1. What was Joe's NOPAT in 2013?
2. What was Joe's Free Cash Flow (FCF) in 2013? (Note: For this question, assume Joe obtained no new plant and equipment or additional net working capital in 2013. Thus his Net Investment in Operating Capital (NIOC) for 2013 is $0.00.)
3. Suppose you were an investor and you were considering whether to buy a corporate bond from Joe's Corporation or a Municipal Bond from the city of St. Louis. Joe's corporate bond has a yield of 7%. The St Louis city bond has a yield of 5%. The income from Joe's bond is taxable. The income from the St Louis city bond is tax-free. If your effective tax rate is 30%, which bond would give you the higher after-tax yield?
4. What was Joe's Net Worth at the end of 2013?
5. Why is the market value of a firm's stock almost always higher than the book value of the firm's stock as shown on the balance sheet?
6. a. Calculate Joe's ROE for 2013.
b Construct a Du Pont equation (use the extended, or modified version shown in the Week 1, chapters 2 & 3 lesson notes) and comment on the sources of Joe's ROE as revealed by the equation.
| Joe's Fly-by-Night Oil |
| INCOME STATEMENT, 2013 |
BALANCE SHEET, as of Dec 31, 2013 |
| Sales |
$10,000 |
ASSETS |
|
| Cost of goods sold |
$4 |
Cash |
$5,000 |
| Gross profit |
$6,000 |
Accounts receivable |
3,000 |
| S, G & A expenses |
$3 |
Inventory |
$17 |
| EBIT |
$3,000 |
Current assets |
$25,000 |
| Interest |
$200 |
Equipment (gross) |
27,000 |
| Before-tax earnings |
$2,800 |
Less Accum Depreciation |
($12) |
| Taxes |
1 |
Equipment (net) |
$15,000 |
| Net income |
1 800 |
Total assets |
$40,000 |
|
|
LIABILITIES AND EQUITY |
|
| EPS |
$1.80 |
Accounts payable |
$17,000 |
|
|
Current liabilities |
$17,000 |
| Dtidends |
$600 |
Long-term debt |
$3,000 |
| Addition to retained earnings |
$1,200 |
Total liabilities |
$20,000 |
|
|
Common stock (1,000 shares) |
$7,000 |
|
|
Retained earnings |
$13,000 |
|
|
Total equity |
$20,000 |
|
|
Total liabilities & Equity |
$40,000 |