt from 2009 to 2013?

b.What was Mydeco’s EBITDA/Interest coverage ratio in 2009 and 2013? Did its coverage ratio ever fall below 2?

c.Overall, did Mydeco’s ability to meet its interest payments improve or decline over this period?

2-34.See Table 2.5 showing financial statement data and share price data for Mydeco Corp.

a.How did Mydeco’s bookdebt-equityratio change from 2009 to 2013?

b.How did Mydeco’s marketdebt-equityratio change from 2009 to 2013?

c.Compute Mydeco’sdebt-to-enterprisevalue ratio to assess how the fraction of its business that is debt financed has changed over the period.

3-1.Honda Motor Company is considering offering a $2000 rebate on its minivan, lowering the vehicle’s price from $30,000 to $28,000. The marketing group estimates that this rebate will increase sales over the next year from 40,000 to 55,000 vehicles. Suppose

Honda’s profit margin with the rebate is $6000 per vehicle. If the change in sales is the only consequence of this decision, what are its costs and benefits? Is it a good idea?

The benefit of the rebate is that Honda will sell more vehicles and earn a profit on each additional vehicle sold:

Benefit = Profit of $6,000 per vehicle × 15,000 additional vehicles sold = $90 million.

The cost of the rebate is that Honda will make less on the vehicles it would have sold:

Cost = Loss of $2,000 per vehicle × 40,000 vehicles that would have sold without rebate = $80 million.

Thus, Benefit – Cost = $90 million – $80 million = $10 million, and offering the rebate looks attractive.

(Alternatively, we could view it in terms of total, rather than incremental, profits. The benefit as $6000/vehicle × 55,000 sold = $330 million, and the cost is $8,000/vehicle × 40,000 sold = $320 million.)

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