Solutions of Financial Management

Chapter 1 An Overview of financial Management Learning Objectives After reading this chapter, students should be able to ? Identify the three main forms of employment organization and describe the advantages and disadvantages of each one. ? Identify the primary tendency of the management of a publicly held corporation, and come across the relationship between line of descent sets and sh atomic number 18holder measure out. ? Differentiate between what is meant by a profligates infixed valuate and its market jimmy and understand the concept of equilibrium in the market. Briefly explicate three most-valuable trends that throw away been occurring in business that drive implications for managers. ? Define business ethics and short explain what companies be doing in response to a renewed interest in ethics, the consequences of unethical behavior, and how employees should conduct with unethical behavior. ? Briefly explain the conflicts between managers and derivationholde rs, and explain useful motivational tools that put up help to check these conflicts. Identify the key officers in the organization and briefly explain their responsibilities. Lecture Suggestions Chapter 1 c all all oers some important concepts, and discussing them in stratum can be interesting. However, students can read the chapter on their own, so it can be assigned but non cover in class. We spend the beginning day going over the syllabus and discussing grading and separate mechanics relating to the course. To the extent that time permits, we talk about the topics that pass on be covered in the course and the structure of the book.We also discuss briefly the fact that it is assumed that managers discover to maximize stock outlays, but that they may put one across other goals, hence that it is useful to tie executive purposeor compensation to stockholder-oriented consummation measures. If time permits, we think its worthwhile to spend at least a full day on the chapt er. If not, we ask students to read it on their own, and to keep them honest, we ask one or two questions about the material on the first mid-term exam.One point we emphasize in the first class is that students should print a copy of the PowerPoint slides for each chapter covered and purchase a financial calculator right off, and drive both to class regularly. We also put copies of the various versions of our Brief Calculator Manual, which in about 12 pages explains how to use the most popular calculators, in the copy center. Students give need to learn how to use their calculators immediately as time value of money concepts are covered in Chapter 2. It is important for students to grasp these concepts azoic as mevery of the remaining chapters build on the TVM concepts.We are often asked what calculator students should buy. If they already have a financial calculator that can find IRRs, we tell them that it will do, but if they do not have one, we recommend either the HP-10BII o r 17BII. Pl assuagement see the Lecture Suggestions for Chapter 2 for more on calculators. DAYS ON CHAPTER 1 OF 58 DAYS (50-minute periods) Answers to End-of-Chapter Questions 1-1When you purchase a stock, you tarry to receive dividends add-on capital gains. Not all stocks pay dividends immediately, but those corporations that do, typically pay dividends quarterly. great gains (losses) are received when the stock is sold. forms are risky, so you would not be certain that your expectations would be metas you would if you had purchased a U. S. Treasury security, which offers a guaranteed payment every 6 months plus repayment of the purchase price when the security matures. 1-2No, the stocks of variant companies are not equally risky. A accompany might operate in an industry that is viewed as comparatively risky, much(prenominal) as biotechnologywhere millions of dollars are spent on R&D that may never result in winnings.A company might also be heavily regulated and this could b e sensed as increasing its risk. Other factors that could cause a companys stock to be viewed as relatively risky take on heavy use of debt financing vs. equity financing, stock price volatility, and so on. 1-3If institutionalizeors are more confident that Company As cash flows will be adjacent to their expected value than Company Bs cash flows, pastce investors will drive the stock price up for Company A. Consequently, Company A will have a higher stock price than Company B. -4No, all corporate projects are not equally risky. A jutetary houses investment decisions have a significant impact on the riskiness of the stock. For example, the types of assets a company charters to invest in can impact the stocks risksuch as capital intensifier vs. labor intensive, specialized assets vs. general (multipurpose) assetsand how they choose to finance those assets can also impact risk. 1-5A cockeyeds intrinsic value is an estimate of a stocks true value base on accurate risk and retu rn data. It can be estimated but not measured precisely.A stocks flow rate price is its market pricethe value found on perceived but possibly incorrect study as seen by the marginal investor. From these definitions, you can see that a stocks true long-run value is more closely related to its intrinsic value kind of than its current price. 1-6Equilibrium is the situation where the actual market price equals the intrinsic value, so investors are indifferent between purchase or selling a stock. If a stock is in equilibrium then there is no fundamental imbalance, hence no pressure for a change in the stocks price.At any given time, most stocks are reasonably close to their intrinsic determine and thus are at or close to equilibrium. However, at times stock prices and equilibrium values are different, so stocks can be temporarily undervalued or overvalued. 1-7If the three intrinsic value estimates for Stock X were different, I would have the most confidence in Company Xs CFOs esti mate. Intrinsic values are strictly estimates, and different analysts with different data and different views of the future will form different estimates of the intrinsic value for any given stock.However, a loadeds managers have the best information about the companys future prospects, so managers estimates of intrinsic value are generally advance than the estimates of outside investors. 1-8If a stocks market price and intrinsic value are equal, then the stock is in equilibrium and there is no pressure (buying/selling) to change the stocks price. So, theoretically, it is go bad that the two be equal however, intrinsic value is a long-run concept. Managements goal should be to maximize the firms intrinsic value, not its current price.So, maximizing the intrinsic value will maximize the average price over the long run but not inescapably the current price at each point in time. So, stockholders in general would probably expect the firms market price to be under the intrinsic valu erealizing that if management is doing its occupation that current price at any point in time would not necessarily be maximized. However, the chief operating officer would prefer that the market price be highsince it is the current price that he will receive when exercising his stock options.In addition, he will be retiring after exercising those options, so there will be no repercussions to him (with respect to his job) if the market price dropsunless he did something illegal during his land tenure as CEO. 1-9The board of directors should set CEO compensation dependent on how well the firm performs. The compensation packet boat should be sufficient to attract and retain the CEO but not go beyond what is needed. fee should be structured so that the CEO is rewarded on the basis of the stocks performance over the long run, not the stocks price on an option performance date.This direction that options (or direct stock awards) should be phased in over a number of years so the CEO will have an incentive to keep the stock price high over time. If the intrinsic value could be measured in an objective and verifiable manner, then performance pay could be based on changes in intrinsic value. However, it is easier to measure the growth rate in reported profits than the intrinsic value, although reported profits can be manipulated through aggressive accounting procedures and intrinsic value cannot be manipulated.Since intrinsic value is not observable, compensation must(prenominal) be based on the stocks market pricebut the price used should be an average over time rather than on a spot date. 1-10The three principal forms of business organization are sole proprietorship, partnership, and corporation. The advantages of the first two include the ease and low cost of formation. The advantages of the corporation include limited liability, indefinite life, ease of ownership transfer, and access to capital markets.The disadvantages of a sole proprietorship are (1) diffic ulty in obtaining pear-shaped sums of capital (2) eternal personal liability for business debts and (3) limited life. The disadvantages of a partnership are (1) unlimited liability, (2) limited life, (3) difficulty of transferring ownership, and (4) difficulty of raising large amounts of capital. The disadvantages of a corporation are (1) double tax of earnings and (2) setting up a corporation and filing required state and federal reports, which are complex and time-consuming. 1-11Stockholder wealth maximization is a long-run goal.Companies, and consequently the stockholders, prosper by management do decisions that will produce long-term earnings increases. Actions that are continually shortsighted often catch up with a firm and, as a result, it may find itself unable to compete workively against its competitors. in that respect has been much criticism in recent years that U. S. firms are too short-run profit-oriented. A found example is the U. S. auto industry, which has bee n accused of continuing to build large throttle valve guzzler automobiles because they had higher profit margins rather than retooling for smaller, more fuel-efficient models. -12Useful motivational tools that will aid in aligning stockholders and managements interests include (1) reasonable compensation packages, (2) direct intervention by shareowners, including firing managers who dont perform well, and (3) the terror of takeover. The compensation package should be sufficient to attract and retain able managers but not go beyond what is needed. Also, compensation packages should be structured so that managers are rewarded on the basis of the stocks performance over the long run, not the stocks price on an option exercise date.This means that options (or direct stock awards) should be phased in over a number of years so managers will have an incentive to keep the stock price high over time. Since intrinsic value is not observable, compensation must be based on the stocks market pricebut the price used should be an average over time rather than on a spot date. Stockholders can intervene directly with managers. Today, the majority of stock is owned by institutional investors and these institutional money managers have the clout to exercise considerable influence over firms operations.First, they can talk with managers and render suggestions about how the business should be run. In effect, these institutional investors act as lobbyists for the body of stockholders. Second, any shareholder who has owned $2,000 of a companys stock for one year can sponsor a proposal that must be voted on at the annual stockholders meeting, even if management opposes the proposal. Although shareholder-sponsored proposals are non-binding, the results of such votes are clearly heard by top management. If a firms stock is undervalued, then corporate raiders will see it to be a bargain and will attempt to capture the firm in a hostile takeover.If the raid is successful, the targets executives will almost certainly be fired. This situation gives managers a strong incentive to take actions to maximize their stocks price. 1-13a. Corporate bounty is always a sticky issue, but it can be justified in terms of luck to create a more attractive commwholey that will get to it easier to hire a plentiful work force. This corporate philanthropy could be received by stockholders negatively, especially those stockholders not living in its headquarters city.Stockholders are interested in actions that maximize share price, and if competing firms are not making mistakable contributions, the cost of this philanthropy has to be borne by someonethe stockholders. Thus, stock price could decrease. b. Companies must make investments in the current period in order to generate future cash flows. Stockholders should be aware of this, and expect a correct analysis has been performed, they should react positively to the decision. The Mexican plant is in this category. Capital budge ting is covered in depth in Part 4 of the text.Assuming that the correct capital budgeting analysis has been make, the stock price should increase in the future. c. U. S. Treasury bonds are considered safe investments, while common stock are farther more risky. If the company were to switch the emergency funds from Treasury bonds to stocks, stockholders should see this as increasing the firms risk because stock returns are not guaranteedsometimes they go up and sometimes they go down. The firm might need the funds when the prices of their investments were low and not have the needed emergency funds.Consequently, the firms stock price would probably fall. 1-14a. No, TIAA-CREF is not an ordinary shareholder. Because it is one of the largest institutional shareholders in the unify States and it controls nearly $280 billion in pension funds, its voice carries a lot of weight. This shareholder in effect consists of many man-to-man shareholders whose pensions are invested with this gro up. b. The owners of TIAA-CREF are the singular teachers whose pensions are invested with this group. c. For TIAA-CREF to be effective in wielding its weight, it must act as a coordinated unit.In order to do this, the funds managers should solicit from the individual shareholders their votes on the funds practices, and from those votes act on the majoritys wishes. In so doing, the individual teachers whose pensions are invested in the fund have in effect determined the funds take practices. 1-15Earnings per share in the current year will decline due to the cost of the investment made in the current year and no significant performance impact in the short run. However, the companys stock price should increase due to the significant cost savings expected in the future. -16The board of directors should set CEO compensation dependent on how well the firm performs. The compensation package should be sufficient to attract and retain the CEO but not go beyond what is needed. Compensation should be structured so that the CEO is rewarded on the basis of the stocks performance over the long run, not the stocks price on an option exercise date. This means that options (or direct stock awards) should be phased in over a number of years so the CEO will have an incentive to keep the stock price high over time.If the intrinsic value could be measured in an objective and verifiable manner, then performance pay could be based on changes in intrinsic value. Since intrinsic value is not observable, compensation must be based on the stocks market pricebut the price used should be an average over time rather than on a spot date. The board should probably set the CEOs compensation as a mix between a fixed salary and stock options. The iniquity president of Company Xs actions would be different than if he were CEO of some other company. 17.Setting the compensation policy for three division managers would be different than setting the compensation policy for a CEO because performan ce of each of these managers could be more easily observed. For a CEO an award based on stock price performance makes sense, while in this situation it probably doesnt make sense. Each of the managers could still be given stock awards however, rather than the award being based on stock price it could be determined from some observable measure like increased gas output, oil output, etc. Answers to End-of-Chapter ProblemsWe present here some intermediate steps and final answers to end-of-chapter problems. Please bring up that your answer may differ slightly from ours due to rounding differences. Also, although we hope not, some of the problems may have more than one correct solution, depending on what assumptions are made in working the problem. Finally, many of the problems enquire some verbal discussion as well as numerical calculations this verbal material is not presented here. 2-1FV5 = $16,105. 10. 2-2PV = $1,292. 10. 2-3I/YR = 8. 01%. 2-4N = 11. 01 years. 2-5N = 11 years. 2-6F VA5 = $1,725. 22 FVA5 Due = $1,845. 99. 2-7PV = $923. 98 FV = $1,466. 4. 2-8PMT = $444. 89 EAR = 12. 6825%. 2-9a. $530. d. $445. 2-10a. $895. 42. b. $1,552. 92. c. $279. 20. d. $499. 99 $867. 13. 2-11a. 14. 87%. 2-12b. 7%. c. 9%. d. 15%. 2-13a. 10. 24 years. c. 4. 19 years. 2-14a. $6,374. 97. d(1). $7,012. 47. 2-15a. $2,457. 83. c. $2,000. d(1). $2,703. 61. 2-16PV7% = $1,428. 57 PV14% = $714. 29. 2-179%. 2-18a. Stream A $1,251. 25. 2-19a. $423,504. 48. b. $681,537. 69. c(2). $84,550. 80. 2-20Contract 2 PV = $10,717,847. 14. 2-21a. 30-year payment plan PV = $68,249,727. b. 10-year payment plan PV = $63,745,773. c. Lump sum PV = $61,000,000. 2-22a. $802. 43. c. $984. 88. 2-23a. $881. 7. b. $895. 42. c. $903. 06. d. $908. 35. e. $910. 97. 2-24a. $279. 20. b. $276. 84. c. $443. 72. 2-25a. $5,272. 32. b. $5,374. 07. 2-26$17,290. 89 $19,734. 26. 2-27a. Bank A = 4%. 2-28INOM = 7. 8771%. 2-293%. 2-30a. E = 63. 74 yrs. K = 41. 04 yrs. b. $35,825. 33. 2-31a. $35,459. 51. b. $27,232. 49. 2-32 $496. 11. 2-33$17,659. 50. 2-34a. PMT = $10,052. 87. b. Yr 3 Int/Pymt = 9. 09% Princ/Pymt = 90. 91%. 2-35a. PMT = $34,294. 65. b. PMT = $7,252. 78. c. Balloon PMT = $94,189. 69. 2-36a. $5,308. 12. b. $4,877. 09. 2-37a. 50 mos. b. 13 mos. c. $112. 38. 2-38$309,015. 2-39$36,950. 2-40$9,385. 3-1$1,000,000. 3-2$2,500,000. -3$3,600,000. 3-4$20,000,000. 3-5a, possibly c. 3-6$89,100,000. 3-7a. $50,000. b. $115,000. 3-8NI = $450,000 NCF = $650,000 OCF = $650,000. 3-910,500,000 shares. 3-10a. $2,400,000,000. b. $4,500,000,000. c. $5,400,000,000. d. $1,100,000,000. 3-11$12,681,482. 3-12a. $592 million. b. RE04 = $1,374 million. c. $1,600 million. d. $15 million. e. $620 million. 3-13a. $90,000,000. b. NOWC05 = $192,000,000 NOWC04 = $210,000,000. c. OC04 = $460,000,000 OC05 = $492,000,000. d. FCF = $58,000,000. 3-14a. $2,400,000. b. NI = 0 NCF = $3,000,000. c. NI = $1,350,000 NCF = $2,100,000. 4-1AR = $800,000. 4-2D/A = 58. 33%. 4-3TATO = 5 EM = 1. . 4-4M/B = 4. 2667. 4-5P/E = 12. 0. 4-6ROE = 8%. 4-7$112,500. 4-815. 31%. 4-9$142. 50. 4-10NI/S = 2% D/A = 40%. 4-112. 9867. 4-12 data link = 2. 25. 4-13TIE = 3. 86. 4-14ROE = 23. 1%. 4-15(ROE = +5. 54% QR = 1. 2. 4-167. 2%. 4-17a. 4-186. 0. 4-19$262,500. 4-20$405,682. 4-21$50. 4-22A/P = $90,000 Inv = $90,000 FA = $138,000. 4-23a. rate of flow ratio = 1. 98 DSO = 76. 3 age Total assets turnover = 1. 73 Debt ratio = 61. 9%. 4-24a. TIE = 11 EBITDA coverage = 9. 46 Profit margin = 3. 40% ROE = 8. 57%. 6-1b. Upward tilt yield curve. c. Inflation expected to increase. d. Borrow long term. 6-22. 25%. 6-36% 6. 33%. 6-41. 5%. 6-50. %. 6-621. 8%. 6-75. 5%. 6-88. 5%. 6-96. 8%. 6-106. 0%. 6-111. 55%. 6-120. 35%. 6-131. 775%. 6-14a. r1 in Year 2 = 6%. b. I1 = 2% I2 = 5%. 6-15r1 in Year 2 = 9% I2 = 7%. 6-1614%. 6-177. 2%. 6-18a. r1 = 9. 20% r5 = 7. 20%. 6-19a. 8. 20%. b. 10. 20%. c. r5 = 10. 70%. 7-1$935. 82. 7-2a. 7. 11%. b. 7. 22%. c. $988. 46. 7-3$1,028. 60. 7-4YTM = 6. 62% YTC = 6. 49% most likely yield = 6. 49%. 7-5a. VL at 5% = $1 ,518. 98 VL at 8% = $1,171. 19 VL at 12% = $863. 78. 7-6a. C0 = $1,012. 79 Z0 = $693. 04 C1 = $1,010. 02 Z1 = $759. 57 C2 = $1,006. 98 Z2 = $832. 49 C3 = $1,003. 65 Z3 = $912. 41 C4 = $1,000. 00 Z4 = $1,000. 00. -710-year, 10% coupon = 6. 75% 10-year cypher = 9. 75% 5-year zero = 4. 76% 30-year zero = 32. 19% $100 perpetuity = 14. 29%. 7-815. 03%. 7-9a. YTM at $829 ? 15%. 7-10a. YTM = 9. 69%. b. CY = 8. 875% CGY = 0. 816%. 7-11a. YTM = 10. 37% YTC = 10. 15% YTC. b. 10. 91%. c. -0. 54% (based on YTM) -0. 76% (based on YTC). 7-12a. YTM = 8% YTC = 6. 1%. 7-13VB = $974. 42 YTM = 8. 64%. 7-1410. 78%. 7-15a. 5 years. b. YTC = 6. 47%. 7-16$987. 87. 7-17$1,067. 95. 7-188. 88%. 7-19a. ABS = 6. 3% F = 8%. 7-20a. 8. 35%. b. 8. 13%. 8-1pic = 11. 40% ( = 26. 69% CV = 2. 34. 8-2bp = 1. 12. 8-3r = 10. 9%. 8-4rM = 11% r = 12. 2%. 8-5a. = 1. b. r = 13%. 8-6a. picY = 14%. b. (X = 12. 20%. 8-7bp = 0. 7625 rp = 12. 1%. 8-8b = 1. 33. 8-94. 5%. 8-104. 2%. 8-11r = 17. 05%. 8-12rM rRF = 4. 375%. 8-13a. r i = 15. 5%. b(1). rM = 15% ri = 16. 5%. c(1). ri = 18. 1%. 8-14bN = 1. 16. 8-157. 2%. 8-16rp = 11. 75%. 8-171. 7275. 8-18a. $0. 5 million. d(2). 15%. 8-19a. CVX = 3. 5 CVY = 2. 0. c. rX = 10. 5% rY = 12%. d. Stock Y. e. rp = 10. 875%. 8-20a. rA = 11. 30%. c. (A = 20. 8% (p = 20. 1%. 8-21a. ri = 6% + (5%)bi. b. 15%. c. Indifference rate = 16%. 9-1D1 = $1. 6050 D3 = $1. 8376 D5 = $2. 0259. 9-2pic = $6. 25. 9-3pic = $21. 20 rs = 11. 30%. 9-4b. $37. 80. c. 34. 09. 9-5$60. 9-6rp = 8. 33%. 9-7a. 13. 33%. b. 10%. c. 8%. d. 5. 71%. 9-8a. $125. b. $83. 33. 9-9a. 10%. b. 10. 38%. 9-10$23. 75. 9-11$13. 11. 9-12a(1). $9. 50. a(2). $13. 33. a(3). $21. 00. a(4). $44. 00. b(1). Undefined. b(2). -$48. 00, which is nonsense. 9-13a. rC = 8. 6% rD = 5%. b. No pic = $32. 61. 9-14pic = $27. 32. 9-15a. P0 = $32. 14. b. P0 = $37. 50. c. P0 = $50. 00. d. P0 = $78. 28. 9-16P0 = $19. 89. 9-17a. $713. 33 million. b. $527. 89 million. c. $42. 79. 9-186. 25%. 9-19a. $2. 10 $2. 205 $2. 31525. b. PV = $5. 29. c. $24. 72. d. $30. 00. e. $30. 00 9-20a. P0 = $54. 11 D1/P0 = 3. 55% CGY = 6. 45%. 9-21a. 24,112,308. b. $321,000,000. c. $228,113,612. d. $16. 81. 9-22$35. 00. 9-23a. New price = $44. 26. b. beta = 0. 5107. 9-24a. $2. 01 $2. 31 $2. 66 $3. 06 $3. 52. b. P0 = $39. 43. c. D1/P0 2006 = 5. 10% CGY2006 = 6. 9% D1/P0 2011 = 7. 00% CGY2011 = 5%. 10-1rd(1 T) = 7. 80%. 10-2rp = 8%. 10-3rs = 13%. 10-4rs = 15% re = 16. 11%. 10-5Projects A through E should be judge. 10-6a. rs = 16. 3%. b. rs = 15. 4%. c. rs = 16%. d. rs AVG = 15. 9%. 10-7a. rs = 14. 83%. b. F = 10%. c. re = 15. 81%. 10-8rs = 16. 51% WACC = 12. 79%. 10-9WACC = 12. 72%. 10-10WACC = 11. 4%. 10-11wd = 20%. 10-12a. rs = 14. 40%. b. WACC = 10. 62%. c.Project A. 10-13re = 17. 26%. 10-1411. 94%. 10-15a. g = 9. 10%. b. Payout = 50. 39%. 10-16a. g = 8%. b. D1 = $2. 81. c. rs = 15. 81%. 10-17a. g = 3%. b. EPS1 = $5. 562. 10-18a. rd = 7% rp = 10. 20% rs = 15. 72%. b. WACC = 13. 86%. c. Projects 1 and 2 will be accepted. 10-19a. Projects A, C, E, F, and H should be accepted. b. Projects A, F, and H should be accepted $12 million. c. Projects A, C, F, and H should be accepted $15 million. 10-20a. rd(1 T) = 5. 4% rs = 14. 6%. b. WACC = 10. 92%. 11-1NPV = $7,486. 68. 11-2IRR = 16%. 11-3MIRR = 13. 89%. 11-44. 34 years. 11-5DPP = 6. 51 years. 11-6a. 5% NPVA = $3. 52 NPVB = $2. 87. 0% NPVA = $0. 58 NPVB = $1. 04. 15% NPVA = -$1. 91 NPVB = -$0. 55. b. IRRA = 11. 10% IRRB = 13. 18%. c. 5% Choose A 10% Choose B 15% Do not choose either one. 11-7a. NPVA = $866. 16 IRRA = 19. 86% MIRRA = 17. 12% PaybackA = 3 yrs Discounted Payback = 4. 17 yrs NPVB = $1,225. 25 IRRB = 16. 80% MIRRB = 15. 51% PaybackB = 3. 21 yrs Discounted Payback = 4. 58 yrs. 11-8a. Without mitigation NPV = $12. 10 million With mitigation NPV = $5. 70 million. 11-9a. Without mitigation NPV = $15. 95 million With mitigation NPV = -$11. 25 million. 11-10Project A NPVA = $30. 16. 11-11NPVS = $448. 86 NPVL = $607. 0 Accept Project L. 11-12IRRL = 11. 74%. 11-13MIRRX = 13. 59%. 11-14a. HCC PV of costs = -$805,009. 87. c. HCC PV of costs = -$767,607. 75. LCC PV of costs = -$686,627. 14. 11-15a. IRRA = 20% IRRB = 16. 7% crosswalk rate ? 16%. 11-16a. NPVA = $14,486,808 NPVB = $11,156,893 IRRA = 15. 03% IRRB = 22. 26%. b. Crossover rate ? 12%. 11-17a. NPVA = $200. 41 NPVB = $145. 93. b. IRRA = 18. 1% IRRB = 24. 0%. c. MIRRA = 15. 10% MIRRB = 17. 03%. f. MIRRA = 18. 05% MIRRB = 20. 48%. 11-18a. No PVOld = -$89,910. 08 PVNew = -$94,611. 45. b. $2,470. 80. c. 22. 94%. 11-19b. NPV10% = -$99,174 NPV20% = $500,000. d. 9. 54% 22. 7%. 11-20$10,239. 20. 11-21MIRR = 10. 93%. 11-22$250. 01. 12-1a. $12,000,000. 12-2a. $2,600,000. 12-3$4,600,000. 12-4b. Accelerated method $12,781. 64. 12-5E(NPV) = $3,000,000 (NPV = $23. 622 million CV = 7. 874. 12-6a. -$178,000. b. $52,440 $60,600 $40,200. c. $48,760. d. NPV = -$19,549 Do not purchase. 12-7b. -$126,000. c. $42,518 $47,579 $34,926. d. $50,702. e. NPV = $10,841 Purchase. 12-8a. pass judgment CFA = $6,750 Expect ed CFB = $7,650 CVA = 0. 0703. b. NPVA = $10,036 NPVB = $11,624. 12-9NPV5 = $2,211 NPV4 = -$2,081 NPV8 = $13,329. 12-10a. NPV = $37,035. 13. b. +20% $77,975. 63 -20% NPV = -$3,905. 37. c.E(NPV) = $34,800. 21 (NPV = $35,967. 84 CV = 1. 03. 13-1a. E(NPV) = -$446,998. 50. b. E(NPV) = $2,806,803. 16. c. $3,253,801. 66. 13-2a. Project B NPVB = $2,679. 46. b. Project A NPVA = $3,773. 65. c. Project A EAAA = $1,190. 48. 13-3NPV190-3 = $20,070 NPV360-6 = $22,256. 13-4A EAAA = $1,407. 85. 13-5Projects A, B, C, and D Optimal capital budget = $3,900000. 13-6NPVA = $9. 93 million. 13-7Machine B Extended NPVB = $3. 67 million. 13-8EAAY = $7,433. 12. 13-9Wait NPV = $2,212,964. 13-10No, NPV3 = $1,307. 29. 13-11a. Accept A, B, C, D, and E Capital budget = $5,250,000. b. Accept A, B, D, and E Capital budget = $4,000,000. c.Accept B, C, D, E, F, and G Capital budget = $6,000,000. 13-12a. NPV = $4. 6795 million. b. No, NPV = $3. 2083 million. c. 0. 13-13a. NPV = -$2,113,481. 31. b. NPV = $1,973,037. 3 9. c. E(NPV) = -$70,221. 96. d. E(NPV) = $832,947. 27. e. $1,116,071. 43. 14-1QBE = 500,000. 14-230% debt and 70% equity. 14-3a. E(EPSC) = $5. 10. 14-4bU = 1. 0435. 14-5a. ROELL = 14. 6% ROEHL = 16. 8%. b. ROELL = 16. 5%. 14-6a(1). -$60,000. b. QBE = 14,000. 14-7No leverage ROE = 10. 5% ( = 5. 4% CV = 0. 51 60% leverage ROE = 13. 7% ( = 13. 5% CV = 0. 99. 14-8rs = 17%. 14-9a. P0 = $25. b. P0 = $25. 81. 14-10a. FCA = $80,000 VA = $4. 80/unit PA = $8. 0/unit. 14-11a. 10. 96%. b. 1. 25. c. 1. 086957. d. 14. 13%. e. 10. 76%. 14-12a. EPSOld = $2. 04 New EPSD = $4. 74 EPSS = $3. 27. b. 339,750 units. c. QNew, Debt = 272,250 units. 14-13Debt used E(EPS) = $5. 78 (EPS = $1. 05 E(TIE) = 3. 49(. Stock used E(EPS) = $5. 51 (EPS = $0. 85 E(TIE) = 6. 00(. 15-1Payout = 55%. 15-2P0 = $60. 15-3P0 = $40. 15-4D0 = $3. 44. 15-5$3,250,000. 15-6Payout = 31. 39%. 15-7a. $1. 44. b. 3%. c. $1. 20. d. 33? %. 15-8a. 12%. b. 18%. c. 6% 18%. d. 6%. e. 28,800 new shares $0. 13 per share. 15-9a(1). $3,960,000. a (2). $4,800,000. a(3). $9,360,000. a(4). Regular = $3,960,000 Extra = $5,400,000. c. 5%. d. 15%. 16-1103. 41 days 86. 99 days $400,000 $32,000. 16-273 days 30 days $1,178,082. 16-3$1,205,479 20. 5% 22. 4% 10. 47% bank debt. 16-4a. 83 days. b. $356,250. c. 4. 87(. 16-5a. DSO = 28 days. b. A/R = $70,000. 16-6a. 32 days. b. $288,000. c. $45,000. d(1). 30. d(2). $378,000. 16-7a. 57. 33 days. b(1). 2(. b(2). 12%. c(1). 46. 5 days. c(2). 2. 1262(. c(3). 12. 76%. 16-8a. ROET = 11. 75% ROEM = 10. 80% ROER = 9. 16%. 16-9b. $420,000. c. $35,000. 16-10a. Oct. loan = $22,800. 17-1AFN = $410,000. 17-2AFN = $610,000. 17-3AFN = $200,000. 17-4a. $133. 50 million. b. 39. 06%. 17-5a. $5,555,555,556. b. 30. 6%. c. $13,600,000. 7-6$67 million 5. 01. 17-7$156 million. 17-8a. $480,000. b. $18,750. 17-9? S = $68,965. 52. 17-10$34. 338 million 34. 97 ? 35 days. 17-11$19. 10625 million 6. 0451. 17-12a. $2,500,000,000. b. 24%. c. $24,000,000. 17-13a. AFN = $128,783. b. 3. 45%. 17-14a. 33%. b. AFN = $2,549. c . ROE = 13. 06%. 18-1a. $5. 00. b. $2. 00. 18-2$27. 00 $37. 00. 18-3a, b, and c. 18-4$1. 82. 18-5rd = 5. 95% $91,236. 18-6b. Futures = +$4,180,346 Bond = -$2,203,701 Net = $1,976,645. 18-7a. $3. 06 $4. 29. b. 16. 67%, 61. 46% -100%. c. -16. 67% -100% 63. 40%. d. No $30. 00 and $27. 00. e. Yes $37. 50 and $37. 50. 19-10. 6667 pound per dollar. 9-227. 2436 yen per shekel. 19-31 yen = $0. 00907. 19-41 euro = $0. 68966 or $1 = 1. 45 euros. 19-5 Dollars per 1,000 Units of Pounds Can. Dollars Euros Yen Pesos Kronas $1,747. 10 $820. 60 $1,206. 90 $8. 97 $93. 10 $128. 10 19-76. 49351 krones. 19-815 kronas per pound. 19-10rNOM-U. S. = 4. 6%. 19-11117 pesos. 19-12b. $1. 6488. 19-13a. $2,772,003. b. $2,777,585. c. $3,333,333. 19-14+$250,000. 19-15b. $19,865. 19-16$468,837,209. 19-17a. $52. 63 20%. b. 1. 5785 SF per U. S. $. c. 41. 54 Swiss francs 16. 92%. 20-155. 6% 50%. 20-2$196. 6. 20-3CR = 25 shares. 20-4a. D/AJ-H = 50% D/AM-E = 67%. 20-5a. PV cost of leasing = -$954,639 Lease equipment. 20-6a. EV = -$3 EV = $0 EV = $4 EV = $49. d. 9% $90. 20-8a. PV cost of owning = -$185,112 PV cost of leasing = -$187,534 Purchase loom. 20-9b. Percent ownership Original = 80% Plan 1 = 53% Plans 2 and 3 = 57%. c. EPS0 = $0. 48 EPS1 = $0. 60 EPS2 = $0. 64 EPS3 = $0. 86. d. D/A0 = 73% D/A1 = 13% D/A2 = 13% D/A3 = 48%. 21-1P0 = $37. 04. 21-2P0 = $43. 48. 21-3$37. 04 to $43. 48. 21-4a. 16. 8%. b. V = $14. 93 million. 21-5NPV = -$6,747. 71 Do not purchase. 21-6a. 14%. b. TV = $1,143. 4 V = $877. 2.