Loose Leaf for Fundamentals of Corporate Finance 12th Edition

Case Solutions Fundamentals of Corporate Finance Ross, Westerfield, and Jordan 12th edition 06/15/2018 Prepared by Brad Jordan University of Kentucky Joe Smolira Belmont University CHAPTER 1 THE McGEE CAKE COMPANY 1. The advantages to an LLC are: (a) Reduction of personal liability. A sole proprietor has unlimited liability, which can include the potential loss of all personal assets. (b) Taxes.

Solutions Manual Fundamentals of Corporate Finance 12th edition Ross, Westerfield, and Jordan 06-15-2018 Prepared by Brad Jordan University of Kentucky Joe SmoliraBelmont University CHAPTER 1 INTRODUCTION TO CORPORATE FINANCE Answers to Concepts Review and Critical Thinking Questions 1. Capital budgeting (deciding whether to expand a manufacturing plant), capital structure (deciding whether to issue new equity and use the proceeds to

CHAPTER 10 CONCH REPUBLIC ELECTRONICS, PART 1 This is an in-depth capital budgeting problem. The initial cash outlay at Time 0 is the cost of the new equipment, $43,500,000. The sales each year are a combination of the sales of the new smart phone, the lost sales each year, and the lost revenue. In

CHAPTER 10 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 is actually worth today, not, for

18. To calculate the EAC of the project, we first need the PV of the costs of the project. Notice that we include the NWC expenditure at the beginning of the project, and recover the NWC at the end of the project. The PV of the costs of the project is: PV

35. The salvage value and treatment of the land will remain the same as in the previous problem. The new cash flows each year will be: 35. The salvage value and treatment of the land will remain the same as in the previous problem. The new cash flows each year will

CHAPTER 11 CONCH REPUBLIC ELECTRONICS, PART 2 1. Here we want to examine the sensitivity of NPV to changes in the price of the new smart phone. The calculations for sensitivity to changes in price are similar to the original cash flows. The only difference is that we will change the price of

CHAPTER 11 PROJECT ANALYSIS AND EVALUATION 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 flows are probably harder to predict. The danger is greatest

14. We can use the equation for DOL to calculate fixed costs. The fixed costs must be: DOL = 3.26 = 1 + FC/OCF FC = (3.26 1)$78,000 FC = $176,280 FC = (3.26 1)$78,000 FC = $176,280 FC = (3.26 1)$78,000 FC = $176,280 If the output rises to 18,500 units, the percentage

22. To calculate the sensitivity of the NPV to changes in the price of the new club, we need to change the price of the new club. We will choose $855, but the choice is irrelevant as the sensitivity will be the same no matter what price we choose. We will

CHAPTER 12 A JOB AT S&S AIR 1. The biggest advantage the mutual funds have is instant diversification. The mutual funds have a number of assets within each portfolio. 1. The biggest advantage the mutual funds have is instant diversification. The mutual funds have a number of assets within each portfolio. 1.

CHAPTER 12 SOME LESSONS FROM CAPITAL MARKET HISTORY Answers to Concepts Review and Critical Thinking Questions 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.2. As in the previous question, its easy to see after

CHAPTER 13 THE BETA FOR COLGATE-PALMOLIVE NOTE: The example below shows the results from early 2017. The actual answer to the case will change based on current market conditions. 1. The information used for the analysis is presented below. Note that the risk-free rate (3-month T-bill rate) is expressed as an annual rate.

CHAPTER 13 RISK, RETURN, AND THE SECURITY MARKET LINE 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 total risk can be eliminated at little cost.

18. There are two ways to correctly answer this question so we will work through both. First, we can use the CAPM. Substituting in the value we are given for each stock, we find: E(RY) = .024 + .072(1.20) E(RY) = .1104, or 11.04% E(RY) = .024 + .072(1.20) E(RY) =

CHAPTER 14 COST OF CAPITAL FOR SWAN MOTORS NOTE: The example below shows the results during early 2017. The actual answer to the case will change based on current market conditions. 1. The book value of the companys liabilities and equity can be found from a number of sources. We show the relevant values

CHAPTER 14 COST OF CAPITAL Answers to Concepts Review and Critical Thinking Questions 1. It is the minimum rate of return the firm must earn overall on its existing assets. If it earns more than this, value is created. 2. Book values for debt are likely to be much closer to market values than

21. The total cost including flotation costs was: Total costs = $35,000,000 + 2,200,000 Total costs = $37,200,000 Total costs = $35,000,000 + 2,200,000 Total costs = $37,200,000 Total costs = $35,000,000 + 2,200,000 Total costs = $37,200,000 Using the equation to calculate the total cost including flotation costs, we

CHAPTER 15 S&S AIR GOES PUBLIC 1. The main difference in the costs is the reduced possibility of underpricing in a Dutch auction. As to which is better, we dont actually know. In theory, the Dutch auction should be better since it should eliminate underpricing. However, as Google shows, underpricing can still exist

CHAPTER 15 RAISING CAPITAL Answers to Concepts Review and Critical Thinking Questions 1. A companys internally generated cash flow provides a source of equity financing. For a profitable company, outside equity may never be needed. Debt issues are larger because large companies havethe greatest access to public debt markets (small companies tend to

CHAPTER 16 STEPHENSON REAL ESTATE RECAPITALIZATION 1. If Stephenson wishes to maximize the overall value of the firm, it should use debt to finance the $85 million purchase. Since interest payments are tax deductible, debt in the firms capital structure willdecrease the firms taxable income, creating a tax shield that will increase

CHAPTER 16 FINANCIAL LEVERAGE AND CAPITAL STRUCTURE POLICY Answers to Concepts Review and Critical Thinking Questions 1. Business risk is the equity risk arising from the nature of the firms operating activity and is directly related to the systematic risk of the firms assets. Financial risk is the equity risk that is

11. If there are corporate taxes, the value of an unlevered firm is: VU = EBIT(1 TC)/RU Using this relationship, we can find EBIT as:$16,300,000 = EBIT(1 .22)/.084EBIT = $1,755,384.62 Using this relationship, we can find EBIT as:$16,300,000 = EBIT(1 .22)/.084EBIT = $1,755,384.62 Using this relationship, we can find EBIT as: $16,300,000 =

CHAPTER 17 ELECTRONIC TIMING, INC. 1. The value of the company will decline by the amount of the dividend. Ignoring taxes, shareholders wealth will not be affected because the stock price will drop by the amount of the dividend payment. wealth will not be affected because the stock price will drop by the

CHAPTER 17 DIVIDENDS AND DIVIDEND POLICY Answers to Concepts Review and Critical Thinking Questions 1. Dividend policy deals with the timing of dividend payments, not the amounts ultimately paid. Dividend policy is irrelevant when the timing of dividend payments doesnt affect the present valueof all future dividends. Dividend policy is irrelevant when the timing

CHAPTER 18 PIEPKORN 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 individual cash flows are calculated as follows: Accounts receivable collected from the previous quarter: For the 1st quarter, this is 80 percent of the

CHAPTER 18 SHORT-TERM FINANCE AND PLANNING Answers to Concepts Review and Critical Thinking Questions 1. These are firms with relatively long inventory periods and/or relatively long receivables periods. Thus, such firms tend to keep inventory on hand, and they allow customers to purchase on credit andtake a relatively long time to pay. Thus, such

15. a. A 45-day collection period means sales collections each quarter are: Collections = 1/2 current sales + 1/2 prior quarters sales Collections = 1/2 current sales + 1/2 prior quarters sales Collections = 1/2 current sales + 1/2 prior quarters sales A 36-day payables period means payables each quarter are: Payables = 3/5

CHAPTER 19 CASH MANAGEMENT AT WEBB CORP. 1. The amount the company will have available is the future value of the transfers, which are an annuity. The amount of each transfer is one minus the wire transfer cost, times the number oftransfers, which is four since there are four banks, times the

CHAPTER 19 CASH AND LIQUIDITY MANAGEMENT Answers to Concepts Review and Critical Thinking Questions 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 profitableways. Question 10 discusses another reason. cash has

CHAPTER 2 CASH FLOWS AND FINANCIAL STATEMENTS AT SUNSET BOARDS Below are the financial statements that you are asked to prepare. 1. The income statement for each year will look like this: Income Statement 2017 2018 Sales $501,441 $611,224 Cost of goods sold 255,605 322,742 Selling and administrative 50,268 65,610 Depreciation 72,158 81,559 EBIT

CHAPTER 2 FINANCIAL STATEMENTS, TAXES, AND CASH FLOW Answers to Concepts Review and Critical Thinking Questions 1. Liquidity measures how quickly and easily an asset can be converted to cash without significant loss in value. Its desirable for firms to have high liquidity so that they have a large factor of safety in meeting

CHAPTER 20 CREDIT POLICY AT HOWLETT INDUSTRIES To decide on the optimal credit policy, we need to calculate the NPV of each policy. We will begin with the calculation of the NPV of the current policy. Current Policy First, we need to calculate the average daily sales which are: Average daily sales = $134,000,000/365Average

CHAPTER 20 CREDIT AND INVENTORY MANAGEMENT Answers to Concepts Review and Critical Thinking Questions 1. a. A sight draft is a commercial draft that is payable immediately. b. A time draft is a commercial draft that does not require immediate payment. c. A bankers acceptance is a banks guarantee of the future payment

16. If the cost of subscribing to the credit agency is less than the savings from collection of the bad debts, the company should subscribe. The cost of the subscription is: Cost of the subscription = $1,000 + $8.95(125) Cost of the subscription = $2,118.75 And the savings from having no bad

CHAPTER 21 S&S AIR GOES INTERNATIONAL 1. The biggest advantage is the increased sales, while the biggest risk is exchange rate risk. 2. If the dollar strengthens, the profit will decline. Conversely, if the dollar weakens, the profit will increase.3. The company will pay the sales commission out of gross sales,

CHAPTER 21 INTERNATIONAL CORPORATE FINANCE Answers to Concepts Review and Critical Thinking Questions 1. a. The dollar is selling at a premium because it is more expensive in the forward market than in the spot market (SF 1.53 versus SF 1.50). the spot market (SF 1.53 versus SF 1.50). the spot market (SF 1.53 versus

CHAPTER 22 YOUR 401(k) ACCOUNT AT S&S AIR 1. Before the fact, you would expect that mutual funds managers would be able to outperform the market. This is due, in part, to the Darwinian nature of the business. Good performing fund managers are richly rewarded, and poor performing fund managers are fired, often

CHAPTER 22 BEHAVIORAL FINANCE: IMPLICATIONS FOR FINANCIAL MANAGEMENT Answers to Concepts Review and Critical Thinking Questions 1. The least likely limit to arbitrage is firm-specific risk. For example, in the 3Com/Palm case, the stocks are perfect substitutes after accounting for the exchange ratio. An investor could invest in arisk neutral portfolio by purchasing

CHAPTER 23 CHATMAN MORTGAGE, INC. 1. Mikes mortgage payments form a 25-year annuity with monthly payments, discounted at the long- term interest rate of 6 percent. We can solve for the payment amount so that the present value of theannuity equals $400,000, the amount of principal that he plans to borrow. The

CHAPTER 23 ENTERPRISE RISK MANAGEMENT Answers to Concepts Review and Critical Thinking Questions 1. Since the firm is selling futures, it wants to be able to deliver the lumber; therefore, it is a supplier. Since a decline in lumber prices would reduce the income of a lumber supplier, it has hedged itsprice risk

CHAPTER 24 S&S AIRS CONVERTIBLE BOND 1. We can use the PE ratio to calculate the current stock price. Doing so, we get: PE = Price/EPS 14.50 = Price/$1.30Price = $18.85 14.50 = Price/$1.30Price = $18.85 14.50 = Price/$1.30 Price = $18.85 This means the conversion premium of the bond is: Conversion premium = ($25 18.85)/$18.85 Conversion

CHAPTER 24 OPTIONS AND CORPORATE FINANCE Answers to Concepts Review and Critical Thinking 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 at a

15. a. If the project is a success, the present value of the future cash flows will be: PV future CFs = $56(10,800)(PVIFA14%,9) PV future CFs = $2,991,565.69 PV future CFs = $56(10,800)(PVIFA14%,9) PV future CFs = $2,991,565.69 PV future CFs = $56(10,800)(PVIFA14%,9) PV future CFs = $2,991,565.69 From the previous question, if

CHAPTER 25 EXOTIC CUISINE EMPLOYEE STOCK OPTIONS 1. We can use the Black-Scholes equation to value the employee stock options. We need to use the risk- free rate that is the same as the maturity as the options. So, assuming expiration in three years, thevalue of the stock options per share of

CHAPTER 25 OPTION VALUATION Answers to Concepts Review and Critical Thinking Questions 1. Increasing the time to expiration increases the value of an option. The reason is that the option gives the holder the right to buy or sell. The longer the holder has that right, the more time there is for theoption

20. a. Using the Black-Scholes model to value the equity, we get: d1 = [ln($15,900,000/$17,500,000) + (.06 + .412/2) 5]/(.41 5) = .6810 d1 = [ln($15,900,000/$17,500,000) + (.06 + .412/2) 5]/(.41 5) = .6810 d1 = [ln($15,900,000/$17,500,000) + (.06 + .412/2) 5]/(.41 5 ) = .6810 d2 = .6810 (.41 5) = .2357 d2 =

CHAPTER 26 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 costs plus the dividends paid today, or: Acquisition of Hybrid $185,000,000 Dividends from Hybrid 55,000,000 Total $130,000,000

CHAPTER 26 MERGERS AND ACQUISITIONS Answers to Concepts Review and Critical Thinking Questions 1. Since both companies are in the liquor industry, this is a horizontal acquisition. A major factor that may have led Beam to be relatively more attractive to Suntory is that it is based in the U.S. This means that Suntory

CHAPTER 27 THE DECISION TO LEASE OR BUY AT WARF COMPUTERS 1. The decision to buy or lease is made by looking at the incremental cash flows. The incremental cash flows from leasing the machine are the security deposit, the lease payments, the tax savings on thelease, the lost depreciation tax shield,

CHAPTER 27 LEASING Answers to Concepts Review and Critical Thinking Questions 1. Some key differences are: (a) Lease payments are fully tax-deductible, but only the interest portion of the loan is tax-deductible. (b) The lessee does not own the asset and cannot depreciate it for taxpurposes. (c) In the event of a default,

CHAPTER 3 RATIO ANALYSIS AT S&S AIR 1. The calculations for the ratios listed are: Current ratio = $2,603,218/$3,507,909 Current ratio = .74 times Quick ratio = ($2,603,218 1,235,161)/$3,507,909 Quick ratio = .39 times Cash ratio = $524,963/$3,507,909 Cash ratio = .15 times Total asset turnover = $46,298,115/$22,985,163 Total asset turnover = 2.01 timesInventory turnover

CHAPTER 3 WORKING WITH FINANCIAL STATEMENTS Answers to Concepts Review and Critical Thinking Questions 1. a. If inventory is purchased with cash, then there is no change in the current ratio. If inventory is purchased on credit, then there is a decrease in the current ratio if it was initially greater than 1.0. b.

20. The solution to this problem requires a number of steps. First, remember that Current assets + Net fixed assets = Total assets. So, if we find the current assets and the total assets, we can solve for netfixed assets. Using the numbers given for the current ratio and the

CHAPTER 4 PLANNING FOR GROWTH AT S&S AIR 1. To calculate the internal growth rate, we first need to find the ROA and the retention ratio, so: ROA = NI/TA ROA = $2,317,789/$22,985,163 ROA = .1008, or 10.08% ROA = $2,317,789/$22,985,163 ROA = .1008, or 10.08% ROA = $2,317,789/$22,985,163 ROA = .1008, or 10.08% b

CHAPTER 4 LONG-TERM FINANCIAL PLANNING AND GROWTH Answers to Concepts Review and Critical Thinking Questions 1. The reason is that, ultimately, sales are the driving force behind a business. A firms assets, employees, and, in fact, just about every aspect of its operations and financing exist to directly orindirectly support sales. Put differently,

19. We are given the profit margin. Remember that: ROA = PM(TAT) We can calculate the ROA from the internal growth rate formula, and then use the ROA in this equation to find the total asset turnover. The retention ratio is: b = 1 .25 b = .75 b = 1

27. The pro forma income statements for all three growth rates will be: Pro Forma Income Statement 15 % Sales Growth 20% Sales Growth 25% Sales Growth Sales $1,127,874 $1,176,912 $1,225,950 Costs 911,904 951,552 991,200 Other expenses 23,069 24,072 25,075EBIT $192,901 $201,288 $209,675Interest 14,740 14,740 14,740Taxable income $178,161 $186,548 $194,935Taxes (21%) 37,414 39,175 40,936Net income $140,747 $147,373 $153,999 Dividends

CHAPTER 5 INTRODUCTION TO VALUATION: THE TIME VALUE OF MONEY Answers to Concepts Review and Critical Thinking Questions 1. The four parts are the present value (PV), the future value (FV), the discount rate (r), and the life of the investment (t). 1. The four parts are the present value (PV), the future

20. The time line is: 0 2 ? $10,00 0 $60,000 To answer this question, we can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)t Solving for t, we

CHAPTER 6 THE MBA DECISION 1. Age is obviously an important factor. The younger an individual is, the more time there is for the (hopefully) increased salary to offset the cost of the decision to return to school for an MBA. (hopefully) increased salary to offset the cost of the decision to

CHAPTER 6 DISCOUNTED CASH FLOW VALUATION Answers to Concepts Review and Critical Thinking Questions 1. The four pieces are the present value (PV), the periodic cash flow (C), the discount rate (r), and the number of payments, or the life of the annuity, t.2. Assuming positive cash flows, both the present and the

22. The time line is: 0 1 $3 $4 $3 $4 $3 $4 Here we are trying to find the interest rate when we know the PV and FV. Using the FV equation: FV = PV(1 + r) $4 = $3(1 + r) r = 4/3 1 = 33.33% per week $4 = $3(1 + r)

43. The time line is: 0 1 2 3 4 $7,500 $1,70? $2,45$2,98 $7,500 $1,70? $2,45$2,98 $7,500 $1,70 ? $2,45 $2,98 0 0 0 We are given the total PV of all four cash flows. If we find the PV of the three cash flows we know, and subtract them from the total PV, the amount left over must be

61. The time line is: 24 23 12 11 0 1 60 $3,583.33$3,583.33$3,833.33$3,833.33$4,250 $4,250 $4,250$150,000$20,00 $3,583.33$3,583.33$3,833.33$3,833.33$4,250 $4,250 $4,250$150,000$20,00 $3,583. 33 $3,583. 33 $3,833. 33 $3,833. 33 $4,250 $4,250 $4,250 $150,0 00 $20,00 0 Here we have cash flows that would have occurred in the past and cash flows that will occur in the future. We need to bring both cash flows to today. Before we calculate the value

74. The cash flows in this problem occur every two years, so we need to find the effective two-year rate. One way to find the effective two-year rate is to use an equation similar to the EAR, except use the number of days in two years as the exponent. (We use

19. Enter 324% 12 Enter 324% 12 Enter 324% 12 NOM EFF C/Y Solve for 1,660.53% Solve for 1,660.53% Solve for 1,660.53% 20. Enter 60 5.2%/12 $84,500 Enter 60 5.2%/12 $84,500 Enter 60 5.2%/12 $84,500 N I/Y PV PMT FV Solve for $1,602.37Enter 5.2% 12 Solve for $1,602.37Enter 5.2% 12 Solve for $1,602.37 Enter 5.2% 12 NOM EFF C/Y Solve for 5.33% Solve for 5.33% Solve for 5.33% 21. Enter 1.3% $18,000

52. Monthly rate = .08/12 = .00667; semiannual rate = (1.00667)6 1 = 4.067% Enter 10 4.067% $5,900 N I/Y PV PMT FV Solve for $47,694.45 Enter 8 4.067% $47,694.45N I/Y PV PMT FVSolve for $34,670.08Enter 12 4.067% $47,694.45N I/Y PV PMT FVSolve for $29,559.58Enter 18 4.067% $47,694.45N I/Y PV PMT FVSolve for

CHAPTER 7 FINANCING S&S AIRS EXPANSION PLANS WITH A BOND ISSUE A rule of thumb with bond provisions is to determine who benefits by the provision. If the company benefits, the bond will have a higher coupon rate. If the bondholders benefit, the bond will have a lower coupon rate. 1. A bond with collateral

CHAPTER 7 INTEREST RATES AND BOND VALUATION Answers to Concepts Review and Critical Thinking 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. Long-term Treasury

24. Accrued interest is the coupon payment for the period times the fraction of the period that has passed since the last coupon payment. Since we have a semiannual coupon bond, the coupon payment per six months is one-half of the annual coupon payment. There are two months until the next

35. To calculate this, we need to set up an equation with the callable bond equal to a weighted average of the noncallable bonds. We will invest X percent of our money in the first noncallable bond, which means our investment in Bond 3 (the other noncallable bond) will be (1

CHAPTER 8 STOCK VALUATION AT RAGAN, INC. 1. The total dividends paid by the company were $90,000. Since there are 100,000 shares outstanding, the total earnings for the company were: Total earnings = 100,000($3.15) Total earnings= $315,000 Total earnings = 100,000($3.15) Total earnings= $315,000 Total earnings = 100,000($3.15) Total earnings= $315,000 This means the payout

CHAPTER 8 STOCK VALUATION Answers to Concepts Review and Critical Thinking Questions 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. actually receive. The cash flows from a share of stock

24. We can use the two-stage dividend growth model for this problem, which is: P0 = [D0(1 + g1)/(R g1)]{1 [(1 + g1)/(1 + R)]t}+ [(1 + g1)/(1 + R)]t[D0(1 + g2)/(R g2)] P0 = [$1.55(1.21)/(.12 .21)][1 (1.21/1.12)8] + [(1.21)/(1.12)]8[$1.55(1.035)/(.12 .035)] P0 = $52.86 P0 = [$1.55(1.21)/(.12 .21)][1 (1.21/1.12)8] +

CHAPTER 9 BULLOCK GOLD MINING 1. An example spreadsheet is: Note, there is no Excel function to directly calculate the payback period. We used If statements in our spreadsheet. The IF statement we used is: =IF(-D8>(D9+D10+D11+D12+D13+D14),"Greater than 6 years",IF(- D8>(D9+D10+D11+D12+D13),(5+(-D8-D9-D10-D11-D12-D13)/D14),IF(- D8>(D9+D10+D11+D12),(4+(-D8-D9-D10-D11-D12)/D13),IF(-D8>(D9+D10+D11),(3+(-D8-D9-D10-D11)/D12),IF(-D8>(D9+D10),(2+(-D8-D9-D10)/D11),IF(-D8>D9,(1+(-D8-D9)/D10),IF(-D8<D9,-D8/D9," "))))))) D8>(D9+D10+D11+D12),(4+(-D8-D9-D10-D11-D12)/D13),IF(-D8>(D9+D10+D11),(3+(-D8-D9-D10-D11)/D12),IF(-D8>(D9+D10),(2+(-D8-D9-D10)/D11),IF(-D8>D9,(1+(-D8-D9)/D10),IF(-D8<D9,-D8/D9," "))))))) D8>(D9+D10+D11+D12),(4+(-D8-D9-D10-D11-D12)/D13),IF(-D8>(D9+D10+D11),(3+(-D8-D9- D10-D11)/D12),IF(-D8>(D9+D10),(2+(-D8-D9-D10)/D11),IF(-D8>D9,(1+(-D8-D9)/D10),IF(- D8<D9,-D8/D9," "))))))) 2. Since the NPV of the mine is positive, the company should

CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA Answers to Concepts Review and Critical Thinking Questions 1. 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 said. For discount rates greater than zero, the payback period

12. a. The IRR is the interest rate that makes the NPV of the project equal to zero. The equation for the IRR of Project A is: 0 = $37,500 + $17,300/(1+IRR) + $16,200/(1+IRR)2 + $13,800/(1+IRR)3 + $7,600/(1+IRR)4 0 = $37,500 + $17,300/(1+IRR) + $16,200/(1+IRR)2 + $13,800/(1+IRR)3 + $7,600/(1+IRR)4 0 =

23. Given the seven-year payback, the worst case is that the payback occurs at the end of the seventh year. Thus, the worst-case: NPV = $685,000 + $685,000/1.117 NPV = $355,063.99 NPV = $685,000 + $685,000/1.117 NPV = $355,063.99 NPV = $685,000 + $685,000/1.117 NPV = $355,063.99 The best case has infinite cash flows

1 Answer: E Difficulty: 1 Easy Topic: Management organization and roles Learning Objective: 01-01 Define the basic types of financial management decisions and the role of the financial manager. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: E Difficulty: 1 Easy Topic: Management organization and roles Learning Objective:

17 Answer: C Difficulty: 2 Medium Topic: Forms of business organization Learning Objective: 01-03 Articulate the financial implications of the different forms of business organization. Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 17 Answer: C Difficulty: 2 Medium Topic: Forms of business organization Learning Objective: 01-03 Articulate the financial

40 Answer: E Explanation: OCF = $129,400(1 .23) + ($411,500/7)(.23) OCF = $113,158.71 NPV = $411,500 22,500 + $113,158.71[(1 1/1.1327)/.132] + [$35,000(1 .23) + $22,500]/1.1327 NPV = $84,117.64 Difficulty: 2 Medium Topic: Project analysis and evaluation Learning Objective: 10-02 Evaluate whether a project is acceptable. Bloom's: Analyze AACSB: Analytical Thinking

1 Answer: B Difficulty: 1 Easy Topic: Project analysis and evaluation Learning Objective: 10-01 Determine the relevant cash flows for a proposed project. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: B Difficulty: 1 Easy Topic: Project analysis and evaluation Learning Objective: 10-01 Determine the relevant cash flows

21 Answer: B Explanation: CF0 = $128,900 494,200 CF0 = $623,100 Difficulty: 2 Medium Topic: Cash flows Learning Objective: 10-01 Determine the relevant cash flows for a proposed project. Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 21 Answer: B Explanation: CF0 = $128,900 494,200 CF0 = $623,100 Difficulty: 2

21 Answer: E Difficulty: 1 Easy Topic: Break-even analysis Learning Objective: 11-03 Determine and interpret cash, accounting, and financial break-even points. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 21 Answer: E Difficulty: 1 Easy Topic: Break-even analysis Learning Objective: 11-03 Determine and interpret cash, accounting, and financial break-even points.

1 Answer: D Difficulty: 1 Easy Topic: Forecasting risk Learning Objective: 11-01 Perform and interpret a sensitivity analysis for a proposed investment. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: D Difficulty: 1 Easy Topic: Forecasting risk Learning Objective: 11-01 Perform and interpret a sensitivity analysis for a

38 Answer: C Explanation: = ($791,000 486,000)/1,700,000 = $.1794 The marginal cost per unit for the one-time offer will be $.1794 since the variable cost per unit will be unchanged. The order should be rejected because the offered price is less than the marginal cost. Difficulty: 2 Medium Topic: Average

36 Answer: D Explanation: Average return = (.05 + .14 + .11 .08 + .06)/5 Average return = .056 = {[1/(5 1)] [(.05 .056)2 + (.14 .056)2 + (.11 .056)2 + (.08 .056)2 + (.06 .056)2]}.5 = .0844, or 8.44% Difficulty: 2 Medium Topic: Standard deviation and variance Learning Objective:

1 Answer: A Difficulty: 1 Easy Topic: Stock returns and yields Learning Objective: 12-01 Calculate the return on an investment. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: A Difficulty: 1 Easy Topic: Stock returns and yields Learning Objective: 12-01 Calculate the return on an investment. Bloom's: Remember

21 Answer: C Difficulty: 1 Easy Topic: Market efficiency - implications Learning Objective: 12-04 Explain the implications of market efficiency. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 21 Answer: C Difficulty: 1 Easy Topic: Market efficiency - implications Learning Objective: 12-04 Explain the implications of market efficiency. Bloom's: Understand

52 Copyright 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Copyright 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Copyright 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution

41 Answer: A Explanation: E(r) = .13[(.18 .14)/2] + .82[(.06 + .06)/2] + .05[(.14 + .18)/2] E(r)= .0528, or 5.28% Difficulty: 2 Medium Topic: Expected return Learning Objective: 13-01 Show how to calculate expected returns, variance, and standard deviation. Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 41 Answer: A

21 Answer: A Difficulty: 1 Easy Topic: Security market line Learning Objective: 13-04 Describe the security market line and the risk-return trade-off. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 21 Answer: A Difficulty: 1 Easy Topic: Security market line Learning Objective: 13-04 Describe the security market line and the

1 Answer: D Difficulty: 1 Easy Topic: Expected return Learning Objective: 13-01 Show how to calculate expected returns, variance, and standard deviation. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: D Difficulty: 1 Easy Topic: Expected return Learning Objective: 13-01 Show how to calculate expected returns, variance, and

41 Answer: E Explanation: E = 43,800($51) = $2,233,800 P = 10,000($83) = $830,000 D = 5,000($1,000)(.96) = $4,800,000 V = $2,233,800 + 830,000 + 4,800,000 V = $7,863,800 RE = .036 + 1.54(.075) RE = .1515 RP = [.07($100)]/$83 RP = .0843 RD = .96($1,000) = [.08($1,000)/2][(1 {1/[1 +

21 Answer: C Explanation: RE = .031 + .93(.076) RE = .1017, or 10.17% Difficulty: 2 Medium Topic: Cost of equity Learning Objective: 14-01 Determine a firm's cost of equity capital. Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 21 Answer: C Explanation: RE = .031 + .93(.076) RE =

53 Answer: B Explanation: RE = .127 = Rf + 1.38(.074) Rf = .0249 RE Division = .0249 + 1.52(.074) RE Division = .1374, or 13.74% Difficulty: 2 Medium Topic: Divisional and project costs of capital Learning Objective: 14-05 Describe some of the pitfalls associated with a firm's overall cost

1 Answer: E Difficulty: 1 Easy Topic: Cost of capital - general Learning Objective: 14-03 Determine a firm's overall cost of capital and how to use it to value a company. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: E Difficulty: 1 Easy Topic: Cost of capital -

1 Answer: E Difficulty: 1 Easy Topic: Venture capital Learning Objective: 15-01 Describe the venture capital market and its role in the financing of new, high-risk ventures. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: E Difficulty: 1 Easy Topic: Venture capital Learning Objective: 15-01 Describe the venture

21 Answer: B Difficulty: 1 Easy Topic: Rights offerings Learning Objective: 15-04 Demonstrate how rights are issued to existing shareholders and how to value those rights. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 21 Answer: B Difficulty: 1 Easy Topic: Rights offerings Learning Objective: 15-04 Demonstrate how rights are

38 Answer: C Explanation: Number of new shares = $11,300,000/$15 Number of new shares = 753,333 Rights needed for each new share = 1,240,000/753,333 Rights needed for each new share = 1.65 Difficulty: 2 Medium Topic: Rights offerings Learning Objective: 15-04 Demonstrate how rights are issued to existing shareholders and

1 Answer: B Difficulty: 1 Easy Topic: Capital structure and firm valuation Learning Objective: 16-01 Explain the effect of financial leverage. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: B Difficulty: 1 Easy Topic: Capital structure and firm valuation Learning Objective: 16-01 Explain the effect of financial leverage.

21 Answer: C Difficulty: 1 Easy Topic: Financial distress Learning Objective: 16-03 Describe the essentials of the bankruptcy process. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 21 Answer: C Difficulty: 1 Easy Topic: Financial distress Learning Objective: 16-03 Describe the essentials of the bankruptcy process. Bloom's: Remember AACSB: Reflective

38 Answer: D Explanation: VU = [$63,300(1 .23)]/.147 VU = $331,571 VL = $331,571 + .23($11,000) VL = $334,101 Difficulty: 2 Medium Topic: M and M Proposition I with taxes Learning Objective: 16-02 Show the impact of taxes and bankruptcy on capital structure choice. Bloom's: Analyze AACSB: Analytical Thinking Accessibility:

1 Answer: B Difficulty: 1 Easy Topic: Chronology of dividend payments Learning Objective: 17-01 Define dividend types and how dividends are paid. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: B Difficulty: 1 Easy Topic: Chronology of dividend payments Learning Objective: 17-01 Define dividend types and how dividends

21 Answer: E Difficulty: 1 Easy Topic: Stock splits Learning Objective: 17-03 Describe the difference between cash and stock dividends. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 21 Answer: E Difficulty: 1 Easy Topic: Stock splits Learning Objective: 17-03 Describe the difference between cash and stock dividends. Bloom's: Understand

35 Answer: C Explanation: The capital in excess of par account will remain at $32,400 as it does not change with a large stock dividend. Difficulty: 2 Medium Topic: Stock dividends Learning Objective: 17-03 Describe the difference between cash and stock dividends. Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation

21 Answer: A Difficulty: 1 Easy Topic: Short-term finance and planning Learning Objective: 18-03 Summarize the essentials of short-term financial planning. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 21 Answer: A Difficulty: 1 Easy Topic: Short-term finance and planning Learning Objective: 18-03 Summarize the essentials of short-term financial planning.

38 Answer: B Explanation: Q3 disbursements = (45/90)(.58)$52,700 + (45/90)(.58)$85,000 Q3 disbursements = $39,933 Difficulty: 2 Medium Topic: Cash disbursements Learning Objective: 18-03 Summarize the essentials of short-term financial planning. Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 38 Answer: B Explanation: Q3 disbursements = (45/90)(.58)$52,700 + (45/90)(.58)$85,000 Q3 disbursements

1 Answer: B Difficulty: 1 Easy Topic: Sources and uses of cash Learning Objective: 18-04 Explain the sources and uses of cash on the balance sheet. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: B Difficulty: 1 Easy Topic: Sources and uses of cash Learning Objective: 18-04 Explain

37 Answer: D Explanation: NPV = 594($4,618)(2.2) [594($.75)]/.00009 NPV = $1,084,802 Difficulty: 2 Medium Topic: Cash collections management Learning Objective: 19-02 Explain how firms manage their cash and some of the collection, concentration, and disbursement techniques used. Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 37 Answer: D Explanation: NPV

1 Answer: D Difficulty: 1 Easy Topic: Reasons to hold cash Learning Objective: 19-03 Describe the advantages and disadvantages to holding cash and some of the ways to invest idle cash. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: D Difficulty: 1 Easy Topic: Reasons to hold cash

21 Answer: A Difficulty: 1 Easy Topic: Baumol-Allais-Tobin (BAT) model Learning Objective: 19-03 Describe the advantages and disadvantages to holding cash and some of the ways to invest idle cash. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 21 Answer: A Difficulty: 1 Easy Topic: Baumol-Allais-Tobin (BAT) model Learning Objective:

21 Answer: B Explanation: NWC = $4,900 3,200 1,400 NWC = $300 Difficulty: 2 Medium Topic: Net working capital Learning Objective: 02-01 Describe the difference between accounting value (or "book" value) and market value. Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 21 Answer: B Explanation: NWC = $4,900 3,200

34 Answer: C Explanation: CFC = $6,430 ($68,219 72,918) CFC = $11,129 Difficulty: 2 Medium Topic: Cash flow to creditors Learning Objective: 02-04 Determine a firm's cash flow from its financial statements. Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 34 Answer: C Explanation: CFC = $6,430 ($68,219 72,918) CFC

1 Answer: C Difficulty: 1 Easy Topic: Balance sheet Learning Objective: 02-01 Describe the difference between accounting value (or "book" value) and market value. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: C Difficulty: 1 Easy Topic: Balance sheet Learning Objective: 02-01 Describe the difference between accounting value

1 Answer: B Difficulty: 1 Easy Topic: Credit analysis Learning Objective: 20-01 Explain how firms manage their receivables and the basic components of a firm's credit policies. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: B Difficulty: 1 Easy Topic: Credit analysis Learning Objective: 20-01 Explain how firms

34 Answer: A Explanation: Q' 733 = [$49(733)]/{[($49 23)/.0048] $23} Q = 739.66 units Difficulty: 2 Medium Topic: Credit policy analysis Learning Objective: 20-02 Analyze a firm's decision to grant credit. Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 34 Answer: A Explanation: Q' 733 = [$49(733)]/{[($49 23)/.0048] $23} Q

21 Answer: C Difficulty: 1 Easy Topic: Inventory costs Learning Objective: 20-04 Determine the costs of carrying inventory and the optimal inventory level. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 21 Answer: C Difficulty: 1 Easy Topic: Inventory costs Learning Objective: 20-04 Determine the costs of carrying inventory and

37 Answer: A Explanation: E(S4) = .7658[1 + (.036 .033)]4 E(S4) = .7750 Difficulty: 2 Medium Topic: Purchasing power parity Learning Objective: 21-02 Explain purchasing power parity, interest rate parity, unbiased forward rates, uncovered interest rate parity, and the international Fisher effect and their implications for exchange rate changes. Bloom's:

21 Answer: B Difficulty: 1 Easy Topic: Uncovered interest parity Learning Objective: 21-02 Explain purchasing power parity, interest rate parity, unbiased forward rates, uncovered interest rate parity, and the international Fisher effect and their implications for exchange rate changes. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 21 Answer: B

1 Answer: B Difficulty: 1 Easy Topic: Exchange rates Learning Objective: 21-01 Define how exchange rates are quoted, what they mean, and the difference between spot and forward exchange rates. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: B Difficulty: 1 Easy Topic: Exchange rates Learning Objective: 21-01

1 Answer: C Difficulty: 1 Easy Topic: Biases Learning Objective: 22-01 Describe how behaviors such as overconfidence, overoptimism, and confirmation bias can affect decision making. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: C Difficulty: 1 Easy Topic: Biases Learning Objective: 22-01 Describe how behaviors such as overconfidence,

13 Answer: E Difficulty: 1 Easy Topic: Heuristics Learning Objective: 22-03 Show how the use of heuristics can lead to suboptimal financial decisions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 13 Answer: E Difficulty: 1 Easy Topic: Heuristics Learning Objective: 22-03 Show how the use of heuristics can lead

19 Answer: B Difficulty: 1 Easy Topic: Option types and features Learning Objective: 23-04 Explain the payoffs of option contracts and how they are used to hedge risk. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 19 Answer: B Difficulty: 1 Easy Topic: Option types and features Learning Objective: 23-04

1 Answer: C Difficulty: 1 Easy Topic: Risk management Learning Objective: 23-01 Outline the exposures to risk in a company's business and how a company could choose to hedge these risks. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: C Difficulty: 1 Easy Topic: Risk management Learning Objective:

21 Answer: B Difficulty: 1 Easy Topic: Options and corporate decisions Learning Objective: 24-05 Value options in capital budgeting projects, including timing options, the option to expand, the option to abandon, and the option to contract. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 21 Answer: B Difficulty: 1 Easy

39 Answer: D Explanation: C0 = $38 $35/1.038 C0 = $4.28 Difficulty: 2 Medium Topic: Option valuation fundamentals Learning Objective: 24-02 List the factors that affect option values and show how to price call and put options using no arbitrage conditions. Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 39

1 Answer: C Difficulty: 1 Easy Topic: Options Learning Objective: 24-01 Lay out the basics of call and put options and explain how to calculate their payoffs and profits. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: C Difficulty: 1 Easy Topic: Options Learning Objective: 24-01 Lay out

21 Answer: C Difficulty: 1 Easy Topic: Options and corporate decisions Learning Objective: 25-05 Show how option valuation can result in some surprising conclusions regarding mergers and capital budgeting decisions. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 21 Answer: C Difficulty: 1 Easy Topic: Options and corporate decisions Learning

1 Answer: E Difficulty: 1 Easy Topic: Put-call parity Learning Objective: 25-01 Describe the relationship between stock prices, call prices, and put prices using put-call parity. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: E Difficulty: 1 Easy Topic: Put-call parity Learning Objective: 25-01 Describe the relationship between

35 Copyright 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Copyright 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Copyright 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution

36 Answer: C Explanation: Minimum economic value = $218 million 215 million Minimum economic value = $3 million Difficulty: 2 Medium Topic: Merger and acquisition analysis Learning Objective: 26-03 Define the gains from a merger or acquisition and how to value the transaction. Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard

21 Answer: D Difficulty: 1 Easy Topic: Merger and acquisition analysis Learning Objective: 26-03 Define the gains from a merger or acquisition and how to value the transaction. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 21 Answer: D Difficulty: 1 Easy Topic: Merger and acquisition analysis Learning Objective: 26-03

1 Answer: B Difficulty: 1 Easy Topic: Types of mergers and acquisitions Learning Objective: 26-01 Discuss the different types of mergers and acquisitions, why they should (or shouldn't) take place, and the terminology associated with them. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: B Difficulty: 1 Easy

21 Answer: C Explanation: Cash flowYear 4 = $18,800(1 .21) $69,000(.0741)(.21) $22,500(1 .21) Cash flowYear 4 = $33,701 Difficulty: 2 Medium Topic: Leasing cash flows Learning Objective: 27-03 Show how to calculate the net advantage of leasing and related issues. Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 21 Answer:

1 Answer: A Difficulty: 1 Easy Topic: Leasing Learning Objective: 27-01 Define the types of leases and how the IRS qualifies leases. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: A Difficulty: 1 Easy Topic: Leasing Learning Objective: 27-01 Define the types of leases and how the IRS

32 Answer: C Explanation: Depreciation tax shield = ($3,500,000/4)(.22) Depreciation tax shield = $192,500 Aftertax lease payment = $1,025,000(1 .22) Aftertax lease payment = $799,500 Aftertax cost of debt = .075(1 .22) Aftertax cost of debt = .0585, or 5.85% NAL = $3,500,000 ($192,500 + 799,500)PVIFA5.85%, 4 NAL = $50,776

37 Answer: E Explanation: Inventory = $28,000 (1.22 .71) Inventory = $14,280 Days' sales in inventory = 365/($62,400/$14,280) Days' sales in inventory = 83.53 days Difficulty: 2 Medium Topic: Asset management ratios Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios. Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard

1 Answer: E Difficulty: 1 Easy Topic: Sources and uses of cash Learning Objective: 03-01 Standardize financial statements for comparison purposes. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: E Difficulty: 1 Easy Topic: Sources and uses of cash Learning Objective: 03-01 Standardize financial statements for comparison purposes.

21 Answer: E Explanation: Net income = $198,600(1 .21) Net income = $156,894 Dividends paid = $156,894 ($316,940 318,750) Dividends paid = $158,704 Difficulty: 2 Medium Topic: Financing activities Learning Objective: 03-01 Standardize financial statements for comparison purposes. Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 21 Answer: E Explanation:

1 Answer: E Difficulty: 1 Easy Topic: Financial planning basics Learning Objective: 04-01 Apply the percentage of sales method. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: E Difficulty: 1 Easy Topic: Financial planning basics Learning Objective: 04-01 Apply the percentage of sales method. Bloom's: Understand AACSB: Reflective

39 Answer: B Explanation: Projected total assets = ($3,950 + 7,850 + 27,600) (1.11) Projected total assets = $43,734 Projected accounts payable = $3,950 (1.11) Projected accounts payable = $4,384.50 Projected owners' equity = $20,750 + [($2,900 870) (1.11)] Projected owners' equity = $23,003.30 EFN = $43,734 4,384.50 14,700 23,003.30

21 Answer: C Explanation: Full-capacity sales = $878,000/.93 Full-capacity sales = $944,086.02 Capital intensity ratio = $913,000/$944,086.02 Capital intensity ratio = .97 Difficulty: 2 Medium Topic: Financial planning and forecasting Learning Objective: 04-01 Apply the percentage of sales method. Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 21 Answer: C

1 Answer: E Difficulty: 1 Easy Topic: Future value Learning Objective: 05-01 Determine the future value of an investment made today. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: E Difficulty: 1 Easy Topic: Future value Learning Objective: 05-01 Determine the future value of an investment made today.

19 Answer: E Explanation: FV = $5,000(1.07550) FV = $185,948.73 FV = $5,000(1.0750) FV = $147,285.13 Difference = $185,948.73 147,285.13 Difference = $38,663.60 Difficulty: 2 Medium Topic: Future value - single cash flow Learning Objective: 05-01 Determine the future value of an investment made today. Bloom's: Analyze AACSB: Analytical Thinking

53 Answer: A Explanation: Loan amount = $2,500,000(.65) Loan amount = $1,625,000 PVA = $1,625,000 = $10,400[(1 {1/[1 + (r/12)](30)(12)})/(r/12)] r = .0662, or 6.62% EAR = (1 + .0662/12)12 1 EAR = .0682, or 6.82% Difficulty: 2 Medium Topic: Interest rates Learning Objective: 06-04 Show how interest rates are

21 Answer: B Explanation: PVADue = $2,000({1 [1/(1 + .045/12)(3)(12)]}(.045/12))[1 + (.045/12)] PVADue = $67,485.97 Difficulty: 2 Medium Topic: Present value - annuity Learning Objective: 06-01 Determine the future and present value of investments with multiple cash flows. Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 21 Answer: B Explanation:

1 Answer: E Difficulty: 1 Easy Topic: Present value - multiple cash flows Learning Objective: 06-01 Determine the future and present value of investments with multiple cash flows. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: E Difficulty: 1 Easy Topic: Present value - multiple cash flows Learning

41 Answer: D Explanation: GAPV = $5,000{[1 (1.035/1.065)10]/(.065 .035)} GAPV = $41,422.89 Difficulty: 2 Medium Topic: Present value - annuity Learning Objective: 06-01 Determine the future and present value of investments with multiple cash flows. Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 41 Answer: D Explanation: GAPV = $5,000{[1

21 Answer: E Difficulty: 1 Easy Topic: Bond types Learning Objective: 07-01 Define important bond features and types of bonds. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 21 Answer: E Difficulty: 1 Easy Topic: Bond types Learning Objective: 07-01 Define important bond features and types of bonds. Bloom's: Understand

52 Answer: B Explanation: Call premium = $1,035 1,000 Call premium = $35 Difficulty: 2 Medium Topic: Bond valuation Learning Objective: 07-02 Explain bond values and yields and why they fluctuate. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 52 Answer: B Explanation: Call premium = $1,035 1,000 Call premium

41 Answer: C Explanation: Current yield = [.065 ($1,000)]/[.86725 ($1,000)] Current yield = .0749, or 7.49% Difficulty: 2 Medium Topic: Bond yields and returns Learning Objective: 07-02 Explain bond values and yields and why they fluctuate. Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 41 Answer: C Explanation: Current yield

1 Answer: B Difficulty: 1 Easy Topic: Bond features Learning Objective: 07-01 Define important bond features and types of bonds. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: B Difficulty: 1 Easy Topic: Bond features Learning Objective: 07-01 Define important bond features and types of bonds. Bloom's: Remember

40 Answer: A Explanation: P0 = [$4.20 (1 .25)]/(.18 + .25) P0 = $7.33 Difficulty: 2 Medium Topic: Constant-growth stock Learning Objective: 08-01 Explain how stock prices depend on future dividends and dividend growth. Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation 40 Answer: A Explanation: P0 = [$4.20 (1

21 Answer: C Difficulty: 1 Easy Topic: Stock exchanges and markets Learning Objective: 08-03 Lay out the different ways corporate directors are elected to office. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 21 Answer: C Difficulty: 1 Easy Topic: Stock exchanges and markets Learning Objective: 08-03 Lay out the

1 Answer: C Difficulty: 1 Easy Topic: Stock dividends Learning Objective: 08-01 Explain how stock prices depend on future dividends and dividend growth. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: C Difficulty: 1 Easy Topic: Stock dividends Learning Objective: 08-01 Explain how stock prices depend on future

1 Answer: D Difficulty: 1 Easy Topic: Net present value Learning Objective: 09-01 Show the reasons why the net present value criterion is the best way to evaluate proposed investments. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 1 Answer: D Difficulty: 1 Easy Topic: Net present value Learning Objective:

40 Answer: C Explanation: AAR = $6,250/[$98,400 + 0)/2] AAR = .1270, or 12.70% The firm should accept the project because the AAR exceeds the requirement. Difficulty: 2 Medium Topic: Average accounting return Learning Objective: 09-04 Explain accounting rates of return and some of the problems with them. Bloom's: Apply

21 Answer: C Difficulty: 1 Easy Topic: Mutually exclusive projects Learning Objective: 09-01 Show the reasons why the net present value criterion is the best way to evaluate proposed investments. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 21 Answer: C Difficulty: 1 Easy Topic: Mutually exclusive projects Learning Objective: