Answered: depreciation of $960 million in that…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Pak China Railroad reported net income of $770 million
after interest expenses of $320 million in a recent
financial year. (The corporate tax rate was 36%.) It reported
depreciation of $960 million in that year, and capital
spending was $1.2 billion. The firm also had $4 billion
in debt outstanding on the books, was rated AA (carrying
a yield to maturity of 8%), and was trading at par
(up from $3.8 billion at the end of the previous year).
The beta of the stock is 1.05, and there were 200 million
shares outstanding (trading at $60 per share), with
a book value of $5 billion. Union Pacific paid 40% of its
earnings as dividends and working capital requirements
are negligible. (The Treasury bond rate is 7%.)

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