Archives: Solution Manual

Input area: Lost salvage value (2,812,638)$ Lost depreciation tax shield (426,957)$ (569,405) Lease payment (1,875,000) (1,875,000) Tax on lease payment 393,750 393,750 Cash flow from leasing 4,618,750$ (1,908,207)$ (3,382,043)$ NAL (110,732.59)$ PV of lease payments 3,595,183.49$ Purchase price 6,100,000$ Year […]

2. The less profitable one because leasing provides, among other things, a mechanism for transferring tax benefits from entities that value them less to entities that value them more. preferred depending on the setup of the analysis); and (2) Care […]

CHAPTER 21 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 […]

Input area: Underwriter fee 7.00% Legal fees and expenses 2,200,000$ SEC registration fees 15,000$ Filing fees 20,000$ NASDAQ listing fee 100,000$ Transfer agent fee 8,500$ Engraving expenses 525,000$ Other expenses 75,000$ Audit cost/year 325,000$ IPO size 90,000,000$ Output area: East […]

large amounts of debt securities can be sold to a relatively small number of buyers, particularly large institutional buyers such as pension funds and insurance companies, and debt securities are much easier to price. 3. They are riskier and harder […]

agency costs of excess cash. The extra cash may encourage management to act carelessly. The extra cash will also earn a small return unless invested in income producing assets. At best, cash and short– term investments are a zero NPV […]

CHAPTER 18 – 1 2. A stock repurchase reduces equity while leaving debt unchanged. The debt ratio rises. A firm could, if desired, use excess cash to reduce debt instead. This is a capital structure decision. to dividend announcements, then […]

3. The PE ratio will fall and the ROA and ROE will increase, but the changes are irrelevant. rarely begins regular dividend payments that anticipates will not be sustainable Cessation of dividend payments is viewed by the market as a […]

Input area: 2019 2020 2021 2022 2023 Depreciation 534.00 568.00 591.00 620.00 633.00 EBT 1,686.00$ 1,768.00$ 1,953.00$ 1,920.00$ 1,996.00$ Tax 354.06 371.28 410.13 403.20 419.16 Net income 1,331.94$ 1,396.72$ 1,542.87$ 1,516.80$ 1,576.84$ PV unlevered CF 8,243.23$ Terminal value of future […]

3. FTE uses levered cash flow and other methods use unlevered cash flow. the interest cost in the WACC. If he insists that the interest payments are explicitly shown, you should use the FTE method. NPV = –P + (1 […]

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 […]

Chapter 17 Input Area: Probability Without Expansion With Expansion 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 31,700,000$ […]

bankruptcy, bondholders have the first claim to the assets of the firm. When faced with a possible bankruptcy, the stockholders have strong incentives to vote for increased dividends or other distributions. This will ensure them of getting some of the […]

VD = .30($22,000,000) + .50($26,000,000) + .20($26,000,000) VD = $24,800,000 And the value of the company’s debt in one year with expansion is: VD = .30($26,000,000) + .50($26,000,000) + .20($26,000,000) VD = $26,000,000 CHAPTER 16 C-1 CHAPTER 17 McKENZIE CORPORATION’S […]

Chapter 16 Input area: NPV 37,523,810$ NPV of project 37,523,810 Equity 683,123,810$ Total assets 683,123,810$ Total Debt & Equity 683,123,810$ New share price 56.93$ New shares issued 860,752 Price NPV of project 37,523,810 Equity 732,123,810$ Total assets 732,123,810$ Total Debt […]

14. a. The value of the unlevered firm is: V = EBIT(1 – TC)/R0 15. We can find the cost of equity using M&M Proposition II with taxes. First, we need to find the market value of equity, which is: […]

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 […]

2. Since Stephenson is an all-equity firm with 12 million shares of common stock outstanding, worth Market value of equity = $645,600,000 So, the market value balance sheet before the land purchase is: Market value balance sheet Assets $645,600,000 Equity […]

ordinary income for tax purposes. For corporate investors, 70% of the amount they receive as dividends from preferred stock are exempt from income taxes. b. In case of liquidation (at bankruptcy), preferred stock is junior to debt and senior to […]

historical prices to predict future price movements. 2) Semistrong form. In addition to historical data, market prices reflect all publicly-available information. Investors with insider, or private information, are able to earn abnormal returns. 3) Strong form. Market prices reflect all […]

are the worst investors in the market. We should also consider that mutual funds managers may be able to outperform the market before expenses. Whether they can outperform the market on an after-expense basis becomes a question of whether mutual […]

Input area: 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% Bond maturity Book value Price YTM 3/1/2019 920,000,000$ 94.347 2.028% 3/1/2021 1,380,000,000$ 92.625 2.754% BV of debt 2,300,000,000$ […]

3. You are assuming that the new project’s risk is the same as the risk of the firm as a whole, and that the firm is financed entirely with equity. method are (1) three parameters (the risk-free rate, the expected […]

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 company’s liabilities and […]

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 201103 0.45 2.68 -1.16 0.01 58.61 30.06 22.52 201106 -1.75 -0.14 -0.26 0 56.63 30.73 22.86 201107 -2.36 -1.44 -1.18 0 55.82 30.00 22.23 […]

CHAPTER 12 B- 1 factor model to be useful as a practical matter, the number of factors that explain the returns on an asset must be relatively limited. common to all stocks. In this case, wheat would be a firm […]

CHAPTER 11 CASE C-1 CHAPTER 12 THE FAMA-FRENCH MULTI-FACTOR MODEL AND MUTUAL FUND RETURNS NOTE: The example below shows the results for returns between October 2010 and September 2015. The actual answer to the case will change based on current […]

Input area: 10-year annual Standard deviation Bledsoe Large Company Stock Fund 12.15% 24.43% 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% […]

And the standard deviation of Stock B is:  2 B =.33(–.073 – .1160)2 + .33(.128 – .1160)2 + .33(.293 – .1160)2 26. The expected return of an asset is the sum of the probability of each state occurring times […]

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 […]

2. This is not the portfolio with the least risk. By adding stocks, a riskier asset, the overall risk of the portfolio will decline. This will be demonstrated in the next questions. P = (X 2 E  2 E […]

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 […]

3. No, stocks are riskier. Some investors are highly risk averse, and the extra possible return doesn’t attract them relative to the extra risk. 5. T-bill rates were highest in the early eighties. This was during a period of high […]

underperforming the market. In general, most mutual funds do not outperform the market for an extended period of time and finding the funds that will outperform the market in the future beforehand is a daunting task. One factor that makes […]

Input area: Year Total dividends 1720,807.48$ 2811,817.84$ 3914,319.33$ 41,029,762.82$ 51,159,782.41$ 61,250,384.00$ Stock value in Year 5 17,395,308.29$ Total stock value today 11,655,749.48$ Value per share 38.85$ Blue Ribband Motors Corp. 1.19$ 0.19$ 16.32$ 10.00% 12.00% Bon Voyage Marine, Inc. 1.26 […]

CHAPTER 9 – 1 expense. Young, growing companies with profitable investment opportunities are one example; another example is a company in financial distress. This question is examined in depth in a later chapter. of dividends occurs forever. A violation of […]

CHAPTER 9 STOCK VALUATION AT RAGAN ENGINES 1. The total dividends paid by the company were $640,000. Since there are 300,000 shares outstanding, the total earnings for the company were: Total earnings = 300,000($5.35) = $1,605,000 This means the payout […]

Input area: 3) Repayment of coupon bonds 50,000,000$ Repayment of zeroes 218,016,000$ Aftertax coupon payment 2,962,500$ Cash outflow Value of zero in one year 246.86$ Zero coupon growth 17.52$ Zero coupon bond (802,157.54)$ Cash inflow During the life of a […]

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, 31. The […]

CHAPTER 8 INTEREST RATES AND BOND VALUATION Answers to Concept Questions 2. All else the same, the Treasury security will have lower coupons because of its lower default risk, so it will have greater interest rate risk. 3. No. If […]

that the company cannot call the bond for a specified period. This offers the bondholders protection for this period. The disadvantage of a deferred call is that the company cannot call the bond during the call protection period. Interest rates […]

30 18.2 22% 46% 32% 35 18.9 24% 47% 29% Excavator piling/acre 155$ Broadcast burning/acre 305$ Site preparation/acre 150$ Planting costs/acre 230$ Nominal required return 10.00% Inflation rate 3.70% Tax rate 21% Conservation fund 500,000$ Conservation fund growth 3.20% Cash […]

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 […]

CHAPTER 7 RISK ANALYSIS, REAL OPTIONS, AND CAPITAL BUDGETING Answers to Concepts Review and Critical Thinking Questions 2. With a sensitivity analysis, one variable is examined over a broad range of values. With a scenario analysis, all variables are examined […]

Cash flow from thinning = Acres thinned × Cash flow per acre Cash flow from thinning = 5,000($1,200) Cash flow from thinning = $6,000,000 The real cost of the conservation fund is constant, but the expense will be tax deductible, […]

Chapter 6 Input area: Land cost 4,000,000$ Aftertax land value 6,500,000$ Equipment 95,000,000$ Equipment salvage 60% Contract sales/tons 500,000 Contract $/ton $86 Year 1 production 620,000 Year 2 production 680,000 Year 3 production 730,000 Year 4 production 590,000 Spot market […]

With these cash flows, the NPV of the project is: b. To find the minimum number of cartons sold to still break even, we need to use the tax shield approach to calculating OCF, and solve the problem similar to […]

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 We can also find the NPV using real cash flows and 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 2. a. Yes, […]

CHAPTER 6, Case #2 GOODWEEK TIRES, INC. The cash flow to start the project is the $160 million equipment cost and the $9 million required for net working capital, yielding a total cash outflow today of $169 million. The research […]