Revised Shockley, Chapter 7 Answers:
Problem 1:
Problem 2:
Problem 3:
The underlying security price is the revenue portion of the NPV of Phase 3 discounted at
the nominal WACC for five years.
Problem 4:
The strike prices need to be appreciated by the inflation rate:
The underlying security price is the revenue portion of the NPV of Phase 3 discounted at
the real WACC for five years.
Problem 5:
Year 0:
Year 1:
Year 2:
Year 3:
Year 4:
0.00
The deal is worth more than $100 million and should be accepted.
Problem 6:
Year 0:
Year 1:
Year 2:
Year 3:
Year 4:
567.00
1141.80
2299.30
4630.22
9324.11
281.56
567.00
1141.80
2299.30
139.82
281.56
567.00
69.43
139.82
34.48
Year 0:
Year 1:
Year 2:
Year 3:
Year 4:
98.81
286.70
831.87
3477.27
8124.11
0.00
0.00
378.87
1099.30
0.00
0.00
0.00
0.00
0.00
0.00
Because the deal is worth less than $100 million, it is better to reject the deal.
Problem 7:
Using the binomial models for the operation cash flows from Problem 6, the following
deal value is calculated:
Year 0:
Year 1:
Year 2:
Year 3:
Year 4:
134.44
390.09
1131.87
3477.27
8124.11
0.00
0.00
378.87
1099.30
0.00
0.00
0.00
119.50
359.84
1083.58
4226.60
0.00
0.00
445.36
1341.12
0.00
0.00
0.00
0.00
0.00
Problem 8:
The associated binomial tree assesses the value to be $48.11 million.
Year 0:
Year 0.5:
Year 1.0:
Year 1.5:
Year 2.0:
Year 2.5:
Year 3:
48.11
129.44
348.27
1744.23
4693.05
11625.97
22283.79
2090.44
5495.02
29.41
79.12
Problem 9:
You should sell the rights to QRS because the selling price of $55 million is more
Problem 10:
Year 0:
Year 0.5:
Year 1.0:
Year 1.5:
Year 2.0:
Year 2.5:
Year 3:
832.00
1517.58
2768.09
5049.05
9209.54
16798.36
30640.47
456.14
832.00
1517.58
2768.09
5049.05
9209.54
250.07
456.14
832.00
1517.58
2768.09
137.10
250.07
456.14
832.00
75.16
137.10
250.07
41.21
75.16
22.59
Year 0:
Year 0.5:
Year 1.0:
Year 1.5:
Year 2.0:
Year 2.5:
Year 3:
68.72
189.51
522.61
2205.36
5907.57
14347.86
28140.47
37.10
102.31
2598.55
6709.54
97.21
268.09
Firm QRS’ value of the joint venture is $68.72 million which is far in excess of the $55
million purchase price indicating that QRS did not pay too much (assuming a correct
analysis).