Archives: Solution Manual

B-202 SOLUTIONS Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer

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

B-192 SOLUTIONS 30. Surprise! You should definitely upgrade the truck. Heres why. At 10 mpg, the truck burns 12,000 / 10 = 1,200 Challenge 31. We will begin by calculating the aftertax salvage value of the equipment at the end of the projects life. The aftertax salvage

CHAPTER 10 B-185 16. To calculate the EAC of the project, we first need the NPV 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 NPV of the project is:

B-178 SOLUTIONS from the sale of new books. Thus, it is important to examine whether the new book would displace sales of used books (good from the publishers perspective) or new books (not good). The concern arises any time there is an active market for used product. 8. Definitely.

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

CHAPTER 9 B-171 While this may look like a MIRR calculation, it is not an MIRR, rather it is a standard IRR calculation. Since the cash inflows are blocked by the government, they are not available to the company for a period of one year. Thus, all we are

CHAPTER 9 B-163 b. The equation for the IRR of the project is: 0 = $45,000,000 + $78,000,000/(1+IRR) $14,000,000/(1+IRR)2 From Descartes rule of signs, we know there are potentially two IRRs since the cash flows change signs twice. From trial and error, the two IRRs

CHAPTER 9 B-157 Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final

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

B-148 SOLUTIONS 21. We can use the two-stage dividend growth model for this problem, which is: P 0 = [D0(1 + g1)/(R g1)]{1 [(1 + g1)/(1 + R)]T}+ [(1 + g1)/(1 + R)]T[D0(1 + g2)/(R g2)] P0 = [$1.74(1.25)/(.12 .25)][1 (1.25/1.12)11] + [(1.25)/(1.12)]11[$1.74(1.06)/(.12 .06)] P0 = $142.14 Challenge

B-144 SOLUTIONS 9. We can use the constant dividend growth model, which is: Pt = Dt (1 + g) / (R g) Pt = Dt (1 + g) / (R g) P t = Dt (1 + g) / (R g) So the price of

B-142 SOLUTIONS 11. Presumably, the current stock value reflects the risk, timing and magnitude of all future cash flows, both short-term and long-term. If this is correct, then the statement is false. 12. If this assumption is violated, the two-stage dividend growth model is not valid. In other words,

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. 2.

B-134 SOLUTIONS Now we need to find the monthly interest rate in retirement. We can use the same procedure that we used to find the monthly interest rates for the stock and bond accounts, so: (1 + R) = (1 + r)(1 + h) 1 +

CHAPTER 7 B-127 23. The bond has 14 years to maturity, so the bond price equation is: P = $1,089.60 = $36(PVIFAR%,28) + $1,000(PVIFR%,28) P = $1,089.60 = $36(PVIFAR%,28) + $1,000(PVIFR%,28) P = $1,089.60 = $36(PVIFAR%,28) + $1,000(PVIFR%,28) Using a spreadsheet, financial calculator, or

CHAPTER 7 B-123 14. This is a premium bond because it sells for more than 100% of face value. The current yield is: Current yield = Annual coupon payment / Price = $75/$1,351.5625 = 5.978% The YTM is located under the Asked Yield column, so the YTM is

CHAPTER 7 B-119 10. The term structure is based on pure discount bonds. The yield curve is based on coupon-bearing issues. 11. Bond ratings have a subjective factor to them. Split ratings reflect a difference of opinion among credit agencies. 12. As a general constitutional principle, the federal

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. 2. All else the same, the Treasury security

B-84 SOLUTIONS So the APR is: APR = 12(2.361%) = 28.33% And the EAR is: EAR = (1.02361)12 1 = .3231 or 32.31% 52. The cash flows in this problem are semiannual, so we need the effective semiannual rate. The interest

CHAPTER 6 B-81 42. The amount of principal paid on the loan is the PV of the monthly payments you make. So, the present value of the $1,150 monthly payments is: PVA = $1,150[(1 {1 / [1 + (.0635/12)]}360) / (.0635/12)] = $184,817.42 PVA = $1,150[(1

CHAPTER 6 B-77 Setting the two equal, we get: (.07)(10) = (1 + r)10 1 r = 1.71/10 1 = .0545 or 5.45% 30. Here we need to convert an EAR into interest rates for different compounding periods. Using the equation for the

B-74 SOLUTIONS 18. For this problem, we simply need to find the PV of a lump sum using the equation: PV = FV / (1 + r)t It is important to note that compounding occurs daily. To account for this, we will divide the interest rate

CHAPTER 6 B-69 10. In general, viatical settlements are ethical. In the case of a viatical settlement, it is simply an exchange of cash today for payment in the future, although the payment depends on the death of the seller. The purchaser of the life insurance policy is bearing

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.

CHAPTER 5 B-63 20. 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

CHAPTER 5 B-61 11. To find the PV of a lump sum, we use: PV = FV / (1 + r)t PV = $1,000,000 / (1.10)80 = $488.19 PV = FV / (1 + r)t PV = $1,000,000 / (1.10)80 = $488.19 PV = FV

B-58 SOLUTIONS Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer

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). 2. Compounding refers to

B-54 SOLUTIONS This is a negative dividend payout ratio of 66 percent, which is impossible. The growth rate is not consistent with the other constraints. The lowest possible payout rate is 0, which corresponds to retention ratio of 1, or total earnings retention. The maximum sustainable growth

CHAPTER 4 B-39 Now we can use the DuPont identity to find the equity multiplier as: ROE = PM(TAT)(EM) .1473 = (.062)(1 / .60)EM EM = (.1473)(.60) / .062 EM = 1.43 So, the D/E ratio is: D/E =

CHAPTER 4 B-35 10. Below is the balance sheet with the percentage of sales for each account on the balance sheet. Notes payable, total current liabilities, long-term debt, and all equity accounts do not vary directly with sales. HEIR JORDAN CORPORATION Balance Sheet ($) (%) ($)

B-30 SOLUTIONS 7. Apparently not! In hindsight, the firm may have underestimated costs and also underestimated the extra demand from the lower price. 8. Financing possibly could have been arranged if the company had taken quick enough action. Sometimes it becomes apparent that help is needed only when

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

CHAPTER 3 B-27 28. SMOLIRA GOLF CORP. Statement of Cash Flows For 2009 Cash, beginning of the year $ 21,860 Operating activities Net income $ 36,475 Plus: Depreciation $ 26,850 Increase in accounts payable 3,530 Increase in other current liabilities

CHAPTER 3 B-21 The common-base year answers for Question 14 are found by dividing each category value for 2009 by the same category value for 2008. For example, the cash common-base year number is found by: $10,157 / $8,436 = 1.2040 This means the cash

CHAPTER 3 B-17 d. For an on-line service provider such as AOL, using a per call basis for costs would allow for comparisons with smaller services. A per subscriber basis would also make sense. comparisons with smaller services. A per subscriber basis would also make sense.

CHAPTER 2 B-5 9. If a company raises more money from selling stock than it pays in dividends in a particular period, its cash flow to stockholders will be negative. If a company borrows more than it pays in interest, its cash flow to creditors will be negative.

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

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 retire outstanding debt), and working capital management (modifying the firms