Corporate Finance 12th Edition

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CHAPTER 6, Case #1 BETHESDA MINING To analyze this project, we must calculate the incremental cash flows generated by the project. Since net working capital is built up ahead of sales, the initial cash flow depends in part on this cash outflow. So, we will begin by calculating

ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone elses best interests, rather than those of the shareholders. If such events occur, they may contradict the goal of maximizing the share price of the equity

Input area: 10-year annual Standard deviation Bledsoe S&P 500 Index Fund 11.04% 18.45% Bledsoe Small-Cap Fund 16.14% 29.18% Bledsoe Large Company Stock Fund 12.15% 24.43% Bledsoe Bond Fund 6.93% 9.96% Risk-free rate 3.20% Company stock expected return 16.00% Company stock standard deviation 58.00% Output area: Bledsoe S&P 500 Index Fund 0.4249 Bledsoe Small-Cap Fund 0.4435 Bledsoe Large Company Stock Fund

1. The biggest advantage the mutual funds have is instant diversification. The mutual funds have multiple assets in the portfolio. 1. The biggest advantage the mutual funds have is instant diversification. The mutual funds have multiple assets in the portfolio. 1. The biggest advantage the mutual funds have is instant

1. They all wish they had! Since they didnt, it must have been the case that the stellar performance was not foreseeable, at least not by most. 1. They all wish they had! Since they didnt, it must have been the case that the stellar performance was not foreseeable, at

CHAPTER 11 RISK AND RETURN: THE CAPITAL ASSET PRICING MODEL (CAPM) Answers to Concepts Review and Critical Thinking Questions 1. Some of the risk in holding any asset is unique to the asset in question. By investing in a variety of assets, this unique portion of the

Input area: 10-year annual Standard deviation Bledsoe Large Company Stock Fund 12.15% 24.43% Bledsoe Bond Fund 6.93% 9.96%Risk-free rate3.20%Correlation 0.15 Bledsoe Bond Fund 6.93% 9.96%Risk-free rate3.20%Correlation 0.15 Bledsoe Bond Fund 6.93% 9.96% Risk-free rate 3.20% Correlation 0.15 Output area: Weight of stock fund Portfolio E(R) Portfolio standard deviation 30% 8.50% 10.8468%40% 9.02% 12.1952%50% 9.54% 13.8656%60% 10.06% 15.7559%70% 10.58% 17.7961%80% 11.11%

And the standard deviation of Stock B is: 2 B =.33(.073 .1160)2 + .33(.128 .1160)2 + .33(.293 .1160)2 2B = .02240 B = .022401/2 B = .1497, or 14.97% To find the covariance, we multiply each possible state times the product of each assets deviation from the

does not create a diversified portfolio. This is especially true since income also comes from the company. If times get bad for the company, employees face layoffs, or reduced work hours. So, not only does the investment perform poorly, but income may be reduced as well. We only have to

CHAPTER 12 B- 1 those factors will not necessarily affect all firms equally. Unsystematic risk is the type of risk that can be diversified away through portfolio formation. Unsystematic risk factors are specific to the firm or industry. Surprises in these factors will affect the returns of the firm

We would expect the betas for the SMB and HML risk factors to be low, and possibly negative, since large company stock returns are not highly related to small company stock returns and large company stocks tend to be more oriented toward value stocks. We would expect the betas for

201009 49.63 25.52 17.98 201009 49.63 25.52 17.98 201009 49.63 25.52 17.98 201011 0.6 3.69 -0.58 0.01 52.12 26.55 19.33 201011 0.6 3.69 -0.58 0.01 52.12 26.55 19.33 201011 0.6 3.69 -0.58 0.01 52.12 26.55 19.33 201101 1.99 -2.4 0.68 0.01 56.50 28.68 20.93 201101 1.99 -2.4 0.68 0.01 56.50 28.68 20.93 201101 1.99 -2.4 0.68 0.01 56.50

Input area: 2)RE from CAPM 9.86% 2)RE from CAPM 9.86% 2) RE from CAPM 9.86% Stock price 232.36$ Shares outstanding 129,800,000 Beta 1.400 3-month Treasury bill rate 0.06%Market risk premium 7.00%Tax rate 21% Stock price 232.36$ Shares outstanding 129,800,000 Beta 1.400 3-month Treasury bill rate 0.06%Market risk premium 7.00%Tax rate 21% Stock price 232.36$ Shares outstanding 129,800,000

1. No. The cost of capital depends on the risk of the project, not the source of the money. 1. No. The cost of capital depends on the risk of the project, not the source of the money. 1. No. The cost of capital depends on the risk of the

CHAPTER 13 COST OF CAPITAL FOR SWAN MOTORS NOTE: The example below shows the results during November 2015. The actual answer to the case will change based on current market conditions. 1. The book value of the companys liabilities and equity can

poor investor who takes all of the losses in a given year, in general, to get the market average, we would expect one-half of investors would outperform the market, and one-half would underperform the market. After all, the market average return must be the average return of all investors average

to receive the greatest value. 2) Reduce costs or increase subsidies. A firm can package securities to reduce taxes. Such a security will increase the value of the firm. In addition, financing techniques involve many costs, such as accountants, lawyers, and investment bankers. Packaging securities in a way to reduce

included are: the basic terms of the bond, the total amount of the bonds issued, description of the property used as security, repayment arrangements, call provisions, convertibility provisions, and details of protective covenants. included are: the basic terms of the bond, the total amount of the bonds issued, description of

CHAPTER 16 CAPITAL STRUCTURE: BASIC CONCEPTS Answers to Concepts Review and Critical Thinking Questions 1. Assumptions of the Modigliani-Miller theory in a world without taxes: 1) Individuals can borrow at the same interest rate at which the firm borrows. Since investors can purchase securities on margin, an individuals

14. a. The value of the unlevered firm is: V = EBIT(1 TC)/R0 V = $163,000(1 .23)/.15 V = $836,733.33 b. The value of the levered firm is: V = VU + TCB V = $836,733.33 + .23($185,000) V = $879,283.33 V = $163,000(1 .23)/.15

million purchase. Since interest payments are tax deductible, debt in the firms capital structure will decrease the firms taxable income, creating a tax shield that will increase the overall value of the firm. million purchase. Since interest payments are tax deductible, debt in the firms capital structure will decrease the

Chapter 16 Input area: 2. Assets 645,600,000$ Equity 645,600,000$ Total assets 645,600,000$ Total Debt & Equity 645,600,000$ 2. Assets 645,600,000$ Equity 645,600,000$ Total assets 645,600,000$ Total Debt & Equity 645,600,000$ 2. Assets 645,600,000$ Equity 645,600,000$ Total assets 645,600,000$ Total Debt & Equity 645,600,000$ NPV 37,523,810$ NPV 37,523,810$ NPV 37,523,810$ NPV of project

Chapter 17 Input Area: Probability Without Expansion With Expansion With expansion 38,000,000$ Expected NPV 900,000$ With expansion 38,000,000$ Expected NPV 900,000$ With expansion 38,000,000$ Expected NPV 900,000$ Low 0.30 22,000,000$ 29,000,000$ Normal 0.50 31,000,000$ 37,000,000$ High 0.20 48,000,000$ 54,000,000$ Face value of debt 26,000,000$ Cost of expansion 5,400,000$ Output Area: 1) Expected value of firm Without expansion

Firms may suffer a loss of sales due to a decrease in consumer confidence and loss of reliable supplies due to a lack of confidence by suppliers. 2) Incentive to take large risks. When faced with projects of different risk levels, managers acting in the stockholders interest have an incentive

V = $31,700,000 And the expected value of the company in one year with expansion is: V = .30($29,000,000) + .50($37,000,000) + .20($54,000,000) V = $38,000,000 The companys stockholders appear to be better off with expansion since the expected NPV of the project is positive. The difference in the

Input area: 2019 2020 2021 2022 2023 Terminal value of company 17,777.96$ Terminal value of tax shields 460.53$ Value of terminal tax shields Terminal value of company 17,777.96$ Terminal value of tax shields 460.53$ Value of terminal tax shields Terminal value of company 17,777.96$ Terminal value of tax shields 460.53$ Value of terminal tax

CHAPTER 18 CASE C-1 CHAPTER 18 THE LEVERAGED BUYOUT OF CHEEK PRODUCTS, INC. In this leveraged buyout, the debt level of the company changes through time. Since the debt level changes through time, the APV method is appropriate for evaluating the LBO. The steps we must undertake

1. APV is equal to the NPV of the project (i.e. the value of the project for an unlevered firm) plus the NPV of financing side effects. 1. APV is equal to the NPV of the project (i.e. the value of the project for an unlevered firm) plus the NPV

can lower the interest rate on debt, and decrease financial distress costs. If there are no financial distress costs, capital structure theory argues that increasing debt can increase the value of the company because of the interest tax shield. can lower the interest rate on debt, and decrease financial distress

CHAPTER 18 - 1 Dividend policy is irrelevant when the timing of dividend payments doesnt affect the present value of all future dividends. Dividend policy is irrelevant when the timing of dividend payments doesnt affect the present value of all future dividends. Dividend policy is irrelevant when the timing

CHAPTER 2 CASH FLOWS AT WARF COMPUTERS The operating cash flow for the company is: (NOTE: All numbers are in thousands of dollars) OCF = EBIT + Depreciation Current taxes OCF = $2,665 + 298 559 OCF = $2,404 To calculate

Chapter 2 Cash Flows at Warf Computer, Inc. Input area: 2018 2019 2018 2019 Accounts receivable 802 859 Accrued expenses 481 296 Inventories 795 769 Total current liabilities 1,063$ 919$ Other 94 110 Total current assets 2,160$ 2,280$ Long-term liabilitiesFixed assets Deferred taxes 191$ 257$ Property, plant, and equipment 3,815$ 4,978$ Long-term

asset, the added assumption that the asset can be quickly converted to cash at or near market value is important. asset, the added assumption that the asset can be quickly converted to cash at or near market value is important. asset, the added assumption that the asset can be quickly

the greatest access to public debt markets (small companies tend to borrow more from private lenders). Equity issuers are frequently small companies going public; such issues are often quite small. Additionally, to maintain a debt-equity ratio, a company must issue new bonds when the current bonds mature. the greatest access

underpricing. However, as Google shows, underpricing can still exist in a Dutch auction. Whether the underpricing is as severe in a Dutch auction as it would be in a traditional underwritten offer is unknown. underpricing. However, as Google shows, underpricing can still exist in a Dutch auction. Whether the underpricing

Underwriter fees 6,300,000$ Total fees excluding underwriter fees 2,943,500$ Total fees 9,243,500$ Net amount raised 83,700,000$ Fee as a percentage of funds raised 11.04% Underwriter fees 6,300,000$ Total fees excluding underwriter fees 2,943,500$ Total fees 9,243,500$ Net amount raised 83,700,000$ Fee as a percentage of funds raised 11.04% Underwriter fees 6,300,000$ Total

the loan is; (2) The lessee does not own the asset and cannot depreciate it for tax purposes; (3) In the event of a default, the lessor cannot force bankruptcy; and (4) The lessee does not obtain title to the asset at the end of the lease (absent some additional

Input area: Security deposit (400,000) 400,000 Lease payment (1,480,000) (1,480,000) (1,480,000) (1,480,000) Tax on lease payment 310,800 310,800 310,800 310,800 Cash flow from leasing 4,530,800$ (1,596,157)$ (1,738,605)$ (1,358,916)$ (311,122)$ NAL 182,902.93$ Security deposit (400,000) 400,000 Lease payment (1,480,000) (1,480,000) (1,480,000) (1,480,000) Tax on lease payment 310,800 310,800 310,800 310,800 Cash flow

Aftertax salvage value = $616,200 This is an opportunity cost to Warf Computers since, if the company leases the equipment, it will not be able to sell the equipment in four years. The lease payments are due at the beginning of each year, so the incremental cash flows are:

Input Area: Current stock price 53$ Exercise price 65$ Expiration (months) 6 Risk-free rate 4% Standard deviation 63.22% Output Area: d1(0.1883) d2(0.6353) N(d1)0.4253 N(d2)0.2626 Call 5.81$ d2(0.6353) N(d1)0.4253 N(d2)0.2626 Call 5.81$ d2(0.6353) N(d1)0.4253 N(d2)0.2626 Call 5.81$ Chapter 22 Clissold Industries Options Microsoft Excel 14.0 Answer Report Worksheet: [Corporate Finance 11th edition Case Solutions.xlsx]Chapter 22 Report Created: 1/3/2015 3:44:01

one underlying asset no matter how many strike prices are available, we would only expect to see one implied standard deviation. one underlying asset no matter how many strike prices are available, we would only expect to see one implied standard deviation. one underlying asset no matter how many strike

Call Option If the stock price rises to $73: Payoff = $13 If the stock price falls to $49: Payoff = $0 Delta Shares If the stock price rises to $73: Payoff = (.54)($73) = $39.54 If the stock price falls to $49:

CHAPTER 22 OPTIONS AND CORPORATE FINANCE Answers to Concept Questions 1. A call option confers the right, without the obligation, to buy an asset at a given price on or before a given date. A put option confers the right, without the obligation, to sell an asset

firms stock with the compensation of the CEO. In this way, the CEO has an incentive to increase shareholder value. firms stock with the compensation of the CEO. In this way, the CEO has an incentive to increase shareholder value. firms stock with the compensation of the CEO. In this

Input Area: Current stock price 27.15$ Exercise price 40$ Expiration (years) 3 Risk-free rate 3.80% Standard deviation 60.00% Output Area: d10.2564 d2(0.7828) N(d1)0.6012 N(d2)0.2169 Call 8.58$ d10.2564 d2(0.7828) N(d1)0.6012 N(d2)0.2169 Call 8.58$ d10.2564 d2(0.7828) N(d1)0.6012 N(d2)0.2169 Call 8.58$ Chapter 23 Exotic Cuisine Employee Stock Options

d1 = [ln($27.15/$40) + (.038 + .602/2) 3]/(.60 3) = .2564 d2 = .2564 (.60 3) = .7828 N(d1) = .6012 N(d2) = .2169 d1 = [ln($27.15/$40) + (.038 + .602/2) 3]/(.60 3) = .2564 d2 = .2564 (.60 3) = .7828 N(d1) = .6012 N(d2) = .2169

Intrinsic value = $25(PVIFA4%,20) + $1000(PVIF4%,20) Intrinsic value = $703.11 So, the floor value of the bond is $703.11. This means that if the company offered bonds with the same coupon rate and no conversion feature, they would be able to sell them for $703.11. Intrinsic value =

Convertible bond coupon 5%Conversion value of bond 680.56$ Plain vanilla coupon 8% Convertible bond coupon 5%Conversion value of bond 680.56$ Plain vanilla coupon 8% Convertible bond coupon 5% Conversion value of bond 680.56$ Plain vanilla coupon 8% Stock price 30.63$ Intrinsic bond value 703.11$ Floor value 703.11$ Conversion ratio 22.22Conversion premium 46.94%Option value 296.89$

1. A warrant is issued by the company, and when a warrant is exercised, the number of shares increases. A call option is a contract between investors and does not affect the number of shares of the firm. 1. A warrant is issued by the company, and when a warrant

annuity equals $500,000, the amount of principal that he plans to borrow. The monthly mortgage payment will be: $500,000 = C(PVIFA5.5%/12,300) C = $3,070.44 annuity equals $500,000, the amount of principal that he plans to borrow. The monthly mortgage payment will be: $500,000 = C(PVIFA5.5%/12,300) C = $3,070.44 annuity equals

Chapter 25 Input area: 1) Mortgage payment 3,070.44$ 1) Mortgage payment 3,070.44$ 1) Mortgage payment 3,070.44$ 5) Mortgage value 546,804.59$ 5) Mortgage value 546,804.59$ 5) Mortgage value 546,804.59$ 4) Mortgage value 467,639.54$ 4) Mortgage value 467,639.54$ 4) Mortgage value 467,639.54$ Mortgage value 500,000$ Years 25 Interest rate 5.50% 4) Interest rate 6.20% 5) Interest

CHAPTER 24 - 1 Since a decline in lumber prices would reduce the income of a lumber supplier, it has hedged its price risk by selling lumber futures. Losses in the spot market due to a fall in lumber prices are offset by gains on the short position in

CHAPTER 25 - 1 such firms tend to keep inventory on hand, and they allow customers to purchase on credit and take a relatively long time to pay. such firms tend to keep inventory on hand, and they allow customers to purchase on credit and take a relatively long

CHAPTER 26 KEAFER MANUFACTURING WORKING CAPITAL MANAGEMENT 1. The cash flow each quarter will consist of the sales collection, minus the suppliers paid, expenses, dividends, interest, and capital outlays. The cash flows for each quarter will be: Cash Flow Q1 Q2 Q3 Q4 Collections from previous quarter

567891011121314A/R 675,000$ Percent uncollectible 10%Collection period 57 % of purchases for next Q sales 50%Suppliers paid 53 % of sales for expenses 25%Interest and dividends 185,000$ Outlay in third Q 390,000$ 567891011121314A/R 675,000$ Percent uncollectible 10%Collection period 57 % of purchases for next Q sales 50%Suppliers paid 53 % of

1. Yes. Once a firm has more cash than it needs for operations and planned expenditures, the excess cash has an opportunity cost. It could be invested (by shareholders) in potentially more profitable ways. 1. Yes. Once a firm has more cash than it needs for operations and planned expenditures,

Chapter 27 Input Area: 1. FVA $10,385,104.152. FVA 10,391,608.36$ The company should go ahead with the plan.3. ACH transfer cost 315.67$ 1. FVA $10,385,104.152. FVA 10,391,608.36$ The company should go ahead with the plan.3. ACH transfer cost 315.67$ 1. FVA $10,385,104.15 2. FVA 10,391,608.36$ The company should go ahead with the plan. 3. ACH

is four since there are four banks, times the amount of each transfer. So, the total available in two weeks will be: Amount available = (1 .002){4[$185,000(FVIFA.068%,14)]} Amount available = $10,385,104.15 is four since there are four banks, times the amount of each transfer. So, the total available in two

Input Area: Sales Default rate Administrative costs Receivables period Current policy $ 113,000,000 2.10% 1.60% 38 Option 1 $ 129,000,000 2.60% 2.40% 41 Option 2 $ 127,000,000 2.20% 1.90% 51 Option 3 $ 130,000,000 2.50% 2.10% 49 Variable costs (daily) 160,273.97$ Defaults on sales (daily) 8,904.11$ Administrative costs (daily) 7,479.45$ Interest rate 0.7853%NPV 22,697,882.88$ Variable costs

Current Policy First, we need to calculate the average daily sales, which are: Average daily sales = $113,000,000/365 Average daily sales = $309,589.04 Now, we need to calculate the daily interest rate: Daily interest rate = (1 + .06)1/365 1 = .01597% Next, we need the average daily costs. We

CHAPTER 27 APPENDIX - 1 c. A bankers acceptance is when a bank guarantees the future payment of a commercial draft. d. A promissory note is an IOU that the customer signs. e. A trade acceptance is when the buyer accepts the commercial draft and promises to pay

Chapter 29 Input Area: Cash paid 282,000,000$ 2019 2020 2021 2022 2023 Profit retention - 17,400,000 13,900,000 31,800,000 13,200,000 Total 17,900,000$ 26,600,000$ 22,100,000$ 46,800,000$ 19,300,000$ Tax rate 25%Loan to buy company 57,000,000$ Dividends from Hybrid today 76,000,000$ Current target debt-equity ratio 0.5000 New target debt-equity ratio 1.0000 Year 2 tax-loss carryforward 12,800,000$ Year

CHAPTER 29 THE BIRDIE GOLF-HYBRID GOLF MERGER 1. As with any other merger analysis, we need to examine the present value of the incremental cash flows. The cash flow today from the acquisition is the acquisition cost plus the dividends paid today, or: Acquisition of

CHAPTER 28 - 1 sheets of the two firms are combined; no goodwill is created. The choice of accounting method has no direct impact on the cash flows of the firms. EPS will probably be lower under the purchase method because reported income is usually lower due to the

Input area: EBIT 26,464,900$ Interest 4,170,100 Taxable income 22,294,800$ Taxes (21%) 4,681,908 Net income 17,612,892$ Dividends 7,925,000$ Add to RE 9,687,892$ EBIT 26,464,900$ Interest 4,170,100 Taxable income 22,294,800$ Taxes (21%) 4,681,908 Net income 17,612,892$ Dividends 7,925,000$ Add to RE 9,687,892$ EBIT 26,464,900$ Interest 4,170,100 Taxable income 22,294,800$ Taxes (21%) 4,681,908 Net

CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH Answers to Concepts Review and Critical Thinking Questions 1. Time trend analysis gives a picture of changes in the companys financial situation over time. Comparing a firm to itself over time allows the financial manager to evaluate whether some aspects of

So, the dollar growth rate in sales is: Sales growth = $588,889 530,000 Sales growth = $58,889 Sales growth = $588,889 530,000 Sales growth = $58,889 Sales growth = $588,889 530,000 Sales growth = $58,889 20. To find the new level of fixed

Total debt ratio = ($129,035,500 66,180,900)/$129,035,500 Total debt ratio = .49 times Debt-equity ratio = ($22,754,600 + 40,100,000)/$66,180,900 Debt-equity ratio = .95 times Equity multiplier = $129,035,500/$66,180,900 Equity multiplier = 1.95 times Interest coverage = $26,464,900/$4,170,100 Interest coverage = 6.35 times Profit margin = $17,612,892/$231,900,000 Profit margin = .0760,

negative net worth. Flow-based insolvency occurs when operating cash flow is insufficient to meet current obligations. negative net worth. Flow-based insolvency occurs when operating cash flow is insufficient to meet current obligations. negative net worth. Flow-based insolvency occurs when operating cash flow is insufficient to meet current obligations. 2. Financial

1. The biggest advantage is the increased sales, while the biggest risk is exchange rate risk. 1. The biggest advantage is the increased sales, while the biggest risk is exchange rate risk. 1. The biggest advantage is the increased sales, while the biggest risk is exchange rate risk. Total

Chapter 31 Input Area: Sales per month 8,000,000 Commission 5% Current exhange rate ($/)1.34$ Production costs 80% 3) Exhange rate ($/)1.25$ Sales less commission 7,600,000 Dollar value of sales 10,184,000$ Total sales 10,720,000$ Production costs 8,576,000$ Profit at current exchange rate 1,608,000$ Sales less commission 7,600,000 Dollar value of sales 10,184,000$ Total sales 10,720,000$ Production

b. The franc is expected to depreciate relative to the dollar because it will take more francs to buy one dollar in the future than it does today. c. Inflation in Switzerland is higher than in the United States, as are nominal interest rates. b. The franc is

CHAPTER 4 - 52 CHAPTER 4 - 52 CHAPTER 4 - 52 45. Enter 15 12 6.4%/12 $1,175 N I/Y PV PMT FV Solve for $353,610.97 FV = $353,610.97 = PVe.07(15); PV = $353,610.97e1.05 = $123,741.83 Enter 15 12 6.4%/12 $1,175 N

Input area: PV of tuition & expenses (152,498.57)$ Aftertax bonus 13,800.00$ PV of bonus 12,588.84$ Aftertax salary 75,900.00$ PV of salary in two years 2,439,811.44$ PV of tuition & expenses (152,498.57)$ Aftertax bonus 13,800.00$ PV of bonus 12,588.84$ Aftertax salary 75,900.00$ PV of salary in two years 2,439,811.44$ PV of tuition

CHAPTER 4 DISCOUNTED CASH FLOW VALUATION Answers to Concepts Review and Critical Thinking Questions 1. Assuming positive cash flows and interest rates, the future value increases and the present value decreases. 1. Assuming positive cash flows and interest rates, the future value increases and the present value

(hopefully) increased salary to offset the cost of the decision to return to school for an MBA. The cost includes both the explicit costs such as tuition, as well as the opportunity cost of the lost salary. (hopefully) increased salary to offset the cost of the decision to return to

CHAPTER 4 - 41 APR = 52(7.64%) APR = 397.42% EAR = (1 + .0764)52 1 EAR = 45.0450, or 4,504.50% EAR = (1 + .0764)52 1 EAR = 45.0450, or 4,504.50% EAR = (1 + .0764)52 1 EAR = 45.0450, or

CHAPTER 4 - 21 r = .504% The APR is the monthly interest rate times the number of months in the year, so: APR = 12(.504%) APR = 6.04% And the EAR is: EAR = (1 + .00504)12 1 EAR = .0621, or 6.21% r = .504%

CHAPTER 5 NET PRESENT VALUE AND OTHER INVESTMENT RULES Answers to Concepts Review and Critical Thinking Questions 1. Assuming conventional cash flows, a payback period less than the projects life means that the NPV is positive for a zero discount rate, but nothing more definitive can be

CHAPTER 5 BULLOCK GOLD MINING 1. An example spreadsheet is: advantageous to delay the mine opening because of real options, a topic covered in more detail in a later chapter. advantageous to delay the mine opening because of real options, a topic covered in

Payback period 4.13IRR 16.19% =IRR(D8:D17)IRR -70.62% =IRR(D8:D17,-0.99)MIRR 13.68% =MIRR(D8:D17,D19,D19)Profitability index 1.15 =NPV(D19,D9:D17)/-D8NPV 139,740,017.61$ =NPV(D19,D9:D17)+D8 Payback period 4.13IRR 16.19% =IRR(D8:D17)IRR -70.62% =IRR(D8:D17,-0.99)MIRR 13.68% =MIRR(D8:D17,D19,D19)Profitability index 1.15 =NPV(D19,D9:D17)/-D8NPV 139,740,017.61$ =NPV(D19,D9:D17)+D8 Payback period 4.13 IRR 16.19% =IRR(D8:D17) IRR -70.62% =IRR(D8:D17,-0.99) MIRR 13.68% =MIRR(D8:D17,D19,D19) Profitability index 1.15 =NPV(D19,D9:D17)/-D8 NPV 139,740,017.61$ =NPV(D19,D9:D17)+D8 Input area: Year Cash flow 0(950,000,000)$ 1190,000,000$ 2215,000,000$ 3225,000,000$ 4285,000,000$ 5275,000,000$ 6235,000,000$ 7205,000,000$

For investing-type projects, we accept the larger project when the incremental IRR is greater than the discount rate. Since the incremental IRR, 12.68%, is greater than the required rate of return of 8 percent, we choose the dry prepeg. For investing-type projects, we accept the larger project

(1 + R) = (1 + r)(1 + h) R = [(1.01)(1.0325)] 1 R = .0428, or 4.28% To analyze this project, we must calculate the incremental cash flows generated by the project. We will calculate the real cash flows, although using nominal cash flows will result in the

CHAPTER 6 MAKING CAPITAL INVESTMENT DECISIONS Answers to Concepts Review and Critical Thinking Questions 1. In this context, an opportunity cost refers to the value of an asset or other input that will be used in a project. The relevant cost is what the asset or input

With these cash flows, the NPV of the project is: NPV = $2,100,000 325,000 + $783,203(PVIFA14%,5) + [($325,000 + 118,500)/1.115] NPV = $732,831.45 If the actual price is above the bid price that results in a zero NPV, the project will have a positive NPV. As for

Year 4 Year 5 Year 6 Year 7 Revenues $538,095.24 $538,095.24 $538,095.24 $538,095.24 Costs 319,272.80 316,232.10 313,220.37 310,237.32 Depreciation 76,393.80 72,756.00 69,291.43 65,991.84 EBT $142,428.64 $149,107.13 $155,583.44 $161,866.08 Taxes 34,182.87 35,785.71 37,340.03 38,847.86 Net income $108,245.77 $113,321.42 $118,243.41 $123,018.22 OCF $184,639.57 $186,077.42

NWC (2,612,000) Total ($104,112,000)Sales Year 1 Year 2 Year 3 Year 4 Year 5 Year 6Contract 43,000,000$ 43,000,000$ 43,000,000$ 43,000,000$ Spot 9,240,000 13,860,000 17,710,000 6,930,000 NWC (2,612,000) Total ($104,112,000)Sales Year 1 Year 2 Year 3 Year 4 Year 5 Year 6Contract 43,000,000$ 43,000,000$ 43,000,000$ 43,000,000$ Spot 9,240,000 13,860,000 17,710,000 6,930,000

CHAPTER 7 RISK ANALYSIS, REAL OPTIONS, AND CAPITAL BUDGETING Answers to Concepts Review and Critical Thinking Questions 1. Forecasting risk is the risk that a poor decision is made because of errors in projected cash flows. The danger is greatest with a new product because the cash

2P pond value 620$ 3P pond value 605$ Cash flow/acre from thinning 1,200$ 2P pond value 620$ 3P pond value 605$ Cash flow/acre from thinning 1,200$ 2P pond value 620$ 3P pond value 605$ Cash flow/acre from thinning 1,200$ 30 18.2 22% 46% 32%35 18.9 24% 47% 29% 30 18.2 22%

cycle the company chooses, it will always thin the timber 20 years after harvests and replants. The cash flows will grow at the inflation rate, so we can use the real or nominal cash flows. In this case, it is simpler to use real cash flows, although nominal cash flows

So, the sensitivity of the NPV to changes in the price of the new club is: NPV/P = ($15,165,779.21 16,795,335.05)/($950 960) NPV/P = $162,955.58 For every dollar increase (decrease) in the price of the clubs, the NPV increases (decreases) by $162,955.58. To

CHAPTER 8 INTEREST RATES AND BOND VALUATION Answers to Concept Questions 1. No. As interest rates fluctuate, the value of a Treasury security will fluctuate. Long-term Treasury securities have substantial interest rate risk. 1. No. As interest rates fluctuate, the value of a Treasury security will fluctuate.

To calculate the HPY, we need to find the interest rate that equates the price we paid for the bond with the cash flows we received. The cash flows we received were $54 each year for two years, and the price of the bond when we sold it. The

Input area: # of coupon bonds needed 50,000 Price of zero coupon bond 229.34$ # of zeroes needed 218,016 # of coupon bonds needed 50,000 Price of zero coupon bond 229.34$ # of zeroes needed 218,016 # of coupon bonds needed 50,000 Price of zero coupon bond 229.34$ # of zeroes

lowers their risk in default. The downside of collateral is that the company generally cannot sell the asset used as collateral, and they will generally have to keep the asset in good working order. b. The more senior the bond is, the lower the coupon rate. Senior bonds get full

CHAPTER 9 - 1 1. The value of any investment depends on the present value of its cash flows; i.e., what investors will actually receive. The cash flows from a share of stock are the dividends. 1. The value of any investment depends on the present value of its

Payout ratio = $640,000/$1,605,000 = .3988, or 39.88% So, the retention ratio was: Retention ratio = 1 .3988 = .6012, or 60.12% Using the retention ratio, the companys growth rate is: g = ROE b = .21(.6012) = .1263, or 12.63% Now we can value the company using the entire

Input area: Retention ratio 60.12%Growth rate 12.63%Total dividends next year 720,807.48$ Total equity value 13,413,286.96$ Value per share 44.71$ Retention ratio 60.12%Growth rate 12.63%Total dividends next year 720,807.48$ Total equity value 13,413,286.96$ Value per share 44.71$ Retention ratio 60.12% Growth rate 12.63% Total dividends next year 720,807.48$ Total equity value 13,413,286.96$ Value per