Molteni Motors Inc.

Income Statement

#2-3
EBIT
Interest Expense
Pre Tax Income
Taxes (40%)
Net income

#2-7

$13,000,000
$3,000,000
$10,000,000
40%
$6,000,000

Talley Corporation Income Statement

EBIT
Int. Expense
Div
Taxable Div recei
EBT
Taxes liability (3
Div received after
Net income

Tax Liability

Base Amount + Marginal tax rate (taxable income - low

$22,250 + .39 ($319,500 - $100,000)
$107,855.00

Avg Tax Rate is

Income Tax Liabili

Marginal tax rate
Average Tax Rate
After Tax Income

#2-10

$365,000
($50,000)
$15,000
($4,500)
$319,500
($107,855)
$10,500 (15,000 4,500)
$222,145

Tax Liability / taxable income

$107,855/$319,500
33.76%
$107,855
39%
33.76%
$222,145

Depreciation

$200,000

EBIT
Taxes (40%)

$750,000
($300,000)

Net income

Net Cash Flow

$450,000

Net income + Depreciation

$450,000 + $200,000
$650,000

(EBIT - Pre Tax Income)

0.4

30% of $15000
falls into the $100,000 to $335,000 bracket

taxable income - lower base)

(EBIT - Tax)

Problem 3-5
sale
$

Profit Margin
100,000,000.00

3%

Asset Turnover

2 (Sales / Total Assets)

ROE =
ROE

Profit Margin X Asset Turnover X Equity Multiplier

12%

ROE=

Profit Margin X Asset Turnover X Equity Multiplier

ROA
Profit Marg
12%
5%

Problem 3-6
ROE
20%
Equity Multiplier =
Asset Turnover =

Problem 3-7
$

Current Asset
3,000,000.00

Current Ratio =

ROE/ROA

1.67

ROA/Profit Margin

2.4

Current Ratio
1.5

Quick Ratio
1

Current Asset/Current liability

Current Liability
Quick ratio =

$2,000,000.00
(Current Asset-Inventory)/ current liabilities

Inventory

Problem 3-8 Haslem Corporation

Sales / total assets
Return on assets (ROA)
Return on equity (ROE)

$1,000,000.00

1.2
4%
7%

1.2
0.04
0.07

Profit Margin =

ROA / Asset Turnover

(0.04) / 1.2
0.0333333333
3%

ROA/ROE =

(Net Income / Total Assets) * ( Equity / Net Income)

Equity / Total Assets

ROA/ROE =

E / TA

Liabilities to assets ratio = Total Liabilities / Total Asset

1 - (E/TA)
1 - ( 4/7 )
1 - 0.5714
0.4286
42.86%
Given : Half its liabilities are in the form of debt
Debt to assets ratio =
42.86 / 2

21.43%

Asset
Equity Multp.
$ 50,000,000.00
2

Total Assets)

quity Multiplier

Equity Multiplier

ity / Net Income)

Problem 4-9

Int
N
PV

6%
1

500
Excel

A)
B)
C)
D)

FV
FV
PV
PV

$530.00
$561.80
$471.70
$445.00

Problem 4-11
Int
PV
FV
N
(Excel)
N
(Using Formula)

7%
200
400

10%

18%

10.244768351 7.272540897 4.18783513

log(1.07) (2) =
10.24

log(1.10)(2) = log(1.18) (2)

7.27
= 4.19

PV

Problem 4-12
FV
FV
FV

Problem 4-13
PV
PV
PV

400
200
400

Int
10
5
5

10%
5%
0%

Problem 4-14
Year

A
1
2
3
4
5

a
b

PV
PV0

100
400
400
400
300
$1,251.25
$1,600.00

Cash Flow
B
300
400
400
400
100
$1,300.32
$1,600.00

Int
8%

Problem 4-15
PV
700
-700
85000
9000

FV
-749
749
-201229
-2684.8

N
1
1
10
5

N
5

N
10

7%
7%
9%
15%

Problem 4-20

Int
10%

PV
$25,000.00

1
2
3
4
5
Total

Payments
$6,594.94
$6,594.94
$6,594.94
$6,594.94
$6,594.94
$32,974.69

PV
PMT

$50,000.00
$13,189.87

10

PV
PMT

$50,000.00
$8,137.27

10

b
c

Problem 4-21

Interest
Principal
$2,500.00
$20,905.06
$2,090.51
$16,400.63
$1,640.06
$11,445.76
$1,144.58
$5,995.40
$599.54
$0.00
$7,974.69 $25,000.00

FV
$12,000,000.00
Rate

PV
$6,000,000.00
14.87%

N
5

Annual compounding growth rate is 14.87% and not 20%.

Further, if the growth was 20% then the FV would be $14.93 million over 5 yea
1 year FV= 7.2 million
2 year FV= 8.64 million
3 year FV= 10.37 million
4 year FV= 12.44 million
5 year FV= 14.93 million
Using the Financial Calculator, N = 5, I/YR

Problem 4-35

Please see Ch4 - 4-35 Excel Tab

FV=PV(1+I)^N
Using Formula
500(1+0.06)
500(1+0.06)^2
500= PV (1+0.06)
500=PV(1+0.06)^2

$530.00
$561.80
$471.70
$445.00

100%

1
log(2.0) (2) =
1

Annuity (using Excel)

End
Beginning
$6,374.97
$7,012.47
$1,105.13
$1,160.38
$2,000.00
$2,000.00

400x[((1+0.10)^10 -1) /0.10] = $6374.97

200x[((1+0.05)^5 -1) /0.05] = $1,105.13
400x 5 = $2,000.00

Using Excel
$2,457.83
$865.90
$2,000.00

400x[1/0.10-(1/(0.10)(1+0.10)^10)]=$ 2457.83
200x[1/0.05-(1/(0.05)(1+0.05)^5)]=$ 865.90
400x5=$ 2000.00

$2,703.61
$909.19
$2,000.00

0%

3 million over 5 years.

alculator, N = 5, I/YR = 20, PV = - 6 million

)^10)]=$ 2457.83
)^5)]=$ 865.90

$6,374.97 x (1+0.10) = $7,012.47

$1,105.13 x (1+0.10) = $1,160.39
$2,000 x (1+0) = $2,000

$2,457.83 (1+.10) = $2,703.63

$865.90(1+0.05) = $909.19
$2000 x (1) = $2,000.00

Chapter:
Problem:

4
35

a. Find the FV of $1,000 invested to earn 10% annually 5 years from now. Answer this question by using a math
formula and also by using the Excel function wizard.
Inputs:

Formula:
Wizard (FV):

PV =
I/YR =
N =
FV = PV(1+I)^N =

1000
10%
5
$1,610.51
$1,610.51

Note: When you use the wizard and fill in the menu items, the result is the formula you see on the formula line if you click
on cell E12. Put the pointer on E12 and then click the function wizard (fx) to see the completed menu. Also, it is generally
easiest to fill in the wizard menus by clicking on one of the menu slots to activate the cursor and then clicking on the cell
where the item is given. Then, hit the tab key to move down to the next menu slot to continue filling out the dialog box.
Experiment by changing the input values to see how quickly the output values change.

b. Now create a table that shows the FV at 0%, 5%, and 20% for 0, 1, 2, 3, 4, and 5 years. Then create a graph with
years on the horizontal axis and FV on the vertical axis to display your results.

Begin by typing in the row and column labels as shown below. We could fill in the table by inserting formulas in all the cells,
but a better way is to use an Excel data table as described in the model for Chapter 4 (Bond Valuation). We used the data
table procedure. Note that the Row Input Cell is D9 and the Column Input Cell is D10, and we set Cell B32 equal to Cell
E11. Then, we selected (highlighted) the range B32:E38, then clicked Data, Table, and filled in the menu items to complete
the table.
Years (D10):
$1,610.51
0
1
2
3
4
5

Interest Rate (D9)

0%
5%
$1,000.00
$1,000.00
$1,000.00
$1,050.00
$1,000.00
$1,102.50
$1,000.00
$1,157.63
$1,000.00
$1,215.51
$1,000.00
$1,276.28

20%
$1,000.00
$1,200.00
$1,440.00
$1,728.00
$2,073.60
$2,488.32

To create the graph, first select the range C33:E38. Then click the chart wizard. Then follow the menu. It is easy to make a
chart, but a lot of detailed steps are involved to format it so that it's "pretty." Pretty charts are generally not necessary to get
the picture, though. Note that as the last item in the chart menu you are asked if you want to put the chart on the worksheet
or on a separate tab. This is a matter of taste. We put the chart below on the spreadsheet so we could see how changes
in the data lead to changes in the graph.

Note that the inputs to the data table, hence to the graph, are now in the row and column heads. Change the 20% in Cell
E32 to .3 (or 30%), then to .4, then to .5, etc., to see how the table and the chart changes.

FV & Rate
$3,000.00
$2,500.00

FV & Rate
$3,000.00
$2,500.00
$2,000.00
$1,500.00
$1,000.00
$500.00
$0.00

c. Find the PV of $1,000 due in 5 years if the discount rate is 10% per year. Again, work the problem with a
formula and also by using the function wizard.
Inputs:

FV =
I/YR =
N =
PV = FV/(1+I)^N =

Formula:
Wizard (PV):

1000
10%
5
$620.92
$620.92

Note: In the wizard's menu, use zero for Pmt because there are no periodic payments. Also, set the FV with a negative
sign so that the PV will appear as a positive number.
d. A security has a cost of $1,000 and will return $2,000 after 5 years. What rate of return does the
security provide?
Inputs:

PV =
FV =
I/YR =
N =

Wizard (Rate):

-1000
2000
?
5
15.02%

Note: Use zero for Pmt since there are no periodic payments. Note that the PV is given a negative sign because it is an
outflow (cost to buy the security). Also, note that you must scroll down the menu to complete the inputs.

e. Suppose Californias population is 30 million people, and its population is expected to grow by 2% per year.
How long would it take for the population to double?
Inputs:

PV =
FV =
I/YR = growth rate
N =

-30
60
2%
?

Wizard (NPER):

35

= Years to double.

f. Find the PV of an ordinary annuity that pays $1,000 at the end of each of the next 5 years if the interest rate is
15%. Then find the FV of that same annuity.
Inputs:

PMT =

1,000

N=
I/YR =

5
15%

PV: Use function wizard (PV)

PV =

$3,352.16

FV: Use function wizard (FV)

FV =

$6,742.38

g. How would the PV and FV of the above annuity change if it were an annuity due rather than an
ordinary annuity?
For the PV, each payment would be received one period sooner, hence would be discounted back one less year. This
would make the PV larger. We can find the PV of the annuity due by finding the PV of an ordinary annuity and then
multiplying it by (1 + I).
PV annuity due =

$3,352.16

1.15%

1.15%

Exactly the same adjustment is made to find the FV of the annuity due.
FV annuity due =

$6,742.38

h. What would the FV and the PV for parts a and c be if the interest rate were 10% with
semiannual compounding rather than 10% with annual compounding?
Part a. FV with semiannual compounding:
Inputs:

Orig. Inputs
1000
10%
5
$1,610.51

PV =
I/YR =
N =
FV = PV(1+I)^N =

Formula:
Wizard (FV):
Part c. PV with semiannual compounding:
Inputs:

Orig. Inputs
1000
10%
5

FV =
I/YR =
N =
PV = FV/(1+I)^N =

Formula:
Wizard (PV):

$620.92

i. Find the PV and FV of an investment that makes the following end-of-year payments. The
interest rate is 8%.
Year
1
2
3

Payment
100
200
400
Rate =

To find the PV, use the NPV function:

8%
PV =

$581.59

Excel does not have a function for the sum of the future values for a set of uneven payments. Therefore, we must find this
FV by some other method. Probably the easiest procedure is to simply compound each payment, then sum them, as is
done below. Note that since the payments are received at the end of each year, the first payment is compounded for 2
years, the second for 1 year, and the third for 0 years.
Year
1
2
3

Payment
100
200
400

(1 + I )^(N-t)
1.17
1.08
1.00

Sum =
An alternative procedure for finding the FV would be to find the PV of the series using the NPV
function, then compound that amount, as is done below:
PV =
FV of PV =

$560.00
$1,093.75

j. Suppose you bought a house and took out a mortgage for $50,000. The interest rate is 8%, and you must
amortize the loan over 10 years with equal end-of-year payments. Set up an amortization schedule that shows the
annual payments and the amount of each payment that repays the principal and the amount that constitutes
interest expense to the borrower and interest income to the lender.
Original amount of mortgage:
Term of mortgage:
Interest rate:

50000
10
0.08

Annual payment (use PMT function):

Year
1
2
3
4
5
6
7
8
9
10

Beg. Amt.
$50,000.00
$46,548.53
$42,820.94
$38,795.15
$34,447.29
$29,751.60
$24,680.26
$19,203.21
$13,288.00
$6,899.57

$7,451.47

Pmt
$7,451.47
$7,451.47
$7,451.47
$7,451.47
$7,451.47
$7,451.47
$7,451.47
$7,451.47
$7,451.47
$7,451.47

Interest
$4,000.00
$3,723.88
$3,425.68
$3,103.61
$2,755.78
$2,380.13
$1,974.42
$1,536.26
$1,063.04
$551.97

Principal
$3,451.47
$3,727.59
$4,025.79
$4,347.86
$4,695.69
$5,071.34
$5,477.05
$5,915.21
$6,388.43
$6,899.50

End. Bal.
$46,548.53
$42,820.94
$38,795.15
$34,447.29
$29,751.60
$24,680.26
$19,203.21
$13,288.00
$6,899.57
$0.06

(1) Create a graph that shows how the payments are divided between interest and
principal repayment over time.

Payment Break down

$60,000.00
$50,000.00
$40,000.00
$30,000.00
$20,000.00

Payment Break down

$60,000.00
$50,000.00
$40,000.00
$30,000.00
$20,000.00
$10,000.00
$0.00

10

Go back to cells D184 and D185, and change the interest rate and the term to maturity to see how the
payments would change.
(2) Suppose the loan called for 10 years of monthly payments, 120 payments in all, with
the same original amount and the same nominal interest rate. What would the
amortization schedule show now?
Now we would have a 12 10 = 120-payment loan at a monthly rate of .08/12 = 0.666667%.
The monthly payment would be:
$606.64
Month
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31

Beg. Amt.
$50,000.00
$49,726.69
$49,451.56
$49,174.60
$48,895.79
$48,615.12
$48,332.59
$48,048.16
$47,761.84
$47,473.62
$47,183.47
$46,891.38
$46,597.35
$46,301.36
$46,003.40
$45,703.45
$45,401.50
$45,097.53
$44,791.54
$44,483.51
$44,173.43
$43,861.28
$43,547.05
$43,230.72
$42,912.29
$42,591.73
$42,269.03
$41,944.19
$41,617.17
$41,287.98
$40,956.60

Pmt
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64

Interest
$333.33
$331.51
$329.68
$327.83
$325.97
$324.10
$322.22
$320.32
$318.41
$316.49
$314.56
$312.61
$310.65
$308.68
$306.69
$304.69
$302.68
$300.65
$298.61
$296.56
$294.49
$292.41
$290.31
$288.20
$286.08
$283.94
$281.79
$279.63
$277.45
$275.25
$273.04

Principal
$273.31
$275.13
$276.96
$278.81
$280.67
$282.54
$284.42
$286.32
$288.23
$290.15
$292.08
$294.03
$295.99
$297.96
$299.95
$301.95
$303.96
$305.99
$308.03
$310.08
$312.15
$314.23
$316.33
$318.44
$320.56
$322.70
$324.85
$327.01
$329.19
$331.39
$333.60

32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84

$40,623.00
$40,287.18
$39,949.12
$39,608.81
$39,266.23
$38,921.36
$38,574.20
$38,224.72
$37,872.91
$37,518.76
$37,162.24
$36,803.35
$36,442.07
$36,078.37
$35,712.25
$35,343.70
$34,972.68
$34,599.19
$34,223.21
$33,844.73
$33,463.72
$33,080.17
$32,694.07
$32,305.39
$31,914.12
$31,520.24
$31,123.73
$30,724.58
$30,322.77
$29,918.29
$29,511.10
$29,101.20
$28,688.57
$28,273.19
$27,855.03
$27,434.09
$27,010.35
$26,583.78
$26,154.36
$25,722.09
$25,286.93
$24,848.87
$24,407.88
$23,963.96
$23,517.08
$23,067.22
$22,614.37
$22,158.49
$21,699.57
$21,237.59
$20,772.54
$20,304.38
$19,833.10

$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64

$270.82
$268.58
$266.33
$264.06
$261.77
$259.48
$257.16
$254.83
$252.49
$250.13
$247.75
$245.36
$242.95
$240.52
$238.08
$235.62
$233.15
$230.66
$228.15
$225.63
$223.09
$220.53
$217.96
$215.37
$212.76
$210.13
$207.49
$204.83
$202.15
$199.46
$196.74
$194.01
$191.26
$188.49
$185.70
$182.89
$180.07
$177.23
$174.36
$171.48
$168.58
$165.66
$162.72
$159.76
$156.78
$153.78
$150.76
$147.72
$144.66
$141.58
$138.48
$135.36
$132.22

$335.82
$338.06
$340.31
$342.58
$344.87
$347.16
$349.48
$351.81
$354.15
$356.51
$358.89
$361.28
$363.69
$366.12
$368.56
$371.02
$373.49
$375.98
$378.49
$381.01
$383.55
$386.11
$388.68
$391.27
$393.88
$396.51
$399.15
$401.81
$404.49
$407.18
$409.90
$412.63
$415.38
$418.15
$420.94
$423.75
$426.57
$429.41
$432.28
$435.16
$438.06
$440.98
$443.92
$446.88
$449.86
$452.86
$455.88
$458.92
$461.98
$465.06
$468.16
$471.28
$474.42

85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120

$19,358.69
$18,881.10
$18,400.34
$17,916.37
$17,429.17
$16,938.72
$16,445.01
$15,948.00
$15,447.68
$14,944.03
$14,437.01
$13,926.62
$13,412.82
$12,895.60
$12,374.93
$11,850.79
$11,323.16
$10,792.01
$10,257.31
$9,719.05
$9,177.21
$8,631.75
$8,082.65
$7,529.90
$6,973.46
$6,413.31
$5,849.42
$5,281.78
$4,710.35
$4,135.11
$3,556.04
$2,973.11
$2,386.29
$1,795.56
$1,200.89
$602.25

$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64
$606.64

$129.06
$125.87
$122.67
$119.44
$116.19
$112.92
$109.63
$106.32
$102.98
$99.63
$96.25
$92.84
$89.42
$85.97
$82.50
$79.01
$75.49
$71.95
$68.38
$64.79
$61.18
$57.54
$53.88
$50.20
$46.49
$42.76
$39.00
$35.21
$31.40
$27.57
$23.71
$19.82
$15.91
$11.97
$8.01
$4.02

$477.58
$480.77
$483.97
$487.20
$490.45
$493.72
$497.01
$500.32
$503.66
$507.01
$510.39
$513.80
$517.22
$520.67
$524.14
$527.63
$531.15
$534.69
$538.26
$541.85
$545.46
$549.10
$552.76
$556.44
$560.15
$563.88
$567.64
$571.43
$575.24
$579.07
$582.93
$586.82
$590.73
$594.67
$598.63
$602.62

s question by using a math

on the formula line if you click

ed menu. Also, it is generally
and then clicking on the cell
e filling out the dialog box.

rs. Then create a graph with

serting formulas in all the cells,

Valuation). We used the data
we set Cell B32 equal to Cell
in the menu items to complete

the menu. It is easy to make a

generally not necessary to get
put the chart on the worksheet
o we could see how changes

ads. Change the 20% in Cell

rk the problem with a

, set the FV with a negative

urn does the

egative sign because it is an

e the inputs.

d to grow by 2% per year.

Years to double.

years if the interest rate is

her than an

back one less year. This

dinary annuity and then

$3,854.98

$7,753.74

New Inputs
1000
5%
10
$1,628.89

New Inputs
1000
5%
10
$613.91

. Therefore, we must find this

ment, then sum them, as is
ment is compounded for 2

FV
116.64
216.00
400.00
$

732.64

e is 8%, and you must

on schedule that shows the
mount that constitutes

interest and

10

m to maturity to see how the

yments in all, with

at would the

12 = 0.666667%.

End. Bal.
$49,726.69
$49,451.56
$49,174.60
$48,895.79
$48,615.12
$48,332.59
$48,048.16
$47,761.84
$47,473.62
$47,183.47
$46,891.38
$46,597.35
$46,301.36
$46,003.40
$45,703.45
$45,401.50
$45,097.53
$44,791.54
$44,483.51
$44,173.43
$43,861.28
$43,547.05
$43,230.72
$42,912.29
$42,591.73
$42,269.03
$41,944.19
$41,617.17
$41,287.98
$40,956.60
$40,623.00

$40,287.18
$39,949.12
$39,608.81
$39,266.23
$38,921.36
$38,574.20
$38,224.72
$37,872.91
$37,518.76
$37,162.24
$36,803.35
$36,442.07
$36,078.37
$35,712.25
$35,343.70
$34,972.68
$34,599.19
$34,223.21
$33,844.73
$33,463.72
$33,080.17
$32,694.07
$32,305.39
$31,914.12
$31,520.24
$31,123.73
$30,724.58
$30,322.77
$29,918.29
$29,511.10
$29,101.20
$28,688.57
$28,273.19
$27,855.03
$27,434.09
$27,010.35
$26,583.78
$26,154.36
$25,722.09
$25,286.93
$24,848.87
$24,407.88
$23,963.96
$23,517.08
$23,067.22
$22,614.37
$22,158.49
$21,699.57
$21,237.59
$20,772.54
$20,304.38
$19,833.10
$19,358.69

$18,881.10
$18,400.34
$17,916.37
$17,429.17
$16,938.72
$16,445.01
$15,948.00
$15,447.68
$14,944.03
$14,437.01
$13,926.62
$13,412.82
$12,895.60
$12,374.93
$11,850.79
$11,323.16
$10,792.01
$10,257.31
$9,719.05
$9,177.21
$8,631.75
$8,082.65
$7,529.90
$6,973.46
$6,413.31
$5,849.42
$5,281.78
$4,710.35
$4,135.11
$3,556.04
$2,973.11
$2,386.29
$1,795.56
$1,200.89
$602.25
-$0.37