TCO 1 Lifelike Inc Has Sales Of $585,000 Costs Of $273,000

1tco 1 Lifelike Inc Has Sales Of 585000 Costs Of 273000 Dep

1. (TCO 1) Lifelike, Inc. has sales of $585,000, costs of $273,000, depreciation expense of $71,000, interest expense of $38,000, and a tax rate of 35 percent. What is their net income?

2. (TCO 1) Hamble, Inc., has sales of $19,070, costs of $10,460, depreciation expense of $2,530, and interest expense of $1,600. If the tax rate is 35 percent, what is the operating cash flow, or OCF?

3. (TCOs 2 and 3) App Co. issued 15-year, $1,000 bonds at a coupon rate of 6 percent. The bonds make annual payments. If the YTM on these bonds is 5 percent, what is the current bond price?

4. (TCO 3) Fifteenth Bank has an issue of 7% preferred stock with a $100.00 par value that just sold for $109 per share. What is the bank’s cost of preferred stock? (Show your work and round your answer to two decimal places)

Paper For Above instruction

Financial analysis using fundamental principles of corporate finance provides essential insights into a company's performance and valuation. This paper aims to address four key problems derived from typical financial scenarios encountered in corporate finance, focusing on net income calculation, operating cash flow determination, bond valuation, and the cost of preferred stock, respectively. Each problem involves applying core financial formulas, understanding the interplay between revenues, expenses, interest, taxes, and market determinants to derive meaningful financial metrics.

Net Income Calculation for Lifelike, Inc.

Lifelike, Inc. reports sales of $585,000 with costs of $273,000, depreciation expense of $71,000, and interest expense of $38,000. The corporate tax rate is 35%. To calculate net income, we first determine the Earnings Before Interest and Taxes (EBIT). EBIT is derived as:

EBIT = Sales - Costs - Depreciation = $585,000 - $273,000 - $71,000 = $241,000.

Next, we subtract interest expenses to derive taxable income:

Taxable income = EBIT - Interest expense = $241,000 - $38,000 = $203,000.

Taxes owed are then:

Taxes = Taxable income × Tax rate = $203,000 × 0.35 = $71,050.

Finally, net income is:

Net income = Taxable income - Taxes = $203,000 - $71,050 = $131,950.

Thus, Lifelike, Inc.'s net income amounts to approximately $131,950.

Operating Cash Flow for Hamble, Inc.

Hamble, Inc. has sales of $19,070, costs of $10,460, depreciation of $2,530, and interest expense of $1,600. The tax rate is 35%. To compute Operating Cash Flow (OCF), we start with EBIT:

EBIT = Sales - Costs - Depreciation = $19,070 - $10,460 - $2,530 = $6,080.

Interest expense is deducted to find taxable income:

Taxable income = EBIT - Interest = $6,080 - $1,600 = $4,480.

Taxes paid are:

Taxes = $4,480 × 0.35 = $1,568.

Net income is:

Net income = Taxable income - Taxes = $4,480 - $1,568 = $2,912.

Operating Cash Flow (OCF) is computed as:

OCF = EBIT + Depreciation - Taxes on EBIT (without interest adjustment) + Non-cash charges.

Alternatively, more straightforwardly, OCF can be calculated using the formula:

OCF = (EBIT × (1 - Tax rate)) + Depreciation.

Applying the formula:

OCF = ($6,080 × (1 - 0.35)) + $2,530 = ($6,080 × 0.65) + $2,530 = $3,952 + $2,530 = $6,482.

Therefore, the operating cash flow for Hamble, Inc. is approximately $6,482.

Bond Valuation for App Co.

App Co. issues 15-year bonds with a face value of $1,000, a coupon rate of 6%, and annual coupon payments. The yield to maturity (YTM) on these bonds is 5%. To assess their current price, we treat this as a present value of future cash flows: the annual coupon payments and the face value at maturity.

Annual coupon payment = Coupon rate × Face value = 0.06 × $1,000 = $60.

The bond price is the sum of the present value of the annuity of coupons and the present value of the face value:

Price = PV of coupons + PV of face value.

The PV of coupons:

PV_coupon = C × [1 - (1 + r)^-n] / r = $60 × [1 - (1 + 0.05)^-15] / 0.05.

Calculating:

PV_coupon ≈ $60 × [1 - (1 + 0.05)^-15] / 0.05 ≈ $60 × [1 - 1 / (1.05)^15] / 0.05.

(1.05)^15 ≈ 2.0789, so:

PV_coupon ≈ $60 × [1 - 1/2.0789] / 0.05 ≈ $60 × (1 - 0.4814) / 0.05 ≈ $60 × 0.5186 / 0.05 ≈ $60 × 10.372.

PV_coupon ≈ $622.32.

PV of face value:

PV_face = F / (1 + r)^n = $1,000 / (1.05)^15 ≈ $1,000 / 2.0789 ≈ $481.86.

Adding both components:

Bond price ≈ $622.32 + $481.86 ≈ $1,104.18.

Since the YTM (5%) is lower than the coupon rate (6%), the bond price is above par, approximately $1,104.18.

Cost of Preferred Stock for Fifteenth Bank

Fifteenth Bank's preferred stock has a par value of $100, sells for $109, and pays a 7% dividend annually. The cost of preferred stock (k_ps) is calculated as:

k_ps = D / P₀,

where D is the annual dividend, and P₀ is the current price.

Dividend D = 7% × $100 = $7.

k_ps = $7 / $109 ≈ 0.06422 or 6.42%.

Therefore, the cost of the preferred stock is approximately 6.42%, rounded to two decimal places.

Conclusion

This comprehensive financial analysis demonstrates the application of fundamental principles such as EBIT computation, tax implications, bond valuation, and preferred stock cost calculation. These metrics enable investors and managers to evaluate a company's profitability, cash-generating ability, market valuation of debt, and cost of capital for preferred equity. Mastery of these concepts is essential for decision-making in corporate finance, investment analysis, and strategic planning.

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