Corporate Tax Liability and Balance Sheet Analysis

Full Answer Section

Therefore, XYZ, Inc.'s total net operating capital is $14 million.

2. Balance Sheet Analysis

XYZ, Inc.'s balance sheet:

Assets

Cash $50,000 Accounts receivable $83,333 Inventories $27,027 Fixed assets $239,643

Total assets $400,000

Liabilities and Equity

Accounts payable $100,000 Long-term debt $50,000 Common stock $100,000 Retained earnings $150,000

Total liabilities and equity $400,000

Balance sheet analysis:

RatioValue

Total assets turnover 1.50 Gross profit margin on sales 25% Total liabilities-to-assets ratio 40% Quick ratio 0.80 Days sales outstanding 36.5 days Inventory turnover ratio 3.75

3. Yield to Maturity for Annual Payments

The yield to maturity (YTM) is the rate of return an investor will receive if they hold a bond to maturity. To calculate YTM for annual payments, you can use the following formula:

YTM = (C / PV) + (C / PV + YTM) * (n - 1)

Where:

• C is the annual coupon payment
• PV is the present value of the bond
• n is the number of years to maturity

XYZ Corporation's bond YTM calculation:

Annual coupon payment (C): $100 Present value (PV): $950 Number of years to maturity (n): 14

Substituting values into the formula:

YTM = (100 / 950) + (100 / (950 + YTM)) * (14 - 1)

YTM = 0.1053 + (0.1053 / (950 + YTM)) * (13)

Solving for YTM using trial and error or a financial calculator, we find that the YTM is approximately 10.62%.

4. Required Rate of Return

The required rate of return is the rate of return an investor expects to earn on an investment, given the risk of the investment. The required rate of return for a stock can be calculated using the Capital Asset Pricing Model (CAPM):

Required rate of return = Risk-free rate + Beta * (Market return - Risk-free rate)

Given the information provided:

• Risk-free rate (rRF) = 6%
• Market return (rM) = 10%
• Stock A's beta (β) = 1.4

Plugging in the values:

Required rate of return = 6% + 1.4 * (10% - 6%)

Required rate of return = 6% + 1.4 * 4%

Required rate of return = 6% + 5.6%

Required rate of return = 11.6%

Therefore, Stock A's required rate of return is 11.6%.

5. Portfolio Beta

The portfolio beta is the weighted average of the betas of the individual stocks in the portfolio. It is calculated using the following formula:

Portfolio beta = Sum of (weight of each stock * beta of each stock)

Given the information provided:

• Portfolio beta = 1.1
• Weight of each stock = 0.05 (since there

Sample Solution

Part 1: Balance Sheet Analysis

1. Total Net Operating Capital

Total net operating capital (TNOC) is a measure of a company's liquidity and financial strength. It is calculated by subtracting operating current liabilities from operating current assets.

XYZ, Inc.'s TNOC calculation:

Operating current assets: $20 million Operating current liabilities: $6 million TNOC = Operating current assets - Operating current liabilities TNOC = $20 million - $6 million = $14 million