英文版罗斯公司理财习题答案Chap020

CHAPTER 8MAKING CAPITAL INVESTMENT DECISIONSAnswers to Concepts Review and Critical Thinking Questions1.In this context, an opportunity cost refers to the value of an asset or other input that will be used in aproject. The relevant cost is what the asset or input is actually worth today, not, for example, what it cost to acquire.2. a.Yes, the reduction in the sales of the company’s other products, referred to as erosion, andshould be treated as an incremental cash flow. These lost sales are included because they are a cost (a revenue reduction) that the firm must bear if it chooses to produce the new product.b. Yes, expenditures on plant and equipment should be treated as incremental cash flows. Theseare costs of the new product line. However, if these expenditures have already occurred, they are sunk costs and are not included as incremental cash flows.c. No, the research and development costs should not be treated as incremental cash flows. Thecosts of research and development undertaken on the product during the past 3 years are sunk costs and should not be included in the evaluation of the project. Decisions made and costs incurred in the past cannot be changed. They should not affect the decision to accept or reject the project.d. Yes, the annual depreciation expense should be treated as an incremental cash flow.Depreciation expense must be taken into account when calculating the cash flows related to a given project. While depreciation is not a cash expense that directly affects cash flow, it decreases a firm’s net income and hence, lowers its tax bill for the year. Because of this depreciation tax shield, the firm has more cash on hand at the end of the year than it would have had without expensing depreciation.e.No, dividend payments should not be treated as incremental cash flows. A firm’s decision topay or not pay dividends is independent of the decision to accept or reject any given investment project. For this reason, it is not an incremental cash flow to a given project. Dividend policy is discussed in more detail in later chapters.f.Yes, the resale value of plant and equipment at the end of a project’s life should be treated as anincremental cash flow. The price at which the firm sells the equipment is a cash inflow, and any difference between the book value of the equipment and its sale price will create gains or lossesthat result in either a tax credit or liability.g.Yes, salary and medical costs for production employees hired for a project should be treated asincremental cash flows. The salaries of all personnel connected to the project must be included as costs of that project.3.Item I is a relevant cost because the opportunity to sell the land is lost if the new golf club is produced. Item II is also relevant because the firm must take into account the erosion of sales of existing products when a new product is introduced. If the firm produces the new club, the earnings from the existing clubs will decrease, effectively creating a cost that must be included in the decision.Item III is not relevant because the costs of Research and Development are sunk costs. Decisions made in the past cannot be changed. They are not relevant to the production of the new clubs.4.For tax purposes, a firm would choose MACRS because it provides for larger depreciationdeductions earlier. These larger deductions reduce taxes, but have no other cash consequences.Notice that the choice between MACRS and straight-line is purely a time value issue; the total depreciation is the same; only the timing differs.5.It’s probably only a mild over-simplification. Current liabilities will all be paid, presumably. Thecash portion of current assets will be retrieved. Some receivables won’t be collected, and some inventory will not be sold, of course. Counterbalancing these losses is the fact that inventory sold above cost (and not replaced at the end of the project’s life) acts to increase working capital. These effects tend to offset one another.6.Management’s discretion to set the firm’s capital structure is applicable at the firm level. Since anyone particular project could be financed entirely with equity, another project could be financed with debt, and the firm’s overall capital structure remains unchanged, financing cost s are not relevant in the analysis of a project’s incremental cash flows according to the stand-alone principle.7.The EAC approach is appropriate when comparing mutually exclusive projects with different livesthat will be replaced when they wear out. This type of analysis is necessary so that the projects havea common life span over which they can be compared; in effect, each project is assumed to existover an infinite horizon of N-year repeating projects. Assuming that this type of analysis is valid implies that the project cash flows remain the same forever, thus ignoring the possible effects of, among other things: (1) inflation, (2) changing economic conditions, (3) the increasing unreliability of cash flow estimates that occur far into the future, and (4) the possible effects of future technology improvement that could alter the project cash flows.8.Depreciation is a non-cash expense, but it is tax-deductible on the income statement. Thusdepreciation causes taxes paid, an actual cash outflow, to be reduced by an amount equal to the depreciation tax shield, t c D. A reduction in taxes that would otherwise be paid is the same thing as a cash inflow, so the effects of the depreciation tax shield must be added in to get the total incremental aftertax cash flows.9.There are two particularly important considerations. The first is erosion. Will the “essentialized”book simply displace copies of the existing book that would have otherwise been sold? This is of special concern given the lower price. The second consideration is competition. Will other publishers step in and produce such a product? If so, then any erosion is much less relevant. A particular concern to book publishers (and producers of a variety of other product types) is that the publisher only makes money 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 publisher’s perspective) or new books (not good). The concern arises any time there is an active market for used product.10.Definitely. The damage to Porsche’s reputation is definitely a factor the company needed to consider.If the reputation was damaged, the company would have lost sales of its existing car lines.11.One company may be able to produce at lower incremental cost or market better. Also, of course,one of the two may have made a mistake!12.Porsche would recognize that the outsized profits would dwindle as more products come to marketand competition becomes more intense.Solutions to Questions and ProblemsNOTE: 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 for each problem is found without rounding during any step in the problem.Basicing the tax shield approach to calculating OCF, we get:OCF = (Sales – Costs)(1 – t C) + t C DepreciationOCF = [($5 × 2,000 – ($2 × 2,000)](1 – 0.35) + 0.35($10,000/5)OCF = $4,600So, the NPV of the project is:NPV = –$10,000 + $4,600(PVIFA17%,5)NPV = $4,7172.We will use the bottom-up approach to calculate the operating cash flow for each year. We also mustbe sure to include the net working capital cash flows each year. So, the total cash flow each year will be:Year 1 Year 2 Year 3 Year 4 Sales Rs.7,000 Rs.7,000 Rs.7,000 Rs.7,000Costs 2,000 2,000 2,000 2,000Depreciation 2,500 2,500 2,500 2,500EBT Rs.2,500 Rs.2,500 Rs.2,500 Rs.2,500Tax 850 850 850 850Net income Rs.1,650 Rs.1,650 Rs.1,650 Rs.1,650OCF 0 Rs.4,150 Rs.4,150 Rs.4,150 Rs.4,150Capital spending –Rs.10,000 0 0 0 0NWC –200 –250 –300 –200 950Incremental cashflow –Rs.10,200 Rs.3,900 Rs.3,850 Rs.3,950 Rs.5,100The NPV for the project is:NPV = –Rs.10,200 + Rs.3,900 / 1.10 + Rs.3,850 / 1.102 + Rs.3,950 / 1.103 + Rs.5,100 / 1.104NPV = Rs.2,978.333. Using the tax shield approach to calculating OCF, we get:OCF = (Sales – Costs)(1 – t C) + t C DepreciationOCF = (R2,400,000 – 960,000)(1 – 0.30) + 0.30(R2,700,000/3)OCF = R1,278,000So, the NPV of the project is:NPV = –R2,700,000 + R1,278,000(PVIFA15%,3)NPV = R217,961.704.The cash outflow at the beginning of the project will increase because of the spending on NWC. Atthe end of the project, the company will recover the NWC, so it will be a cash inflow. The sale of the equipment will result in a cash inflow, but we also must account for the taxes which will be paid on this sale. So, the cash flows for each year of the project will be:Year Cash Flow0 – R3,000,000 = –R2.7M – 300K1 1,278,0002 1,278,0003 1,725,000 = R1,278,000 + 300,000 + 210,000 + (0 – 210,000)(.30)And the NPV of the project is:NPV = –R3,000,000 + R1,278,000(PVIFA15%,2) + (R1,725,000 / 1.153)NPV = R211,871.465. First we will calculate the annual depreciation for the equipment necessary for the project. Thedepreciation amount each year will be:Year 1 depreciation = R2.7M(0.3330) = R899,100Year 2 depreciation = R2.7M(0.4440) = R1,198,800Year 3 depreciation = R2.7M(0.1480) = R399,600So, the book value of the equipment at the end of three years, which will be the initial investment minus the accumulated depreciation, is:Book value in 3 years = R2.7M – (R899,100 + 1,198,800 + 399,600)Book value in 3 years = R202,500The asset is sold at a gain to book value, so this gain is taxable.Aftertax salvage value = R202,500 + (R202,500 – 210,000)(0.30)Aftertax salvage value = R207,750To calculate the OCF, we will use the tax shield approach, so the cash flow each year is:OCF = (Sales – Costs)(1 – t C) + t C DepreciationYear Cash Flow0 – R3,000,000 = –R2.7M – 300K1 1,277,730.00 = (R1,440,000)(.70) + 0.30(R899,100)2 1,367,640.00 = (R1,440,000)(.70) + 0.30(R1,198,800)3 1,635,630.00 = (R1,440,000)(.70) + 0.30(R399,600) + R207,750 + 300,000Remember to include the NWC cost in Year 0, and the recovery of the NWC at the end of the project.The NPV of the project with these assumptions is:NPV = – R3.0M + (R1,277,730/1.15) + (R1,367,640/1.152) + (R1,635,630/1.153)NPV = R220,655.206. First, we will calculate the annual depreciation of the new equipment. It will be:Annual depreciation charge = €925,000/5Annual depreciation charge = €185,000The aftertax salvage value of the equipment is:Aftertax salvage value = €90,000(1 – 0.35)Aftertax salvage value = €58,500Using the tax shield approach, the OCF is:OCF = €360,000(1 – 0.35) + 0.35(€185,000)OCF = €298,750Now we can find the project IRR. There is an unusual feature that is a part of this project. Accepting this project means that we will reduce NWC. This reduction in NWC is a cash inflow at Year 0. This reduction in NWC implies that when the project ends, we will have to increase NWC. So, at the end of the project, we will have a cash outflow to restore the NWC to its level before the project. We also must include the aftertax salvage value at the end of the project. The IRR of the project is:NPV = 0 = –€925,000 + 125,000 + €298,750(PVIFA IRR%,5) + [(€58,500 – 125,000) / (1+IRR)5]IRR = 23.85%7.First, we will calculate the annual depreciation of the new equipment. It will be:Annual depreciation = £390,000/5Annual depreciation = £78,000Now, we calculate the aftertax salvage value. The aftertax salvage value is the market price minus (or plus) the taxes on the sale of the equipment, so:Aftertax salvage value = MV + (BV – MV)t cVery often, the book value of the equipment is zero as it is in this case. If the book value is zero, the equation for the aftertax salvage value becomes:Aftertax salvage value = MV + (0 – MV)t cAftertax salvage value = MV(1 – t c)We will use this equation to find the aftertax salvage value since we know the book value is zero. So, the aftertax salvage value is:Aftertax salvage value = £60,000(1 – 0.34)Aftertax salvage value = £39,600Using the tax shield approach, we find the OCF for the project is:OCF = £120,000(1 – 0.34) + 0.34(£78,000)OCF = £105,720Now we can find the project NPV. Notice that we include the NWC in the initial cash outlay. The recovery of the NWC occurs in Year 5, along with the aftertax salvage value.NPV = –£390,000 – 28,000 + £105,720(PVIFA10%,5) + [(£39,600 + 28,000) / 1.15]NPV = £24,736.268.To find the BV at the end of four years, we need to find the accumulated depreciation for the firstfour years. We could calculate a table with the depreciation each year, but an easier way is to add the MACRS depreciation amounts for each of the first four years and multiply this percentage times the cost of the asset. We can then subtract this from the asset cost. Doing so, we get:BV4 = $9,300,000 – 9,300,000(0.2000 + 0.3200 + 0.1920 + 0.1150)BV4 = $1,608,900The asset is sold at a gain to book value, so this gain is taxable.Aftertax salvage value = $2,100,000 + ($1,608,900 – 2,100,000)(.40)Aftertax salvage value = $1,903,5609. We will begin by calculating the initial cash outlay, that is, the cash flow at Time 0. To undertake theproject, we will have to purchase the equipment and increase net working capital. So, the cash outlay today for the project will be:Equipment –€2,000,000NWC –100,000Total –€2,100,000Using the bottom-up approach to calculating the operating cash flow, we find the operating cash flow each year will be:Sales €1,200,000Costs 300,000Depreciation 500,000EBT €400,000Tax 140,000Net income €260,000The operating cash flow is:OCF = Net income + DepreciationOCF = €260,000 + 500,000OCF = €760,000To find the NPV of the project, we add the present value of the project cash flows. We must be sure to add back the net working capital at the end of the project life, since we are assuming the net working capital will be recovered. So, the project NPV is:NPV = –€2,100,000 + €760,000(PVIFA14%,4) + €100,000 / 1.144NPV = €173,629.3810.We will need the aftertax salvage value of the equipment to compute the EAC. Even though theequipment for each product has a different initial cost, both have the same salvage value. The aftertax salvage value for both is:Both cases: aftertax salvage value = $20,000(1 – 0.35) = $13,000To calculate the EAC, we first need the OCF and NPV of each option. The OCF and NPV for Techron I is:OCF = – $34,000(1 – 0.35) + 0.35($210,000/3) = $2,400NPV = –$210,000 + $2,400(PVIFA14%,3) + ($13,000/1.143) = –$195,653.45EAC = –$195,653.45 / (PVIFA14%,3) = –$84,274.10And the OCF and NPV for Techron II is:OCF = – $23,000(1 – 0.35) + 0.35($320,000/5) = $7,450NPV = –$320,000 + $7,450(PVIFA14%,5) + ($13,000/1.145) = –$287,671.75EAC = –$287,671.75 / (PVIFA14%,5) = –$83,794.05The two milling machines have unequal lives, so they can only be compared by expressing both on an equivalent annual basis, which is what the EAC method does. Thus, you prefer the Techron II because it has the lower (less negative) annual cost.。

Chapter 2: Accounting Statements and Cash Flow2.10AssetsCurrent assetsCash $ 4,000Accounts receivable 8,000Total current assets $ 12,000Fixed assetsMachinery $ 34,000Patents 82,000Total fixed assets $116,000Total assets $128,000Liabilities and equityCurrent liabilitiesAccounts payable $ 6,000Taxes payable 2,000Total current liabilities $ 8,000Long-term liabilitiesBonds payable $7,000Stockholders equityCommon stock ($100 par) $ 88,000Capital surplus 19,000Retained earnings 6,000Total stockholders equity $113,000Total liabilities and equity $128,0002.11One year ago TodayLong-term debt $50,000,000 $50,000,000Preferred stock 30,000,000 30,000,000Common stock 100,000,000 110,000,000Retained earnings 20,000,000 22,000,000Total $200,000,000 $212,000,0002.12Total Cash Flow ofthe Stancil CompanyCash flows from the firmCapital spending $(1,000)Additions to working capital (4,000)Total $(5,000)Cash flows to investors of the firmShort-term debt $(6,000)Long-term debt (20,000)Equity (Dividend - Financing) 21,000Total $(5,000)[Note: This table isn’t the Statement of Cash Flows, which is only covered in Appendix 2B, since the latter has th e change in cash (on the balance sheet) as a final entry.]2.13 a. The changes in net working capital can be computed from:Sources of net working capitalNet income $100Depreciation 50Increases in long-term debt 75Total sources $225Uses of net working capitalDividends $50Increases in fixed assets* 150Total uses $200Additions to net working capital $25*Includes $50 of depreciation.b.Cash flow from the firmOperating cash flow $150Capital spending (150)Additions to net working capital (25)Total $(25)Cash flow to the investorsDebt $(75)Equity 50Total $(25)Chapter 3: Financial Markets and Net Present Value: First Principles of Finance (Advanced)3.14 $120,000 - ($150,000 - $100,000) (1.1) = $65,0003.15 $40,000 + ($50,000 - $20,000) (1.12) = $73,6003.16 a. ($7 million + $3 million) (1.10) = $11.0 millionb.i. They could spend $10 million by borrowing $5 million today.ii. They will have to spend $5.5 million [= $11 million - ($5 million x 1.1)] at t=1.Chapter 4: Net Present Valuea. $1,000 ⨯ 1.0510 = $1,628.89b. $1,000 ⨯ 1.0710 = $1,967.15c. $1,000 ⨯ 1.0520 = $2,653.30d. Interest compounds on the interest already earned. Therefore, the interest earned inSince this bond has no interim coupon payments, its present value is simply the present value of the $1,000 that will be received in 25 years. Note: As will be discussed in the next chapter, the present value of the payments associated with a bond is the price of that bond.PV = $1,000 /1.125 = $92.30PV = $1,500,000 / 1.0827 = $187,780.23a. At a discount rate of zero, the future value and present value are always the same. Remember, FV =PV (1 + r) t. If r = 0, then the formula reduces to FV = PV. Therefore, the values of the options are $10,000 and $20,000, respectively. You should choose the second option.b. Option one: $10,000 / 1.1 = $9,090.91Option two: $20,000 / 1.15 = $12,418.43Choose the second option.c. Option one: $10,000 / 1.2 = $8,333.33Option two: $20,000 / 1.25 = $8,037.55Choose the first option.d. You are indifferent at the rate that equates the PVs of the two alternatives. You know that rate mustfall between 10% and 20% because the option you would choose differs at these rates. Let r be thediscount rate that makes you indifferent between the options.$10,000 / (1 + r) = $20,000 / (1 + r)5(1 + r)4 = $20,000 / $10,000 = 21 + r = 1.18921r = 0.18921 = 18.921%The $1,000 that you place in the account at the end of the first year will earn interest for six years. The $1,000 that you place in the account at the end of the second year will earn interest for five years, etc. Thus, the account will have a balance of$1,000 (1.12)6 + $1,000 (1.12)5 + $1,000 (1.12)4 + $1,000 (1.12)3= $6,714.61PV = $5,000,000 / 1.1210 = $1,609,866.18a. $1.000 (1.08)3 = $1,259.71b. $1,000 [1 + (0.08 / 2)]2 ⨯ 3 = $1,000 (1.04)6 = $1,265.32c. $1,000 [1 + (0.08 / 12)]12 ⨯ 3 = $1,000 (1.00667)36 = $1,270.24d. $1,000 e0.08 ⨯ 3 = $1,271.25e. The future value increases because of the compounding. The account is earning interest on interest. Essentially, the interest is added to the account balance at the e nd of every compounding period. During the next period, the account earns interest on the new balance. When the compounding period shortens, the balance that earns interest is rising faster.The price of the consol bond is the present value of the coupon payments. Apply the perpetuity formula to find the present value. PV = $120 / 0.15 = $800a. $1,000 / 0.1 = $10,000b. $500 / 0.1 = $5,000 is the value one year from now of the perpetual stream. Thus, the value of theperpetuity is $5,000 / 1.1 = $4,545.45.c. $2,420 / 0.1 = $24,200 is the value two years from now of the perpetual stream. Thus, the value of the perpetuity is $24,200 / 1.12 = $20,000.pply the NPV technique. Since the inflows are an annuity you can use the present value of an annuity factor.ANPV = -$6,200 + $1,200 81.0= -$6,200 + $1,200 (5.3349)= $201.88Yes, you should buy the asset.Use an annuity factor to compute the value two years from today of the twenty payments. Remember, the annuity formula gives you the value of the stream one year before the first payment. Hence, the annuity factor will give you the value at the end of year two of the stream of payments.A= $2,000 (9.8181)Value at the end of year two = $2,000 20.008= $19,636.20The present value is simply that amount discounted back two years.PV = $19,636.20 / 1.082 = $16,834.88The easiest way to do this problem is to use the annuity factor. The annuity factor must be equal to $12,800 / $2,000 = 6.4; remember PV =C A T r. The annuity factors are in the appendix to the text. To use the factor table to solve this problem, scan across the row labeled 10 years until you find 6.4. It is close to the factor for 9%, 6.4177. Thus, the rate you will receive on this note is slightly more than 9%.You can find a more precise answer by interpolating between nine and ten percent.[ 10% ⎤[6.1446 ⎤a ⎡r ⎥bc ⎡6.4 ⎪ d⎣9%⎦⎣6.4177 ⎦By interpolating, you are presuming that the ratio of a to b is equal to the ratio of c to d.(9 - r ) / (9 - 10) = (6.4177 - 6.4 ) / (6.4177 - 6.1446)r = 9.0648%The exact value could be obtained by solving the annuity formula for the interest rate. Sophisticated calculators can compute the rate directly as 9.0626%.[Note: A standard financial calculator’s TVM keys can solve for this rate. With annuity flows, the IRR key on “advanced” financial c alculators is unnecessary.]a. The annuity amount can be computed by first calculating the PV of the $25,000 which youThat amount is $17,824.65 [= $25,000 / 1.075]. Next compute the annuity which has the same present value.A$17,824.65 = C 507.0$17,824.65 = C (4.1002)C = $4,347.26Thus, putting $4,347.26 into the 7% account each year will provide $25,000 five years from today.b. The lump sum payment must be the present value of the $25,000, i.e., $25,000 / 1.075 =$17,824.65The formula for future value of any annuity can be used to solve the problem (see footnote 11 of the text).Option one: This cash flow is an annuity due. To value it, you must use the after-tax amounts. Theafter-tax payment is $160,000 (1 - 0.28) = $115,200. Value all except the first payment using the standard annuity formula, then add back the first payment of $115,200 to obtain the value of this option.AValue = $115,200 + $115,200 30.010= $115,200 + $115,200 (9.4269)= $1,201,178.88Option two: This option is valued similarly. You are able to have $446,000 now; this is already on an after-tax basis. You will receive an annuity of $101,055 for each of the next thirty years. Those payments are taxable when you receive them, so your after-tax payment is $72,759.60 [= $101,055 (1 - 0.28)].AValue = $446,000 + $72,759.60 30.010= $446,000 + $72,759.60 (9.4269)= $1,131,897.47Since option one has a higher PV, you should choose it.et r be the rate of interest you must earn.$10,000(1 + r)12 = $80,000(1 + r)12= 8r = 0.18921 = 18.921%First compute the present value of all the payments you must make for your children’s educati on. The value as of one year before matriculation of one child’s education isA= $21,000 (2.8550) = $59,955.$21,000 415.0This is the value of the elder child’s education fourteen years from now. It is the value of the younger child’s education sixteen years from today. The present value of these isPV = $59,955 / 1.1514 + $59,955 / 1.1516= $14,880.44You want to make fifteen equal payments into an account that yields 15% so that the present value of the equal payments is $14,880.44.A= $14,880.44 / 5.8474 = $2,544.80Payment = $14,880.44 / 15.015This problem applies the growing annuity formula. The first payment is$50,000(1.04)2(0.02) = $1,081.60.PV = $1,081.60 [1 / (0.08 - 0.04) - {1 / (0.08 - 0.04)}{1.04 / 1.08}40]= $21,064.28This is the present value of the payments, so the value forty years from today is$21,064.28 (1.0840) = $457,611.46se the discount factors to discount the individual cash flows. Then compute the NPV of the project. NoticeYou can still use the factor tables to compute their PV. Essentially, they form cash flows that are a six year annuity less a two year annuity. Thus, the appropriate annuity factor to use with them is 2.6198 (= 4.3553 - 1.7355).Year Cash Flow Factor PV0.9091 $636.371$70020.8264 743.769003 1,000 ⎤4 1,000 ⎥ 2.6198 2,619.805 1,000 ⎥6 1,000 ⎦7 1,250 0.5132 641.508 1,375 0.4665 641.44Total $5,282.87NPV = -$5,000 + $5,282.87= $282.87Purchase the machine.Chapter 5: How to Value Bonds and StocksThe amount of the semi-annual interest payment is $40 (=$1,000 ⨯ 0.08 / 2). There are a total of 40 periods;i.e., two half years in each of the twenty years in the term to maturity. The annuity factor tables can be usedto price these bonds. The appropriate discount rate to use is the semi-annual rate. That rate is simply the annual rate divided by two. Thus, for part b the rate to be used is 5% and for part c is it 3%.A+F/(1+r)40PV=C Tra. $40 (19.7928) + $1,000 / 1.0440 = $1,000Notice that whenever the coupon rate and the market rate are the same, the bond is priced at par.b. $40 (17.1591) + $1,000 / 1.0540 = $828.41Notice that whenever the coupon rate is below the market rate, the bond is priced below par.c. $40 (23.1148) + $1,000 / 1.0340 = $1,231.15Notice that whenever the coupon rate is above the market rate, the bond is priced above par.a. The semi-annual interest rate is $60 / $1,000 = 0.06. Thus, the effective annual rate is 1.062 - 1 =0.1236 = 12.36%.A+ $1,000 / 1.0612b. Price = $30 12.006= $748.48A+ $1,000 / 1.0412c. Price = $30 1204.0= $906.15Note: In parts b and c we are implicitly assuming that the yield curve is flat. That is, the yield in year 5applies for year 6 as well.rice = $2 (0.72) / 1.15 + $4 (0.72) / 1.152 + $50 / 1.153= $36.31The number of shares you own = $100,000 / $36.31 = 2,754 sharesPrice = $1.15 (1.18) / 1.12 + $1.15 (1.182) / 1.122 + $1.152 (1.182) / 1.123+ {$1.152 (1.182)(1.06) / (0.12 - 0.06)} / 1.123= $26.95[Insert before last sentence of question: Assume that dividends are a fixed proportion of earnings.] Dividend one year from now = $5 (1 - 0.10) = $4.50Price = $5 + $4.50 / {0.14 - (-0.10)}= $23.75Since the current $5 dividend has not yet been paid, it is still included in the stock price.Chapter 6: Some Alternative Investment Rulesa. Payback period of Project A = 1 + ($7,500 - $4,000) / $3,500 = 2 yearsPayback period of Project B = 2 + ($5,000 - $2,500 -$1,200) / $3,000 = 2.43 yearsProject A should be chosen.b. NPV A = -$7,500 + $4,000 / 1.15 + $3,500 / 1.152 + $1,500 / 1.153 = -$388.96NPV B = -$5,000 + $2,500 / 1.15 + $1,200 / 1.152 + $3,000 / 1.153 = $53.83Project B should be chosen.a. Average Investment:($16,000 + $12,000 + $8,000 + $4,000 + 0) / 5 = $8,000Average accounting return:$4,500 / $8,000 = 0.5625 = 56.25%b. 1. AAR does not consider the timing of the cash flows, hence it does not consider the timevalue of money.2. AAR uses an arbitrary firm standard as the decision rule.3. AAR uses accounting data rather than net cash flows.aAverage Investment = (8000 + 4000 + 1500 + 0)/4 = 3375.00Average Net Income = 2000(1-0.75) = 1500=> AAR = 1500/3375=44.44%a. Solve x by trial and error:-$8,000 + $4,000 / (1 + x) + $3000 / (1 + x)2 + $2,000 / (1 + x)3 = 0x = 6.93%b. No, since the IRR (6.93%) is less than the discount rate of 8%.Alternatively, the NPV @ a discount rate of 0.08 = -$136.62.a. Solve r in the equation:$5,000 - $2,500 / (1 + r) - $2,000 / (1 + r)2 - $1,000 / (1 + r)3- $1,000 / (1 + r)4 = 0By trial and error,IRR = r = 13.99%b. Since this problem is the case of financing, accept the project if the IRR is less than the required rate of return.IRR = 13.99% > 10%Reject the offer.c. IRR = 13.99% < 20%Accept the offer.d. When r = 10%:NPV = $5,000 - $2,500 / 1.1 - $2,000 / 1.12 - $1,000 / 1.13 - $1,000 / 1.14When r = 20%:NPV = $5,000 - $2,500 / 1.2 - $2,000 / 1.22 - $1,000 / 1.23 - $1,000 / 1.24= $466.82Yes, they are consistent with the choices of the IRR rule since the signs of the cash flows change only once.A/ $160,000 = 1.04PI = $40,000 715.0Since the PI exceeds one accept the project.Chapter 7: Net Present Value and Capital BudgetingSince there is uncertainty surrounding the bonus payments, which McRae might receive, you must use the expected value of McRae’s bonuses in the computation of the PV of his contract. McRae’s salary plus the expected value of his bonuses in years one through three is$250,000 + 0.6 ⨯ $75,000 + 0.4 ⨯ $0 = $295,000.Thus the total PV of his three-year contract isPV = $400,000 + $295,000 [(1 - 1 / 1.12363) / 0.1236]+ {$125,000 / 1.12363} [(1 - 1 / 1.123610 / 0.1236]= $1,594,825.68EPS = $800,000 / 200,000 = $4NPVGO = (-$400,000 + $1,000,000) / 200,000 = $3Price = EPS / r + NPVGO= $4 / 0.12 + $3=$36.33Year 0 Year 1 Year 2 Year 3 Year 4 Year 51. Annual Salary$120,000 $120,000 $120,000 $120,000 $120,000 Savings2. Depreciation 100,000 160,000 96,000 57,600 57,6003. Taxable Income 20,000 -40,000 24,000 62,400 62,4004. Taxes 6,800 -13,600 8,160 21,216 21,2165. Operating Cash Flow113,200 133,600 111,840 98,784 98,784 (line 1-4)$100,000 -100,0006. ∆ Net workingcapital7. Investment $500,000 75,792*8. Total Cash Flow -$400,000 $113,200 $133,600 $111,840 $98,784 $74,576*75,792 = $100,000 - 0.34 ($100,000 - $28,800)NPV = -$400,000+ $113,200 / 1.12 + $133,600 / 1.122 + $111,840 / 1.123+ $98,784 / 1.124 + $74,576 / 1.125= -$7,722.52Real interest rate = (1.15 / 1.04) - 1 = 10.58%NPV A = -$40,000+ $20,000 / 1.1058 + $15,000 / 1.10582 + $15,000 / 1.10583= $1,446.76NPV B = -$50,000+ $10,000 / 1.15 + $20,000 / 1.152 + $40,000 / 1.153= $119.17Choose project A.PV = $120,000 / {0.11 - (-0.06)}t = 0 t = 1 t = 2 t = 3 t = 4 t = 5 t = 6 ...$12,000 $6,000 $6,000 $6,000$4,000$12,000 $6,000 $6,000 ...The present value of one cycle is:A+ $4,000 / 1.064PV = $12,000 + $6,000 306.0= $12,000 + $6,000 (2.6730) + $4,000 / 1.064= $31,206.37The cycle is four years long, so use a four year annuity factor to compute the equivalent annual cost (EAC).AEAC = $31,206.37 / 406.0= $31,206.37 / 3.4651= $9,006The present value of such a stream in perpetuity is$9,006 / 0.06 = $150,100o evaluate the word processors, compute their equivalent annual costs (EAC).BangAPV(costs) = (10 ⨯ $8,000) + (10 ⨯ $2,000) 414.0= $80,000 + $20,000 (2.9137)= $138,274EAC = $138,274 / 2.9137= $47,456IOUAPV(costs) = (11 ⨯ $5,000) + (11 ⨯ $2,500) 3.014- (11 ⨯ $500) / 1.143= $55,000 + $27,500 (2.3216) - $5,500 / 1.143= $115,132EAC = $115,132 / 2.3216= $49,592BYO should purchase the Bang word processors.Chapter 8: Strategy and Analysis in Using Net Present ValueThe accounting break-even= (120,000 + 20,000) / (1,500 - 1,100)= 350 units. The accounting break-even= 340,000 / (2.00 - 0.72)= 265,625 abalonesb. [($2.00 ⨯ 300,000) - (340,000 + 0.72 ⨯ 300,000)] (0.65)= $28,600This is the after tax profit.Chapter 9: Capital Market Theory: An Overviewa. Capital gains = $38 - $37 = $1 per shareb. Total dollar returns = Dividends + Capital Gains = $1,000 + ($1*500) = $1,500 On a per share basis, this calculation is $2 + $1 = $3 per sharec. On a per share basis, $3/$37 = 0.0811 = 8.11% On a total dollar basis, $1,500/(500*$37) = 0.0811 = 8.11%d. No, you do not need to sell the shares to include the capital gains in the computation of the returns. The capital gain is included whether or not you realize the gain. Since you could realize the gain if you choose, you should include it.The expected holding period return is:()[]%865.1515865.052$/52$75.54$50.5$==-+There appears to be a lack of clarity about the meaning of holding period returns. The method used in the answer to this question is the one used in Section 9.1. However, the correspondence is not exact, because in this question, unlike Section 9.1, there are cash flows within the holding period. The answer above ignores the dividend paid in the first year. Although the answer above technically conforms to the eqn at the bottom of Fig. 9.2, the presence of intermediate cash flows that aren’t accounted for renders th is measure questionable, at best. There is no similar example in the body of the text, and I have never seen holding period returns calculated in this way before.Although not discussed in this book, there are two generally accepted methods of computing holding period returns in the presence of intermediate cash flows. First, the time weighted return calculates averages (geometric or arithmetic) of returns between cash flows. Unfortunately, that method can’t be used here, because we are not given the va lue of the stock at the end of year one. Second, the dollar weighted measure calculates the internal rate of return over the entire holding period. Theoretically, that method can be applied here, as follows: 0 = -52 + 5.50/(1+r) + 60.25/(1+r)2 => r = 0.1306.This produces a two year holding period return of (1.1306)2 – 1 = 0.2782. Unfortunately, this book does not teach the dollar weighted method.In order to salvage this question in a financially meaningful way, you would need the value of the stock at the end of one year. Then an illustration of the correct use of the time-weighted return would be appropriate. A complicating factor is that, while Section 9.2 illustrates the holding period return using the geometric return for historical data, the arithmetic return is more appropriate for expected future returns.E(R) = T-Bill rate + Average Excess Return = 6.2% + (13.0% -3.8%) = 15.4%. Common Treasury Realized Stocks Bills Risk Premium -7 32.4% 11.2% 21.2%-6 -4.9 14.7 -19.6-5 21.4 10.5 10.9 -4 22.5 8.8 13.7 -3 6.3 9.9 -3.6 -2 32.2 7.7 24.5 Last 18.5 6.2 12.3 b. The average risk premium is 8.49%.49.873.125.246.37.139.106.192.21=++-++- c. Yes, it is possible for the observed risk premium to be negative. This can happen in any single year. The.b.Standard deviation = 03311.0001096.0=.b.Standard deviation = = 0.03137 = 3.137%.b.Chapter 10: Return and Risk: The Capital-Asset-Pricing Model (CAPM)a. = 0.1 (– 4.5%) + 0.2 (4.4%) + 0.5 (12.0%) + 0.2 (20.7%) = 10.57%b.σ2 = 0.1 (–0.045 – 0.1057)2 + 0.2 (0.044 – 0.1057)2 + 0.5 (0.12 – 0.1057)2+ 0.2 (0.207 – 0.1057)2 = 0.0052σ = (0.0052)1/2 = 0.072 = 7.20%Holdings of Atlas stock = 120 ⨯ $50 = $6,000 ⨯ $20 = $3,000Weight of Atlas stock = $6,000 / $9,000 = 2 / 3Weight of Babcock stock = $3,000 / $9,000 = 1 / 3a. = 0.3 (0.12) + 0.7 (0.18) = 0.162 = 16.2%σP 2= 0.32 (0.09)2 + 0.72 (0.25)2 + 2 (0.3) (0.7) (0.09) (0.25) (0.2)= 0.033244σP= (0.033244)1/2 = 0.1823 = 18.23%a.State Return on A Return on B Probability1 15% 35% 0.4 ⨯ 0.5 = 0.22 15% -5% 0.4 ⨯ 0.5 = 0.23 10% 35% 0.6 ⨯ 0.5 = 0.34 10% -5% 0.6 ⨯ 0.5 = 0.3b. = 0.2 [0.5 (0.15) + 0.5 (0.35)] + 0.2[0.5 (0.15) + 0.5 (-0.05)]+ 0.3 [0.5 (0.10) + 0.5 (0.35)] + 0.3 [0.5 (0.10) + 0.5 (-0.05)]= 0.135= 13.5%Note: The solution to this problem requires calculus.Specifically, the solution is found by minimizing a function subject to a constraint. Calculus ability is not necessary to understand the principles behind a minimum variance portfolio.Min { X A2 σA2 + X B2σB2+ 2 X A X B Cov(R A , R B)}subject to X A + X B = 1Let X A = 1 - X B. Then,Min {(1 - X B)2σA2 + X B2σB2+ 2(1 - X B) X B Cov (R A, R B)}Take a derivative with respect to X B.d{∙} / dX B = (2 X B - 2) σA2+ 2 X B σB2 + 2 Cov(R A, R B) - 4 X B Cov(R A, R B)Set the derivative equal to zero, cancel the common 2 and solve for X B.X BσA2- σA2+ X B σB2 + Cov(R A, R B) - 2 X B Cov(R A, R B) = 0X B = {σA2 - Cov(R A, R B)} / {σA2+ σB2 - 2 Cov(R A, R B)}andX A = {σB2 - Cov(R A, R B)} / {σA2+ σB2 - 2 Cov(R A, R B)}Using the data from the problem yields,X A = 0.8125 andX B = 0.1875.a. Using the weights calculated above, the expected return on the minimum variance portfolio isE(R P) = 0.8125 E(R A) + 0.1875 E(R B)= 0.8125 (5%) + 0.1875 (10%)= 5.9375%b. Using the formula derived above, the weights areX A = 2 / 3 andX B = 1 / 3c. The variance of this portfolio is zero.σP 2= X A2 σA2 + X B2σB2+ 2 X A X B Cov(R A , R B)= (4 / 9) (0.01) + (1 / 9) (0.04) + 2 (2 / 3) (1 / 3) (-0.02)= 0This demonstrates that assets can be combined to form a risk-free portfolio.14.2%= 3.7%+β(7.5%) ⇒β = 1.40.25 = R f + 1.4 [R M– R f] (I)0.14 = R f + 0.7 [R M– R f] (II)(I) – (II)=0.11 = 0.7 [R M– R f] (III)[R M– R f ]= 0.1571Put (III) into (I) 0.25 = R f + 1.4[0.1571]R f = 3%[R M– R f ]= 0.1571R M = 0.1571 + 0.03= 18.71%a. = 4.9% + βi (9.4%)βD= Cov(R D, R M) / σM 2 = 0.0635 / 0.04326 = 1.468= 4.9 + 1.468 (9.4) = 18.70%Weights:X A = 5 / 30 = 0.1667X B = 10 / 30 = 0.3333X C = 8 / 30 = 0.2667X D = 1 - X A - X B - X C = 0.2333Beta of portfolio= 0.1667 (0.75) + 0.3333 (1.10) + 0.2667 (1.36) + 0.2333 (1.88)= 1.293= 4 + 1.293 (15 - 4) = 18.22%a. (i) βA= ρA,MσA / σMρA,M= βA σM / σA= (0.9) (0.10) / 0.12= 0.75(ii) σB= βB σM / ρB,M= (1.10) (0.10) / 0.40= 0.275(iii) βC= ρC,MσC / σM= (0.75) (0.24) / 0.10= 1.80(iv) ρM,M= 1(v) βM= 1(vi) σf= 0(vii) ρf,M= 0(viii) βf= 0b. SML:E(R i) = R f + βi {E(R M) - R f}= 0.05 + (0.10) βiSecurity βi E(R i)A 0.13 0.90 0.14B 0.16 1.10 0.16C 0.25 1.80 0.23Security A performed worse than the market, while security C performed better than the market.Security B is fairly priced.c. According to the SML, security A is overpriced while security C is under-priced. Thus, you could invest in security C while sell security A (if you currently hold it).a. The typical risk-averse investor seeks high returns and low risks. To assess thetwo stocks, find theReturns:State of economy ProbabilityReturn on A*Recession 0.1 -0.20 Normal 0.8 0.10 Expansion0.10.20* Since security A pays no dividend, the return on A is simply (P 1 / P 0) - 1. = 0.1 (-0.20) + 0.8 (0.10) + 0.1 (0.20) = 0.08 = 0.09 This was given in the problem.Risk:R A - (R A -)2 P ⨯ (R A -)2 -0.28 0.0784 0.00784 0.02 0.0004 0.00032 0.12 0.0144 0.00144 Variance 0.00960Standard deviation (R A ) = 0.0980βA = {Corr(R A , R M ) σ(R A )} / σ(R M ) = 0.8 (0.0980) / 0.10= 0.784βB = {Corr(R B , R M ) σ(R B )} / σ(R M ) = 0.2 (0.12) / 0.10= 0.24The return on stock B is higher than the return on stock A. The risk of stock B, as measured by itsbeta, is lower than the risk of A. Thus, a typical risk-averse investor will prefer stock B.b. = (0.7) + (0.3) = (0.7) (0.8) + (0.3) (0.09) = 0.083σP 2= 0.72 σA 2 + 0.32 σB 2 + 2 (0.7) (0.3) Corr (R A , R B ) σA σB = (0.49) (0.0096) + (0.09) (0.0144) + (0.42) (0.6) (0.0980) (0.12) = 0.0089635 σP = = 0.0947 c. The beta of a portfolio is the weighted average of the betas of the components of the portfolio. βP = (0.7) βA + (0.3) βB = (0.7) (0.784) + (0.3) (0.240) = 0.621Chapter 11:An Alternative View of Risk and Return: The Arbitrage Pricing Theorya. Stock A:()()R R R R R A A A m m Am A=+-+=+-+βεε105%12142%...Stock B:()()R R R R R B B m m Bm B=+-+=+-+βεε130%098142%...Stock C:()R R R R R C C C m m Cm C=+-+=+-+βεε157%137142%)..(.b.()[]()[]()[]()()()()()()[]()()CB A m cB A m c m B m A m CB A P 25.045.030.0%2.14R 1435.1%925.1225.045.030.0%2.14R 37.125.098.045.02.130.0%7.1525.0%1345.0%5.1030.0%2.14R 37.1%7.1525.0%2.14R 98.0%0.1345.0%2.14R 2.1%5.1030.0R 25.0R 45.0R 30.0R ε+ε+ε+-+=ε+ε+ε+-+++++=ε+-++ε+-++ε+-+=++= c.i.()R R R A B C =+-==+-==+-=105%1215%142%)1113%09815%142%)137%157%13715%142%168%..(..46%.(......ii.R P =+-=12925%1143515%142%)138398%..(..To determine which investment investor would prefer, you must compute the variance of portfolios created bymany stocks from either market. Note, because you know that diversification is good, it is reasonable to assume that once an investor chose the market in which he or she will invest, he or she will buy many stocks in that market.Known:E EF ====001002 and and for all i.i σσεε..Assume: The weight of each stock is 1/N; that is, X N i =1/for all i.If a portfolio is composed of N stocks each forming 1/N proportion of the portfolio, the return on the portfolio is 1/N times the sum of the returns on the N stocks. Recall that the return on each stock is 0.1+βF+ε.()()()()()()[]()()()()()()()[]()[]()[]()()[]()()()()()j i 2j i 22j i i 2222222222P P P P iP ,0.04Corr 0.01,Cov s =isvariance the ,N as limit In the ,Cov 1/N 1s 1/N s )(1/N 1/N F 2F E 1/N F E 0.10.1/N F 0.1E R E R E R Var 0.101/N 00.1E 1/N F E 0.11/N F 0.1E R E 1/N F 0.1F 0.1(1/N)R 1/N R εε+β=εε+β∞⇒εε-+ε+β=ε∑+εβ+β=ε+β=-ε+β+=-==+β+=ε+β+=ε∑+β+=ε+β+=ε+β+==∑∑∑∑∑∑∑∑()()()()()()Thus,F R f E R E R Var R Corr Var R Corr ii ip P p i j PijR 1i =++=++===+=+010*********002250040002500412212111222.........,,εεεεεεa.()()()()Corr Corr Var R Var R i j i j p pεεεε112212000225000225,,..====Since Var ()()R p 1 Var R 2p 〉, a risk averse investor will prefer to invest in the second market.b. Corr ()()εεεε112090i j j ,.,== and Corr 2i()()Var R Var R pp120058500025==..。

Chapter 20Issuing Securities to the Public Multiple Choice Questions1. An equity issue sold directly to the public is called:A. a rights offer.B. a general cash offer.C. a restricted placement.D. a fully funded sales.E. a standard call issue.2. An equity issue sold to the firm's existing stockholders is called:A. a rights offer.B. a general cash offer.C. a private placement.D. an underpriced issue.E. an investment banker's issue.3. Management's first step in any issue of securities to the public is:A. to file a registration form with the SEC.B. to distribute copies of the preliminary prospectus.C. to distribute copies of the final prospectus.D. to obtain approval from the board of directors.E. to prepare the tombstone advertisement.4. A rights offering is:A. the issuing of options on shares to the general public to acquire stock.B. the issuing of an option directly to the existing shareholders to acquire stock.C. the issuing of proxies which are used by shareholders to exercise their voting rights.D. strictly a public market claim on the company which can be traded on an exchange.E. the awarding of special perquisites to management.5. Companies use tombstone advertisements in the financial press to:A. announce the death of the company.B. announce the failure of a financial strategy.C. announce the availability of a new issue of a corporate security.D. notify the public of foreclosure.E. None of the above.6. The first public equity issue made by a company is a(n):A. initial private offering.B. initial public offering.C. secondary offering.D. seasoned new issue.E. None of the above.7. The first public equity issue that is made by a company is referred to as:A. a rights issue.B. a general cash offer.C. an initial public offering.D. an unseasoned issue.E. Both C and D.8. A new public equity issue from a company with equity previously outstanding is called a(n):A. initial public offering.B. seasoned equity issue.C. unseasoned equity issue.D. private placement.E. syndicate.9. The green shoe option is used to:A. cover oversubscription.B. cover excess demand.C. provide additional reward to the investment bankers for a risky issue.D. provide additional reward to the issuing firm for a risky issue.E. Both A and B.10. Dilution refers to:A. the increase in stock value due to wider ownership of stock.B. the loss in existing shareholder's equity.C. the loss in new shareholder's equity.D. the loss in all shareholder's equity, both existing shareholders and new shareholders.E. None of the above.11. During the SEC waiting period the potential issuing company can issue a preliminary prospectus which contains:A. exactly the same information as the final prospectus except an indication of SEC approval.B. all the information as the final prospectus including red writing stating it is a red herring.C. very limited financial information and red writing stating it is preliminary.D. only a description of what the funds are to be used for.E. information very similar to the final prospectus without a price nor with SEC approval.12. A company must file a registration statement with the SEC providing various financial and company history information. The registration statement does not need to be filed if:A. the issue is less than $50 million.B. the loan matures within 9 months.C. the issue is less than $5.0 million.D. Both A and B.E. Both B and C.13. Regulation A security issues are exempt from full SEC registration filing and use only a brief offering statement if:A. the issue is for less than $5,000,000.B. insiders sell no more than $1,500,000 of stock.C. insiders sell no more than 100,000,000 shares.D. Both A and C.E. Both A and B.14. Potential investors learn of the information concerning the firm and its new issue from the:A. pre-underwriting negotiating meeting.B. red herring.C. letter of commitment.D. emails from their former finance professor.E. rights offering.15. A registration statement is effective on the 20th day after filing unless:A. the SEC is backlogged with statements.B. a tombstone ad is issued indicating its demise.C. a letter of comment suggesting changes is issued by the SEC.D. a syndicate can be formed sooner.E. None of the above.16. Investment banks perform which of the following services for corporate issuers:A. formulating the method used to issue the securities.B. pricing the new securities.C. selling the new securities.D. All of the above.E. None of the above.17. A group of investment bankers who pool their efforts to underwrite a security are known as a(n):A. amalgamate.B. conglomerate.C. green shoe group.D. klatch.E. syndicate.18. A firm commitment arrangement with an investment banker occurs when:A. the syndicate is in place to handle the issue.B. the spread between the buying and selling price is less than one percent.C. the issue is solidly accepted in the market evidenced by a large price increase.D. when the investment banker buys the securities for less than the offering price and accepts the risk of not being able to sell them.E. when the investment banker sells as much of the security as the market can bear without a price decrease.19. Which of the following is not normally an example of the services offered by investment bankers?A. Aiding in the sale of securitiesB. Facilitating mergersC. Acting as brokers to both individuals and institutional clientsD. Offering checking accounts to corporationsE. Both C and D20. In a best efforts offering the investment banker makes their money primarily by:A. earning the spread between the buying and offering price.B. earning a commission on each share sold.C. earning the discount between the buying and offering price.D. charging a flat fee for all services.E. None of the above.21. Under the _____ method, the underwriter buys the securities for less than the offering price and accepts the risk of not selling the issue, while under the _____ method, the underwriter does not purchase the shares but merely acts as an agent.A. best efforts; firm commitmentB. firm commitment; best effortsC. general cash offer; best effortsD. competitive offer; negotiated offerE. seasoned; unseasoned22. Professor Jay Ritter found best-efforts offerings are:A. reserved for the premier customers because they deserve 'best-efforts'.B. used most often with seasoned equity issues.C. used with small IPO issues.D. attractive because of price stability.E. None of the above.23. Empirical evidence suggests that new equity issues are generally:A. priced efficiently by the market.B. overpriced by investor excitement concerning a new issue.C. overpriced resulting from SEC regulation.D. underpriced, in part, to counteract the winner's curse.E. underpriced resulting from SEC regulation.24. The diagonal listing of investment bankers on tombstone advertisements reflects their ____ relative to the other investment bankers listed below.A. prestigeB. ability to manage selling syndicatesC. role as a firm commitment buyerD. role as a best efforts sellerE. None of the above25. The reputational capital of investment bankers is based on their roles as intermediaries with more in-depth knowledge of the issuer. Investment bankers maintain their reputation by:A. certifying the issue.B. monitoring the issuing firm's management and performance.C. pricing issues fairly.D. All of the above.E. None of the above.26. The key difference between a negotiated offer and a competitive offer is that:A. the underwriters can not set the spread in a negotiated bid but can in a competitive offer.B. the issuing firm can offer its securities to the highest bidder in a competitive bid but in a negotiated bid only one investment banker is used.C. the issuing firm works the underwriter for the best spread in a negotiated bid which will be less than that available in a competitive offer.D. the underwriter will not do a full investigation in a negotiated bid because the company is at their mercy, while in a competitive bid the underwriter must be extra diligent.E. None of the above.27. The offering price is set to make an issue attractive to the market and provide a good price to the issuer. Which of the following is/are true?A. Empirical studies by Ritter have shown that the average firm commitments have had a17.8% underpricing on the first day of trading.B. Empirical studies have shown that best efforts sales have underpricing on the first day of trading.C. Some issues which rose dramatically on the first day of trading were viewed as successfully priced by the underwriter because it helped build a long-term investment base.D. All of the above.E. None of the above.28. Empirical evidence suggests that upon announcement of a new equity issue, current stock prices generally:A. drop, perhaps because the new issue reflects management's view that common stock is currently overvalued.B. remain about the same since an efficient market anticipates a new equity issue.C. increase, perhaps because the issues are associated with positive NPV projects.D. increase, because the market supply is always less than demand.E. increase, because underwriters exercise their green shoe option.29. Underpricing can possibly be explained by:A. oversubscription of an issue.B. strong demand by investors.C. undersubscription of an issue.D. Both B and C.E. Both A and B.30. Debt capacity is often given as a reason for the value of the stock falling when equity is issued. The reason for this is:A. the high issue costs of a debt offering must be paid by the shareholders.B. the priority position of the equity is lowered.C. management has information that the probability of default has risen, limiting the debt capacity and causing the firm to raise equity capital.D. All of the above.E. None of the above31. A study by Lee, Lockhead, Ritter, and Zhao that examined the underwriting discount and other direct costs of going public with a debt or equity offering, found:A. the direct expenses are higher for equity than debt offerings.B. substantial economies of scale are prevalent.C. underpricing, on average, is similar in magnitude to total direct expenses.D. All of the above.E. None of the above.32. The six components that make up the total costs of new issues are:A. the spread; other direct expenses such as filing fees; indirect expenses such as management time; economies of scale; abnormal returns and the Green Shoe option.B. the discount; other direct expenses such as filing fees; indirect expenses such as management time; due diligence costs; abnormal returns and the Green Shoe option.C. the spread; other direct expenses such as filing fees; indirect expenses such as management time; abnormal returns; underpricing and the Green Shoe option.D. the spread; other direct expenses such as filing fees; economies of scale; due diligence costs; abnormal returns and underpricing.E. None of the above.33. In comparison to debt issuance expenses, the total direct costs of equity issues are:A. considerably less.B. about the same.C. meaningless.D. considerably greater.E. None of the above.34. To determine the value of a rights offering, the stockholder needs to know the following two pieces of information in addition to the current stock price:A. the subscription price and the number of rights needed to acquire a new share.B. the amount of new equity to be raised and the number of rights needed to acquire a new share.C. the amount of new equity to be raised and standby fee.D. the detachment date and the subscription price.E. None of the above.35. Assuming everything else is constant, when a stock goes ex-rights its price should:A. decrease since the stockholder is losing an option.B. increase since the corporation no longer has the right to force the stockholder to convert.C. remain the same since an efficient market would anticipate this change.D. move up or down depending on whether a small investor wanted to exercise his/his rights.E. None of the above.36. If a shareholder or investor wants to acquire new stock under a rights plant they must:A. acquire new stock in the market to get a controlling fraction of shares to be eligible for rights.B. simply pay a registration fee and turn in the subscription price.C. acquire the correct rights per share desired, then turn the rights and the total subscription price into the subscription agent.D. acquire the correct rights and wait for the company to send you the stock.E. call their broker and sell some CBOE options to make any money.37. Which of the following statements is true?A. The subscription price is generally above the old stock price.B. The subscription price is generally above the ex-rights price.C. The subscription price is generally below the old stock price.D. Both A and B.E. Both B and C.38. A shareholder who has rights is:A. always better off to exercise the rights.B. always better off to sell the rights into the market.C. able to exercise their rights or sell them.D. never in the same ownership position again with rights.E. None of the above.39. A standby underwriting arrangement provides the:A. company with methods to cancel the offering.B. company with an alternate investment banker if there is conflict between the issuer and the agent.C. investment banker with an oversubscription privilege to ensure profits are earned.D. company with an alternative avenue of sale to ensure success of the rights offering.E. investment bankers with an added syndication for the rights offering.40. Professor Clifford W. Smith, in evaluating issuance costs from underwritten issues, rights issues with standby underwriting, and a pure rights issues, found that 90% of the issues are underwritten, which was the most expensive method. This is done because:A. investment bankers know more than CFOs and they may buy the issue at an agreed upon price and disburse the funds sooner.B. investment bankers can increase the price received by increasing confidence in the issue, and they will buy the issue at an agreed upon price and disburse the cash sooner.C. investment bankers provide other services including price counseling, increasing public confidence, and providing funds to the issuer sooner.D. investment bankers know how to price the issue, and would not need to set as low as a price as the subscription price and provide price counseling.E. None of the above.41. Corporations use the shelf registration method of security sales because:A. preregistered securities can be quickly brought to market.B. the main registration process is eliminated for up to two years.C. their stock is below investment grade.D. Both A and B.E. Both B and C.42. In terms of costs of issuing equity, Professor Clifford W. Smith finds that the ranking of methods, from cheapest to most expensive, is:A. rights issue with standby underwriting, equity issue with underwriting, pure rights issue.B. pure rights issue, rights issue with standby underwriting, equity issue with underwriting.C. pure rights issue, preferred stock and debt issue with underwriting for an IPO, rights issue with standby underwriting.D. equity issue with underwriting, rights issue with standby underwriting, pure rights issue.E. equity issue with underwriting, pure rights issue, rights issue with standby underwriting.43. Arguments to explain why most equity issues are underwritten versus sold through a rights offering are:A. underwriters buy at an agreed upon price and bear some risk of selling the issue.B. cash proceeds are available sooner in underwriting and the issue is available to a wider market.C. investment bankers can provide market advice and certify the issue for potential investors.D. All of the above.E. None of the above.44. Corporations are allowed to use the shelf registration method if they:A. are rated investment grade and have aggregate market stock value of more than $150 million.B. have not violated the 1934 Securities Act in the past 12 months.C. have not defaulted on its debt in the past 3 years.D. All of the above.E. None of the above.45. Arguments against the use of the shelf-registration are:A. only technology and manufacturing-based firms can use it.B. less current information available to investors might raise the cost of debt.C. possible market overhang from future issues depressing price.D. Both A and C.E. Both B and C.46. The market for venture capital refers to the:A. private financial marketplace for servicing small, young firms.B. bond markets.C. market for selling rights to individuals who already own shares.D. market for selling equity securities for firms with equity already outstanding.E. None of the above.47. Rule 144A provides the framework for the issuance of private securities to qualified institutional investors. To buy private securities, institutional investors:A. must be willing to hold a less liquid security and manage a fund.B. must be willing to make a market in the security and be a primary market dealer.C. must be a limited partner in the issue and willing to reduce the illiquidity of the security.D. must be willing to hold a less liquid security and have $100 million under management.E. None of the above.48. Venture capitalists provide financing for new firms from the seed and start-up stage all the way to mezzanine and bridge financing. In exchange for financing, entrepreneurs give:A. a high interest rate debt instrument and control.B. an equity position and usually board of director positions.C. up the right to have an initial public offering.D. control to a court appointed trustee.E. the venture capitalists jobs as CEOs and CFOs.49. An IPO of a firm formerly financed by venture capital is carried out for what primary purposes?A. Insiders can sell their shares or cash outB. Generate cash to pay down bank indebtednessC. To establish a market value for the equity and provide funds for operationsD. All of the above.E. None of the above.50. Which of the following is not one of the four main functions that underwriters provide?A. Risk bearingB. MarketingC. Auditing the financial statementsD. CertificationE. Monitoring51. Types of dilution include:A. dilution of percentage ownershipB. dilution of market shareC. dilution of book value and earnings per shareD. A and CE. All of the above52. The Wordsmith Corporation has 10,000 shares outstanding at $30 each. They expect to raise $150,000 by a rights offering with a subscription price of $25. How many rights must you turn in to get a new share?A. 0.60B. 1.20C. 1.67D. 2.00E. Insufficient data to determine53. Assuming everything else is constant, if a stock's old price is $25 and the ex-rights or new stock price is $19, then the value of the right is:A. $-6.B. $6.C. impossible to determine without the subscription price.D. impossible to determine without the number of rights needed to buy one share.54. The LaPorte Corporation has a new rights offering that allows you to buy one share of stock with 3 rights and $20 per share. The stock is now selling ex-rights for $26. The price rights-on is:A. $22.00B. $24.00C. $26.00D. $28.00E. impossible to determine without the cum-rights price.55. Regional Power wants to raise $10 million in new equity. The subscription price is $20. There are currently 3 million shares outstanding, each with 1 right. How many rights are needed to purchase 1 share?A. 1B. 3C. 5D. 6E. 856. The Overland Corporation intends to issue 50,000 new shares to raise funds for expansion of current plant facilities. The current share price is $40 and there are 500,000 shares outstanding. The number of rights needed to buy a share of stock should be:A. 1B. 10C. 40D. 400E. indeterminate without the subscription price.57. The Schroeder Corporation has 20,000 shares outstanding at $20 each. They expect to raise $200,000 by a rights offering with a subscription price of $25. How many rights must you turn in to get a new share?A. 1.25B. 1.50C. 2.00D. 2.50E. Insufficient data to determine58. Assuming everything else is constant, if a stock's old price is $40 and the ex-rights or new stock price is $32, then the value of the right is:A. $-8.B. $8.C. impossible to determine without the subscription price.D. impossible to determine without the number of rights needed to buy one share.59. The Holly Corporation has a new rights offering that allows you to buy one share of stock with 4 rights and $25 per share. The stock is now selling ex-rights for $30. The price rights-on is:A. $21.00B. $25.00C. $30.00D. $31.25E. impossible to determine without the cum-rights price.60. Bradley Power wants to raise $40 million in new equity. The subscription price is $25. There are currently 5 million shares outstanding, each with 1 right. How many rights are needed to purchase 1 share?A. 1.000B. 3.000C. 3.125D. 4.525E. 6.52561. The Shields Corporation intends to issue 100,000 new shares to raise funds for expansion of current plant facilities. The current share price is $20 and there are 500,000 shares outstanding. The number of rights needed to buy a share of stock should be:A. 1B. 5C. 20D. 50E. indeterminate without the subscription price.62. For a particular stock the old stock price is $20, the ex-rights price is $15, and the number of rights needed to buy a new share is 2. Assuming everything else constant, the subscription price is ______ .A. $5B. $13C. $17D. $18E. $20Essay QuestionsThe Holyoke Corporation has 120,000 shares outstanding with a current market price of $8.10 per share. The company needs to raise an additional $36,000 to finance new expenditures, and has decided on a rights issue. The issue will allow current stockholders to purchase one additional share for 20 rights at a subscription price of $6 per share.63. Calculate the ex-rights price that would make a new stockholder indifferent between buying shares at the old stock price and exercising the rights or buying the shares ex-rights.64. If the ex-rights price were set at $7.90, would you as a potential new stockholder choose to buy shares ex-rights or buy shares at the old price and exercise your rights?65. Suppose that the company was also considering structuring the rights issue to allow for an additional share to be purchased for 10 rights at a subscription price of $3. Prove that a stockholder with 100 shares would be indifferent between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6.66. Explain the advantages of a shelf-registration to an issuer. How can timeliness of disclosure and a potential market overhang work against a shelf-registration?67. The evidence on IPO sales is varied from issue to issue, but there are three common themes; underpricing, underperformance, and the reasons for going public. Explain these three themes.68. The Direct Interactive Publishing Company is planning to raise $200 million dollars in new capital. There are currently 50 million shares outstanding with an estimated market price of $60 each. The corporate officers are debating whether to use a rights offering (with or without a standby underwriting) or have the issue fully underwritten. The company is currently listed on a regional exchange and plans to list on a national exchange after the security issue. List and explain three advantages/disadvantages of each method.69. Discuss what a Dutch auction is and how it works.70. Lamar Inc. is attempting to raise $5,000,000 in new equity with a rights offering. The subscription price will be $40 per share. The stock currently sells for $50 per share and there are 250,000 shares outstanding. How many rights are needed to buy a new share?71. Lamar Inc. is attempting to raise $5,000,000 in new equity with a rights offering. The subscription price for the 125,000 new shares will be $40 per share. The stock currently sells for $50 per share and there are 250,000 shares outstanding. What will the price per share be if all rights are exercised?Chapter 20 Issuing Securities to the Public Answer KeyMultiple Choice Questions1. An equity issue sold directly to the public is called:A. a rights offer.B. a general cash offer.C. a restricted placement.D. a fully funded sales.E. a standard call issue.Difficulty level: EasyTopic: EQUITY ISSUEType: DEFINITIONS2. An equity issue sold to the firm's existing stockholders is called:A. a rights offer.B. a general cash offer.C. a private placement.D. an underpriced issue.E. an investment banker's issue.Difficulty level: EasyTopic: RIGHTS OFFERType: DEFINITIONS3. Management's first step in any issue of securities to the public is:A. to file a registration form with the SEC.B. to distribute copies of the preliminary prospectus.C. to distribute copies of the final prospectus.D. to obtain approval from the board of directors.E. to prepare the tombstone advertisement.Difficulty level: EasyTopic: SECURITY ISSUANCEType: DEFINITIONS4. A rights offering is:A. the issuing of options on shares to the general public to acquire stock.B. the issuing of an option directly to the existing shareholders to acquire stock.C. the issuing of proxies which are used by shareholders to exercise their voting rights.D. strictly a public market claim on the company which can be traded on an exchange.E. the awarding of special perquisites to management.Difficulty level: MediumTopic: RIGHTS OFFERINGType: DEFINITIONS5. Companies use tombstone advertisements in the financial press to:A. announce the death of the company.B. announce the failure of a financial strategy.C. announce the availability of a new issue of a corporate security.D. notify the public of foreclosure.E. None of the above.Difficulty level: EasyTopic: NEW ISSUANCEType: DEFINITIONS6. The first public equity issue made by a company is a(n):A. initial private offering.B. initial public offering.C. secondary offering.D. seasoned new issue.E. None of the above.Difficulty level: EasyTopic: INITIAL PUBLIC OFFERINGType: DEFINITIONS7. The first public equity issue that is made by a company is referred to as:A. a rights issue.B. a general cash offer.C. an initial public offering.D. an unseasoned issue.E. Both C and D.Difficulty level: MediumTopic: INITIAL PUBLIC OFFERINGType: DEFINITIONS8. A new public equity issue from a company with equity previously outstanding is called a(n):A. initial public offering.B. seasoned equity issue.C. unseasoned equity issue.D. private placement.E. syndicate.Difficulty level: EasyTopic: SEASONED EQUITY OFFERINGType: DEFINITIONS9. The green shoe option is used to:A. cover oversubscription.B. cover excess demand.C. provide additional reward to the investment bankers for a risky issue.D. provide additional reward to the issuing firm for a risky issue.E. Both A and B.Difficulty level: MediumTopic: GREEN SHOE PROVISIONType: DEFINITIONS。

罗斯-公司理财-英文练习题-附带答案-第九章CHAPTER 9Risk Analysis, Real Options, and Capital Budgeting Multiple Choice Questions:I. DEFINITIONSSCENARIO ANALYSISb 1. An analysis of what happens to the estimate of the net present value when you examinea number of different likely situations is called _____ analysis.a. forecastingb. scenarioc. sensitivityd. simulatione. break-evenDifficulty level: EasySENSITIVITY ANALYSISc 2. An analysis of what happens to the estimate of net present value when only onevariable is changed is called _____ analysis.a. forecastingb. scenarioc. sensitivityd. simulatione. break-evenDifficulty level: EasySIMULATION ANALYSISd 3. An analysis which combines scenario analysis with sensitivity analysis is called _____analysis.a. forecastingb. scenarioc. sensitivityd. simulatione. break-evenDifficulty level: EasyBREAK-EVEN ANALYSISe 4. An analysis of the relationship between the sales volume and various measures ofprofitability is called _____ analysis.a. forecastingb. scenarioc. sensitivityd. simulatione. break-evenDifficulty level: EasyVARIABLE COSTSa 5. Variable costs:a. change in direct relationship to the quantity of output produced.b. are constant in the short-run regardless of the quantity of output produced.c. reflect the change in a variable when one more unit of output is produced.d. are subtracted from fixed costs to compute the contribution margin.e. form the basis that is used to determine the degree of operating leverage employed by afirm.Difficulty level: EasyFIXED COSTSb 6. Fixed costs:a. change as the quantity of output produced changes.b. are constant over the short-run regardless of the quantity of output produced.c. reflect the change in a variable when one more unit of output is produced.d. are subtracted from sales to compute the contribution margin.e. can be ignored in scenario analysis since they are constant over the life of a project.Difficulty level: EasyACCOUNTING BREAK-EVENc 7. The sales level that results in a project’s net income exactly equaling zero is called the_____ break-even.a. operationalb. leveragedc. accountingd. cashe. present valueDifficulty level: EasyPRESENT VALUE BREAK-EVENe 8. The sales level that results in a project’s net present value exactly equaling zero iscalled the _____ break-even.a. operationalb. leveragedc. accountingd. cashe. present valueDifficulty level: EasyII. CONCEPTSSCENARIO ANALYSISb 9. Conducting scenario analysis helps managers see the:a. impact of an individual variable on the outcome of a project.b. potential range of outcomes from a proposed project.c. changes in long-term debt over the course of a proposed project.d. possible range of market prices for their stock over the life of a project.e. allocation distribution of funds for capital projects under conditions of hard rationing.Difficulty level: EasySENSITIVITY ANALYSISb 10. Sensitivity analysis helps you determine the:a. range of possible outcomes given possible ranges for every variable.b. degree to which the net present value reacts to changes in a single variable.c. net present value given the best and the worst possible situations.d. degree to which a project is reliant upon the fixed costs.e. level of variable costs in relation to the fixed costs of a project.Difficulty level: EasySENSITIVITY ANALYSISc 11. As the degree of sensitivity of a project to a single variable rises, the:a. lower the forecasting risk of the project.b. smaller the range of possible outcomes given a pre-defined range of values for theinput.c. more attention management should place on accurately forecasting the future value ofthat variable.d. lower the maximum potential value of the project.e. lower the maximum potential loss of the project.Difficulty level: MediumSENSITIVITY ANALYSISc 12. Sensitivity analysis is conducted by:a. holding all variables at their base level and changing the required rate of returnassigned to a project.b. changing the value of two variables to determine their interdependency.c. changing the value of a single variable and computing the resulting change in thecurrent value of a project.d. assigning either the best or the worst possible value to each variable and comparing theresults to those achieved by the base case.e. managers after a project has been implemented to determine how each variable relatesto the level of output realized.Difficulty level: MediumSENSITIVITY ANALYSISd 13. To ascertain whether the accuracy of the variable cost estimate for a project will havemuch effect on the final outcome of the project, you should probably conduct _____analysis.a. leverageb. scenarioc. break-evend. sensitivitye. cash flowDifficulty level: EasySIMULATIONd 14. Simulation analysis is based on assigning a _____ and analyzing the results.a. narrow range of values to a single variableb. narrow range of values to multiple variables simultaneouslyc. wide range of values to a single variabled. wide range of values to multiple variables simultaneouslye. single value to each of the variablesDifficulty level: MediumSIMULATIONe 15. The type of analysis that is most dependent upon the use of a computer is _____analysis.a. scenariob. break-evenc. sensitivityd. degree of operating leveragee. simulationDifficulty level: EasyVARIABLE COSTSd 16. Which one of the following is most likely a variable cost?a. office rentb. property taxesc. property insuranced. direct labor costse. management salariesDifficulty level: EasyVARIABLE COSTSa 17. Which of the following statements concerning variable costs is (are) correct?I. Variable costs minus fixed costs equal marginal costs.II. Variable costs are equal to zero when production is equal to zero.III. An increase in variable costs increases the operating cash flow.a. II onlyb. III onlyc. I and III onlyd. II and III onlye. I and II onlyDifficulty level: MediumVARIABLE COSTSa 18. All else constant, as the variable cost per unit increases, the:a. contribution margin decreases.b. sensitivity to fixed costs decreases.c. degree of operating leverage decreases.d. operating cash flow increases.e. net profit increases.Difficulty level: MediumFIXED COSTSc 19. Fixed costs:I. are variable over long periods of time.II. must be paid even if production is halted.III. are generally affected by the amount of fixed assets owned by a firm.IV. per unit remain constant over a given range of production output.a. I and III onlyb. II and IV onlyc. I, II, and III onlyd. I, II, and IV onlye. I, II, III, and IVDifficulty level: MediumCONTRIBUTION MARGINc 20. The contribution margin must increase as:a. both the sales price and variable cost per unit increase.b. the fixed cost per unit declines.c. the gap between the sales price and the variable cost per unit widens.d. sales price per unit declines.e. the sales price minus the fixed cost per unit increases.Difficulty level: MediumACCOUNTING BREAK-EVENa 21. Which of the following statements are correct concerning the accounting break-evenpoint?I. The net income is equal to zero at the accounting break-even point.II. The net present value is equal to zero at the accounting break-even point.III. The quantity sold at the accounting break-even point is equal to the total fixed costs plus depreciation divided by the contribution margin.IV. The quantity sold at the accounting break-even point is equal to the total fixed costs divided by the contribution margin.a. I and III onlyb. I and IV onlyc. II and III onlyd. II and IV onlye. I, II, and IV onlyDifficulty level: MediumACCOUNTING BREAK-EVENb 22. All else constant, the accounting break-even level of sales will decrease when the:a. fixed costs increase.b. depreciation expense decreases.c. contribution margin decreases.d. variable costs per unit increase.e. selling price per unit decreases.Difficulty level: MediumPRESENT VALUE BREAK-EVENd 23. The point where a project produces a rate of return equal to the required return isknown as the:a. point of zero operating leverage.b. internal break-even point.c. accounting break-even point.d. present value break-even point.e. internal break-even point.Difficulty level: EasyPRESENT VALUE BREAK-EVENb 24. Which of the following statements are correct concerning the present value break-evenpoint of a project?I. The present value of the cash inflows equals the amount of the initial investment.II. The payback period of the project is equal to the life of the project.III. The operating cash flow is at a level that produces a net present value of zero.IV. The project never pays back on a discounted basis.a. I and II onlyb. I and III onlyc. II and IV onlyd. III and IV onlye. I, III, and IV onlyDifficulty level: MediumINVESTMENT TIMING DECISIONb 25. The investment timing decision relates to:a. how long the cash flows last once a project is implemented.b. the decision as to when a project should be started.c. how frequently the cash flows of a project occur.d. how frequently the interest on the debt incurred to finance a project is compounded.e. the decision to either finance a project over time or pay out the initial cost in cash.Difficulty level: MediumOPTION TO WAITe 26. The timing option that gives the option to wait:I. may be of minimal value if the project relates to a rapidly changing technology.II. is partially dependent upon the discount rate applied to the project being evaluated.III. is defined as the situation where operations are shut down for a period of time.IV. has a value equal to the net present value of the project if it is started today versus the net present value if it is started at some later date.a. I and III onlyb. II and IV onlyc. I and II onlyd. II, III, and IV onlye. I, II, and IV onlyDifficulty level: ChallengeOPTION TO EXPANDb 27. Last month you introduced a new product to the market. Consumer demand has beenoverwhelming and appears that strong demand will exist over the long-term. Given thissituation, management should consider the option to:a. suspend.b. expand.c. abandon.d. contract.e. withdraw.Difficulty level: EasyOPTION TO EXPANDc 28. Including the option to expand in your project analysis will tend to:a. extend the duration of a project but not affect the project’s net present value.b. incre ase the cash flows of a project but decrease the project’s net present value.c. increase the net present value of a project.d. decrease the net present value of a project.e. have no effect on either a project’s c ash flows or its net present value.Difficulty level: MediumSENSITIVITY AND SENARIO ANALYSISd 29. Theoretically, the NPV is the most appropriate method to determine the acceptabilityof a project. A false sense of security can be overwhelm the decision-maker when theprocedure is applied properly and the positive NPV resultsare accepted blindly.Sensitivity and scenario analysis aid in the process bya. changing the underlying assumptions on which the decision is based.b. highlights the areas where more and better data are needed.c. providing a picture of how an event can affect the calculations.d. All of the above.e. None of the above.Difficulty level: MediumDECSION TREEa 30. In order to make a decision with a decision treea. one starts farthest out in time to make the first decision.b. one must begin at time 0.c. any path can be taken to get to the end.d. any path can be taken to get back to the beginning.e. None of the above.Difficulty level: MediumDECISION TREEc 31. In a decision tree, the NPV to make the yes/no decision is dependent ona. only the cash flows from successful path.b. on the path where the probabilities add up to one.c. all cash flows and probabilities.d. only the cash flows and probabilities of the successful path.e. None of the above.Difficulty level: MediumDECISION TREEe 32. In a decision tree, caution should be used in analysis becausea. early stage decisions are probably riskier and should not likely use the same discountrate.b. if a negative NPV is actually occurring, management should opt out of the project andminimize their loss.c. decision trees are only used for planning, not actually daily management.d. Both A and C.e. Both A and B.Difficulty level: MediumSENSITIVITY ANALYSISd 33. Sensitivity analysis evaluates the NPV with respect toa. changes in the underlying assumptions.b. one variable changing while holding the others constant.c. different economic conditions.d. All of the above.e. None of the above.Difficulty level: MediumSENSITIVITY ANALYSISd 34. Sensitivity analysis provides information ona. whether the NPV should be trusted, it may provide a false sense of security if allNPVs are positive.b. the need for additional information as it tests each variablein isolation.c. the degree of difficulty in changing multiple variables together.d. Both A and B.e. Both A and C.Difficulty level: MediumFIXED COSTSb 35. Fixed production costs area. directly related to labor costs.b. measured as cost per unit of time.c. measured as cost per unit of output.d. dependent on the amount of goods or services produced.e. None of the above.Difficulty level: MediumVARIABLE COSTSd 36. Variable costsa. change as the quantity of output changes.b. are zero when production is zero.c. are exemplified by direct labor and raw materials.d. All of the above.e. None of the above.Difficulty level: EasySENSITIVITY ANALYSISb 37. An investigation of the degree to which NPV depends on assumptions made about anysingular critical variable is called a(n)a. operating analysis.b. sensitivity analysis.c. marginal benefit analysis.d. decision tree analysis.e. None of the above.Difficulty level: EasySENSITIVITY AND SCENARIOS ANALYSISb 38. Scenario analysis is different than sensitivity analysisa. as no economic forecasts are changed.b. as several variables are changed together.c. because scenario analysis deals with actual data versus sensitivity analysis which dealswith a forecast.d. because it is short and simple.e. because it is 'by the seat of the pants' technique.Difficulty level: MediumEQUIVALENT ANNUAL COSTc 39. In the present-value break-even the EAC is used toa. determine the opportunity cost of investment.b. allocate depreciation over the life of the project.c. allocate the initial investment at its opportunity cost over the life of the project.d. determine the contribution margin to fixed costs.e. None of the above.Difficulty level: MediumBREAK-EVENb 40. The present value break-even point is superior to the accounting break-even pointbecausea. present value break-even is more complicated to calculate.b. present value break-even covers the economic opportunity costs of the investment.c. present value break-even is the same as sensitivity analysis.d. present value break-even covers the fixed costs of production, which the accountingbreak-even does not.e. present value break-even covers the variable costs of production, which the accountingbreak-even does not.Difficulty level: EasyABANDONMENTd 41. The potential decision to abandon a project has option value becausea. abandonment can occur at any future point in time.b. a project may be worth more dead than alive.c. management is not locked into a negative outcome.d. All of the above.e. None of the above.Difficulty level: EasyTYPES OF BREAK-EVEN ANALYSISd 42. Which of the following are types of break-even analysis?a. present value break-evenb. accounting profit break-evenc. market value break-evend. Both A and B.e. Both A and C.Difficulty level: EasyMONTE CARLO SIMULATIONc 43. The approach that further attempts to model real word uncertainty by analyzingprojects the way one might analyze gambling strategies is calleda. gamblers approach.b. blackjack approach.c. Monte Carlo simulation.d. scenario analysis.e. sensitivity analysis.Difficulty level: MediumMONTE CARLO SIMULATIONc 44. Monte Carlo simulation isa. the most widely used by executives.b. a very simple formula.c. provides a more complete analysis that sensitivity or scenario.d. the oldest capital budgeting technique.e. None of the above.Difficulty level: EasyOPTIONS IN CAPITAL BUDGETINGd 45. Which of the following are hidden options in capital budgeting?a. option to expand.b. timing option.c. option to abandon.d. All of the above.e. None of the above.Difficulty level: EasyIII. PROBLEMSUse this information to answer questions 46 through 50.The Adept Co. is analyzing a proposed project. The company expects to sell 2,500units, give or take 10 percent. The expected variable cost per unit is $8 and the expected fixed costs are $12,500. Cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $4,000. The sale price is estimated at $16 aunit, give or take 2 percent. The company bases their sensitivity analysis on the expected case scenario.SCENARIO ANALYSISd 46. What is the sales revenue under the optimistic case scenario?a. $40,000b. $43,120c. $44,000d. $44,880e. $48,400Difficulty level: MediumSCENARIO ANALYSISd 47. What is the contribution margin under the expected case scenario?a. $2.67b. $3.00c. $7.92d. $8.00e. $8.72Difficulty level: MediumSCENARIO ANALYSISc 48. What is the amount of the fixed cost per unit under the pessimistic case scenario?a. $4.55b. $5.00c. $5.83d. $6.02e. $6.55Difficulty level: MediumSENSITIVITY ANALYSISb 49. The company is conducting a sensitivity analysis on the sales price using a salesprice estimate of $17. Using this value, the earnings before interest and taxes will be:a. $4,000b. $6,000c. $8,500d. $10,000e. $18,500Difficulty level: MediumSENSITIVITY ANALYSISb 50. The company conducts a sensitivity analysis using a variable cost of $9. The totalvariable cost estimate will be:a. $21,375b. $22,500c. $23,625d. $24,125e. $24,750Difficulty level: MediumUse this information to answer questions 51 through 55.The Can-Do Co. is analyzing a proposed project. The company expects to sell 12,000units, give or take 4 percent. The expected variable cost per unit is $7 and the expectedfixed cost is $36,000. The fixed and variable cost estimates are considered accuratewithin a plus or minus 6 percent range. The depreciation expense is $30,000. The tax rate is 34 percent. The sale price is estimated at $14 a unit, give or take 5 percent. Thecompany bases their sensitivity analysis on the expected case scenario.SCENARIO ANALYSISa 51. What is the earnings before interest and taxes under the expected case scenario?a. $18,000b. $24,000c. $36,000d. $48,000e. $54,000Difficulty level: MediumSCENARIO ANALYSISc 52. What is the earnings before interest and taxes under anoptimistic case scenario?a. $22,694.40b. $24,854.40c. $37,497.60d. $52,694.40e. $67,947.60Difficulty level: ChallengeSCENARIO ANALYSISb 53. What is the earnings before interest and taxes under the pessimistic case scenario?b. -$422.40c. -$278.78d. $3,554.50e. $5,385.60Difficulty level: ChallengeSENSITIVITY ANALYSISd 54. What is the operating cash flow for a sensitivity analysis using total fixed costs of$32,000?a. $14,520b. $16,520c. $22,000d. $44,520e. $52,000Difficulty level: MediumSENSITIVITY ANALYSISd 55. What is the contribution margin for a sensitivity analysis using a variable cost per unitof $8?a. $3b. $4c. $5d. $6e. $7Difficulty level: MediumVARIABLE COSTc 56. A firm is reviewing a project with labor cost of $8.90 per unit, raw materials cost of$21.63 a unit, and fixed costs of $8,000 a month. Sales are projected at 10,000 unitsover the three-month life of the project. What are the total variable costs of the project?a. $216,300b. $297,300c. $305,300d. $313,300e. $329,300Difficulty level: MediumVARIABLE COSTd 57. A project has earnings before interest and taxes of $5,750, fixed costs of $50,000, aselling price of $13 a unit, and a sales quantity of 11,500 units. Depreciation is $7,500.What is the variable cost per unit?a. $6.75c. $7.25d. $7.50e. $7.75Difficulty level: MediumFIXED COSTb 58. At a production level of 5,600 units a project has total costs of $89,000. The variablecost per unit is $11.20. What is the amount of the total fixed costs?a. $24,126b. $26,280c. $27,090d. $27,820e. $28,626Difficulty level: MediumFIXED COSTe 59. At a production level of 6,000 units a project has total costs of $120,000. The variablecost per unit is $14.50. What is the amount of the total fixed costs?a. $25,165b. $28,200c. $30,570d. $32,000e. $33,000Difficulty level: MediumCONTRIBUTION MARGINc 60. Wilson’s Meats has computed their fixed costs to be $.60 for every pound of meatthey sell given an average daily sales level of 500 pounds. They charge $3.89 perpound of top-grade ground beef. The variable cost perpound is $2.99. What is thecontribution margin per pound of ground beef sold?a. $.30b. $.60c. $.90d. $2.99e. $3.89Difficulty level: MediumCONTRIBUTION MARGINe 61. Ralph and Emma’s is considering a project with total sales of $17,500, total variablecosts of $9,800, total fixed costs of $3,500, and estimated production of 400 units. Thedepreciation expense is $2,400 a year. What is the contribution margin per unit?a. $4.50b. $10.50d. $19.09e. $19.25Difficulty level: MediumACCOUNTING BREAK-EVENa 62. You are considering a new project. The project has projected depreciation of $720,fixed costs of $6,000, and total sales of $11,760. The variable cost per unit is$4.20. What is the accounting break-even level of production?a. 1,200 unitsb. 1,334 unitsc. 1,372 unitsd. 1,889 unitse. 1,910 unitsDifficulty level: MediumACCOUNTING BREAK-EVENb 63. The accounting break-even production quantity for a project is 5,425 units. The fixedcosts are $31,600 and the contribution margin is $6. What is the projecteddepreciation expense?a. $700b. $950c. $1,025d. $1,053e. $1,100Difficulty level: MediumACCOUNTING BREAK-EVENd 64. A project has an accounting break-even point of 2,000 units. The fixed costs are$4,200 and the depreciation expense is $400. The projected variable cost per unit is$23.10. What is the projected sales price?a. $20.80b. $21.00c. $21.20d. $25.40e. $25.60Difficulty level: MediumACCOUNTING BREAK-EVENa 65. A proposed project has fixed costs of $3,600,depreciation expense of $1,500, and asales quantity of 1,300 units. What is the contribution margin if the projected level ofsales is the accounting break-even point?a. $3.92c. $4.50d. $4.80e. $5.00Difficulty level: MediumPRESENT VALUE BREAK-EVENc 66. A project has a contribution margin of $5, projected fixed costs of $12,000, projectedvariable cost per unit of $12, and a projected present value break-even point of 5,000units. What is the operating cash flow at this level of output?a. $1,000b. $12,000c. $13,000d. $68,000e. $73,000Difficulty level: MediumPRESENT VALUE BREAK-EVENa 67. Thompson & Son have been busy analyzing a new product. They have determined thatan operating cash flow of $16,700 will result in a zero net present value, which is acompany requirement for project acceptance. The fixed costs are $12,378 and thecontribution margin is $6.20. The company feels that they can realistically capture10 percent of the 50,000 unit market for this product. Should the company develop thenew product? Why or why not?a. yes; because 5,000 units of sales exceeds the quantity required for a zero net presentvalueb. yes; because the internal break-even point is less than 5,000 unitsc. no; because the firm can not generate sufficient sales to obtain at least a zero netpresent valued. no; because the project has an expected internal rate of return of negative 100percente. no; because the project will not pay back on a discounted basisDifficulty level: ChallengePRESENT VALUE BREAK-EVENe 68. Kurt Neal and Son is considering a project with a discounted payback just equal to theproject’s life. The projections include a sales price of $11, variable cost per unit of$8.50, and fixed costs of $4,500. The operating cash flow is $6,200. What is the break-even quantity?a. 1,800 unitsb. 2,480 unitsc. 3,057 unitsd. 3,750 unitse. 4,280 unitsDECISION TREE NET PRESENT VALUEb 69. At stage 2 of the decision tree it shows that if a project is successful, the payoff will be$53,000 with a 2/3 chance of occurrence. There is also the 1/3 chance of a $-24,000payoff. The cost of getting to stage 2 (1 year out) is $44,000. The cost of capital is15%. What is the NPV of the project at stage 1?a. $-13,275b. $-20,232c. $ 2,087d. $ 7,536e. Can not be calculated without the exact timing of future cash flows.Difficulty level: MediumUse the following to answer questions 70-71:The Quick-Start Company has the following pattern of potential cash flows with their planned investment in a new cold weather starting system for fuel injected cars.DECISION TREEa 70. If the company has a discount rate of 17%, what is the value closest to time 1 netpresent value?a. $ 48.6 millionb. $ 80.9 millionc. $108.2 milliond. $181.4 millione. None of the above.DECISION TREEb 71. If the company has a discount rate of 17%, should they decide to invest?a. yes, NPV = $ 2.2 millionb. yes, NPV = $ 21.6 millionc. no, NPV = $-1.9 milliond. yes, NPV = $ 8.6 millione. No, since more than one branch is NPV = 0 or negative you must reject.Difficulty level: ChallengeACCOUNTING BREAK-EVENe 72. The Mini-Max Company has the following cost information on their new prospectiveproject. Calculate the accounting break-even point.Initial investment: $700。

CHAPTER 20INTERNATIONAL CORPORATE FINANCEAnswers to Concepts Review and Critical Thinking Questions1. a.The dollar is selling at a premium because it is more expensive in the forward market than inthe spot market (SFr 1.53 versus SFr 1.50).b.The franc is expected to depreciate relative to the dollar because it will take more francs to buyone dollar in the future than it does today.c.Inflation in Switzerland is higher than in the United States, as are nominal interest rates.2.The exchange rate will increase, as it will take progressively more pesos to purchase a dollar. This isthe relative PPP relationship.3. a.The Australian dollar is expected to weaken relative to the dollar, because it will take moreA$ in the future to buy one dollar than it does today.b.The inflation rate in Australia is higher.c.Nominal interest rates in Australia are higher; relative real rates in the two countries are thesame.4. A Yankee bond is most accurately described by d.5. No. For example, if a country’s currency strengthens, imports become cheaper (good), but its exportsbecome more expensive for others to buy (bad). The reverse is true for currency depreciation.6.Additional advantages include being closer to the final consumer and, thereby, saving ontransportation, significantly lower wages, and less exposure to exchange rate risk. Disadvantages include political risk and costs of supervising distant operations.7.One key thing to remember is that dividend payments are made in the home currency. Moregenerally, it may be that the owners of the multinational are primarily domestic and are ultimately concerned about their wealth denominated in their home currency because, unlike a multinational, they are not internationally diversified.8. a.False. If prices are rising faster in Great Britain, it will take more pounds to buy the sameamount of goods that one dollar can buy; the pound will depreciate relative to the dollar.b.False. The forward market would already reflect the projected deterioration of the euro relativeto the dollar. Only if you feel that there might be additional, unanticipated weakening of the euro that isn’t reflected in forward rates today, will the forward hedge protect you against additional declines.c.True. The market would only be correct on average, while you would be correct all the time.9. a.American exporters: their situation in general improves because a sale of the exported goods fora fixed number of euros will be worth more dollars.American importers: their situation in general worsens because the purchase of the imported goods for a fixed number of euros will cost more in dollars.b.American exporters: they would generally be better off if the British government’s intentionsresult in a strengthened pound.American importers: they would generally be worse off if the pound strengthens.c.American exporters: they would generally be much worse off, because an extreme case of fiscalexpansion like this one will make American goods prohibitively expensive to buy, or else Brazilian sales, if fixed in cruzeiros, would become worth an unacceptably low number of dollars.American importers: they would generally be much better off, because Brazilian goods will become much cheaper to purchase in dollars.10.IRP is the most likely to hold because it presents the easiest and least costly means to exploit anyarbitrage opportunities. Relative PPP is least likely to hold since it depends on the absence of market imperfections and frictions in order to hold strictly.11.It all depends on whether the forward market expects the same appreciation over the period andwhether the expectation is accurate. Assuming that the expectation is correct and that other traders do not have the same information, there will be value to hedging the currency exposure.12.One possible reason investment in the foreign subsidiary might be preferred is if this investmentprovides direct diversification that shareholders could not attain by investing on their own. Another reason could be if the political climate in the foreign country was more stable than in the home country. Increased political risk can also be a reason you might prefer the home subsidiary investment. Indonesia can serve as a great example of political risk. If it cannot be diversified away, investing in this type of foreign country will increase the systematic risk. As a result, it will raise the cost of the capital, and could actually decrease the NPV of the investment.13.Yes, the firm should undertake the foreign investment. If, after taking into consideration all risks, aproject in a foreign country has a positive NPV, the firm should undertake it. Note that in practice, the stated assumption (that the adjustment to the discount rate has taken into consideration all political and diversification issues) is a huge task. But once that has been addressed, the net present value principle holds for foreign operations, just as for domestic.14.If the foreign currency depreciates, the U.S. parent will experience an exchange rate loss when theforeign cash flow is remitted to the U.S. This problem could be overcome by selling forward contracts. Another way of overcoming this problem would be to borrow in the country where the project is located.15.False. If the financial markets are perfectly competitive, the difference between the Eurodollar rateand the U.S. rate will be due to differences in risk and government regulation. Therefore, speculating in those markets will not be beneficial.16.The difference between a Eurobond and a foreign bond is that the foreign bond is denominated in thecurrency of the country of origin of the issuing company. Eurobonds are more popular than foreign bonds because of registration differences. Eurobonds are unregistered securities.Solutions to Questions and ProblemsNOTE: 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 for each problem is found without rounding during any step in the problem.Basicing the quotes from the table, we get:a.$50(€0.7870/$1) = €39.35b.$1.2706c.€5M($1.2706/€) = $6,353,240d.New Zealand dollare.Mexican pesof.(P11.0023/$1)($1.2186/€1) = P13.9801/€This is a cross rate.g.The most valuable is the Kuwait dinar. The least valuable is the Indonesian rupiah.2. a.You would prefer £100, since:(£100)($.5359/£1) = $53.59b.You would still prefer £100. Using the $/£ exchange rate and the SF/£ exchange rate to find theamount of Swiss francs £100 will buy, we get:(£100)($1.8660/£1)(SF .8233) = SF 226.6489ing the quotes in the book to find the SF/£ cross rate, we find:(SF 1.2146/$1)($0.5359/£1) = SF 2.2665/£1The £/SF exchange rate is the inverse of the SF/£ exchange rate, so:£1/SF .4412 = £0.4412/SF 13. a.F180= ¥104.93 (per $). The yen is selling at a premium because it is more expensive in theforward market than in the spot market ($0.0093659 versus $0.009530).b.F90 = $1.8587/£. The pound is selling at a discount because it is less expensive in the forwardmarket than in the spot market ($0.5380 versus $0.5359).c.The value of the dollar will fall relative to the yen, since it takes more dollars to buy one yen inthe future than it does today. The value of the dollar will rise relative to the pound, because it will take fewer dollars to buy one pound in the future than it does today.4. a.The U.S. dollar, since one Canadian dollar will buy:(Can$1)/(Can$1.26/$1) = $0.7937b.The cost in U.S. dollars is:(Can$2.19)/(Can$1.26/$1) = $1.74Among the reasons that absolute PPP doe sn’t hold are tariffs and other barriers to trade, transactions costs, taxes, and different tastes.c.The U.S. dollar is selling at a discount, because it is less expensive in the forward market thanin the spot market (Can$1.22 versus Can$1.26).d.The Canadian dollar is expected to appreciate in value relative to the dollar, because it takesfewer Canadian dollars to buy one U.S. dollar in the future than it does today.e.Interest rates in the United States are probably higher than they are in Canada.5. a.The cross rate in ¥/£ terms is:(¥115/$1)($1.70/£1) = ¥195.5/£1b.The yen is quoted too low relative to the pound. Take out a loan for $1 and buy ¥115. Use the¥115 to purchase pounds at the cross-rate, which will give you:¥115(£1/¥185) = £0.6216Use the pounds to buy back dollars and repay the loan. The cost to repay the loan will be:£0.6216($1.70/£1) = $1.0568You arbitrage profit is $0.0568 per dollar used.6.We can rearrange the interest rate parity condition to answer this question. The equation we will useis:R FC = (F T– S0)/S0 + R USUsing this relationship, we find:Great Britain: R FC = (£0.5394 – £0.5359)/£0.5359 + .038 = 4.45%Japan: R FC = (¥104.93 – ¥106.77)/¥106.77 + .038 = 2.08%Switzerland: R FC = (SFr 1.1980 – SFr 1.2146)/SFr 1.2146 + .038 = 2.43%7.If we invest in the U.S. for the next three months, we will have:$30M(1.0045)3 = $30,406,825.23If we invest in Great Britain, we must exchange the dollars today for pounds, and exchange the pounds for dollars in three months. After making these transactions, the dollar amount we would have in three months would be:($30M)(£0.56/$1)(1.0060)3/(£0.59/$1) = $28,990,200.05We should invest in U.S.ing the relative purchasing power parity equation:F t = S0 × [1 + (h FC– h US)]tWe find:Z3.92 = Z3.84[1 + (h FC– h US)]3h FC– h US = (Z3.92/Z3.84)1/3– 1h FC– h US = .0069Inflation in Poland is expected to exceed that in the U.S. by 0.69% over this period.9.The profit will be the quantity sold, times the sales price minus the cost of production. Theproduction cost is in Singapore dollars, so we must convert this to U.S. dollars. Doing so, we find that if the exchange rates stay the same, the profit will be:Profit = 30,000[$145 – {(S$168.50)/(S$1.6548/$1)}]Profit = $1,295,250.18If the exchange rate rises, we must adjust the cost by the increased exchange rate, so:Profit = 30,000[$145 – {(S$168.50)/1.1(S$1.6548/$1)}]Profit = $1,572,954.71If the exchange rate falls, we must adjust the cost by the decreased exchange rate, so:Profit = 30,000[$145 – {(S$168.50)/0.9(S$1.6548/$1)}]Profit = $955,833.53To calculate the breakeven change in the exchange rate, we need to find the exchange rate that make the cost in Singapore dollars equal to the selling price in U.S. dollars, so:$145 = S$168.50/S TS T = S$1.1621/$1S T = –.2978 or –29.78% decline10. a.If IRP holds, then:F180 = (Kr 6.43)[1 + (.08 – .05)]1/2F180 = Kr 6.5257Since given F180 is Kr6.56, an arbitrage opportunity exists; the forward premium is too high.Borrow Kr1 today at 8% interest. Agree to a 180-day forward contract at Kr 6.56. Convert the loan proceeds into dollars:Kr 1 ($1/Kr 6.43) = $0.15552Invest these dollars at 5%, ending up with $0.15931. Convert the dollars back into krone as$0.15931(Kr 6.56/$1) = Kr 1.04506Repay the Kr 1 loan, ending with a profit of:Kr1.04506 – Kr1.03868 = Kr 0.00638b.To find the forward rate that eliminates arbitrage, we use the interest rate parity condition, so:F180 = (Kr 6.43)[1 + (.08 – .05)]1/2F180 = Kr 6.525711.The international Fisher effect states that the real interest rate across countries is equal. We canrearrange the international Fisher effect as follows to answer this question:R US– h US = R FC– h FCh FC = R FC + h US– R USa.h AUS = .05 + .035 – .039h AUS = .046 or 4.6%b.h CAN = .07 + .035 – .039h CAN = .066 or 6.6%c.h TAI = .10 + .035 – .039h TAI = .096 or 9.6%12. a.The yen is expected to get stronger, since it will take fewer yen to buy one dollar in the futurethan it does today.b.h US– h JAP (¥129.76 – ¥131.30)/¥131.30h US– h JAP = – .0117 or –1.17%(1 – .0117)4– 1 = –.0461 or –4.61%The approximate inflation differential between the U.S. and Japan is – 4.61% annually.13. We need to find the change in the exchange rate over time, so we need to use the relative purchasingpower parity relationship:F t = S0 × [1 + (h FC– h US)]TUsing this relationship, we find the exchange rate in one year should be:F1 = 215[1 + (.086 – .035)]1F1 = HUF 225.97The exchange rate in two years should be:F2 = 215[1 + (.086 – .035)]2F2 = HUF 237.49And the exchange rate in five years should be:F5 = 215[1 + (.086 – .035)]5F5 = HUF 275.71ing the interest-rate parity theorem:(1 + R US) / (1 + R FC) = F(0,1) / S0We can find the forward rate as:F(0,1) = [(1 + R US) / (1 + R FC)] S0F(0,1) = (1.13 / 1.08)$1.50/£F(0,1) = $1.57/£Intermediate15.First, we need to forecast the future spot rate for each of the next three years. From interest rate andpurchasing power parity, the expected exchange rate is:E(S T) = [(1 + R US) / (1 + R FC)]T S0So:E(S1) = (1.0480 / 1.0410)1 $1.22/€ = $1.2282/€E(S2) = (1.0480 / 1.0410)2 $1.22/€ = $1.2365/€E(S3) = (1.0480 / 1.0410)3 $1.22/€ = $1.2448/€Now we can use these future spot rates to find the dollar cash flows. The dollar cash flow each year will be:Year 0 cash flow = –€$12,000,000($1.22/€) = –$14,640,000.00Year 1 cash flow = €$2,700,000($1.2282/€) = $3,316,149.86Year 2 cash flow = €$3,500,000($1.2365/€) = $4,327,618.63Year 3 cash flow = (€3,300,000 + 7,400,000)($1.2448/€) = $13,319,111.90And the NPV of the project will be:NPV = –$14,640,000 + $3,316,149.86/1.13 + $4,4327,618.63/1.132 + $13,319,111.90/1.133NPV = $914,618.7316. a.Implicitly, it is assumed that interest rates won’t change over the life of the project, but theexchange rate is projected to decline because the Euroswiss rate is lower than the Eurodollar rate.b.We can use relative purchasing power parity to calculate the dollar cash flows at each time. Theequation is:E[S T] = (SFr 1.72)[1 + (.07 – .08)]TE[S T] = 1.72(.99)TSo, the cash flows each year in U.S. dollar terms will be:t SFr E[S T] US$0 –27.0M –$15,697,674.421 +7.5M 1.7028 $4,404,510.222 +7.5M 1.6858 $4,449,000.223 +7.5M 1.6689 $4,493,939.624 +7.5M 1.6522 $4,539,332.955 +7.5M 1.6357 $4,585,184.79And the NPV is:NPV = –$15,697,674.42 + $4,404,510.22/1.13 + $4,449,000.22/1.132 + $4,493,939.62/1.133 + $4,539,332.95/1.134 + $4,585,184.79/1.135NPV = $71,580.10c.Rearranging the relative purchasing power parity equation to find the required return in Swissfrancs, we get:R SFr = 1.13[1 + (.07 – .08)] – 1R SFr = 11.87%So, the NPV in Swiss francs is:NPV = –SFr 27.0M + SFr 7.5M(PVIFA11.87%,5)NPV = SFr 123,117.76Converting the NPV to dollars at the spot rate, we get the NPV in U.S. dollars as:NPV = (SFr 123,117.76)($1/SFr 1.72)NPV = $71,580.10Challenge17. a.The domestic Fisher effect is:1 + R US = (1 + r US)(1 + h US)1 + r US = (1 + R US)/(1 + h US)This relationship must hold for any country, that is:1 + r FC = (1 + R FC)/(1 + h FC)The international Fisher effect states that real rates are equal across countries, so:1 + r US = (1 + R US)/(1 + h US) = (1 + R FC)/(1 + h FC) = 1 + r FCb.The exact form of unbiased interest rate parity is:E[S t] = F t = S0 [(1 + R FC)/(1 + R US)]tc.The exact form for relative PPP is:E[S t] = S0 [(1 + h FC)/(1 + h US)]td.For the home currency approach, we calculate the expected currency spot rate at time t as:E[S t] = (€0.5)[1.07/1.05]t= (€0.5)(1.019)tWe then convert the euro cash flows using this equation at every time, and find the present value. Doing so, we find:NPV = –[€2M/(€0.5)] + {€0.9M/[1.019(€0.5)]}/1.1 + {€0.9M/[1.0192(€0.5)]}/1.12 + {€0.9M/[1.0193(€0.5/$1)]}/1.13NPV = $316,230.72For the foreign currency approach, we first find the return in the euros as:R FC = 1.10(1.07/1.05) – 1 = 0.121Next, we find the NPV in euros as:NPV = –€2M + (€0.9M)/1.121 + (€0.9M)/1.1212+ (€0.9M)/1.1213= €158,115.36And finally, we convert the euros to dollars at the current exchange rate, which is:NPV ($) = €158,115.36 /(€0.5/$1) = $316,230.72。

罗斯《公司理财》第9版精要版英文原书课后部分章节答案详细»1 / 17 CH5 11，13，18，19，20 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 13. 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 r, we get: r = (FV / PV) 1 / t –1 r = ($1,260,000 / $150) 1/112 – 1 = .0840 or 8.40% To find the FV of the first prize, we use: FV = PV(1 + r) t FV = $1,260,000(1.0840) 33 = $18,056,409.94 18. To find the FV of a lump sum, we use: FV = PV(1 + r) t FV = $4,000(1.11) 45 = $438,120.97 FV = $4,000(1.11) 35 = $154,299.40 Better start early! 19. We need to find the FV of a lump sum. However, the money will only be invested for six years, so the number of periods is six. FV = PV(1 + r) t FV = $20,000(1.084)6 = $32,449.33 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 Solving for t, we get: t = ln(FV / PV) / ln(1 + r) t = ln($75,000 / $10,000) / ln(1.11) = 19.31 So, the money must be invested for 19.31 years. However, you will not receive the money for another two years. From now, you’ll wait: 2 years + 19.31 years = 21.31 years CH6 16，24，27，42，58 16. For this problem, we simply need to find the FV of a lump sum using the equation: FV = PV(1 + r) t 2 / 17 It is important to note that compounding occurs semiannually. To account for this, we will divide the interest rate by two (the number of compounding periods in a year), and multiply the number of periods by two. Doing so, we get: FV = $2,100[1 + (.084/2)] 34 = $8,505.93 24. This problem requires us to find the FV A. The equation to find the FV A is: FV A = C{[(1 + r) t – 1] / r} FV A = $300[{[1 + (.10/12) ] 360 – 1} / (.10/12)] = $678,146.38 27. The cash flows are annual and the compounding period is quarterly, so we need to calculate the EAR to make the interest rate comparable with the timing of the cash flows. Using the equation for the EAR, we get: EAR = [1 + (APR / m)] m – 1 EAR = [1 + (.11/4)] 4 – 1 = .1146 or 11.46% And now we use the EAR to find the PV of each cash flow as a lump sum and add them together: PV = $725 / 1.1146 + $980 / 1.1146 2 + $1,360 / 1.1146 4 = $2,320.36 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: PV A = $1,150[(1 – {1 / [1 + (.0635/12)]} 360 ) / (.0635/12)] = $184,817.42 The monthly payments of $1,150 will amount to a principal payment of $184,817.42. The amount of principal you will still owe is: $240,000 – 184,817.42 = $55,182.58 This remaining principal amount will increase at the interest rate on the loan until the end of the loan period. So the balloon payment in 30 years, which is the FV of the remaining principal will be: Balloon payment = $55,182.58[1 + (.0635/12)] 360 = $368,936.54 58. To answer this question, we should find the PV of both options, and compare them. Since we are purchasing the car, the lowest PV is the best option. The PV of the leasing is simply the PV of the lease payments, plus the $99. The interest rate we would use for the leasing option is the same as the interest rate of the loan. The PV of leasing is: PV = $99 + $450{1 –[1 / (1 + .07/12) 12(3) ]} / (.07/12) = $14,672.91 The PV of purchasing the car is the current price of the car minus the PV of the resale price. The PV of the resale price is: PV = $23,000 / [1 + (.07/12)] 12(3) = $18,654.82 The PV of the decision to purchase is: $32,000 – 18,654.82 = $13,345.18 3 / 17 In this case, it is cheaper to buy the car than leasing it since the PV of the purchase cash flows is lower. To find the breakeven resale price, we need to find the resale price that makes the PV of the two options the same. In other words, the PV of the decision to buy should be: $32,000 – PV of resale price = $14,672.91 PV of resale price = $17,327.09 The resale price that would make the PV of the lease versus buy decision is the FV ofthis value, so: Breakeven resale price = $17,327.09[1 + (.07/12)] 12(3) = $21,363.01 CH7 3，18，21，22，31 3. The price of any bond is the PV of the interest payment, plus the PV of the par value. Notice this problem assumes an annual coupon. The price of the bond will be: P = $75({1 – [1/(1 + .0875)] 10 } / .0875) + $1,000[1 / (1 + .0875) 10 ] = $918.89 We would like to introduce shorthand notation here. Rather than write (or type, as the case may be) the entire equation for the PV of a lump sum, or the PV A equation, it is common to abbreviate the equations as: PVIF R,t = 1 / (1 + r) t which stands for Present V alue Interest Factor PVIFA R,t = ({1 – [1/(1 + r)] t } / r ) which stands for Present V alue Interest Factor of an Annuity These abbreviations are short hand notation for the equations in which the interest rate and the number of periods are substituted into the equation and solved. We will use this shorthand notation in remainder of the solutions key. 18. The bond price equation for this bond is: P 0 = $1,068 = $46(PVIFA R%,18 ) + $1,000(PVIF R%,18 ) Using a spreadsheet, financial calculator, or trial and error we find: R = 4.06% This is thesemiannual interest rate, so the YTM is: YTM = 2 4.06% = 8.12% The current yield is:Current yield = Annual coupon payment / Price = $92 / $1,068 = .0861 or 8.61% The effective annual yield is the same as the EAR, so using the EAR equation from the previous chapter: Effective annual yield = (1 + 0.0406) 2 – 1 = .0829 or 8.29% 20. 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 four months until the next coupon payment, so two months have passed since the last coupon payment. The accrued interest for the bond is: Accrued interest = $74/2 × 2/6 = $12.33 And we calculate the clean price as: 4 / 17 Clean price = Dirty price –Accrued interest = $968 –12.33 = $955.67 21. 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 coupon payment, so four months have passed since the last coupon payment. The accrued interest for the bond is: Accrued interest = $68/2 × 4/6 = $22.67 And we calculate the dirty price as: Dirty price = Clean price + Accrued interest = $1,073 + 22.67 = $1,095.67 22. To find the number of years to maturity for the bond, we need to find the price of the bond. Since we already have the coupon rate, we can use the bond price equation, and solve for the number of years to maturity. We are given the current yield of the bond, so we can calculate the price as: Current yield = .0755 = $80/P 0 P 0 = $80/.0755 = $1,059.60 Now that we have the price of the bond, the bond price equation is: P = $1,059.60 = $80[(1 – (1/1.072) t ) / .072 ] + $1,000/1.072 t We can solve this equation for t as follows: $1,059.60(1.072) t = $1,111.11(1.072) t –1,111.11 + 1,000 111.11 = 51.51(1.072) t2.1570 = 1.072 t t = log 2.1570 / log 1.072 = 11.06 11 years The bond has 11 years to maturity.31. The price of any bond (or financial instrument) is the PV of the future cash flows. Even though Bond M makes different coupons payments, to find the price of the bond, we just find the PV of the cash flows. The PV of the cash flows for Bond M is: P M = $1,100(PVIFA 3.5%,16 )(PVIF 3.5%,12 ) + $1,400(PVIFA3.5%,12 )(PVIF 3.5%,28 ) + $20,000(PVIF 3.5%,40 ) P M = $19,018.78 Notice that for the coupon payments of $1,400, we found the PV A for the coupon payments, and then discounted the lump sum back to today. Bond N is a zero coupon bond with a $20,000 par value, therefore, the price of the bond is the PV of the par, or: P N = $20,000(PVIF3.5%,40 ) = $5,051.45 CH8 4，18，20，22，244. Using the constant growth model, we find the price of the stock today is: P 0 = D 1 / (R – g) = $3.04 / (.11 – .038) = $42.22 5 / 17 18. The price of a share of preferred stock is the dividend payment divided by the required return. We know the dividend payment in Year 20, so we can find the price of the stock in Y ear 19, one year before the first dividend payment. Doing so, we get: P 19 = $20.00 / .064 P 19 = $312.50 The price of the stock today is the PV of the stock price in the future, so the price today will be: P 0 = $312.50 / (1.064) 19 P 0 = $96.15 20. We can use the two-stage dividend growth model for this problem, which is: P 0 = [D 0 (1 + g 1 )/(R – g 1 )]{1 – [(1 + g 1 )/(1 + R)] T }+ [(1 + g 1 )/(1 + R)] T [D 0 (1 + g 2 )/(R –g 2 )] P0 = [$1.25(1.28)/(.13 –.28)][1 –(1.28/1.13) 8 ] + [(1.28)/(1.13)] 8 [$1.25(1.06)/(.13 – .06)] P 0 = $69.55 22. We are asked to find the dividend yield and capital gains yield for each of the stocks. All of the stocks have a 15 percent required return, which is the sum of the dividend yield and the capital gains yield. To find the components of the total return, we need to find the stock price for each stock. Using this stock price and the dividend, we can calculate the dividend yield. The capital gains yield for the stock will be the total return (required return) minus the dividend yield. W: P 0 = D 0 (1 + g) / (R – g) = $4.50(1.10)/(.19 – .10) = $55.00 Dividend yield = D 1 /P 0 = $4.50(1.10)/$55.00 = .09 or 9% Capital gains yield = .19 – .09 = .10 or 10% X: P 0 = D 0 (1 + g) / (R – g) = $4.50/(.19 – 0) = $23.68 Dividend yield = D 1 /P 0 = $4.50/$23.68 = .19 or 19% Capital gains yield = .19 – .19 = 0% Y: P 0 = D 0 (1 + g) / (R – g) = $4.50(1 – .05)/(.19 + .05) = $17.81 Dividend yield = D 1 /P 0 = $4.50(0.95)/$17.81 = .24 or 24% Capital gains yield = .19 – .24 = –.05 or –5% Z: P 2 = D 2 (1 + g) / (R – g) = D 0 (1 + g 1 ) 2 (1 +g 2 )/(R – g 2 ) = $4.50(1.20) 2 (1.12)/(.19 – .12) = $103.68 P 0 = $4.50 (1.20) / (1.19) + $4.50(1.20) 2 / (1.19) 2 + $103.68 / (1.19) 2 = $82.33 Dividend yield = D 1 /P 0 = $4.50(1.20)/$82.33 = .066 or 6.6% Capital gains yield = .19 – .066 = .124 or 12.4% In all cases, the required return is 19%, but the return is distributed differently between current income and capital gains. High growth stocks have an appreciable capital gains component but a relatively small current income yield; conversely, mature, negative-growth stocks provide a high current income but also price depreciation over time. 24. Here we have a stock with supernormal growth, but the dividend growth changes every year for the first four years. We can find the price of the stock in Y ear 3 since the dividend growth rate is constant after the third dividend. The price of the stock in Y ear 3 will be the dividend in Y ear 4, divided by the required return minus the constant dividend growth rate. So, the price in Y ear 3 will be: 6 / 17 P3 = $2.45(1.20)(1.15)(1.10)(1.05) / (.11 – .05) = $65.08 The price of the stock today will be the PV of the first three dividends, plus the PV of the stock price in Y ear 3, so: P 0 = $2.45(1.20)/(1.11) + $2.45(1.20)(1.15)/1.11 2 + $2.45(1.20)(1.15)(1.10)/1.11 3 + $65.08/1.11 3 P 0 = $55.70 CH9 3，4，6，9，15 3. Project A has cash flows of $19,000 in Y ear 1, so the cash flows are short by $21,000 of recapturing the initial investment, so the payback for Project A is: Payback = 1 + ($21,000 / $25,000) = 1.84 years Project B has cash flows of: Cash flows = $14,000 + 17,000 + 24,000 = $55,000 during this first three years. The cash flows are still short by $5,000 of recapturing the initial investment, so the payback for Project B is: B: Payback = 3 + ($5,000 / $270,000) = 3.019 years Using the payback criterion and a cutoff of 3 years, accept project A and reject project B. 4. When we use discounted payback, we need to find the value of all cash flows today. The value today of the project cash flows for the first four years is: V alue today of Y ear 1 cash flow = $4,200/1.14 = $3,684.21 V alue today of Y ear 2 cash flow = $5,300/1.14 2 = $4,078.18 V alue today of Y ear 3 cash flow = $6,100/1.14 3 = $4,117.33 V alue today of Y ear 4 cash flow = $7,400/1.14 4 = $4,381.39 To findthe discounted payback, we use these values to find the payback period. The discounted first year cash flow is $3,684.21, so the discounted payback for a $7,000 initial cost is: Discounted payback = 1 + ($7,000 – 3,684.21)/$4,078.18 = 1.81 years For an initial cost of $10,000, the discounted payback is: Discounted payback = 2 + ($10,000 –3,684.21 –4,078.18)/$4,117.33 = 2.54 years Notice the calculation of discounted payback. We know the payback period is between two and three years, so we subtract the discounted values of the Y ear 1 and Y ear 2 cash flows from the initial cost. This is the numerator, which is the discounted amount we still need to make to recover our initial investment. We divide this amount by the discounted amount we will earn in Y ear 3 to get the fractional portion of the discounted payback. If the initial cost is $13,000, the discounted payback is: Discounted payback = 3 + ($13,000 – 3,684.21 – 4,078.18 – 4,117.33) / $4,381.39 = 3.26 years 7 / 17 6. Our definition of AAR is the average net income divided by the average book value. The average net income for this project is: A verage net income = ($1,938,200 + 2,201,600 + 1,876,000 + 1,329,500) / 4 = $1,836,325 And the average book value is: A verage book value = ($15,000,000 + 0) / 2 = $7,500,000 So, the AAR for this project is: AAR = A verage net income / A verage book value = $1,836,325 / $7,500,000 = .2448 or 24.48% 9. The NPV of a project is the PV of the outflows minus the PV of the inflows. Since the cash inflows are an annuity, the equation for the NPV of this project at an 8 percent required return is: NPV = –$138,000 + $28,500(PVIFA 8%, 9 ) = $40,036.31 At an 8 percent required return, the NPV is positive, so we would accept the project. The equation for the NPV of the project at a 20 percent required return is: NPV = –$138,000 + $28,500(PVIFA 20%, 9 ) = –$23,117.45 At a 20 percent required return, the NPV is negative, so we would reject the project. We would be indifferent to the project if the required return was equal to the IRR of the project, since at that required return the NPV is zero. The IRR of the project is: 0 = –$138,000 + $28,500(PVIFA IRR, 9 ) IRR = 14.59% 15. The profitability index is defined as the PV of the cash inflows divided by the PV of the cash outflows. The equation for the profitability index at a required return of 10 percent is: PI = [$7,300/1.1 + $6,900/1.1 2 + $5,700/1.1 3 ] / $14,000 = 1.187 The equation for the profitability index at a required return of 15 percent is: PI = [$7,300/1.15 + $6,900/1.15 2 + $5,700/1.15 3 ] / $14,000 = 1.094 The equation for the profitability index at a required return of 22 percent is: PI = [$7,300/1.22 + $6,900/1.22 2 + $5,700/1.22 3 ] / $14,000 = 0.983 8 / 17 We would accept the project if the required return were 10 percent or 15 percent since the PI is greater than one. We would reject the project if the required return were 22 percent since the PI。

罗斯公司理财Chap002全英文题库及答案Chapter 02 Financial Statements and Cash Flow Answer Key Multiple Choice Questions1. The financial statement showing a firm's accounting value on a particular date is the:A. income statement.B. balance sheet.C. statement of cash flows.D. tax reconciliation statement.E. shareholders' equity sheet.Difficulty level: EasyTopic: BALANCE SHEETType: DEFINITIONS2. A current asset is:A. an item currently owned by the firm.B. an item that the firm expects to own within the next year.C. an item currently owned by the firm that will convert to cash within the next 12 months.D. the amount of cash on hand the firm currently shows on its balance sheet.E. the market value of all items currently owned by the firm.Difficulty level: EasyTopic: CURRENT ASSETSType: DEFINITIONS3. The long-term debts of a firm are liabilities:A. that come due within the next 12 months.B. that do not come due for at least 12 months.C. owed to the firm's suppliers.D. owed to the firm's shareholders.E. the firm expects to incur within the next 12 months.Difficulty level: EasyTopic: LONG-TERM DEBTType: DEFINITIONS4. Net working capital is defined as:A. total liabilities minus shareholders' equity.B. current liabilities minus shareholders' equity.C. fixed assets minus long-term liabilities.D. total assets minus total liabilities.E. current assets minus current liabilities.Difficulty level: EasyTopic: NET WORKING CAPITALType: DEFINITIONS5. A(n) ____ asset is one which can be quickly converted into cash without significant loss in value.A. currentB. fixedC. intangibleD. liquidE. long-termDifficulty level: EasyTopic: LIQUID ASSETSType: DEFINITIONS6. The financial statement summarizing a firm's accounting performance over a period of time is the:A. income statement.B. balance sheet.C. statement of cash flows.D. tax reconciliation statement.E. shareholders' equity sheet.Difficulty level: EasyTopic: INCOME STATEMENTType: DEFINITIONS7. Noncash items refer to:A. the credit sales of a firm.B. the accounts payable of a firm.C. the costs incurred for the purchase of intangible fixed assets.D. expenses charged against revenues that do not directly affect cash flow.E. all accounts on the balance sheet other than cash on hand.Difficulty level: EasyTopic: NONCASH ITEMSType: DEFINITIONS8. Your _____ tax rate is the amount of tax payable on the next taxable dollar you earn.A. deductibleB. residualC. totalD. averageE. marginalDifficulty level: EasyTopic: MARGINAL TAX RATESType: DEFINITIONS9. Your _____ tax rate is the total taxes you pay divided by your taxable income.A. deductibleB. residualC. totalD. averageE. marginalDifficulty level: EasyTopic: AVERAGE TAX RATESType: DEFINITIONS10. _____ refers to the cash flow that results from the firm's ongoing, normal business activities.A. Cash flow from operating activitiesB. Capital spendingC. Net working capitalD. Cash flow from assetsE. Cash flow to creditorsDifficulty level: MediumTopic: CASH FLOW FROM OPERATING ACTIVITIESType: DEFINITIONS11. _____ refers to the changes in net capital assets.A. Operating cash flowB. Cash flow from investingC. Net working capitalD. Cash flow from assetsE. Cash flow to creditorsDifficulty level: MediumTopic: CASH FLOW FROM INVESTINGType: DEFINITIONS12. _____ refers to the difference between a firm's current assets and its current liabilities.A. Operating cash flowB. Capital spendingC. Net working capitalD. Cash flow from assetsE. Cash flow to creditorsDifficulty level: EasyTopic: NET WORKING CAPITALType: DEFINITIONS13. _____ is calculated by adding back noncash expenses to net income and adjusting for changes in current assets and liabilities.A. Operating cash flowB. Capital spendingC. Net working capitalD. Cash flow from operationsE. Cash flow to creditorsDifficulty level: MediumTopic: CASH FLOW FROM OPERATIONSType: DEFINITIONS14. _____ refers to the firm's interest payments less any net new borrowing.A. Operating cash flowB. Capital spendingC. Net working capitalD. Cash flow from shareholdersE. Cash flow to creditorsDifficulty level: MediumTopic: CASH FLOW TO CREDITORSType: DEFINITIONS15. _____ refers to the firm's dividend payments less any net new equity raised.A. Operating cash flowB. Capital spendingC. Net working capitalD. Cash flow from creditorsE. Cash flow to stockholdersDifficulty level: MediumTopic: CASH FLOW TO STOCKHOLDERSType: DEFINITIONS16. Earnings per share is equal to:A. net income divided by the total number of shares outstanding.B. net income divided by the par value of the common stock.C. gross income multiplied by the par value of the common stock.D. operating income divided by the par value of the common stock.E. net income divided by total shareholders' equity.Difficulty level: MediumTopic: EARNINGS PER SHAREType: DEFINITIONS17. Dividends per share is equal to dividends paid:A. divided by the par value of common stock.B. divided by the total number of shares outstanding.C. divided by total shareholders' equity.D. multiplied by the par value of the common stock.E. multiplied by the total number of shares outstanding.Difficulty level: MediumTopic: DIVIDENDS PER SHAREType: DEFINITIONS18. Which of the following are included in current assets?I. equipmentII. inventoryIII. accounts payableIV. cashA. II and IV onlyB. I and III onlyC. I, II, and IV onlyD. III and IV onlyE. II, III, and IV onlyDifficulty level: MediumTopic: CURRENT ASSETSType: CONCEPTS19. Which of the following are included in current liabilities?I. note payable to a supplier in eighteen monthsII. debt payable to a mortgage company in nine monthsIII. accounts payable to suppliersIV. loan payable to the bank in fourteen monthsA. I and III onlyB. II and III onlyC. III and IV onlyD. II, III, and IV onlyE. I, II, and III onlyDifficulty level: MediumTopic: CURRENT LIABILITIESType: CONCEPTS20. An increase in total assets:A. means that net working capital is also increasing.B. requires an investment in fixed assets.C. means that shareholders' equity must also increase.D. must be offset by an equal increase in liabilities and shareholders' equity.E. can only occur when a firm has positive net income.Difficulty level: MediumTopic: BALANCE SHEETType: CONCEPTS21. Which one of the following assets is generally the most liquid?A. inventoryB. buildingsC. accounts receivableD. equipmentE. patentsDifficulty level: MediumTopic: LIQUIDITYType: CONCEPTS22. Which one of the following statements concerning liquidity is correct?A. If you sold an asset today, it was a liquid asset.B. If you can sell an asset next year at a price equal to its actual value, the asset is highly liquid.C. Trademarks and patents are highly liquid.D. The less liquidity a firm has, the lower the probability the firm will encounter financial difficulties.E. Balance sheet accounts are listed in order of decreasing liquidity.Difficulty level: MediumTopic: LIQUIDITYType: CONCEPTS23. Liquidity is:A. a measure of the use of debt in a firm's capital structure.B. equal to current assets minus current liabilities.C. equal to the market value of a firm's total assets minus its current liabilities.D. valuable to a firm even though liquid assets tend to be lessprofitable to own.E. generally associated with intangible assets.Difficulty level: MediumTopic: LIQUIDITYType: CONCEPTS24. Which of the following accounts are included in shareholders' equity?I. interest paidII. retained earningsIII. capital surplusIV. long-term debtA. I and II onlyB. II and IV onlyC. I and IV onlyD. II and III onlyE. I and III onlyDifficulty level: MediumTopic: SHAREHOLDERS' EQUITYType: CONCEPTS25. Book value:A. is equivalent to market value for firms with fixed assets.B. is based on historical cost.C. generally tends to exceed market value when fixed assets are included.D. is more of a financial than an accounting valuation.E. is adjusted to market value whenever the market value exceeds the stated book value. Difficulty level: Medium Topic: BOOK VALUEType: CONCEPTS26. When making financial decisions related to assets, youshould:A. always consider market values.B. place more emphasis on book values than on market values.C. rely primarily on the value of assets as shown on the balance sheet.D. place primary emphasis on historical costs.E. only consider market values if they are less than book values.Difficulty level: MediumTopic: MARKET VALUEType: CONCEPTS27. As seen on an income statement:A. interest is deducted from income and increases the total taxes incurred.B. the tax rate is applied to the earnings before interest and taxes when the firm has both depreciation and interest expenses.C. depreciation is shown as an expense but does not affect the taxes payable.D. depreciation reduces both the pretax income and the net income.E. interest expense is added to earnings before interest and taxes to get pretax income. Difficulty level: MediumTopic: INCOME STATEMENTType: CONCEPTS28. The earnings per share will:A. increase as net income increases.B. increase as the number of shares outstanding increase.C. decrease as the total revenue of the firm increases.D. increase as the tax rate increases.E. decrease as the costs decrease.Difficulty level: MediumTopic: EARNINGS PER SHAREType: CONCEPTS29. Dividends per share:A. increase as the net income increases as long as the number of shares outstanding remains constant.B. decrease as the number of shares outstanding decrease, all else constant.C. are inversely related to the earnings per share.D. are based upon the dividend requirements established by Generally Accepted Accounting Procedures.E. are equal to the amount of net income distributed to shareholders divided by the number of shares outstanding.Difficulty level: MediumTopic: DIVIDENDS PER SHAREType: CONCEPTS30. Earnings per shareA. will increase if net income increases and number of shares remains constant.B. will increase if net income decreases and number of shares remains constant.C. is number of shares divided by net income.D. is the amount of money that goes into retained earnings on a per share basis.E. None of the above.Difficulty level: MediumTopic: EARNINGS PER SHAREType: CONCEPTS31. According to Generally Accepted Accounting Principles,costs are:A. recorded as incurred.B. recorded when paid.C. matched with revenues.D. matched with production levels.E. expensed as management desires.Difficulty level: MediumTopic: MATCHING PRINCIPLEType: CONCEPTS32. Depreciation:A. is a noncash expense that is recorded on the income statement.B. increases the net fixed assets as shown on the balance sheet.C. reduces both the net fixed assets and the costs of a firm.D. is a non-cash expense which increases the net operating income.E. decreases net fixed assets, net income, and operating cash flows.Difficulty level: MediumTopic: NONCASH ITEMSType: CONCEPTS33. When you are making a financial decision, the most relevant tax rate is the _____ rate.A. averageB. fixedC. marginalD. totalE. variableDifficulty level: MediumTopic: MARGINAL TAX RATEType: CONCEPTS34. An increase in which one of the following will cause the operating cash flow to increase?A. depreciationB. changes in the amount of net fixed capitalC. net working capitalD. taxesE. costsDifficulty level: MediumTopic: OPERATING CASH FLOWType: CONCEPTS35. A firm starts its year with a positive net working capital. During the year, the firm acquires more short-term debt than it does short-term assets. This means that:A. the ending net working capital will be negative.B. both accounts receivable and inventory decreased during the year.C. the beginning current assets were less than the beginning current liabilities.D. accounts payable increased and inventory decreased during the year.E. the ending net working capital can be positive, negative, or equal to zero.Difficulty level: MediumTopic: CHANGE IN NET WORKING CAPITALType: CONCEPTS36. The cash flow to creditors includes the cash:A. received by the firm when payments are paid to suppliers.B. outflow of the firm when new debt is acquired.C. outflow when interest is paid on outstanding debt.D. inflow when accounts payable decreases.E. received when long-term debt is paid off.Difficulty level: MediumTopic: CASH FLOW TO CREDITORSType: CONCEPTS37. Cash flow to stockholders must be positive when:A. the dividends paid exceed the net new equity raised.B. the net sale of common stock exceeds the amount of dividends paid.C. no income is distributed but new shares of stock are sold.D. both the cash flow to assets and the cash flow to creditors are negative.E. both the cash flow to assets and the cash flow to creditors are positive. Difficulty level: MediumTopic: CASH FLOW TO STOCKHOLDERSType: CONCEPTS38. Which equality is the basis for the balance sheet?A. Fixed Assets = Stockholder's Equity + Current AssetsB. Assets = Liabilities + Stockholder's EquityC. Assets = Current Long-Term Debt + Retained EarningsD. Fixed Assets = Liabilities + Stockholder's EquityE. None of the aboveDifficulty level: MediumTopic: BALANCE SHEETType: CONCEPTS39. Assets are listed on the balance sheet in order of:A. decreasing liquidity.B. decreasing size.C. increasing size.D. relative life.E. None of the above.Difficulty level: MediumTopic: BALANCE SHEETType: CONCEPTS40. Debt is a contractual obligation that:A. requires the payout of residual flows to the holders of these instruments.B. requires a repayment of a stated amount and interest over the period.C. allows the bondholders to sue the firm if it defaults.D. Both A and B.E. Both B and C.Difficulty level: MediumTopic: DEBTType: CONCEPTS41. The carrying value or book value of assets:A. is determined under GAAP and is based on the cost of the asset.B. represents the true market value according to GAAP.C. is always the best measure of the company's value to an investor.D. is always higher than the replacement cost of the assets.E. None of the above.Difficulty level: MediumTopic: CARRYING VALUEType: CONCEPTS42. Under GAAP, a firm's assets are reported at:A. market value.B. liquidation value.C. intrinsic value.D. cost.E. None of the above.Difficulty level: MediumTopic: GAAPType: CONCEPTS43. Which of the following statements concerning the income statement is true?A. It measures performance over a specific period of time.B. It determines after-tax income of the firm.C. It includes deferred taxes.D. It treats interest as an expense.E. All of the above.Difficulty level: MediumTopic: INCOME STATEMENTType: CONCEPTS44. According to generally accepted accounting principles (GAAP), revenue is recognized as income when:A. a contract is signed to perform a service or deliver a good.B. the transaction is complete and the goods or services are delivered.C. payment is requested.D. income taxes are paid.E. All of the above.Difficulty level: MediumTopic: GAAP INCOME RECOGNITIONType: CONCEPTS45. Which of the following is not included in the computation of operating cash flow?A. Earnings before interest and taxesB. Interest paidC. DepreciationD. Current taxesE. All of the above are includedDifficulty level: MediumTopic: OPERATING CASH FLOWType: CONCEPTS46. Net capital spending is equal to:A. net additions to net working capital.B. the net change in fixed assets.C. net income plus depreciation.D. total cash flow to stockholders less interest and dividends paid.E. the change in total assets.Difficulty level: MediumTopic: NET CAPITAL SPENDINGType: CONCEPTS47. Cash flow to stockholders is defined as:A. interest payments.B. repurchases of equity less cash dividends paid plus new equity sold.C. cash flow from financing less cash flow to creditors.D. cash dividends plus repurchases of equity minus new equity financing.E. None of the above.Difficulty level: MediumTopic: CASH FLOW TO STOCKHOLDERSType: CONCEPTS48. Free cash flow is:A. without cost to the firm.B. net income plus taxes.C. an increase in net working capital.D. cash that the firm is free to distribute to creditors and stockholders.E. None of the above.Difficulty level: MediumTopic: FREE CASH FLOWType: CONCEPTS49. The cash flow of the firm must be equal to:A. cash flow to stockholders minus cash flow to debtholders.B. cash flow to debtholders minus cash flow to stockholders.C. cash flow to governments plus cash flow to stockholders.D. cash flow to stockholders plus cash flow to debtholders.E. None of the above.Difficulty level: MediumTopic: CASH FLOWType: CONCEPTS50. Which of the following are all components of the statement of cash flows?A. Cash flow from operating activities, cash flow from investing activities, and cash flow from financing activitiesB. Cash flow from operating activities, cash flow from investing activities, and cash flow from divesting activitiesC. Cash flow from internal activities, cash flow from external activities, and cash flow from financing activitiesD. Cash flow from brokering activities, cash flow from profitable activities, and cash flow from non-profitable activitiesE. None of the above.Difficulty level: MediumTopic: STATEMENT OF CASH FLOWSType: CONCEPTS51. One of the reasons why cash flow analysis is popular is because:A. cash flows are more subjective than net income.B. cash flows are hard to understand.C. it is easy to manipulate, or spin the cash flows.D. it is difficult to manipulate, or spin the cash flows.E. None of the above.Difficulty level: MediumTopic: CASH FLOW MANAGEMENTType: CONCEPTS52. A firm has $300 in inventory, $600 in fixed assets, $200 in accounts receivable, $100 in accounts payable, and $50 in cash. What is the amount of the current assets?A. $500B. $550C. $600D. $1,150E. $1,200Current assets = $300 + $200 + $50 = $550Difficulty level: MediumTopic: CURRENT ASSETSType: PROBLEMS53. Total assets are $900, fixed assets are $600, long-term debt is $500, and short-term debt is $200. What is the amount of net working capital?A. $0B. $100C. $200D. $300E. $400Net working capital = $900 - $600 - $200 = $100Difficulty level: MediumTopic: NET WORKING CAPITALType: PROBLEMS54. Brad's Company has equipment with a book value of $500 that could be sold today at a 50% discount. Its inventory is valued at $400 and could be sold to a competitor for that amount. The firm has $50 in cash and customers owe it $300. What is the accounting value of its liquid assets?A. $50B. $350C. $700D. $750E. $1,000Liquid assets = $400 + $50 + $300 = $750Difficulty level: MediumTopic: LIQUIDITYType: PROBLEMS55. Martha's Enterprises spent $2,400 to purchase equipment three years ago. This equipment is currently valued at $1,800 on today's balance sheet but could actually be sold for $2,000. Net working capital is $200 and long-term debt is $800. Assuming the equipment is the firm's only fixed asset, what is the book value of shareholders' equity?A. $200B. $800C. $1,200D. $1,400E. The answer cannot be determined from the informationprovidedBook value of shareholders' equity = $1,800 + $200 - $800 = $1,200Difficulty level: MediumTopic: BOOK VALUEType: PROBLEMS。

CHAPTER 20INTERNATIONAL CORPORATE FINANCEAnswers to Concepts Review and Critical Thinking Questions1. a.The dollar is selling at a premium because it is more expensive in the forward market than inthe spot market (SFr 1.53 versus SFr 1.50).b.The franc is expected to depreciate relative to the dollar because it will take more francs to buyone dollar in the future than it does today.c.Inflation in Switzerland is higher than in the United States, as are nominal interest rates.2.The exchange rate will increase, as it will take progressively more pesos to purchase a dollar. This isthe relative PPP relationship.3. a.The Australian dollar is expected to weaken relative to the dollar, because it will take moreA$ in the future to buy one dollar than it does today.b.The inflation rate in Australia is higher.c.Nominal interest rates in Australia are higher; relative real rates in the two countries are thesame.4. A Yankee bond is most accurately described by d.5. No. For example, if a country’s currency strengthens, imports bee cheaper (good), but its exports beemore expensive for others to buy (bad). The reverse is true for currency depreciation.6.Additional advantages include being closer to the final consumer and, thereby, saving ontransportation, significantly lower wages, and less exposure to exchange rate risk. Disadvantages include political risk and costs of supervising distant operations.7.One key thing to remember is that dividend payments are made in the home currency. Moregenerally, it may be that the owners of the multinational are primarily domestic and are ultimately concerned about their wealth denominated in their home currency because, unlike a multinational, they are not internationally diversified.8. a.False. If prices are rising faster in Great Britain, it will take more pounds to buy the sameamount of goods that one dollar can buy; the pound will depreciate relative to the dollar.b.False. The forward market would already reflect the projected deterioration of the euro relativeto the dollar. Only if you feel that there might be additional, unanticipated weakening of the euro that isn’t reflected in forward rates today, will the forward hedge protect you against additional declines.c.True. The market would only be correct on average, while you would be correct all the time.9. a.American exporters: their situation in general improves because a sale of the exported goods fora fixed number of euros will be worth more dollars.American importers: their situation in general worsens because the purchase of the importedgoods for a fixed number of euros will cost more in dollars.b.American exporters: they would generally be better off if the British government’s intentionsresult in a strengthened pound.American importers: they would generally be worse off if the pound strengthens.c.American exporters: they would generally be much worse off, because an extreme case of fiscalexpansion like this one will make American goods prohibitively expensive to buy, or else Brazilian sales, if fixed in cruzeiros, would bee worth an unacceptably low number of dollars.American importers: they would generally be much better off, because Brazilian goods will beemuch cheaper to purchase in dollars.10.IRP is the most likely to hold because it presents the easiest and least costly means to exploit anyarbitrage opportunities. Relative PPP is least likely to hold since it depends on the absence of market imperfections and frictions in order to hold strictly.11.It all depends on whether the forward market expects the same appreciation over the period andwhether the expectation is accurate. Assuming that the expectation is correct and that other traders do not have the same information, there will be value to hedging the currency exposure.12.One possible reason investment in the foreign subsidiary might be preferred is if this investmentprovides direct diversification that shareholders could not attain by investing on their own. Another reason could be if the political climate in the foreign country was more stable than in the home country. Increased political risk can also be a reason you might prefer the home subsidiary investment. Indonesia can serve as a great example of political risk. If it cannot be diversified away, investing in this type of foreign country will increase the systematic risk. As a result, it will raise the cost of the capital, and could actually decrease the NPV of the investment.13.Yes, the firm should undertake the foreign investment. If, after taking into consideration all risks, aproject in a foreign country has a positive NPV, the firm should undertake it. Note that in practice, the stated assumption (that the adjustment to the discount rate has taken into consideration all political and diversification issues) is a huge task. But once that has been addressed, the net present value principle holds for foreign operations, just as for domestic.14.If the foreign currency depreciates, the U.S. parent will experience an exchange rate loss when theforeign cash flow is remitted to the U.S. This problem could be overe by selling forward contracts.Another way of overing this problem would be to borrow in the country where the project is located.15.False. If the financial markets are perfectly petitive, the difference between the Eurodollar rate andthe U.S. rate will be due to differences in risk and government regulation. Therefore, speculating in those markets will not be beneficial.16.The difference between a Eurobond and a foreign bond is that the foreign bond is denominated in thecurrency of the country of origin of the issuing pany. Eurobonds are more popular than foreign bonds because of registration differences. Eurobonds are unregistered securities.Solutions to Questions and ProblemsNOTE: 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 for each problem is found without rounding during any step in the problem.Basicing the quotes from the table, we get:a.$50(€0.7870/$1) = €39.35b.$1.2706c.€5M($1.2706/€) = $6,353,240d.New Zealand dollare.Mexican pesof.(P11.0023/$1)($1.2186/€1) = P13.9801/€This is a cross rate.g.The most valuable is the Kuwait dinar. The least valuable is the Indonesian rupiah.2. a.You would prefer £100, since:(£100)($.5359/£1) = $53.59b.You would still prefer £100. Using the $/£ exchange rate and the SF/£ exchange rate to find theamount of Swiss francs £100 will buy, we get:(£100)($1.8660/£1)(SF .8233) = SF 226.6489ing the quotes in the book to find the SF/£ cross rate, we find:(SF 1.2146/$1)($0.5359/£1) = SF 2.2665/£1The £/SF exchange rate is the inverse of the SF/£ exchange rate, so:£1/SF .4412 = £0.4412/SF 13. a.F180= ¥104.93 (per $). The yen is selling at a premium because it is more expensive in theforward market than in the spot market ($0.0093659 versus $0.009530).b.F90 = $1.8587/£. The pound is selling at a discount because it is less expensive in the forwardmarket than in the spot market ($0.5380 versus $0.5359).c.The value of the dollar will fall relative to the yen, since it takes more dollars to buy one yen inthe future than it does today. The value of the dollar will rise relative to the pound, because it will take fewer dollars to buy one pound in the future than it does today.4. a.The U.S. dollar, since one Canadian dollar will buy:(Can$1)/(Can$1.26/$1) = $0.7937b.The cost in U.S. dollars is:(Can$2.19)/(Can$1.26/$1) = $1.74Among the reasons that absolute PPP doesn’t hold are tariffs an d other barriers to trade, transactions costs, taxes, and different tastes.c.The U.S. dollar is selling at a discount, because it is less expensive in the forward market thanin the spot market (Can$1.22 versus Can$1.26).d.The Canadian dollar is expected to appreciate in value relative to the dollar, because it takesfewer Canadian dollars to buy one U.S. dollar in the future than it does today.e.Interest rates in the United States are probably higher than they are in Canada.5. a.The cross rate in ¥/£ terms is:(¥115/$1)($1.70/£1) = ¥195.5/£1b.The yen is quoted too low relative to the pound. Take out a loan for $1 and buy ¥115. Use the¥115 to purchase pounds at the cross-rate, which will give you:¥115(£1/¥185) = £0.6216Use the pounds to buy back dollars and repay the loan. The cost to repay the loan will be:£0.6216($1.70/£1) = $1.0568You arbitrage profit is $0.0568 per dollar used.6.We can rearrange the interest rate parity condition to answer this question. The equation we will useis:R FC = (F T– S0)/S0 + R USUsing this relationship, we find:Great Britain: R FC = (£0.5394 – £0.5359)/£0.5359 + .038 = 4.45%Japan: R FC = (¥104.93 – ¥106.77)/¥106.77 + .038 = 2.08%Switzerland: R FC = (SFr 1.1980 – SFr 1.2146)/SFr 1.2146 + .038 = 2.43%7.If we invest in the U.S. for the next three months, we will have:$30M(1.0045)3 = $30,406,825.23If we invest in Great Britain, we must exchange the dollars today for pounds, and exchange the pounds for dollars in three months. After making these transactions, the dollar amount we would have in three months would be:($30M)(£0.56/$1)(1.0060)3/(£0.59/$1) = $28,990,200.05We should invest in U.S.ing the relative purchasing power parity equation:F t = S0 × [1 + (h FC– h US)]tWe find:Z3.92 = Z3.84[1 + (h FC– h US)]3h FC– h US = (Z3.92/Z3.84)1/3– 1h FC– h US = .0069Inflation in Poland is expected to exceed that in the U.S. by 0.69% over this period.9.The profit will be the quantity sold, times the sales price minus the cost of production. Theproduction cost is in Singapore dollars, so we must convert this to U.S. dollars. Doing so, we find that if the exchange rates stay the same, the profit will be:Profit = 30,000[$145 – {(S$168.50)/(S$1.6548/$1)}]Profit = $1,295,250.18If the exchange rate rises, we must adjust the cost by the increased exchange rate, so:Profit = 30,000[$145 – {(S$168.50)/1.1(S$1.6548/$1)}]Profit = $1,572,954.71If the exchange rate falls, we must adjust the cost by the decreased exchange rate, so:Profit = 30,000[$145 – {(S$168.50)/0.9(S$1.6548/$1)}]Profit = $955,833.53To calculate the breakeven change in the exchange rate, we need to find the exchange rate that make the cost in Singapore dollars equal to the selling price in U.S. dollars, so:$145 = S$168.50/S TS T = S$1.1621/$1S T = –.2978 or –29.78% decline10. a.If IRP holds, then:F180 = (Kr 6.43)[1 + (.08 – .05)]1/2F180 = Kr 6.5257Since given F180 is Kr6.56, an arbitrage opportunity exists; the forward premium is too high.Borrow Kr1 today at 8% interest. Agree to a 180-day forward contract at Kr 6.56. Convert the loan proceeds into dollars:Kr 1 ($1/Kr 6.43) = $0.15552Invest these dollars at 5%, ending up with $0.15931. Convert the dollars back into krone as$0.15931(Kr 6.56/$1) = Kr 1.04506Repay the Kr 1 loan, ending with a profit of:Kr1.04506 – Kr1.03868 = Kr 0.00638b.To find the forward rate that eliminates arbitrage, we use the interest rate parity condition, so:F180 = (Kr 6.43)[1 + (.08 – .05)]1/2F180 = Kr 6.525711.The international Fisher effect states that the real interest rate across countries is equal. We canrearrange the international Fisher effect as follows to answer this question:R US– h US = R FC– h FCh FC = R FC + h US– R USa.h AUS = .05 + .035 – .039h AUS = .046 or 4.6%b.h CAN = .07 + .035 – .039h CAN = .066 or 6.6%c.h TAI = .10 + .035 – .039h TAI = .096 or 9.6%12. a.The yen is expected to get stronger, since it will take fewer yen to buy one dollar in the futurethan it does today.b.h US– h JAP (¥129.76 – ¥131.30)/¥131.30h US– h JAP = – .0117 or –1.17%(1 – .0117)4– 1 = –.0461 or –4.61%The approximate inflation differential between the U.S. and Japan is – 4.61% annually.13. We need to find the change in the exchange rate over time, so we need to use the relative purchasingpower parity relationship:F t = S0 × [1 + (h FC– h US)]TUsing this relationship, we find the exchange rate in one year should be:F1 = 215[1 + (.086 – .035)]1F1 = HUF 225.97The exchange rate in two years should be:F2 = 215[1 + (.086 – .035)]2F2 = HUF 237.49And the exchange rate in five years should be:F5 = 215[1 + (.086 – .035)]5F5 = HUF 275.71ing the interest-rate parity theorem:(1 + R US) / (1 + R FC) = F(0,1) / S0We can find the forward rate as:F(0,1) = [(1 + R US) / (1 + R FC)] S0F(0,1) = (1.13 / 1.08)$1.50/£F(0,1) = $1.57/£Intermediate15.First, we need to forecast the future spot rate for each of the next three years. From interest rate andpurchasing power parity, the expected exchange rate is:E(S T) = [(1 + R US) / (1 + R FC)]T S0So:E(S1) = (1.0480 / 1.0410)1 $1.22/€ = $1.2282/€E(S2) = (1.0480 / 1.0410)2 $1.22/€ = $1.2365/€E(S3) = (1.0480 / 1.0410)3 $1.22/€ = $1.2448/€Now we can use these future spot rates to find the dollar cash flows. The dollar cash flow each year will be:Year 0 cash flow = –€$12,000,000($1.22/€) = –$14,640,000.00Year 1 cash flow = €$2,700,000($1.2282/€) = $3,316,149.86Year 2 cash flow = €$3,500,000($1.2365/€) = $4,327,618.63Year 3 cash flow = (€3,300,000 + 7,400,000)($1.2448/€) = $13,319,111.90And the NPV of the project will be:NPV = –$14,640,000 + $3,316,149.86/1.13 + $4,4327,618.63/1.132 + $13,319,111.90/1.133NPV = $914,618.7316. a.Implicitly, it is assumed that interest rates won’t change over the life of the project, but theexchange rate is projected to decline because the Euroswiss rate is lower than the Eurodollar rate.b.We can use relative purchasing power parity to calculate the dollar cash flows at each time. Theequation is:E[S T] = (SFr 1.72)[1 + (.07 – .08)]TE[S T] = 1.72(.99)TSo, the cash flows each year in U.S. dollar terms will be:t SFr E[S T] US$0 –27.0M –$15,697,674.421 +7.5M 1.7028 $4,404,510.222 +7.5M 1.6858 $4,449,000.223 +7.5M 1.6689 $4,493,939.624 +7.5M 1.6522 $4,539,332.955 +7.5M 1.6357 $4,585,184.79And the NPV is:NPV = –$15,697,674.42 + $4,404,510.22/1.13 + $4,449,000.22/1.132 + $4,493,939.62/1.133 + $4,539,332.95/1.134 + $4,585,184.79/1.135NPV = $71,580.10c.Rearranging the relative purchasing power parity equation to find the required return in Swissfrancs, we get:R SFr = 1.13[1 + (.07 – .08)] – 1R SFr = 11.87%So, the NPV in Swiss francs is:NPV = –SFr 27.0M + SFr 7.5M(PVIFA11.87%,5)NPV = SFr 123,117.76Converting the NPV to dollars at the spot rate, we get the NPV in U.S. dollars as:NPV = (SFr 123,117.76)($1/SFr 1.72)NPV = $71,580.10Challenge17. a.The domestic Fisher effect is:1 + R US = (1 + r US)(1 + h US)1 + r US = (1 + R US)/(1 + h US)This relationship must hold for any country, that is:1 + r FC = (1 + R FC)/(1 + h FC)The international Fisher effect states that real rates are equal across countries, so:1 + r US = (1 + R US)/(1 + h US) = (1 + R FC)/(1 + h FC) = 1 + r FCb.The exact form of unbiased interest rate parity is:E[S t] = F t = S0 [(1 + R FC)/(1 + R US)]tc.The exact form for relative PPP is:E[S t] = S0 [(1 + h FC)/(1 + h US)]td.For the home currency approach, we calculate the expected currency spot rate at time t as:E[S t] = (€0.5)[1.07/1.05]t= (€0.5)(1.019)tWe then convert the euro cash flows using this equation at every time, and find the present value. Doing so, we find:NPV = –[€2M/(€0.5)] + {€0.9M/[1.019(€0.5)]}/1.1 + {€0.9M/[1.0192(€0.5)]}/1.12 + {€0.9M/[1.0193(€0.5/$1)]}/1.13NPV = $316,230.72For the foreign currency approach, we first find the return in the euros as:R FC = 1.10(1.07/1.05) – 1 = 0.121Next, we find the NPV in euros as:NPV = –€2M + (€0.9M)/1.121 + (€0.9M)/1.1212+ (€0.9M)/1.1213= €158,115.36And finally, we convert the euros to dollars at the current exchange rate, which is:NPV ($) = €158,115.36 /(€0.5/$1) = $316,230.72。

30.1 The new corporation issues $300,000 in new debt. The merger creates $100,000 ofgoodwill because the merger is a purchase.Balance SheetLager Brewing(in $ thousands)Current assets $480 Current liabilities $200Other assets 140 Long-term debt 400Net fixed assets 580 Equity 700Goodwill 100Total assets $1,300 Total liabilities $1,300 30.2 If the balance sheet for Philadelphia Pretzel shows assets at book value instead of marketvalue, the goodwill will be only $60,000 (=$300,000 - $240,000). Thus, the net fixed assetsare $620,000 (=$1,300,000 - $480,000 - $140,000 - $60,000).Balance SheetLager Brewing(in $ thousands)Current assets $480 Current liabilities $200Other assets 140 Long-term debt 400Net fixed assets 620 Equity 700Goodwill 60Total assets $1,300 Total liabilities $1,300 30.3Balance SheetLager Brewing(in $ thousands)Current assets $480 Current liabilities $280Other assets 140 Long-term debt 100Net fixed assets 580 Equity 820Total assets $1,200 Total liabilities $1,200 30.4 a. False. Although the reasoning seems correct, the Stillman-Eckbo data do not supportthe monopoly power theory.b. True. When managers act in their own interest, acquisitions are an important controldevice for shareholders. It appears that some acquisitions and takeovers are theconsequence of underlying conflicts between managers and shareholders.c. False. Even if markets are efficient, the presence of synergy will make the value ofthe combined firm different from the sum of the values of the separate firms.Incremental cash flows provide the positive NPV of the transaction.d. False. In an efficient market, traders will value takeovers based on “Fundamentalfactors” regardless of the time horizon. Recall that the evidence as a whole suggestsefficiency in the markets. Mergers should be no different.e. False. The tax effect of an acquisition depends on whether the merger is taxable ornon-taxable. In a taxable merger, there are two opposing factors to consider, thecapital gains effect and the write-up effect. The net effect is the sum of these twoeffects.f. True. Because of the coinsurance effect, wealth might be transferred from thestockholders to the bondholders. Acquisition analysis usually disregards this effectand considers only the total value.30.530.6 a. The weather conditions are independent. Thus, the joint probabilities are theproducts of the individual probabilities.Possible states Joint probabilityRain Rain 0.1 x 0.1=0.01Rain Warm 0.1 x 0.4=0.04Rain Hot 0.1 x 0.5=0.05Warm Rain 0.4 x 0.1=0.04Warm Warm 0.4 x 0.4=0.16Warm Hot 0.4 x 0.5=0.20Hot Rain 0.5 x 0.1=0.05Hot Warm 0.5 x 0.4=0.20Hot Hot 0.5 x 0.5=0.25Since the state Rain Warm has the same outcome (revenue) as Warm Rain, theirprobabilities can be added. The same is true of Rain Hot, Hot Rain and Warm Hot,Hot Warm. Thus the joint probabilities arePossibleJoint probabilitystatesRain Rain 0.01Rain Warm 0.08Rain Hot 0.10Warm Warm 0.16Warm Hot 0.40Hot Hot 0.25The joint values are the sums of the values of the two companies for the particularstate.Possible states Joint valueRain Rain $200,000Rain Warm 300,000Warm Warm 400,000Rain Hot 500,000Warm Hot 600,000Hot Hot 800,000b. Recall, if a firm cannot service its debt, the bondholders receive the value of the assets.Thus, the value of the debt is the value of the company if the face value of the debt isgreater than the value of the company. If the value of the company is greater than the value of the debt, the value of the debt is its face value. Here the value of the common stock is always the residual value of the firm over the value of the debt.Joint Prob. Joint Value Debt Value Stock Value0.01 $200,000 $200,000 $00.08 300,000 300,000 00.16 400,000 400,000 00.10 500,000 400,000 100,0000.40 600,000 400,000 200,0000.25 800,000 400,000 400,000c. To show that the value of the combined firm is the sum of the individual values, youmust show that the expected joint value is equal to the sum of the separate expected values.Expected joint value= 0.01($200,000) + 0.08($300,000) + 0.16($400,000) + 0.10($500,000) +0.40($600,000) + 0.25($800,000)= $580,000Since the firms are identical, the sum of the expected values is twice the expectedvalue of either.Expected individual value = 0.1($100,000) + 0.4($200,000) + 0.5($400,000) = $290,000 Expected combined value = 2($290,000) = $580,000d. The bondholders are better off if the value of the debt after the merger is greater thanthe value of the debt before the merger.Value of the debt before the merger:The value of debt for either company= 0.1($100,000) + 0.4($200,000) + 0.5($200,000) = $190,000Total value of debt before the merger = 2($190,000) = $380,000Value of debt after the merger= 0.01($200,000) + 0.08($300,000) + 0.16($400,000) + 0.10($400,000) +0.40($400,000) +0.25($400,000)= $390,000The bondholders are $10,000 better off after the merger.30.7 The decision hinges upon the risk of surviving. The final decision should hinge on thewealth transfer from bondholders to stockholders when risky projects are undertaken.High-risk projects will reduce the expected value of the bondholders’ claims on the firm.The telecommunications business is riskier than the utilities business. If the total value of the firm does not change, the increase in risk should favor the stockholder. Hence,management should approve this transaction. Note, if the total value of the firm dropsbecause of the transaction and the wealth effect is lower than the reduction in total value, management should reject the project.30.8 If the market is “smart,” the P/E ratio will not be constant.a. Value = $2,500 + $1,000 = $3,500b. EPS = Post-merger earnings / Total number of shares=($100 + $100)/200 =$1c. Price per share = Value/Total number of shares=$3,500/200 =$17.50d. If the market is “fooled,” the P/E ratio will be constant at $25.Value = P/E * Total number of shares= 25 * 200 = $5,000EPS = Post-merger earnings / Total number of shares=$5,000/200 = $25.0030.9 a. After the merger, Arcadia Financial will have 130,000 [=10,000 + (50,000)(6/10)]shares outstanding. The earnings of the combined firm will be $325,000. The earningsper share of the combined firm will be $2.50 (=$325,000/130,000). The acquisition will increase the EPS for the stockholders from $2.25 to $2.50.b. There will be no effect on the original Arcadia stockholders. No synergies exist in thismerger since Arcadia is buying Coldran at its market price. Examining the relativevalues of the two firms sees the latter point.Share price of Arcadia = (16 * $225,000) / 100,000=$36Share price of Coldran = (10.8 * $100,000) / 50,000=$21.60The relative value of these prices is $21.6/$36 = 0.6. Since Coldran’s shareholdersreceive 0.6 shares of Arcadia for every share of Coldran, no synergies exist.30.10 a. The synergy will be the discounted incremental cash flows. Since the cash flows areperpetual, this amount isb. The value of Flash-in-the-Pan to Fly-by-Night is the synergy plus the current marketvalue of Flash-in-the-Pan.V = $7,500,000 + $20,000,000= $27,500,000c. Cash alternative = $15,000,000Stock alternative = 0.25($27,500,000 + $35,000,000)= $15,625,000d. NPV of cash alternative = V - Cost=$27,500,000 - $15,000,000=$12,500,000NPV of stock alternative = V - Cost=$27,500,000 - $15,625,000=$11,875,000e. Use the cash alternative, its NPV is greater.30.11 a. The value of Portland Industries before the merger is $9,000,000 (=750,000x12). Thisvalue is also the discounted value of the expected future dividends.$9,000,000 =r = 0.1025 = 10.25%r is the risk-adjusted discount rate for Portland’s expected future dividends.the value of Portland Industries after the merger isThis is the value of Portland Industries to Freeport.b. NPV = Gain - Cost= $14,815,385 - ($40x250, 000)= $4,815,385c. If Freeport offers stock, the value of Portland Industries to Freeport is the same, but thecost differs.Cost = (Fraction of combined firm owned by Portland’s stockholders)x(Value of the combined firm)Value of the combined firm = (Value of Freeport before merger)+ (Value of Portland to Freeport)= $15x1,000,000 + $14,815,385= $29,815,385Cost = 0.375x$29,815,385= $11,180,769NPV= $14,815,385 - $11,180,769=$3,634,616d. The acquisition should be attempted with a cash offer since it provides a higher NPV.e. The value of Portland Industries after the merger isThis is the value of Portland Industries to Freeport.NPV = Gain-Cost=$11,223,529 - ($40x250,000)=$1,223,529If Freeport offers stock, the value of Portland Industries to Freeport is the same, but the cost differs.Cost = (Fraction of combined firm owned by Portland’s stockholders)x(Value of the combined firm)Value of the combined firm = (Value of Freeport before merger)+ (Value of Portland to Freeport)= $15x1,000,000 + $11,223,529= $26,223,529Cost = 0.375 * $26,223,529=$9,833,823NPV = $11,223,529 - $9,833,823=$1,389,706The acquisition should be attempted with a stock offer since it provides a higher NPV.30.12 a. Number of shares after acquisition=30 + 15 = 45 milStock price of Harrods after acquisition = 1,000/45=22.22 poundsb. Value of Selfridge stockholders after merger:α * 1,000 = 300α = 30%New shares issued = 12.86 mil12.86:20 = 0.643:1The proper exchange ratio should be 0.643 to make the stock offer’s value to Selfridgeequivalent to the cash offer.30.13 To evaluate this proposal, look at the present value of the incremental cash flows.Cash Flows to Company A(in $ million)Year 0 1 2 3 4 5Acquisition of B -550Dividends from B 150 32 5 20 30 45Tax-loss carryforwards 25 25Terminal value 600Total -400 32 30 45 30 645 The additional cash flows from the tax-loss carry forwards and the proposed level of debt should be discounted at the cost of debt because they are determined with very littleuncertainty.The after-tax cash flows are subject to normal business risk and must be discounted at anormal rate.Beta coefficient for the bond = 0.25 = [(8%-6%)/8%].Beta coefficient for the company = 1 = [(0.25)2 + (1.25)(0.75)]Discount rate for normal operations:r = 6% + 8% (1) = 14%Discount rate for dividends:The new beta coefficient for the company, 1, must be the weighted average of the debtbeta and the stock beta.1 = 0.5(0.25) + 0.5(βs)βs = 1.75r = 6% + 8%(1.75) = 20%Because the NPV of the acquisition is negative, Company A should not acquireCompany B.30.14 The commonly used defensive tactics by target-firm managers include:i. corporate charter amendments like super-majority amendment or staggering theelection of board members.ii. repurchase standstill agreements.iii. exclusionary self-tenders.iv. going private and leveraged buyouts.v. other devices like golden parachutes, scorched earth strategy, poison pill, ..., etc.Mini Case: U.S.Steel’s case.You have 3 choices: tender, or do not tender or sell in the market. If you do sell your shares in the market, at some point, somebody else would need to make a decision in “tender” or “not tender” as well.It is important to recognize that the firm has about 60 million shares outstanding (since 30 million shares will give US Steel 50.1% of Marathon shares). Let’s consider the possible sellingthe market price.If you choose not to tender, and 30 million shares were tendered US Steel succeeds to gain50.1% control, you will only receive $85 a share. If you do tender, the price you will receive will be no worse than $85 a share and can be as high as $125 a share. Depending on the number of shares tendered, you will receive one of the following prices.If only 50.1% tendered, you will get $125 per share.If the shares tendered exceed 50.1% but less than 100%, you will get more than $105 ashare.If all 60 million shares were tendered, you will get $105 per share. (which is )It is clear that, in the above 3 cases, when you are not sure about whether US Steel will succeed or not, you will be better off to tender your shares than not tender. This is because at best, you will only receive $85 per share if you choose not to tender.版权申明本文部分内容，包括文字、图片、以及设计等在网上搜集整理。

Chapter 02 Financial Statements and Cash Flow Answer KeyMultiple Choice Questions1.The financial statement showing a firm's accounting value on a particular date is the:A.income statement.B.balance sheet.C.statement of cash flows.D.tax reconciliation statement.E.shareholders' equity sheet.Difficulty level: EasyTopic: BALANCE SHEETType: DEFINITIONS2.A current asset is:A.an item currently owned by the firm.B.an item that the firm expects to own within the next year.C.an item currently owned by the firm that will convert to cash within the next 12 months.D.the amount of cash on hand the firm currently shows on its balance sheet.E.the market value of all items currently owned by the firm.Difficulty level: EasyTopic: CURRENT ASSETSType: DEFINITIONS3.The long-term debts of a firm are liabilities:A.that come due within the next 12 months.B.that do not come due for at least 12 months.C.owed to the firm's suppliers.D.owed to the firm's shareholders.E.the firm expects to incur within the next 12 months. Difficulty level: EasyTopic: LONG-TERM DEBTType: DEFINITIONS working capital is defined as:A.total liabilities minus shareholders' equity.B.current liabilities minus shareholders' equity.C.fixed assets minus long-term liabilities.D.total assets minus total liabilities.E.current assets minus current liabilities.Difficulty level: EasyTopic: NET WORKING CAPITALType: DEFINITIONS5.A(n) ____ asset is one which can be quickly converted into cash without significant loss in value.A.currentB.fixedC.intangibleD.liquidE.long-termDifficulty level: EasyTopic: LIQUID ASSETSType: DEFINITIONS6.The financial statement summarizing a firm's accounting performance over a period of time is the:A.income statement.B.balance sheet.C.statement of cash flows.D.tax reconciliation statement.E.shareholders' equity sheet.Difficulty level: EasyTopic: INCOME STATEMENTType: DEFINITIONS7.Noncash items refer to:A.the credit sales of a firm.B.the accounts payable of a firm.C.the costs incurred for the purchase of intangible fixed assets.D.expenses charged against revenues that do not directly affect cash flow.E.all accounts on the balance sheet other than cash on hand.Difficulty level: EasyTopic: NONCASH ITEMSType: DEFINITIONS8.Your _____ tax rate is the amount of tax payable on the next taxable dollar you earn.A.deductibleB.residualC.totalD.averageE.marginalDifficulty level: EasyTopic: MARGINAL TAX RATESType: DEFINITIONS9.Your _____ tax rate is the total taxes you pay divided by your taxable income.A.deductibleB.residualC.totalD.averageE.marginalDifficulty level: EasyTopic: AVERAGE TAX RATESType: DEFINITIONS10._____ refers to the cash flow that results from the firm's ongoing, normal business activities.A.Cash flow from operating activitiesB.Capital spending working capitalD.Cash flow from assetsE.Cash flow to creditorsDifficulty level: MediumTopic: CASH FLOW FROM OPERATING ACTIVITIESType: DEFINITIONS11._____ refers to the changes in net capital assets.A.Operating cash flowB.Cash flow from investing working capitalD.Cash flow from assetsE.Cash flow to creditorsDifficulty level: MediumTopic: CASH FLOW FROM INVESTINGType: DEFINITIONS12._____ refers to the difference between a firm's current assets and its current liabilities.A.Operating cash flowB.Capital spending working capitalD.Cash flow from assetsE.Cash flow to creditorsDifficulty level: EasyTopic: NET WORKING CAPITALType: DEFINITIONS13._____ is calculated by adding back noncash expenses to net income and adjusting for changes in current assets and liabilities.A.Operating cash flowB.Capital spending working capitalD.Cash flow from operationsE.Cash flow to creditorsDifficulty level: MediumTopic: CASH FLOW FROM OPERATIONSType: DEFINITIONS14._____ refers to the firm's interest payments less any net new borrowing.A.Operating cash flowB.Capital spending working capitalD.Cash flow from shareholdersE.Cash flow to creditorsDifficulty level: MediumTopic: CASH FLOW TO CREDITORSType: DEFINITIONS15._____ refers to the firm's dividend payments less any net new equity raised.A.Operating cash flowB.Capital spending working capitalD.Cash flow from creditorsE.Cash flow to stockholdersDifficulty level: MediumTopic: CASH FLOW TO STOCKHOLDERSType: DEFINITIONS16.Earnings per share is equal to: income divided by the total number of shares outstanding. income divided by the par value of the common stock.C.gross income multiplied by the par value of the common stock.D.operating income divided by the par value of the common stock. income divided by total shareholders' equity.Difficulty level: MediumTopic: EARNINGS PER SHAREType: DEFINITIONS17.Dividends per share is equal to dividends paid:A.divided by the par value of common stock.B.divided by the total number of shares outstanding.C.divided by total shareholders' equity.D.multiplied by the par value of the common stock.E.multiplied by the total number of shares outstanding.Difficulty level: MediumTopic: DIVIDENDS PER SHAREType: DEFINITIONS18.Which of the following are included in current assets?I. equipmentII. inventoryIII. accounts payableIV. cashA.II and IV onlyB.I and III onlyC.I, II, and IV onlyD.III and IV onlyE.II, III, and IV onlyDifficulty level: MediumTopic: CURRENT ASSETSType: CONCEPTS19.Which of the following are included in current liabilities?I. note payable to a supplier in eighteen monthsII. debt payable to a mortgage company in nine monthsIII. accounts payable to suppliersIV. loan payable to the bank in fourteen monthsA.I and III onlyB.II and III onlyC.III and IV onlyD.II, III, and IV onlyE.I, II, and III onlyDifficulty level: MediumTopic: CURRENT LIABILITIESType: CONCEPTS20.An increase in total assets:A.means that net working capital is also increasing.B.requires an investment in fixed assets.C.means that shareholders' equity must also increase.D.must be offset by an equal increase in liabilities and shareholders' equity.E.can only occur when a firm has positive net income.Difficulty level: MediumTopic: BALANCE SHEETType: CONCEPTS21.Which one of the following assets is generally the most liquid?A.inventoryB.buildingsC.accounts receivableD.equipmentE.patentsDifficulty level: MediumTopic: LIQUIDITYType: CONCEPTS22.Which one of the following statements concerning liquidity is correct?A.If you sold an asset today, it was a liquid asset.B.If you can sell an asset next year at a price equal to its actual value, the asset is highly liquid.C.Trademarks and patents are highly liquid.D.The less liquidity a firm has, the lower the probability the firm will encounter financial difficulties.E.Balance sheet accounts are listed in order of decreasing liquidity.Difficulty level: MediumTopic: LIQUIDITYType: CONCEPTS23.Liquidity is:A.a measure of the use of debt in a firm's capital structure.B.equal to current assets minus current liabilities.C.equal to the market value of a firm's total assets minus its current liabilities.D.valuable to a firm even though liquid assets tend to be less profitable to own.E.generally associated with intangible assets.Difficulty level: MediumTopic: LIQUIDITYType: CONCEPTS24.Which of the following accounts are included in shareholders' equity?I. interest paidII. retained earningsIII. capital surplusIV. long-term debtA.I and II onlyB.II and IV onlyC.I and IV onlyD.II and III onlyE.I and III onlyDifficulty level: MediumTopic: SHAREHOLDERS' EQUITYType: CONCEPTS25.Book value:A.is equivalent to market value for firms with fixed assets.B.is based on historical cost.C.generally tends to exceed market value when fixed assets are included.D.is more of a financial than an accounting valuation.E.is adjusted to market value whenever the market value exceeds the stated book value. Difficulty level: MediumTopic: BOOK VALUEType: CONCEPTS26.When making financial decisions related to assets, you should:A.always consider market values.B.place more emphasis on book values than on market values.C.rely primarily on the value of assets as shown on the balance sheet.D.place primary emphasis on historical costs.E.only consider market values if they are less than book values.Difficulty level: MediumTopic: MARKET VALUEType: CONCEPTS27.As seen on an income statement:A.interest is deducted from income and increases the total taxes incurred.B.the tax rate is applied to the earnings before interest and taxes when the firm has both depreciation and interest expenses.C.depreciation is shown as an expense but does not affect the taxes payable.D.depreciation reduces both the pretax income and the net income.E.interest expense is added to earnings before interest and taxes to get pretax income. Difficulty level: MediumTopic: INCOME STATEMENTType: CONCEPTS28.The earnings per share will:A.increase as net income increases.B.increase as the number of shares outstanding increase.C.decrease as the total revenue of the firm increases.D.increase as the tax rate increases.E.decrease as the costs decrease.Difficulty level: MediumTopic: EARNINGS PER SHAREType: CONCEPTS29.Dividends per share:A.increase as the net income increases as long as the number of shares outstanding remains constant.B.decrease as the number of shares outstanding decrease, all else constant.C.are inversely related to the earnings per share.D.are based upon the dividend requirements established by Generally Accepted Accounting Procedures.E.are equal to the amount of net income distributed to shareholders divided by the number of shares outstanding.Difficulty level: MediumTopic: DIVIDENDS PER SHAREType: CONCEPTS30.Earnings per shareA.will increase if net income increases and number of shares remains constant.B.will increase if net income decreases and number of shares remains constant.C.is number of shares divided by net income.D.is the amount of money that goes into retained earnings on a per share basis.E.None of the above.Difficulty level: MediumTopic: EARNINGS PER SHAREType: CONCEPTS31.According to Generally Accepted Accounting Principles, costs are:A.recorded as incurred.B.recorded when paid.C.matched with revenues.D.matched with production levels.E.expensed as management desires.Difficulty level: MediumTopic: MATCHING PRINCIPLEType: CONCEPTS32.Depreciation:A.is a noncash expense that is recorded on the income statement.B.increases the net fixed assets as shown on the balance sheet.C.reduces both the net fixed assets and the costs of a firm.D.is a non-cash expense which increases the net operating income.E.decreases net fixed assets, net income, and operating cash flows.Difficulty level: MediumTopic: NONCASH ITEMSType: CONCEPTS33.When you are making a financial decision, the most relevant tax rate is the _____ rate.A.averageB.fixedC.marginalD.totalE.variableDifficulty level: MediumTopic: MARGINAL TAX RATEType: CONCEPTS34.An increase in which one of the following will cause the operating cash flow to increase?A.depreciationB.changes in the amount of net fixed capital working capitalD.taxesE.costsDifficulty level: MediumTopic: OPERATING CASH FLOWType: CONCEPTS35.A firm starts its year with a positive net working capital. During the year, the firm acquires more short-term debt than it does short-term assets. This means that:A.the ending net working capital will be negative.B.both accounts receivable and inventory decreased during the year.C.the beginning current assets were less than the beginning current liabilities.D.accounts payable increased and inventory decreased during the year.E.the ending net working capital can be positive, negative, or equal to zero.Difficulty level: MediumTopic: CHANGE IN NET WORKING CAPITALType: CONCEPTS36.The cash flow to creditors includes the cash:A.received by the firm when payments are paid to suppliers.B.outflow of the firm when new debt is acquired.C.outflow when interest is paid on outstanding debt.D.inflow when accounts payable decreases.E.received when long-term debt is paid off.Difficulty level: MediumTopic: CASH FLOW TO CREDITORSType: CONCEPTS37.Cash flow to stockholders must be positive when:A.the dividends paid exceed the net new equity raised.B.the net sale of common stock exceeds the amount of dividends paid.C.no income is distributed but new shares of stock are sold.D.both the cash flow to assets and the cash flow to creditors are negative.E.both the cash flow to assets and the cash flow to creditors are positive. Difficulty level: MediumTopic: CASH FLOW TO STOCKHOLDERSType: CONCEPTS38.Which equality is the basis for the balance sheet?A.Fixed Assets = Stockholder's Equity + Current AssetsB.Assets = Liabilities + Stockholder's EquityC.Assets = Current Long-Term Debt + Retained EarningsD.Fixed Assets = Liabilities + Stockholder's EquityE.None of the aboveDifficulty level: MediumTopic: BALANCE SHEETType: CONCEPTS39.Assets are listed on the balance sheet in order of:A.decreasing liquidity.B.decreasing size.C.increasing size.D.relative life.E.None of the above.Difficulty level: MediumTopic: BALANCE SHEETType: CONCEPTS40.Debt is a contractual obligation that:A.requires the payout of residual flows to the holders of these instruments.B.requires a repayment of a stated amount and interest over the period.C.allows the bondholders to sue the firm if it defaults.D.Both A and B.E.Both B and C.Difficulty level: MediumTopic: DEBTType: CONCEPTS41.The carrying value or book value of assets:A.is determined under GAAP and is based on the cost of the asset.B.represents the true market value according to GAAP.C.is always the best measure of the company's value to an investor.D.is always higher than the replacement cost of the assets.E.None of the above.Difficulty level: MediumTopic: CARRYING VALUEType: CONCEPTS42.Under GAAP, a firm's assets are reported at:A.market value.B.liquidation value.C.intrinsic value.D.cost.E.None of the above.Difficulty level: MediumTopic: GAAPType: CONCEPTS43.Which of the following statements concerning the income statement is true?A.It measures performance over a specific period of time.B.It determines after-tax income of the firm.C.It includes deferred taxes.D.It treats interest as an expense.E.All of the above.Difficulty level: MediumTopic: INCOME STATEMENTType: CONCEPTS44.According to generally accepted accounting principles (GAAP), revenue is recognized as income when:A.a contract is signed to perform a service or deliver a good.B.the transaction is complete and the goods or services are delivered.C.payment is requested.D.income taxes are paid.E.All of the above.Difficulty level: MediumTopic: GAAP INCOME RECOGNITIONType: CONCEPTS45.Which of the following is not included in the computation of operating cash flow?A.Earnings before interest and taxesB.Interest paidC.DepreciationD.Current taxesE.All of the above are includedDifficulty level: MediumTopic: OPERATING CASH FLOWType: CONCEPTS capital spending is equal to: additions to net working capital.B.the net change in fixed assets. income plus depreciation.D.total cash flow to stockholders less interest and dividends paid.E.the change in total assets.Difficulty level: MediumTopic: NET CAPITAL SPENDINGType: CONCEPTS47.Cash flow to stockholders is defined as:A.interest payments.B.repurchases of equity less cash dividends paid plus new equity sold.C.cash flow from financing less cash flow to creditors.D.cash dividends plus repurchases of equity minus new equity financing.E.None of the above.Difficulty level: MediumTopic: CASH FLOW TO STOCKHOLDERSType: CONCEPTS48.Free cash flow is:A.without cost to the firm. income plus taxes.C.an increase in net working capital.D.cash that the firm is free to distribute to creditors and stockholders.E.None of the above.Difficulty level: MediumTopic: FREE CASH FLOWType: CONCEPTS49.The cash flow of the firm must be equal to:A.cash flow to stockholders minus cash flow to debtholders.B.cash flow to debtholders minus cash flow to stockholders.C.cash flow to governments plus cash flow to stockholders.D.cash flow to stockholders plus cash flow to debtholders.E.None of the above.Difficulty level: MediumTopic: CASH FLOWType: CONCEPTS50.Which of the following are all components of the statement of cash flows?A.Cash flow from operating activities, cash flow from investing activities, and cash flow from financing activitiesB.Cash flow from operating activities, cash flow from investing activities, and cash flow from divesting activitiesC.Cash flow from internal activities, cash flow from external activities, and cash flow from financing activitiesD.Cash flow from brokering activities, cash flow from profitable activities, and cash flow from non-profitable activitiesE.None of the above.Difficulty level: MediumTopic: STATEMENT OF CASH FLOWSType: CONCEPTS51.One of the reasons why cash flow analysis is popular is because:A.cash flows are more subjective than net income.B.cash flows are hard to understand.C.it is easy to manipulate, or spin the cash flows.D.it is difficult to manipulate, or spin the cash flows.E.None of the above.Difficulty level: MediumTopic: CASH FLOW MANAGEMENTType: CONCEPTS52.A firm has $300 in inventory, $600 in fixed assets, $200 in accounts receivable, $100 in accounts payable, and $50 in cash. What is the amount of the current assets?A.$500B.$550C.$600D.$1,150E.$1,200Current assets = $300 + $200 + $50 = $550Difficulty level: MediumTopic: CURRENT ASSETSType: PROBLEMS53.Total assets are $900, fixed assets are $600, long-term debt is $500, and short-term debt is $200. What is the amount of net working capital?A.$0B.$100C.$200D.$300E.$400Net working capital = $900 - $600 - $200 = $100Difficulty level: MediumTopic: NET WORKING CAPITALType: PROBLEMS54.Brad's Company has equipment with a book value of $500 that could be sold today at a 50% discount. Its inventory is valued at $400 and could be sold to a competitor for that amount. The firm has $50 in cash and customers owe it $300. What is the accounting value of its liquid assets?A.$50B.$350C.$700D.$750E.$1,000Liquid assets = $400 + $50 + $300 = $750Difficulty level: MediumTopic: LIQUIDITYType: PROBLEMS55.Martha's Enterprises spent $2,400 to purchase equipment three years ago. This equipment is currently valued at $1,800 on today's balance sheet but could actually be sold for $2,000. Net working capital is $200 and long-term debt is $800. Assuming the equipment is the firm's only fixed asset, what is the book value of shareholders' equity?A.$200B.$800C.$1,200D.$1,400E.The answer cannot be determined from the information providedBook value of shareholders' equity = $1,800 + $200 - $800 = $1,200Difficulty level: MediumTopic: BOOK VALUEType: PROBLEMS56.Art's Boutique has sales of $640,000 and costs of $480,000. Interest expense is $40,000 and depreciation is $60,000. The tax rate is 34%. What is the net income?A.$20,400B.$39,600C.$50,400D.$79,600E.$99,600Taxable income = $640,000 - $480,000 - $40,000 - $60,000 = $60,000; Tax= .34($60,000) = $20,400; Net income = $60,000 - $20,400 = $39,600Difficulty level: MediumTopic: NET INCOMEType: PROBLEMS57.Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $126,500?A.21.38%B.23.88%C.25.76%D.34.64%E.39.00%Tax = .15($50,000) + .25($25,000) + .34($25,000) + .39($126,500 - $100,000) = $32,585; Average tax rate = $32,585 $126,500 = .2576 = 25.76%Difficulty level: MediumTopic: MARGINAL TAX RATEType: PROBLEMS58.The tax rates are as shown. Your firm currently has taxable income of $79,400. How much additional tax will you owe if you increase your taxable income by $21,000?A.$7,004B.$7,014C.$7,140D.$7,160E.$7,174Additional tax = .34($100,000 - $79,400) + .39($79,400 + $21,000 - $100,000) = $7,160 Difficulty level: MediumTopic: TAXESType: PROBLEMS59.Your firm has net income of $198 on total sales of $1,200. Costs are $715 and depreciation is $145. The tax rate is 34%. The firm does not have interest expenses. What is the operating cash flow?A.$93B.$241C.$340D.$383E.$485Earnings before interest and taxes = $1,200 - $715 - $145 = $340; Tax = [$198 (1- .34)] - $198 = $102; Operating cash flow = $340 + $145 - $102 = $383Difficulty level: MediumTopic: OPERATING CASH FLOWType: PROBLEMS60.Teddy's Pillows has beginning net fixed assets of $480 and ending net fixed assets of $530. Assets valued at $300 were sold during the year. Depreciation was $40. What is the amount of capital spending?A.$10B.$50C.$90D.$260E.$390Net capital spending = $530 - $480 + $40 = $90Difficulty level: MediumTopic: NET CAPITAL SPENDINGType: PROBLEMS61.At the beginning of the year, a firm has current assets of $380 and current liabilities of $210. At the end of the year, the current assets are $410 and the current liabilities are $250. What is the change in net working capital?A.-$30B.-$10C.$0D.$10E.$30Change in net working capital = ($410 - $250) - ($380 - $210) = -$10Difficulty level: MediumTopic: CHANGE IN NET WORKING CAPITALType: PROBLEMS62.At the beginning of the year, long-term debt of a firm is $280 and total debt is $340. At the end of the year, long-term debt is $260 and total debt is $350. The interest paid is $30. What is the amount of the cash flow to creditors?A.-$50B.-$20C.$20D.$30E.$50Cash flow to creditors = $30 - ($260 - $280) = $50Difficulty level: MediumTopic: CASH FLOW TO CREDITORSType: PROBLEMS63.Pete's Boats has beginning long-term debt of $ and ending long-term debt of $210. The beginning and ending total debt balances are $340 and $360, respectively. The interest paid is $20. What is the amount of the cash flow to creditors?A.-$10B.$0C.$10D.$40E.$50Cash flow to creditors = $20 - ($210 - $) = -$10Difficulty level: MediumTopic: CASH FLOW TO CREDITORSType: PROBLEMS64.Peggy Grey's Cookies has net income of $360. The firm pays out 40% of the net income to its shareholders as dividends. During the year, the company sold $80 worth of common stock. What is the cash flow to stockholders?A.$64B.$136C.$144D.$224E.$296Cash flow to stockholders = .40($360) - $80 = $64Difficulty level: MediumTopic: CASH FLOW TO STOCKHOLDERSType: PROBLEMS65.Thompson's Jet Skis has operating cash flow of $218. Depreciation is $45 and interest paid is $35. A net total of $69 was paid on long-term debt. The firm spent $ on fixed assets and increased net working capital by $38. What is the amount of the cash flow to stockholders?A.-$104B.-$28C.$28D.$114E.$142Cash flow of the firm = $218 - $38 - $ = $0; Cash flow to creditors = $35 - (-$69) = $104; Cash flow to stockholders = $0 - $104 = -$104Difficulty level: MediumTopic: CASH FLOW TO STOCKHOLDERSType: PROBLEMS66. What is the change in the net working capital from 2007 to 2008?A. $1,235B. $1,C. $1,335D. $3,405E. $4,740Change in net working capital = ($7,310 - $2,570) - ($6,225 - $2,820) = $1,335Difficulty level: MediumTopic: CHANGE IN NET WORKING CAPITALType: PROBLEMS67.What is the amount of the non-cash expenses for 2008?A.$570B.$630C.$845D.$1,370E.$2,000The non-cash expense is depreciation in the amount of $1,370. Difficulty level: MediumTopic: NONCASH EXPENSESType: PROBLEMS68.What is the amount of the net capital spending for 2008?A.-$290B.$795C.$1,080D.$1,660E.$2,165Net capital spending = $10,670 - $10,960 + $1,370 = $1,080 Difficulty level: MediumTopic: NET CAPITAL SPENDINGType: PROBLEMS69.What is the operating cash flow for 2008?A.$845B.$1,930C.$2,215D.$2,845E.$3,060Operating cash flow = $1,930 + $1,370 - $455 = $2,845 Difficulty level: MediumTopic: OPERATING CASH FLOWType: PROBLEMS70.What is the cash flow of the firm for 2008?A.$430B.$485C.$1,340D.$2,590E.$3,100Operating cash flow = $1,930 + $1,370 - $455 = $2,845; Change in net working capital = ($7,310 - $2,570) - ($6,225 - $2,820) = $1,335; Net capital spending = $10,670 - $10,960 + $1,370 = $1,080; Cash flow of the firm = $2,845 - $1,335 - $1,080 = $430Difficulty level: MediumTopic: CASH FLOW OF THE FIRMType: PROBLEMS71.What is the amount of net new borrowing for 2008?A.-$225B.-$25C.$0D.$25E.$225Net new borrowing = $8,100 - $7,875 = $225Difficulty level: MediumTopic: NET NEW BORROWINGType: PROBLEMS72.What is the cash flow to creditors for 2008?A.-$405B.-$225C.$225D.$405E.$630Cash flow to creditors = $630 - ($8,100 - $7,875) = $405 Difficulty level: MediumTopic: CASH FLOW TO CREDITORSType: PROBLEMS73.What is the net working capital for 2008?A.$345B.$405C.$805D.$812E.$1,005Net working capital = $75 + $502 + $640 - $405 = $812Difficulty level: MediumTopic: NET WORKING CAPITALType: PROBLEMS74.What is the change in net working capital from 2007 to 2008?A.-$93B.-$7C.$7D.$85E.$97Change in net working capital = ($75 + $502 + $640 - $405) - ($70 + $563 + $662 - $390) = -$93Difficulty level: MediumTopic: CHANGE IN NET WORKING CAPITALType: PROBLEMS75.What is net capital spending for 2008?A.-$250B.-$57C.$0D.$57E.$477Net capital spending = $1,413 - $1,680 + $210 = -$57Difficulty level: MediumTopic: NET CAPITAL SPENDINGType: PROBLEMS76.What is the operating cash flow for 2008?A.$143B.$297C.$325D.$353E.$367Earnings before interest and taxes = $785 - $460 - $210 = $115; Taxable income = $115 - $35 = $80; Taxes = .35($80) = $28; Operating cash flow = $115 + $210 - $28 = $297Difficulty level: MediumTopic: OPERATING CASH FLOWType: PROBLEMS。

CHAPTER 7NET PRESENT VALUE AND OTHER INVESTMENT CRITERIAAnswers to Concepts Review and Critical Thinking Questions1. A payback period less than the project’s 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 will still be less than the project’s life, but the NPV may be positive, zero, or negative, depending on whether the discount rate is less than, equal to, or greater than the IRR. The discounted payback includes the effect of the relevant discount rate. If a project’s discounted payback period is less than the project’s life, it must be the case that NPV is positive.2.If a project has a positive NPV for a certain discount rate, then it will also have a positive NPV for azero discount rate; thus, the payback period must be less than the project life. Since discounted payback is calculated at the same discount rate as is NPV, if NPV is positive, the discounted payback period must be less than the project’s life. If NPV is positive, then the present value of future cash inflows is greater than the initial investment cost; thus PI must be greater than 1. If NPV is positive for a certain discount rate R, then it will be zero for some larger discount rate R*; thus, the IRR must be greater than the required return.3. a.Payback period is simply the accounting break-even point of a series of cash flows. To actuallycompute the payback period, it is assumed that any cash flow occurring during a given period isrealized continuously throughout the period, and not at a single point in time. The payback isthen the point in time for the series of cash flows when the initial cash outlays are fullyrecovered. Given some predetermined cutoff for the payback period, the decision rule is toaccept projects that payback before this cutoff, and reject projects that take longer to payback.The worst problem associated with payback period is that it ignores the time value of money. Inaddition, the selection of a hurdle point for payback period is an arbitrary exercise that lacksany steadfast rule or method. The payback period is biased towards short-term projects; it fullyignores any cash flows that occur after the cutoff point.b.The average accounting return is interpreted as an average measure of the accountingperformance of a project over time, computed as some average profit measure attributable tothe project divided by some average balance sheet value for the project. This text computesAAR as average net income with respect to average (total) book value. Given somepredetermined cutoff for AAR, the decision rule is to accept projects with an AAR in excess ofthe target measure, and reject all other projects. AAR is not a measure of cash flows and marketvalue, but a measure of financial statement accounts that often bear little resemblance to therelevant value of a project. In addition, the selection of a cutoff is arbitrary, and the time valueof money is ignored. For a financial manager, both the reliance on accounting numbers ratherthan relevant market data and the exclusion of time value of money considerations are troubling.Despite these problems, AAR continues to be used in practice because (1) the accountinginformation is usually available, (2) analysts often use accounting ratios to analyze firmperformance, and (3) managerial compensation is often tied to the attainment of targetaccounting ratio goals.c.The IRR is the discount rate that causes the NPV of a series of cash flows to be identically zero.IRR can thus be interpreted as a financial break-even rate of return; at the IRR discount rate,the net value of the project is zero. The acceptance and rejection criteria are:If C0 < 0 and all future cash flows are positive, accept the project if the internal rate ofreturn is greater than or equal to the discount rate.If C0 < 0 and all future cash flows are positive, reject the project if the internal rate ofreturn is less than the discount rate.If C0 > 0 and all future cash flows are negative, accept the project if the internal rate ofreturn is less than or equal to the discount rate.If C0 > 0 and all future cash flows are negative, reject the project if the internal rate ofreturn is greater than the discount rate.IRR is the interest rate that causes NPV for a series of cash flows to be zero. NPV is preferred in all situations to IRR; IRR can lead to ambiguous results if there are non-conventional cash flows, and it also ambiguously ranks some mutually exclusive projects. However, for stand-alone projects with conventional cash flows, IRR and NPV are interchangeable techniques. The IRR decision rule for projectsd.The profitability index is the present value of cash inflows relative to the project cost. As such,it is a benefit/cost ratio, providing a measure of the relative profitability of a project. The profitability index decision rule is to accept projects with a PI greater than one, and to reject projects with a PI less than one. The profitability index can be expressed as: PI = (NPV + cost)/cost = 1 + (NPV/cost). If a firm has a basket of positive NPV projects and is subject to capital rationing, PI may provide a good ranking measure of the projects, indicating the “bang for the buck” of each particu lar project.e.NPV is simply the present value of a project’s cash flows. NPV specifically measures, afterconsidering the time value of money, the net increase or decrease in firm wealth due to the project. The decision rule is to accept projects that have a positive NPV, and reject projects with a negative NPV. NPV is superior to the other methods of analysis presented in the text because it has no serious flaws. The method unambiguously ranks mutually exclusive projects, and can differentiate between projects of different scale and time horizon. The only drawback to NPV is that it relies on cash flow and discount rate values that are often estimates and not certain, but this is a problem shared by the other performance criteria as well. A project with NPV = $2,500 implies that the total shareholder wealth of the firm will increase by $2,500 if the project is accepted.4.For a project with future cash flows that are an annuity:Payback = I / CAnd the IRR is:0 = – I + C / IRRSolving the IRR equation for IRR, we get:IRR = C / INotice this is just the reciprocal of the payback. So:IRR = 1 / PBFor long-lived projects with relatively constant cash flows, the sooner the project pays back, the greater is the IRR.5.There are a number of reasons. Two of the most important have to do with transportation costs andexchange rates. Manufacturing in the U.S. places the finished product much closer to the point of sale, resulting in significant savings in transportation costs. It also reduces inventories because goods spend less time in transit. Higher labor costs tend to offset these savings to some degree, at least compared to other possible manufacturing locations. Of great importance is the fact that manufacturing in the U.S. means that a much higher proportion of the costs are paid in dollars. Since sales are in dollars, the net effect is to immunize profits to a large extent against fluctuations in exchange rates. This issue is discussed in greater detail in the chapter on international finance.6.The single biggest difficulty, by far, is coming up with reliable cash flow estimates. Determining anappropriate discount rate is also not a simple task. These issues are discussed in greater depth in the next several chapters. The payback approach is probably the simplest, followed by the AAR, but even these require revenue and cost projections. The discounted cash flow measures (discounted payback, NPV, IRR, and profitability index) are really only slightly more difficult in practice.7.Yes, they are. Such entities generally need to allocate available capital efficiently, just as for-profitsdo. However, it is frequently the case that the “revenues” from not-for-profit ventures are not tangible. For example, charitable giving has real opportunity costs, but the benefits are generally hard to measure. To the extent that benefits are measurable, the question of an appropriate required return remains. Payback rules are commonly used in such cases. Finally, realistic cost/benefit analysis along the lines indicated should definitely be used by the U.S. government and would go a long way toward balancing the budget!8.The statement is false. If the cash flows of Project B occur early and the cash flows of Project Aoccur late, then for a low discount rate the NPV of A can exceed the NPV of B. Observe the following example.C0C1C2IRR NPV @ 0% Project A –$1,000,000 $0 $1,440,000 20% $440,000 Project B –$2,000,000 $2,400,000 $0 20% 400,000However, in one particular case, the statement is true for equally risky Projects. If the lives of the two Projects are equal and the cash flows of Project B are twice the cash flows of Project A in every time period, the NPV of Project B will be twice the NPV of Project A.9. Although the profitability index (PI) is higher for Project B than for Project A, Project A should bechosen because it has the greater NPV. Confusion arises because Project B requires a smaller investment than Project A requires. Since the denominator of the PI ratio is lower for Project B than for Project A, B can have a higher PI yet have a lower NPV. Only in the case of capital rationing could the company’s decision have been incorrect.10. a.Project A would have a higher IRR since initial investment for Project A is less than that ofProject B, if the cash flows for the two projects are identical.b.Yes, since both the cash flows as well as the initial investment are twice that of Project B.11.Project B would have a more sensitive NPV to changes in the discount rate. The reason is the timevalue of money. Cash flows that occur further out in the future are always more sensitive to changes in the interest rate. This is similar to the interest rate risk of a bond.12.The MIRR is calculated by finding the present value of all cash outflows, the future value of all cashinflows to the end of the project, and then calculating the IRR of the two cash flows. As a result, the cash flows have been discounted or compounded by one interest rate (the required return), and then the interest rate between the two remaining cash flows is calculated. As such, the MIRR is not a true interest rate. In contrast, consider the IRR. If you take the initial investment, and calculate the future value at the IRR, you can replicate the future cash flows of the project exactly.13.The criticism is incorrect. It is true that if you calculate the future value of all intermediate cashflows to the end of the project at the required return, then calculate the NPV of this future value and the initial investment, you will get the same NPV. However, NPV says nothing about reinvestment of intermediate cash flows. The NPV is the present value of the project cash flows. The fact that the reinvestment works is an artifact of the time value of money.14.The criticism is incorrect for several reasons. It is true that if you calculate the future value of allintermediate cash flows to the end of the project at the IRR, then calculate the IRR of this future value and the initial investment, you will get the same IRR. This only occurs if the intermediate cash flows are reinvested at the IRR. However, similar to the previous question, IRR deals with the present value of the cash flows, not the future value. There is also another important point. This criticism deals with the reinvestment of the intermediate cash flows. As we will see in the next chapter, any reinvestment assumption concerning the intermediate cash flows is incorrect. The reason is that when we are calculating the cash flows for a project, we are concerned with the incremental cash flows from the project, that is, the cash flows the project creates. Reinvestment violates this principal. Consider the following example:C0C1C2IRR Project A –$100 $10 $110 10% Suppose this is a deposit into a bank account. The IRR of the cash flows is 10 percent. Does it the IRR change if the Year 1 cash flow is reinvested in the account, or if it is withdrawn and spent on pizza? No. Finally, think back to the yield to maturity calculation on a bond. The YTM is the IRR of the bond investment, but no mention of a reinvestment assumption of the bond coupons is inferred.The reason is that the reinvestment assumption is irrelevant to calculating the YTM on a bond; in the same way, the reinvestment assumption is irrelevant in the IRR calculation.Solutions to Questions and ProblemsNOTE: 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 for each problem is found without rounding during any step in the problem.Basic1. a.The payback period is the time that it takes for the cumulative undiscounted cash inflows toequal the initial investment.Project A:Cumulative cash flows Year 1 = €4,000 = €4,000Cumulative cash flows Year 2 = €4,000 +3,500 = €7,500 Payback period = 2 yearsProject B:Cumulative cash flows Year 1 = €2,500 = €2,500Cumulative cash flows Year 2 = €2,500 + 1,200 = €3,700Cumulative cash flows Year 3 = €2,500 + 1,200 + 3,000 = €6,700 Companies can calculate a more precise value using fractional years. To calculate the fractionalpayba ck period, find the fraction of year 3’s cash flows that is needed for the company to have cumulative undiscounted cash flows of €5,000. Divide the difference between the initial investment and the cumulative undiscounted cash flows as of year 2 by the undiscounted cashflow of year 3.Payback period = 2 + (€5,000 –€3,700) / €3,000Payback period = 2.43Since project A has a shorter payback period than project B has, the company should chooseproject A.b.Discount each project’s cash flows at 15 percent. Choose the project with the highest NPV.Project A:NPV = –€7,500 + €4,000 / 1.15 + €3,500 / 1.152 + €1,500 / 1.153NPV = –€388.96Project B:NPV = –€5,000 + €2,500 / 1.15 + €1,200 / 1.152 + €3,000 / 1.153NPV = €53.83The firm should choose Project B since it has a higher NPV than Project A has.2.To calculate the payback period, we need to find the time that the project has recovered its initialinvestment. The cash flows in this problem are an annuity, so the calculation is simpler. If the initial cost is £3,000, the payback period is:Payback = 3 + (£300 / £900) = 3.33 yearsThere is a shortcut to calculate the payback period if the future cash flows are an annuity. Just divide the initial cost by the annual cash flow. For the £3,000 cost, the payback period is:Payback = £3,000 / £900 = 3.33 yearsFor an initial cost of £5,000, the payback period is:Payback = 5 + (£500 / £900) = 5.55 yearsThe payback period for an initial cost of £10,000 is a little trickier. Notice that the total cash inflows after nine years will be:Total cash inflows = 8(£900) = £7,200If the initial cost is £10,000, the project never pays back. Notice that if you use the shortcut forannuity cash flows, you get:Payback = £10,000 / £900 = 11.11 years.This answer does not make sense since the cash flows stop after nine years, so the payback period is never.3.When we use discounted payback, we need to find the value of all cash flows today. The value todayof the project cash flows for the first four years is:Value today of Year 1 cash flow = $7,000/1.14 = $6,140.35Value today of Year 2 cash flow = $7,500/1.142 = $5,771.01Value today of Year 3 cash flow = $8,000/1.143 = $5,399.77Value today of Year 4 cash flow = $8,500/1.144 = $5,032.68To find the discounted payback, we use these values to find the payback period. The discounted first year cash flow is $6,140.35, so the discounted payback for an $8,000 initial cost is:Discounted payback = 1 + ($8,000 – 6,140.35)/$5,771.01 = 1.32 yearsFor an initial cost of $13,000, the discounted payback is:Discounted payback = 2 + ($13,000 – 6,140.35 – 5,771.01)/$5,399.77 = 2.20 yearsNotice the calculation of discounted payback. We know the payback period is between two and three years, so we subtract the discounted values of the Year 1 and Year 2 cash flows from the initial cost.This is the numerator, which is the discounted amount we still need to make to recover our initial investment. We divide this amount by the discounted amount we will earn in Year 3 to get the fractional portion of the discounted payback.If the initial cost is $18,000, the discounted payback is:Discounted payback = 3 + ($18,000 – 6,140.35 – 5,771.01 – 5,399.77) / $5,032.68 = 3.14 years4.To calculate the discounted payback, discount all future cash flows back to the present, and use thesediscounted cash flows to calculate the payback period. Doing so, we find:R = 0%: 4 + (£1,100 / £2,100) = 4.52 yearsDiscounted payback = Regular payback = 4.52 yearsR = 5%: £2,100/1.05 + £2,100/1.052 + £2,100/1.053 + £2,100/1.054 + £2,100/1.055 = £9,091.90 £2,100/1.056 = £1,567.05Discounted payback = 5 + (£9,500 – 9,091.90) / £1,567.05 = 5.26 years R = 15%: £2,100/1.15 + £2,100/1.152 + £2,100/1.153 + £2,100/1.154 + £2,100/1.155 + £2,100/1.156 = £7,947.41; The project never pays back.5. a.The average accounting return is the average project earnings after taxes, divided by theaverage book value, or average net investment, of the machine during its life. The book value of the machine is the gross investment minus the accumulated depreciation.Average book value = (Book Value0 + Book Value1 + Book Value2 + Book Value3 +Book Value4 + Book Value5) / (Economic Life)Average book value = ($16,000 + 12,000 + 8,000 + 4,000 + 0) / (5 years)Average book value = $8,000Average Project Earnings = $4,500To find the average accounting return, we divide the average project earnings by the average book value of the machine to calculate the average accounting return. Doing so, we find:Average Accounting Return = Average Project Earnings / Average Book ValueAverage Accounting Return = $4,500 / $8,000Average Accounting Return = 0.5625 or 56.25%6.First, we need to determine the average book value of the project. The book value is the grossinvestment minus accumulated depreciation.Purchase Date Year 1 Year 2 Year 3 Gross Investment €8,000 €8,000 €8,000 €8,000Less: Accumulated Depreciation 0 4,000 6,500 8,000Net Investment €8,000 €4,000 €1,500 €0 Now, we can calculate the average book value as:Average book value = (€8,000 + 4,000 + 1,500 + 0) / (4 years)Average book value = €3,375To calculate the average accounting return, we must remember to use the aftertax average netincome when calculating the average accounting return. So, the average aftertax net income is:Average aftertax net income = (1 – t c) Annual pretax net incomeAverage aftertax net income = (1 – 0.25) €2,000Average aftertax net income = €1,500The average accounting return is the average after-tax net income divided by the average book value, which is:Average accounting return = €1,500 / €3,375Average accounting return = 0.4444 or 44.44%7.The IRR is the interest rate that makes the NPV of the project equal to zero. So, the equation that definesthe IRR for this project is:0 = C0 + C1 / (1 + IRR) + C2 / (1 + IRR)2 + C3 / (1 + IRR)30 = –¥8,000,000 + ¥4,000,000/(1 + IRR) + ¥3,000,000/(1 + IRR)2 + ¥2,000,000/(1 + IRR)3Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 6.93%Since the IRR is less than the required return we would reject the project.8.The IRR is the interest rate that makes the NPV of the project equal to zero. So, the equation that definesthe IRR for this Project A is:0 = C0 + C1 / (1 + IRR) + C2 / (1 + IRR)2 + C3 / (1 + IRR)30 = – £2,000 + £1,000/(1 + IRR) + £1,500/(1 + IRR)2 + £2,000/(1 + IRR)3Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 47.15%And the IRR for Project B is:0 = C0 + C1 / (1 + IRR) + C2 / (1 + IRR)2 + C3 / (1 + IRR)30 = – £1,500 + £500/(1 + IRR) + £1,000/(1 + IRR)2 + £1,500/(1 + IRR)3Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 36.19%9.The profitability index is defined as the PV of the cash inflows divided by the PV of the cashoutflows. The cash flows from this project are an annuity, so the equation for the profitability index is:PI = C(PVIFA R,t) / C0PI = €41,000(PVIFA15%,7) / €160,000PI = 1.066110. a.The profitability index is the present value of the future cash flows divided by the initial cost.So, for Project Alpha, the profitability index is:PI Alpha = [$300 / 1.10 + $700 / 1.102 + $600 / 1.103] / $500 = 2.604And for Project Beta the profitability index is:PI Beta = [$300 / 1.10 + $1,800 / 1.102 + $1,700 / 1.103] / $2,000 = 1.519b.According to the profitability index, you would accept Project Alpha. However, remember theprofitability index rule can lead to incorrect decision when ranking mutually exclusive projects.Intermediate11. a.To have a payback equal to the project’s life, given C is a constant cash flow for N years:C = I/Nb.To have a positive NPV, I < C (PVIFA R%, N). Thus, C > I / (PVIFA R%, N).c.Benefits = C (PVIFA R%, N) = 2 × costs = 2IC = 2I / (PVIFA R%, N)12. a.The IRR is the interest rate that makes the NPV of the project equal to zero. So, the equationthat defines the IRR for this project is:0 = C0 + C1 / (1 + IRR) + C2 / (1 + IRR)2 + C3 / (1 + IRR)3 + C4 / (1 + IRR)40 = ₩5,000 –₩2,500 / (1 + IRR) –₩2,000 / (1 + IRR)2–₩1,000 / (1 + IRR)3–₩1,000 / (1 +IRR)4Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that:IRR = 13.99%b.This problem differs from previous ones because the initial cash flow is positive and all futurecash flows are negative. In other words, this is a financing-type project, while previous projects were investing-type projects. For financing situations, accept the project when the IRR is less than the discount rate. Reject the project when the IRR is greater than the discount rate.IRR = 13.99%Discount Rate = 12%IRR > Discount RateReject the offer when the discount rate is less than the IRR.ing the same reason as part b., we would accept the project if the discount rate is 20 percent.IRR = 13.99%Discount Rate = 19%IRR < Discount RateAccept the offer when the discount rate is greater than the IRR.d.The NPV is the sum of the present value of all cash flows, so the NPV of the project if thediscount rate is 10 percent will be:NPV = ₩5,000 –₩2,500 / 1.12 –₩2,000 / 1.122–₩1,000 / 1.123–₩1,000 / 1.124NPV = –₩173.83When the discount rate is 12 percent, the NPV of the offer is –₩359.95. Reject the offer.And the NPV of the project is the discount rate is 19 percent will be:NPV = ₩5,000 –₩2,500 / 1.19 –₩2,000 / 1.192–₩1,000 / 1.193–₩1,000 / 1.194NPV = ₩394.75When the discount rate is 19 percent, the NPV of the offer is ₩466.82. Accept the offer.e.Yes, the decisions under the NPV rule are consistent with the choices made under the IRR rulesince the signs of the cash flows change only once.13. a.The IRR is the interest rate that makes the NPV of the project equal to zero. So, the IRR foreach project is:Deepwater Fishing IRR:0 = C0 + C1 / (1 + IRR) + C2 / (1 + IRR)2 + C3 / (1 + IRR)30 = –$600,000 + $270,000 / (1 + IRR) + $350,000 / (1 + IRR)2 + $300,000 / (1 + IRR)3Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that:IRR = 24.30%Submarine Ride IRR:0 = C0 + C1 / (1 + IRR) + C2 / (1 + IRR)2 + C3 / (1 + IRR)30 = –$1,800,000 + $1,000,000 / (1 + IRR) + $700,000 / (1 + IRR)2 + $900,000 / (1 + IRR)3Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that:IRR = 21.46%Based on the IRR rule, the deepwater fishing project should be chosen because it has the higher IRR.b.To calculate the incremental IRR, we s ubtract the smaller project’s cash flows from the largerproject’s cash flows. In this case, we subtract the deepwater fishing cash flows from the submarine ride cash flows. The incremental IRR is the IRR of these incremental cash flows. So, the incremental cash flows of the submarine ride are:Year 0Year 1Year 2 Year 3 Submarine Ride –$1,800,000 $1,000,000 $700,000 $900,000Deepwater Fishing –600,000 270,000 350,000 300,000Submarine – Fishing –$1,200,000 $730,000 $350,000 $600,000 Setting the present value of these incremental cash flows equal to zero, we find the incremental IRR is:0 = C0 + C1 / (1 + IRR) + C2 / (1 + IRR)2 + C3 / (1 + IRR)30 = –$1,200,000 + $730,000 / (1 + IRR) + $350,000 / (1 + IRR)2 + $600,000 / (1 + IRR)3Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that:Incremental IRR = 19.92%For investing-type projects, accept the larger project when the incremental IRR is greater than the discount rate. Since the incremental IRR, 19.92%, is greater than the required rate of return of 15 percent, choose the submarine ride project. Note that this is the choice when evaluating only the IRR of each project. The IRR decision rule is flawed because there is a scale problem.That is, the submarine ride has a greater initial investment than does the deepwater fishing project. This problem is corrected by calculating the IRR of the incremental cash flows, or by evaluating the NPV of each project.c.The NPV is the sum of the present value of the cash flows from the project, so the NPV of eachproject will be:Deepwater fishing:NPV = –$600,000 + $270,000 / 1.15 + $350,000 / 1.152 + $300,000 / 1.153NPV = $96,687.76Submarine ride:NPV = –$1,800,000 + $1,000,000 / 1.15 + $700,000 / 1.152 + $900,000 / 1.153NPV = $190,630.39Since the NPV of the submarine ride project is greater than the NPV of the deepwater fishingproject, choose the submarine ride project. The incremental IRR rule is always consistent withthe NPV rule.14. a.The profitability index is the PV of the future cash flows divided by the initial investment. Thecash flows for both projects are an annuity, so:PI I = 元15,000(PVIFA10%,3 ) / 元30,000 = 1.243PI II = 元2,800(PVIFA10%,3) / 元5,000 = 1.393The profitability index decision rule implies that we accept project II, since PI II is greater thanthe PI I.b.The NPV of each project is:NPV I = –元30,000 + 元15,000(PVIFA10%,3) = 元7,302.78NPV II = –元5,000 + 元2,800(PVIFA10%,3) = 元1,963.19The NPV decision rule implies accepting Project I, since the NPV I is greater than the NPV II.ing the profitability index to compare mutually exclusive projects can be ambiguous whenthe magnitudes of the cash flows for the two projects are of different scale. In this problem,project I is roughly 3 times as large as project II and produces a larger NPV, yet the profit-ability index criterion implies that project II is more acceptable.15. a.The equation for the NPV of the project is:NPV = –₦28,000,000 + ₦53,000,000/1.11 –₦8,000,000/1.112 = ₦13,254,768.28The NPV is greater than 0, so we would accept the project.b.The equation for the IRR of the project is:0 = –₦28,000,000 + ₦53,000,000/(1+IRR) –₦8,000,000/(1+IRR)2From Descartes rule of signs, we know there are two IRRs since the cash flows change signstwice. From trial and error, the two IRRs are:IRR = 72.75%, –83.46%。

CHAPTER 20INTERNATIONAL CORPORATE FINANCEAnswers to Concepts Review and Critical Thinking Questions1. a.The dollar is selling at a premium because it is more expensive in the forward market than inthe spot market (SFr 1.53 versus SFr 1.50).b.The franc is expected to depreciate relative to the dollar because it will take more francs to buyone dollar in the future than it does today.c.Inflation in Switzerland is higher than in the United States, as are nominal interest rates.2.The exchange rate will increase, as it will take progressively more pesos to purchase a dollar. This isthe relative PPP relationship.3. a.The Australian dollar is expected to weaken relative to the dollar, because it will take moreA$ in the future to buy one dollar than it does today.b.The inflation rate in Australia is higher.c.Nominal interest rates in Australia are higher; relative real rates in the two countries are thesame.4. A Yankee bond is most accurately described by d.5. No. For example, if a country’s currency strengthens, imports become cheaper (good), but its exportsbecome more expensive for others to buy (bad). The reverse is true for currency depreciation.6.Additional advantages include being closer to the final consumer and, thereby, saving ontransportation, significantly lower wages, and less exposure to exchange rate risk. Disadvantages include political risk and costs of supervising distant operations.7.One key thing to remember is that dividend payments are made in the home currency. Moregenerally, it may be that the owners of the multinational are primarily domestic and are ultimately concerned about their wealth denominated in their home currency because, unlike a multinational, they are not internationally diversified.8. a.False. If prices are rising faster in Great Britain, it will take more pounds to buy the sameamount of goods that one dollar can buy; the pound will depreciate relative to the dollar.b.False. The forward market would already reflect the projected deterioration of the euro relativeto the dollar. Only if you feel that there might be additional, unanticipated weakening of the euro that isn’t reflected in forward rates today, will the forward hedge protect you against additional declines.c.True. The market would only be correct on average, while you would be correct all the time.9. a.American exporters: their situation in general improves because a sale of the exported goods fora fixed number of euros will be worth more dollars.American importers: their situation in general worsens because the purchase of the imported goods for a fixed number of euros will cost more in dollars.b.American exporters: they would generally be better off if the British government’s intent ionsresult in a strengthened pound.American importers: they would generally be worse off if the pound strengthens.c.American exporters: they would generally be much worse off, because an extreme case of fiscalexpansion like this one will make American goods prohibitively expensive to buy, or else Brazilian sales, if fixed in cruzeiros, would become worth an unacceptably low number of dollars.American importers: they would generally be much better off, because Brazilian goods will become much cheaper to purchase in dollars.10.IRP is the most likely to hold because it presents the easiest and least costly means to exploit anyarbitrage opportunities. Relative PPP is least likely to hold since it depends on the absence of market imperfections and frictions in order to hold strictly.11.It all depends on whether the forward market expects the same appreciation over the period andwhether the expectation is accurate. Assuming that the expectation is correct and that other traders do not have the same information, there will be value to hedging the currency exposure.12.One possible reason investment in the foreign subsidiary might be preferred is if this investmentprovides direct diversification that shareholders could not attain by investing on their own. Another reason could be if the political climate in the foreign country was more stable than in the home country. Increased political risk can also be a reason you might prefer the home subsidiary investment. Indonesia can serve as a great example of political risk. If it cannot be diversified away, investing in this type of foreign country will increase the systematic risk. As a result, it will raise the cost of the capital, and could actually decrease the NPV of the investment.13.Yes, the firm should undertake the foreign investment. If, after taking into consideration all risks, aproject in a foreign country has a positive NPV, the firm should undertake it. Note that in practice, the stated assumption (that the adjustment to the discount rate has taken into consideration all political and diversification issues) is a huge task. But once that has been addressed, the net present value principle holds for foreign operations, just as for domestic.14.If the foreign currency depreciates, the U.S. parent will experience an exchange rate loss when theforeign cash flow is remitted to the U.S. This problem could be overcome by selling forward contracts. Another way of overcoming this problem would be to borrow in the country where the project is located.15.False. If the financial markets are perfectly competitive, the difference between the Eurodollar rateand the U.S. rate will be due to differences in risk and government regulation. Therefore, speculating in those markets will not be beneficial.16.The difference between a Eurobond and a foreign bond is that the foreign bond is denominated in thecurrency of the country of origin of the issuing company. Eurobonds are more popular than foreign bonds because of registration differences. Eurobonds are unregistered securities.Solutions to Questions and ProblemsNOTE: 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 for each problem is found without rounding during any step in the problem.Basicing the quotes from the table, we get:a.$50(€0.7870/$1) = €39.35b.$1.2706c.€5M($1.2706/€) = $6,353,240d.New Zealand dollare.Mexican pesof.(P11.0023/$1)($1.2186/€1) = P13.9801/€This is a cross rate.g.The most valuable is the Kuwait dinar. The least valuable is the Indonesian rupiah.2. a.You would prefer £100, since:(£100)($.5359/£1) = $53.59b.You would still prefer £100. Using the $/£ exchange rate and the SF/£ exchange rate to find theamount of Swiss francs £100 will buy, we get:(£100)($1.8660/£1)(SF .8233) = SF 226.6489ing the quotes in the book to find the SF/£ cross rate, we find:(SF 1.2146/$1)($0.5359/£1) = SF 2.2665/£1The £/SF exchange rate is the inverse of the SF/£ exchange rate, so:£1/SF .4412 = £0.4412/SF 13. a.F180= ¥104.93 (per $). The yen is selling at a premium because it is more expensive in theforward market than in the spot market ($0.0093659 versus $0.009530).b.F90 = $1.8587/£. The pound is selling at a discount because it is less expensive in the forwardmarket than in the spot market ($0.5380 versus $0.5359).c.The value of the dollar will fall relative to the yen, since it takes more dollars to buy one yen inthe future than it does today. The value of the dollar will rise relative to the pound, because it will take fewer dollars to buy one pound in the future than it does today.4. a.The U.S. dollar, since one Canadian dollar will buy:(Can$1)/(Can$1.26/$1) = $0.7937b.The cost in U.S. dollars is:(Can$2.19)/(Can$1.26/$1) = $1.74Among the reasons that absolute PPP doesn’t hold are tariffs and other barriers to trade, transactions costs, taxes, and different tastes.c.The U.S. dollar is selling at a discount, because it is less expensive in the forward market thanin the spot market (Can$1.22 versus Can$1.26).d.The Canadian dollar is expected to appreciate in value relative to the dollar, because it takesfewer Canadian dollars to buy one U.S. dollar in the future than it does today.e.Interest rates in the United States are probably higher than they are in Canada.5. a.The cross rate in ¥/£ terms is:(¥115/$1)($1.70/£1) = ¥195.5/£1b.The yen is quoted too low relative to the pound. Take out a loan for $1 and buy ¥115. Use the¥115 to purchase pounds at the cross-rate, which will give you:¥115(£1/¥185) = £0.6216Use the pounds to buy back dollars and repay the loan. The cost to repay the loan will be:£0.6216($1.70/£1) = $1.0568You arbitrage profit is $0.0568 per dollar used.6.We can rearrange the interest rate parity condition to answer this question. The equation we will useis:R FC = (F T– S0)/S0 + R USUsing this relationship, we find:Great Britain: R FC = (£0.5394 – £0.5359)/£0.5359 + .038 = 4.45%Japan: R FC = (¥104.93 – ¥106.77)/¥106.77 + .038 = 2.08%Switzerland: R FC = (SFr 1.1980 – SFr 1.2146)/SFr 1.2146 + .038 = 2.43%7.If we invest in the U.S. for the next three months, we will have:$30M(1.0045)3 = $30,406,825.23If we invest in Great Britain, we must exchange the dollars today for pounds, and exchange the pounds for dollars in three months. After making these transactions, the dollar amount we would have in three months would be:($30M)(£0.56/$1)(1.0060)3/(£0.59/$1) = $28,990,200.05We should invest in U.S.ing the relative purchasing power parity equation:F t = S0 × [1 + (h FC– h US)]tWe find:Z3.92 = Z3.84[1 + (h FC– h US)]3h FC– h US = (Z3.92/Z3.84)1/3– 1h FC– h US = .0069Inflation in Poland is expected to exceed that in the U.S. by 0.69% over this period.9.The profit will be the quantity sold, times the sales price minus the cost of production. Theproduction cost is in Singapore dollars, so we must convert this to U.S. dollars. Doing so, we find that if the exchange rates stay the same, the profit will be:Profit = 30,000[$145 – {(S$168.50)/(S$1.6548/$1)}]Profit = $1,295,250.18If the exchange rate rises, we must adjust the cost by the increased exchange rate, so:Profit = 30,000[$145 – {(S$168.50)/1.1(S$1.6548/$1)}]Profit = $1,572,954.71If the exchange rate falls, we must adjust the cost by the decreased exchange rate, so:Profit = 30,000[$145 – {(S$168.50)/0.9(S$1.6548/$1)}]Profit = $955,833.53To calculate the breakeven change in the exchange rate, we need to find the exchange rate that make the cost in Singapore dollars equal to the selling price in U.S. dollars, so:$145 = S$168.50/S TS T = S$1.1621/$1S T = –.2978 or –29.78% decline10. a.If IRP holds, then:F180 = (Kr 6.43)[1 + (.08 – .05)]1/2F180 = Kr 6.5257Since given F180 is Kr6.56, an arbitrage opportunity exists; the forward premium is too high.Borrow Kr1 today at 8% interest. Agree to a 180-day forward contract at Kr 6.56. Convert the loan proceeds into dollars:Kr 1 ($1/Kr 6.43) = $0.15552Invest these dollars at 5%, ending up with $0.15931. Convert the dollars back into krone as$0.15931(Kr 6.56/$1) = Kr 1.04506Repay the Kr 1 loan, ending with a profit of:Kr1.04506 – Kr1.03868 = Kr 0.00638b.To find the forward rate that eliminates arbitrage, we use the interest rate parity condition, so:F180 = (Kr 6.43)[1 + (.08 – .05)]1/2F180 = Kr 6.525711.The international Fisher effect states that the real interest rate across countries is equal. We canrearrange the international Fisher effect as follows to answer this question:R US– h US = R FC– h FCh FC = R FC + h US– R USa.h AUS = .05 + .035 – .039h AUS = .046 or 4.6%b.h CAN = .07 + .035 – .039h CAN = .066 or 6.6%c.h TAI = .10 + .035 – .039h TAI = .096 or 9.6%12. a.The yen is expected to get stronger, since it will take fewer yen to buy one dollar in the futurethan it does today.b.h US– h JAP (¥129.76 – ¥131.30)/¥131.30h US– h JAP = – .0117 or –1.17%(1 – .0117)4– 1 = –.0461 or –4.61%The approximate inflation differential between the U.S. and Japan is – 4.61% annually.13. We need to find the change in the exchange rate over time, so we need to use the relative purchasingpower parity relationship:F t = S0 × [1 + (h FC– h US)]TUsing this relationship, we find the exchange rate in one year should be:F1 = 215[1 + (.086 – .035)]1F1 = HUF 225.97The exchange rate in two years should be:F2 = 215[1 + (.086 – .035)]2F2 = HUF 237.49And the exchange rate in five years should be:F5 = 215[1 + (.086 – .035)]5F5 = HUF 275.71ing the interest-rate parity theorem:(1 + R US) / (1 + R FC) = F(0,1) / S0We can find the forward rate as:F(0,1) = [(1 + R US) / (1 + R FC)] S0F(0,1) = (1.13 / 1.08)$1.50/£F(0,1) = $1.57/£Intermediate15.First, we need to forecast the future spot rate for each of the next three years. From interest rate andpurchasing power parity, the expected exchange rate is:E(S T) = [(1 + R US) / (1 + R FC)]T S0So:E(S1) = (1.0480 / 1.0410)1 $1.22/€ = $1.2282/€E(S2) = (1.0480 / 1.0410)2 $1.22/€ = $1.2365/€E(S3) = (1.0480 / 1.0410)3 $1.22/€ = $1.2448/€Now we can use these future spot rates to find the dollar cash flows. The dollar cash flow each year will be:Year 0 cash flow = –€$12,000,000($1.22/€) = –$14,640,000.00Year 1 cash flow = €$2,700,000($1.2282/€) = $3,316,149.86Year 2 cash flow = €$3,500,000($1.2365/€) = $4,327,618.63Year 3 cash flow = (€3,300,000 + 7,400,000)($1.2448/€) = $13,319,111.90And the NPV of the project will be:NPV = –$14,640,000 + $3,316,149.86/1.13 + $4,4327,618.63/1.132 + $13,319,111.90/1.133NPV = $914,618.7316. a.Implicitly, it is assumed that interest rates won’t change over the life of the project, but theexchange rate is projected to decline because the Euroswiss rate is lower than the Eurodollar rate.b.We can use relative purchasing power parity to calculate the dollar cash flows at each time. Theequation is:E[S T] = (SFr 1.72)[1 + (.07 – .08)]TE[S T] = 1.72(.99)TSo, the cash flows each year in U.S. dollar terms will be:t SFr E[S T] US$0 –27.0M –$15,697,674.421 +7.5M 1.7028 $4,404,510.222 +7.5M 1.6858 $4,449,000.223 +7.5M 1.6689 $4,493,939.624 +7.5M 1.6522 $4,539,332.955 +7.5M 1.6357 $4,585,184.79And the NPV is:NPV = –$15,697,674.42 + $4,404,510.22/1.13 + $4,449,000.22/1.132 + $4,493,939.62/1.133 + $4,539,332.95/1.134 + $4,585,184.79/1.135NPV = $71,580.10c.Rearranging the relative purchasing power parity equation to find the required return in Swissfrancs, we get:R SFr = 1.13[1 + (.07 – .08)] – 1R SFr = 11.87%So, the NPV in Swiss francs is:NPV = –SFr 27.0M + SFr 7.5M(PVIFA11.87%,5)NPV = SFr 123,117.76Converting the NPV to dollars at the spot rate, we get the NPV in U.S. dollars as:NPV = (SFr 123,117.76)($1/SFr 1.72)NPV = $71,580.10Challenge17. a.The domestic Fisher effect is:1 + R US = (1 + r US)(1 + h US)1 + r US = (1 + R US)/(1 + h US)This relationship must hold for any country, that is:1 + r FC = (1 + R FC)/(1 + h FC)The international Fisher effect states that real rates are equal across countries, so:1 + r US = (1 + R US)/(1 + h US) = (1 + R FC)/(1 + h FC) = 1 + r FCb.The exact form of unbiased interest rate parity is:E[S t] = F t = S0 [(1 + R FC)/(1 + R US)]tc.The exact form for relative PPP is:E[S t] = S0 [(1 + h FC)/(1 + h US)]td.For the home currency approach, we calculate the expected currency spot rate at time t as:E[S t] = (€0.5)[1.07/1.05]t= (€0.5)(1.019)tWe then convert the euro cash flows using this equation at every time, and find the present value. Doing so, we find:NPV = –[€2M/(€0.5)] + {€0.9M/[1.019(€0.5)]}/1.1 + {€0.9M/[1.0192(€0.5)]}/1.12 + {€0.9M/[1.0193(€0.5/$1)]}/1.13NPV = $316,230.72For the foreign currency approach, we first find the return in the euros as:R FC = 1.10(1.07/1.05) – 1 = 0.121Next, we find the NPV in euros as:NPV = –€2M + (€0.9M)/1.121 + (€0.9M)/1.1212+ (€0.9M)/1.1213= €158,115.36And finally, we convert the euros to dollars at the current exchange rate, which is:NPV ($) = €158,115.36 /(€0.5/$1) = $316,230.72。

第一章1.在所有权形式的公司中,股东是公司的所有者。

股东选举公司的董事会,董事会任命该公司的管理层。

企业的所有权和控制权分离的组织形式是导致的代理关系存在的主要原因。

管理者可能追求自身或别人的利益最大化,而不是股东的利益最大化。

在这种环境下,他们可能因为目标不一致而存在代理问题。

2.非营利公司经常追求社会或政治任务等各种目标。

非营利公司财务管理的目标是获取并有效使用资金以最大限度地实现组织的社会使命。

3.这句话是不正确的。

管理者实施财务管理的目标就是最大化现有股票的每股价值，当前的股票价值反映了短期和长期的风险、时间以及未来现金流量。

4.有两种结论。

一种极端,在市场经济中所有的东西都被定价。

因此所有目标都有一个最优水平，包括避免不道德或非法的行为，股票价值最大化。

另一种极端,我们可以认为这是非经济现象,最好的处理方式是通过政治手段。

一个经典的思考问题给出了这种争论的答案:公司估计提高某种产品安全性的成本是30美元万。

然而,该公司认为提高产品的安全性只会节省20美元万。

请问公司应该怎么做呢?”5.财务管理的目标都是相同的,但实现目标的最好方式可能是不同的,因为不同的国家有不同的社会、政治环境和经济制度。

6.管理层的目标是最大化股东现有股票的每股价值。

如果管理层认为能提高公司利润，使股价超过35美元,那么他们应该展开对恶意收购的斗争。

如果管理层认为该投标人或其它未知的投标人将支付超过每股35美元的价格收购公司,那么他们也应该展开斗争。

然而,如果管理层不能增加企业的价值,并且没有其他更高的投标价格,那么管理层不是在为股东的最大化权益行事。

现在的管理层经常在公司面临这些恶意收购的情况时迷失自己的方向。

7.其他国家的代理问题并不严重,主要取决于其他国家的私人投资者占比重较小。

较少的私人投资者能减少不同的企业目标。

高比重的机构所有权导致高学历的股东和管理层讨论决策风险项目。

此外,机构投资者比私人投资者可以根据自己的资源和经验更好地对管理层实施有效的监督机制。

reported in the financing activity section of the accounting statement of cash flows. When Tyco received payments from customers, the cash inflows were reported as operating cash flows. Another method used by Tyco was to have acquired companies prepay operating expenses. In other words, the company acquired by Tyco would pay vendors for items not yet received. In one case, the payments totaled more than $50 million. When the acquired company was consolidated with Tyco, the prepayments reduced Tyco’s cash outflows, thus increasing the operating cash flows.Dynegy, the energy giant, was accused of engaging in a number of complex “round-trip trades.” The round-trip trades essentially involved the sale of natural resources to a counterparty, with the repurchase of the resources from the same party at the same price. In essence, Dynegy would sell an asset for $100, and immediately repurchase it from the buyer for $100. The problem arose with the treatment of the cash flows from the sale. Dynegy treated the cash from the sale of the asset as an operating cash flow, but classified the repurchase as an investing cash outflow. The total cash flows of the contracts traded by Dynegy in these round-trip trades totaled $300 million.Adelphia Communications was another company that apparently manipulated cash flows. In Adelphia’s case, the company capitalized the labor required to install cable. In other words, the company classified this labor expense as a fixed asset. While this practice is fairly common in the telecommunications industry, Adelphia capitalized a higher percentage of labor than is common. The effect of this classification was that the labor was treated as an investment cash flow, which increased the operating cash flow.In each of these examples, the companies were trying to boost operating cash flows by shifting cash flows to a different heading. The important thing to notice is that these movements don’t affect the total cash flow of the firm, which is why we recommend focusing on this number, not just operating cash flow.Summary and ConclusionsBesides introducing you to corporate accounting, the purpose of this chapter has been to teach you how to determine cash flow from the accounting statements of a typical company.1. Cash flow is generated by the firm and paid to creditors and shareholders. It can be classifiedas:1. Cash flow from operations.2. Cash flow from changes in fixed assets.3. Cash flow from changes in working capital.2. Calculations of cash flow are not difficult, but they require care and particular attention to detailin properly accounting for noncash expenses such as depreciation and deferred taxes. It is especially important that you do not confuse cash flow with changes in net working capital and net income.Concept Questions1. Liquidity True or false: All assets are liquid at some price. Explain.2. Accounting and Cash Flows Why might the revenue and cost figures shown on a standardincome statement not represent the actual cash inflows and outflows that occurred during a period?3. Accounting Statement of Cash Flows Looking at the accounting statement of cash flows,what does the bottom line number mean? How useful is this number for analyzing a company? 4. Cash Flows How do financial cash flows and the accounting statement of cash flows differ?Which is more useful for analyzing a company?5. Book Values versus Market Values Under standard accounting rules, it is possible for astockholders’ equity of Information Control Corp. one year ago:During the past year, Information Control issued 10 million shares of new stock at a total price of $43 million, and issued $10 million in new long-term debt. The company generated $9 million in net income and paid $2 million in dividends. Construct the current balance sheet reflecting the changes that occurred at Information Control Corp. during the year.8. Cash Flow to Creditors The 2009 balance sheet of Anna’s Tennis Shop, Inc., showed long-term debt of $1.34 million, and the 2010 balance sheet showed long-term debt of $1.39 million.The 2010 income statement showed an interest expense of $118,000. What was the firm’s cash flow to creditors during 2010?9. Cash Flow to Stockholders The 2009 balance sheet of Anna’s Tennis Shop, Inc., showed$430,000 in the common stock account and $2.6 million in the additional paid-in surplus account.The 2010 balance sheet showed $450,000 and $3.05 million in the same two accounts, respectively. If the company paid out $385,000 in cash dividends during 2010, what was the cash flow to stockholders for the year?10. Calculating Cash Flows Given the information for Anna’s Tennis Shop, Inc., in the previoustwo problems, suppose you also know that the firm’s net capital spending for 2010 was $875,000 and that the firm reduced its net working capital investment by $69,000. What was the firm’s 2010 operating cash flow, or OCF?INTERMEDIATE (Questions 11–24)11. Cash Flows Ritter Corporation’s accountants prepared the following financial statements foryear-end 2010:1. Explain the change in cash during 2010.2. Determine the change in net working capital in 2010.3. Determine the cash flow generated by the firm’s assets during 2010.12. Financial Cash Flows The Stancil Corporation provided the following current information:Determine the cash flows from the firm and the cash flows to investors of the firm.13. Building an Income Statement During the year, the Senbet Discount Tire Company hadgross sales of $1.2 million. The firm’s cost of goods sold and selling expenses were $450,000 and $225,000, respectively. Senbet also had notes payable of $900,000. These notes carried an interest rate of 9 percent. Depreciation was $110,000. Senbet’s tax rate was 35 percent.1. What was Senbet’s net income?2. What was Senbet’s operating cash flow?14. Calculating Total Cash Flows Schwert Corp. shows the following information on its 2010income statement: sales = $167,000; costs = $91,000; other expenses = $5,400; depreciation expense = $8,000; interest expense = $11,000; taxes = $18,060; dividends = $9,500. In addition, you’re told that the firm issued $7,250 in new equity during 2010 and redeemed $7,100 in outstanding long-term debt.1. What is the 2010 operating cash flow?2. What is the 2010 cash flow to creditors?3. What is the 2010 cash flow to stockholders?4. If net fixed assets increased by $22,400 during the year, what was the addition to networking capital (NWC)?15. Using Income Statements Given the following information for O’Hara Marine Co., calculatethe depreciation expense: sales = $43,000; costs = $27,500; addition to retained earnings = $5,300; dividends paid = $1,530; interest expense = $1,900; tax rate = 35 percent.1. What is owners’ equity for 2009 and 2010?2. What is the change in net working capital for 2010?3. In 2010, Weston Enterprises purchased $1,800 in new fixed assets. How much in fixedassets did Weston Enterprises sell? What is the cash flow from assets for the year? (The tax rate is 35 percent.)4. During 2010, Weston Enterprises raised $360 in new long-term debt. How much long-termdebt must Weston Enterprises have paid off during the year? What is the cash flow to creditors?Use the following information for Ingersoll, Inc., for Problems 23 and 24 (assume the tax rate is34 percent):23. Financial Statements Draw up an income statement and balance sheet for this company for2009 and 2010.24. Calculating Cash Flow For 2010, calculate the cash flow from assets, cash flow to creditors,and cash flow to stockholders.CHALLENGE (Questions 25–27)25. Cash Flows You are researching Time Manufacturing and have found the following accountingstatement of cash flows for the most recent year. You also know that the company paid $82 million in current taxes and had an interest expense of $43 million. Use the accounting statement of cash flows to construct the financial statement of cash flows.Nick has also provided the following information: During the year the company raised $118,000 in new long-term debt and retired $98,000 in long-term debt. The company also sold $11,000 in new stock and repurchased $40,000 in stock. The company purchased $786,000 in fixed assets and sold $139,000 in fixed assets.Angus has asked you to prepare the financial statement of cash flows and the accounting statement of cash flows. He has also asked you to answer the following questions:1. How would you describe Warf Computers’ cash flows?2. Which cash flow statement more accurately describes the cash flows at the company?3. In light of your previous answers, comment on Nick’s expansion plans.。

CHAPTER 2ACCOUNTING STATEMENTS, TAXES AND CASH FLOWAnswers to Concepts Review and Critical Thinking Questions1.Liquidity measures how quickly and easily an asset can be converted to cash without significant lossin value. It’s desirable for firms to have high liquidity so that they have a large factor of safety in meeting short-term creditor demands. However, since liquidity also has an opportunity cost associated with it - namely that higher returns can generally be found by investing the cash into productive assets - low liquidity levels are also desirable to the firm. It’s up to the firm’s financial management staff to find a reasonable compromise between these opposing needs2.The recognition and matching principles in financial accounting call for revenues, and the costsassociated with producing those revenues, to be “booked” when the revenue process is essentially complete, not necessarily when the cash is collected or bills are paid. Note that this way is not necessarily correct; it’s the way accountants have chosen to do it.3.The bottom line number shows the change in the cash balance on the balance sheet. As such, it is nota useful number for analyzing a company.4. The major difference is the treatment of interest expense. The accounting statement of cash flowstreats interest as an operating cash flow, while the financial cash flows treat interest as a financing cash flow. The logic of the accounting statement of cash flows is that since interest appears on the income statement, which shows the operations for the period, it is an operating cash flow. In reality, interest is a financing expense, which results from the company’s choice of debt/equity. We will have more to say about this in a later chapter. When comparing the two cash flow statements, the financial statement of cash flows is a more appropriate measure of the company’s performance because of its treatment of interest.5.Market values can never be negative. Imagine a share of stock selling for –$20. This would meanthat if you placed an order for 100 shares, you would get the stock along with a check for $2,000.How many shares do you want to buy? More generally, because of corporate and individual bankruptcy laws, net worth for a person or a corporation cannot be negative, implying that liabilities cannot exceed assets in market value.6.For a successful company that is rapidly expanding, for example, capital outlays will be large,possibly leading to negative cash flow from assets. In general, what matters is whether the money is spent wisely, not whether cash flow from assets is positive or negative.7.It’s probably not a good sign for an established company, but it would be fairly ordinary for a start-up, so it depends.8.For example, if a company were to become more efficient in inventory management, the amount ofinventory needed would decline. The same might be true if it becomes better at collecting its receivables. In general, anything that leads to a decline in ending NWC relative to beginning would have this effect. Negative net capital spending would mean more long-lived assets were liquidated than purchased.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 and principal, its cash flow to creditors will be negative.10.The adjustments discussed were purely accounting changes; they had no cash flow or market valueconsequences unless the new accounting information caused stockholders to revalue the derivatives. Solutions to Questions and ProblemsNOTE: 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 for each problem is found without rounding during any step in the problem.Basic1.To find owner’s equity, we must construct a balance sheet as follows:Balance SheetCA $5,000 CL $4,500NFA 23,000 LTD 13,000OE ??TA $28,000 TL & OE $28,000We know that total liabilities and owner’s equity (TL & OE) must equal total assets of $28,000. We also know that TL & OE is equal to current liabilities plus long-term debt plus owner’s equity, so owner’s equity is:O E = $28,000 –13,000 – 4,500 = $10,500N WC = CA – CL = $5,000 – 4,500 = $5002. The income statement for the company is:Income StatementSales S/.527,000Costs 280,000Depreciation 38,000EBIT S/.209,000Interest 15,000EBT S/.194,000Taxes (35%) 67,900Net income S/.126,100One equation for net income is:Net income = Dividends + Addition to retained earningsRearranging, we get:Addition to retained earnings = Net income – DividendsAddition to retained earnings = S/.126,100 – 48,000Addition to retained earnings = S/.78,1003.To find the book value of current assets, we use: NWC = CA – CL. Rearranging to solve for currentassets, we get:CA = NWC + CL = $900K + 2.2M = $3.1MThe market value of current assets and fixed assets is given, so:Book value CA = $3.1M Market value CA = $2.8MBook value NFA = $4.0M Market value NFA = $3.2MBook value assets = $3.1M + 4.0M = $7.1M Market value assets = $2.8M + 3.2M = $6.0M 4.Taxes = 0.15(€50K) + 0.25(€25K) + 0.34(€25K) + 0.39(€273K – 100K)Taxes = €89,720The average tax rate is the total tax paid divided by net income, so:Average tax rate = €89,720 / €273,000Average tax rate = 32.86%.The marginal tax rate is the tax rate on the next €1 of earnings, so the marginal tax rate = 39%.5.To calculate OCF, we first need the income statement:Income StatementSales 元13,500Costs 5,400Depreciation 1,200EBIT 元6,900Interest 680Taxable income 元6,220Taxes (35%) 2,177Net income 元4,043OCF = EBIT + Depreciation – TaxesOCF = 元6,900 + 1,200 – 2,177OCF = 元5,923 capital spending = NFA end– NFA beg + DepreciationNet capital spending = £4,700,000 – 4,200,000 + 925,000 Net capital spending = £1,425,0007.The long-term debt account will increase by $8 million, the amount of the new long-term debt issue.Since the company sold 10 million new shares of stock with a $1 par value, the common stock account will increase by $10 million. The capital surplus account will increase by $16 million, the value of the new stock sold above its par value. Since the company had a net income of $7 million, and paid $4 million in dividends, the addition to retained earnings was $3 million, which will increase the accumulated retained earnings account. So, the new long-term debt and stockholders’ equity portion of the balance sheet will be:Long-term debt $ 68,000,000Total long-term debt $ 68,000,000Shareholders equityPreferred stock $ 18,000,000Common stock ($1 par value) 35,000,000Accumulated retained earnings 92,000,000Capital surplus 65,000,000Total equity $ 210,000,000Total Liabilities & Equity $ 278,000,0008.Cash flow to creditors = Interest paid – Net new borrowingCash flow to creditors = €340,000 – (LTD end– LTD beg)Cash flow to creditors = €340,000 – (€3,100,000 – 2,800,000)Cash flow to creditors = €340,000 – 300,000Cash flow to creditors = €40,0009. Cash flow to stockholders = Dividends paid – Net new equityCash flow to stockholders = €600,000 – [(Common end + APIS end) – (Common beg + APIS beg)]Cash flow to stockholders = €600,000 – [(€855,000 + 7,600,000) – (€820,000 + 6,800,000)]Cash flow to stockholders = €600,000 – (€7,620,000 – 8,455,000)Cash flow to stockholders = –€235,000Note, APIS is the additional paid-in surplus.10. Cash flow from assets = Cash flow to creditors + Cash flow to stockholders= €40,000 – 235,000= –€195,000Cash flow from assets = –€195,000 = OCF – Change in NWC – Net capital spending= OCF – (–€165,000) – 760,000= –€195,000Operating cash flow = –€195,000 – 165,000 + 760,000= €400,000Intermediate11. a.The accounting statement of cash flows explains the change in cash during the year. Theaccounting statement of cash flows will be:Statement of cash flowsOperationsNet income ZW$125Depreciation 75Changes in other current assets (25)Total cash flow from operations ZW$175Investing activitiesAcquisition of fixed assets ZW$(175)Total cash flow from investing activities ZW$(175)Financing activitiesProceeds of long-term debt ZW$90Current liabilities 10Dividends (65)Total cash flow from financing activities ZW$35Change in cash (on balance sheet) ZW$35b.Change in NWC = NWC end– NWC beg= (CA end– CL end) – (CA beg– CL beg)= [(ZW$45 + 145) – 70] – [(ZW$10 + 120) – 60)= ZW$120 – 70= ZW$50c.To find the cash flow generated by the firm’s assets, we need the operating cash flow, and thecapital spending. So, calculating each of these, we find:Operating cash flowNet income ZW$125Depreciation 75Operating cash flow ZW$200Note that we can calculate OCF in this manner since there are no taxes.Capital spendingEnding fixed assets ZW$250Beginning fixed assets (150)Depreciation 75Capital spending ZW$175Now we can calculate the cash flow generated by the firm’s assets, which is:Cash flow from assetsOperating cash flow ZW$200Capital spending (175)Change in NWC (50)Cash flow from assets ZW$(25)Notice that the accounting statement of cash flows shows a positive cash flow, but the financial cash flows show a negative cash flow. The cash flow generated by the firm’s assets is a better number for analyzing the firm’s performance.12.With the information provided, the cash flows from the firm are the capital spending and the changein net working capital, so:Cash flows from the firmCapital spending $(3,000)Additions to NWC (1,000)Cash flows from the firm $(4,000)And the cash flows to the investors of the firm are:Cash flows to investors of the firmSale of short-term debt $(7,000)Sale of long-term debt (18,000)Sale of common stock (2,000)Dividends paid 23,000Cash flows to investors of the firm $(4,000)13. a. The interest expense for the company is the amount of debt times the interest rate on the debt.So, the income statement for the company is:Income StatementSales £1,000,000Cost of goods sold 300,000Selling costs 200,000Depreciation 100,000EBIT £400,000Interest 100,000Taxable income £300,000Taxes (35%) 105,000Net income £195,000b. And the operating cash flow is:OCF = EBIT + Depreciation – TaxesOCF = £400,000 + 100,000 – 105,000OCF = £395,00014.To find the OCF, we first calculate net income.Income StatementSales Au$145,000Costs 86,000Depreciation 7,000Other expenses 4,900EBIT Au$47,100Interest 15,000Taxable income Au$32,100Taxes 12,840Net income Au$19,260Dividends Au$8,700Additions to RE Au$10,560a.OCF = EBIT + Depreciation – TaxesOCF = Au$47,100 + 7,000 – 12,840OCF = Au$41,260b.CFC = Interest – Net new LTDCFC = Au$15,000 – (–Au$6,500)CFC = Au$21,500Note that the net new long-term debt is negative because the company repaid part of its long-term debt.c.CFS = Dividends – Net new equityCFS = Au$8,700 – 6,450CFS = Au$2,250d.We know that CFA = CFC + CFS, so:CFA = Au$21,500 + 2,250 = Au$23,750CFA is also equal to OCF – Net capital spending – Change in NWC. We already know OCF.Net capital spending is equal to:Net capital spending = Increase in NFA + DepreciationNet capital spending = Au$5,000 + 7,000Net capital spending = Au$12,000Now we can use:CFA = OCF – Net capital spending – Change in NWCAu$23,750 = Au$41,260 – 12,000 – Change in NWC.Solving for the change in NWC gives Au$5,510, meaning the company increased its NWC by Au$5,510.15.The solution to this question works the income statement backwards. Starting at the bottom:Net income = Dividends + Addition to ret. earningsNet income = $900 + 4,500Net income = $5,400Now, looking at the income statement:EBT –EBT × Tax rate = Net incomeRecognize that EBT × tax rate is simply the calculation for taxes. Solving this for EBT yields: EBT = NI / (1– tax rate)EBT = $5,400 / 0.65EBT = $8,308Now we can calculate:EBIT = EBT + interestEBIT = $8,308 + 1,600EBIT = $9,908The last step is to use:EBIT = Sales – Costs – DepreciationEBIT = $29,000 – 13,000 – DepreciationEBIT = $9,908Solving for depreciation, we find that depreciation = $6,092.16.The balance sheet for the company looks like this:Balance SheetCash ¥175,000 Accounts payable ¥430,000 Accounts receivable 140,000 Notes payable 180,000 Inventory 265,000 Current liabilities ¥610,000 Current assets ¥580,000 Long-term debt 1,430,000Total liabilities ¥2,040,000 Tangible net fixed assets 2,900,000Intangible net fixed assets 720,000 Common stock ??Accumulated ret. earnings 1,240,000 Total assets ¥4,200,000 Total liab. & owners’ equity¥4,200,000Total liabilities and owners’ equity is:TL & OE = CL + LTD + Common stockSolving for this equation for equity gives us:Common stock = ¥4,200,000 – 1,240,000 – 2,040,000Common stock = ¥920,00017.The market value of shareholders’ equity cannot be zero. A negative market va lue in this case wouldimply that the company would pay you to own the stock. The market value of shareholders’ equity can be stated as: Shareholders’ equity = Max [(TA – TL), 0]. So, if TA is 元4,000,000 equity is equal to 元1,000,000 and if TA is 元2,500,000 equity is equal to 元0. We should note here that the book value of shareholders’ equity can be negative.18. a. Taxes Growth = 0.15($50K) + 0.25($25K) + 0.34($10K) = $17,150Taxes Income = 0.15($50K) + 0.25($25K) + 0.34($25K) + 0.39($235K) + 0.34($8.165M)= $2,890,000b. Each firm has a marginal tax rate of 34% on the next $10,000 of taxable income, despite theirdifferent average tax rates, so both firms will pay an additional $3,400 in taxes.19.Income StatementSales ₦850,000COGS 630,000A&S expenses 120,000Depreciation 130,000EBIT (₦30,000)Interest 85,000Taxable income (₦115,000)Taxes (30%) 0 income (₦115,000)b.OCF = EBIT + Depreciation – TaxesOCF = (₦30,000) + 130,000 – 0OCF = ₦100,000 income was negative because of the tax deductibility of depreciation and interest expense.However, the actual cash flow from operations was positive because depreciation is a non-cash expense and interest is a financing expense, not an operating expense.20. A firm can still pay out dividends if net income is negative; it just has to be sure there is sufficientcash flow to make the dividend payments.Change in NWC = Net capital spending = Net new equity = 0. (Given)Cash flow from assets = OCF – Change in NWC – Net capital spendingCash flow from assets = ₦100,000 – 0 – 0 = ₦100,000Cash flow to stockholders = Dividends – Net new equityCash flow to stockholders = ₦30,000 – 0 = ₦30,000Cash flow to creditors = Cash flow from assets – Cash flow to stockholdersCash flow to creditors = ₦100,000 – 30,000Cash flow to creditors = ₦70,000Cash flow to creditors is also:Cash flow to creditors = Interest – Net new LTDSo:Net new LTD = Interest – Cash flow to creditorsNet new LTD = ₦85,000 – 70,000Net new LTD = ₦15,00021. a.The income statement is:Income StatementSales $12,800Cost of good sold 10,400Depreciation 1,900EBIT $ 500Interest 450Taxable income $ 50Taxes (34%) 17Net income $33b.OCF = EBIT + Depreciation – TaxesOCF = $500 + 1,900 – 17OCF = $2,383c.Change in NWC = NWC end– NWC beg= (CA end– CL end) – (CA beg– CL beg)= ($3,850 – 2,100) – ($3,200 – 1,800)= $1,750 – 1,400 = $350Net capital spending = NFA end– NFA beg + Depreciation= $9,700 – 9,100 + 1,900= $2,500CFA = OCF – Change in NWC – Net capital spending= $2,383 – 350 – 2,500= –$467The cash flow from assets can be positive or negative, since it represents whether the firm raised funds or distributed funds on a net basis. In this problem, even though net income and OCF are positive, the firm invested heavily in both fixed assets and net working capital; it had to raise a net $467 in funds from its stockholders and creditors to make these investments.d.Cash flow to creditors = Interest – Net new LTD= $450 – 0= $450Cash flow to stockholders = Cash flow from assets – Cash flow to creditors= –$467 – 450= –$917We can also calculate the cash flow to stockholders as:Cash flow to stockholders = Dividends – Net new equitySolving for net new equity, we get:Net new equity = $500 – (–917)= $1,417The firm had positive earnings in an accounting sense (NI > 0) and had positive cash flow from operations. The firm invested $350 in new net working capital and $2,500 in new fixed assets. The firm had to raise $467 from its stakeholders to support this new investment. It accomplished this by raising $1,417 in the form of new equity. After paying out $500 of this in the form of dividends to shareholders and $450 in the form of interest to creditors, $467 was left to meet the firm’s cash flow needs for investment.22. a.Total assets 2005 = ¥650,000 + 2,900,000 = ¥3,550,000Total liabilities 2005 = ¥265,000 + 1,500,000 = ¥1,765,000Owners’ equity 2005 = ¥3,550,000 – 1,765,000 = ¥1,785,000Total assets 2006 = ¥705,000 + 3,400,000 = ¥4,105,000Total liabilities 2006 = ¥290,000 + 1,720,000 = ¥2,010,000Owners’ equity 2006 = ¥4,105,000 – 2,010,000 = ¥2,095,000b.NWC 2005 = CA05 – CL05 = ¥650,000 – 265,000 = ¥385,000NWC 2006 = CA06 – CL06 = ¥705,000 – 290,000 = ¥415,000Change in NWC = NWC06 – NWC05 = ¥415,000 – 385,000 = ¥30,000c.We can calculate net capital spending as:Net capital spending = Net fixed assets 2006 – Net fixed assets 2005 + DepreciationNet capital spending = ¥3,400,000 – 2,900,000 + 800,000Net capital spending = ¥1,300,000So, the company had a net capital spending cash flow of ¥1,300,000. We also know that net capital spending is:Net capital spending = Fixed assets bought – Fixed assets sold¥1,300,000 = ¥1,500,000 – Fixed assets soldFixed assets sold = ¥1,500,000 – 1,300,000 = ¥200,000To calculate the cash flow from assets, we must first calculate the operating cash flow. The operating cash flow is calculated as follows (you can also prepare a traditional income statement):EBIT = Sales – Costs – DepreciationEBIT = ¥8,600,000 – 4,150,000 – 800,000EBIT = ¥3,650,000EBT = EBIT – InterestEBT = ¥3,650,000 – 216,000EBT = ¥3,434,000Taxes = EBT ⨯ .35Taxes = ¥3,434,000 ⨯ .35Taxes = ¥1,202,000OCF = EBIT + Depreciation – TaxesOCF = ¥3,650,000 + 800,000 – 1,202,000OCF = ¥3,248,000Cash flow from assets = OCF – Change in NWC – Net capital spending.Cash flow from assets = ¥3,248,000 – 30,000 – 1,300,000Cash flow from assets = ¥1,918,000 new borrowing = LTD06 – LTD05Net new borrowing = ¥1,720,000 – 1,500,000Net new borrowing = ¥220,000Cash flow to creditors = Interest – Net new LTDCash flow to creditors = ¥216,000 – 220,000Cash flow to creditors = –¥4,000Net new borrowing = ¥220,000 = Debt issued – Debt retiredDebt retired = ¥300,000 – 220,000 = ¥80,00023.Balance sheet as of Dec. 31, 2005Cash €2,107 Accounts payable €2,213Accounts receivable 2,789 Notes payable 407Inventory 4,959 Current liabilities €2,620Current assets €9,855Long-term debt €7,056 Net fixed assets €17,669 Owners' equity €17,848Total assets €27,524 Total liab. & equity €27,524Balance sheet as of Dec. 31, 2006Cash €2,155 Accounts payable €2,146Accounts receivable 3,142 Notes payable 382Inventory 5,096 Current liabilities €2,528Current assets €10,393Long-term debt €8,232 Net fixed assets €18,091 Owners' equity €17,724Total assets €28,484 Total liab. & equity €28,4842005 Income Statement 2006 Income Statement Sales €4,018.00 Sales €4,312.00 COGS 1,382.00 COGS 1,569.00 Other expenses 328.00 Other expenses 274.00 Depreciation 577.00 Depreciation 578.00 EBIT €1,731.00 EBIT €1,891.00 Interest 269.00 Interest 309.00 EBT €1,462.00 EBT €1,582.00 Taxes (34%) 497.08 Taxes (34%) 537.88 Net income € 964.92 Net income €1,044.12 Dividends €490.00 Dividends €539.00 Additions to RE €474.92 Additions to RE €505.12 24.OCF = EBIT + Depreciation – TaxesOCF = €1,891 + 578 – 537.88OCF = €1,931.12Change in NWC = NWC end– NWC beg = (CA – CL) end– (CA – CL) begChange in NWC = (€10,393 – 2,528) – (€9,855 – 2,620)Change in NWC = €7,865 – 7,235 = €630Net capital spending = NFA end– NFA beg+ DepreciationNet capital spending = €18,091 – 17,669 + 578Net capital spending = €1,000Cash flow from assets = OCF – Change in NWC – Net capital spendingCash flow from assets = €1,931.12 – 630 – 1,000Cash flow from assets = €301.12Cash flow to creditors = Interest – Net new LTDNet new LTD = LTD end– LTD begCash flow to creditors = €309 – (€8,232 – 7,056)Cash flow to creditors = –€867Net new equity = Common stock end– Common stock begCommon stock + Retained earnings = T otal owners’ equityNet new equity = (OE – RE) end– (OE – RE) begNet new equity = OE end– OE beg + RE beg– RE endRE end= RE beg+ Additions to RE04Net new equity = OE end– OE beg+ RE beg– (RE beg + Additions to RE06)= OE end– OE beg– Additions to RENet new equity = €17,724 – 17,848 – 505.12 = –€629.12Cash flow to stockholders = Dividends – Net new equityCash flow to stockholders = €539 – (–€629.12)Cash flow to stockholders = €1,168.12As a check, cash flow from assets is €301.12.Cash flow from assets = Cash flow from creditors + Cash flow to stockholdersCash flow from assets = –€867 + 1,168.12Cash flow from assets = €301.12Challenge25.We will begin by calculating the operating cash flow. First, we need the EBIT, which can becalculated as:EBIT = Net income + Current taxes + Deferred taxes + InterestEBIT = £192 + 110 + 21 + 57EBIT = £380Now we can calculate the operating cash flow as:Operating cash flowEarnings before interest and taxes £380Depreciation 105Current taxes (110)Operating cash flow £375The cash flow from assets is found in the investing activities portion of the accounting statement of cash flows, so:Cash flow from assetsAcquisition of fixed assets £198Sale of fixed assets (25)Capital spending £173The net working capital cash flows are all found in the operations cash flow section of the accounting statement of cash flows. However, instead of calculating the net working capital cash flows as the change in net working capital, we must calculate each item individually. Doing so, we find:Net working capital cash flowCash £140Accounts receivable 31Inventories (24)Accounts payable (19)Accrued expenses 10Notes payable (6)Other (2)NWC cash flow £130Except for the interest expense and notes payable, the cash flow to creditors is found in the financing activities of the accounting statement of cash flows. The interest expense from the income statement is given, so:Cash flow to creditorsInterest £57Retirement of debt 84Debt service £141Proceeds from sale of long-term debt (129)Total £12And we can find the cash flow to stockholders in the financing section of the accounting statement of cash flows. The cash flow to stockholders was:Cash flow to stockholdersDividends £94Repurchase of stock 15Cash to stockholders £109Proceeds from new stock issue (49)Total £60 capital spending = NFA end– NFA beg + Depreciation= (NFA end– NFA beg) + (Depreciation + AD beg) – AD beg= (NFA end– NFA beg)+ AD end– AD beg= (NFA end + AD end) – (NFA beg + AD beg) = FA end– FA beg27. a.The tax bubble causes average tax rates to catch up to marginal tax rates, thus eliminating thetax advantage of low marginal rates for high income corporations.b.Assuming a taxable income of $100,000, the taxes will be:Taxes = 0.15($50K) + 0.25($25K) + 0.34($25K) + 0.39($235K) = $113.9KAverage tax rate = $113.9K / $335K = 34%The marginal tax rate on the next dollar of income is 34 percent.For corporate taxable income levels of $335K to $10M, average tax rates are equal to marginal tax rates.Taxes = 0.34($10M) + 0.35($5M) + 0.38($3.333M) = $6,416,667Average tax rate = $6,416,667 / $18,333,334 = 35%The marginal tax rate on the next dollar of income is 35 percent. For corporate taxable income levels over $18,333,334, average tax rates are again equal to marginal tax rates.c.Taxes = 0.34($200K) = $68K = 0.15($50K) + 0.25($25K) + 0.34($25K) + X($100K);X($100K) = $68K – 22.25K = $45.75KX = $45.75K / $100KX = 45.75%。

Chapter 2: Accounting Statements and Cash Flow2.10AssetsCurrent assetsCash $ 4,000Accounts receivable 8,000Total current assets $ 12,000Fixed assetsMachinery $ 34,000Patents 82,000Total fixed assets $116,000Total assets $128,000Liabilities and equityCurrent liabilitiesAccounts payable $ 6,000Taxes payable 2,000Total current liabilities $ 8,000Long-term liabilitiesBonds payable $7,000Stockholders equityCommon stock ($100 par) $ 88,000Capital surplus 19,000Retained earnings 6,000Total stockholders equity $113,000Total liabilities and equity $128,0002.11One year ago TodayLong-term debt $50,000,000 $50,000,000Preferred stock 30,000,000 30,000,000Common stock 100,000,000 110,000,000Retained earnings 20,000,000 22,000,000Total $200,000,000 $212,000,0002.12Total Cash Flow ofthe Stancil CompanyCash flows from the firmCapital spending $(1,000)Additions to working capital (4,000)Total $(5,000)Cash flows to investors of the firmShort-term debt $(6,000)Long-term debt (20,000)Equity (Dividend - Financing) 21,000Total $(5,000)[Note: This table isn’t the Statement of Cash Flows, which is only covered in Appendix 2B, since the latter has th e change in cash (on the balance sheet) as a final entry.]2.13 a. The changes in net working capital can be computed from:Sources of net working capitalNet income $100Depreciation 50Increases in long-term debt 75Total sources $225Uses of net working capitalDividends $50Increases in fixed assets* 150Total uses $200Additions to net working capital $25*Includes $50 of depreciation.b.Cash flow from the firmOperating cash flow $150Capital spending (150)Additions to net working capital (25)Total $(25)Cash flow to the investorsDebt $(75)Equity 50Total $(25)Chapter 3: Financial Markets and Net Present Value: First Principles of Finance (Advanced)3.14 $120,000 - ($150,000 - $100,000) (1.1) = $65,0003.15 $40,000 + ($50,000 - $20,000) (1.12) = $73,6003.16 a. ($7 million + $3 million) (1.10) = $11.0 millionb.i. They could spend $10 million by borrowing $5 million today.ii. They will have to spend $5.5 million [= $11 million - ($5 million x 1.1)] at t=1.Chapter 4: Net Present Valuea. $1,000 ⨯ 1.0510 = $1,628.89b. $1,000 ⨯ 1.0710 = $1,967.15c. $1,000 ⨯ 1.0520 = $2,653.30d. Interest compounds on the interest already earned. Therefore, the interest earned inSince this bond has no interim coupon payments, its present value is simply the present value of the $1,000 that will be received in 25 years. Note: As will be discussed in the next chapter, the present value of the payments associated with a bond is the price of that bond.PV = $1,000 /1.125 = $92.30PV = $1,500,000 / 1.0827 = $187,780.23a. At a discount rate of zero, the future value and present value are always the same. Remember, FV =PV (1 + r) t. If r = 0, then the formula reduces to FV = PV. Therefore, the values of the options are $10,000 and $20,000, respectively. You should choose the second option.b. Option one: $10,000 / 1.1 = $9,090.91Option two: $20,000 / 1.15 = $12,418.43Choose the second option.c. Option one: $10,000 / 1.2 = $8,333.33Option two: $20,000 / 1.25 = $8,037.55Choose the first option.d. You are indifferent at the rate that equates the PVs of the two alternatives. You know that rate mustfall between 10% and 20% because the option you would choose differs at these rates. Let r be thediscount rate that makes you indifferent between the options.$10,000 / (1 + r) = $20,000 / (1 + r)5(1 + r)4 = $20,000 / $10,000 = 21 + r = 1.18921r = 0.18921 = 18.921%The $1,000 that you place in the account at the end of the first year will earn interest for six years. The $1,000 that you place in the account at the end of the second year will earn interest for five years, etc. Thus, the account will have a balance of$1,000 (1.12)6 + $1,000 (1.12)5 + $1,000 (1.12)4 + $1,000 (1.12)3= $6,714.61PV = $5,000,000 / 1.1210 = $1,609,866.18a. $1.000 (1.08)3 = $1,259.71b. $1,000 [1 + (0.08 / 2)]2 ⨯ 3 = $1,000 (1.04)6 = $1,265.32c. $1,000 [1 + (0.08 / 12)]12 ⨯ 3 = $1,000 (1.00667)36 = $1,270.24d. $1,000 e0.08 ⨯ 3 = $1,271.25e. The future value increases because of the compounding. The account is earning interest on interest. Essentially, the interest is added to the account balance at the e nd of every compounding period. During the next period, the account earns interest on the new balance. When the compounding period shortens, the balance that earns interest is rising faster.The price of the consol bond is the present value of the coupon payments. Apply the perpetuity formula to find the present value. PV = $120 / 0.15 = $800a. $1,000 / 0.1 = $10,000b. $500 / 0.1 = $5,000 is the value one year from now of the perpetual stream. Thus, the value of theperpetuity is $5,000 / 1.1 = $4,545.45.c. $2,420 / 0.1 = $24,200 is the value two years from now of the perpetual stream. Thus, the value of the perpetuity is $24,200 / 1.12 = $20,000.pply the NPV technique. Since the inflows are an annuity you can use the present value of an annuity factor.ANPV = -$6,200 + $1,200 81.0= -$6,200 + $1,200 (5.3349)= $201.88Yes, you should buy the asset.Use an annuity factor to compute the value two years from today of the twenty payments. Remember, the annuity formula gives you the value of the stream one year before the first payment. Hence, the annuity factor will give you the value at the end of year two of the stream of payments.A= $2,000 (9.8181)Value at the end of year two = $2,000 20.008= $19,636.20The present value is simply that amount discounted back two years.PV = $19,636.20 / 1.082 = $16,834.88The easiest way to do this problem is to use the annuity factor. The annuity factor must be equal to $12,800 / $2,000 = 6.4; remember PV =C A T r. The annuity factors are in the appendix to the text. To use the factor table to solve this problem, scan across the row labeled 10 years until you find 6.4. It is close to the factor for 9%, 6.4177. Thus, the rate you will receive on this note is slightly more than 9%.You can find a more precise answer by interpolating between nine and ten percent.[ 10% ⎤[6.1446 ⎤a ⎡r ⎥bc ⎡6.4 ⎪ d⎣9%⎦⎣6.4177 ⎦By interpolating, you are presuming that the ratio of a to b is equal to the ratio of c to d.(9 - r ) / (9 - 10) = (6.4177 - 6.4 ) / (6.4177 - 6.1446)r = 9.0648%The exact value could be obtained by solving the annuity formula for the interest rate. Sophisticated calculators can compute the rate directly as 9.0626%.[Note: A standard financial calculator’s TVM keys can solve for this rate. With annuity flows, the IRR key on “advanced” financial c alculators is unnecessary.]a. The annuity amount can be computed by first calculating the PV of the $25,000 which youThat amount is $17,824.65 [= $25,000 / 1.075]. Next compute the annuity which has the same present value.A$17,824.65 = C 507.0$17,824.65 = C (4.1002)C = $4,347.26Thus, putting $4,347.26 into the 7% account each year will provide $25,000 five years from today.b. The lump sum payment must be the present value of the $25,000, i.e., $25,000 / 1.075 =$17,824.65The formula for future value of any annuity can be used to solve the problem (see footnote 11 of the text).Option one: This cash flow is an annuity due. To value it, you must use the after-tax amounts. Theafter-tax payment is $160,000 (1 - 0.28) = $115,200. Value all except the first payment using the standard annuity formula, then add back the first payment of $115,200 to obtain the value of this option.AValue = $115,200 + $115,200 30.010= $115,200 + $115,200 (9.4269)= $1,201,178.88Option two: This option is valued similarly. You are able to have $446,000 now; this is already on an after-tax basis. You will receive an annuity of $101,055 for each of the next thirty years. Those payments are taxable when you receive them, so your after-tax payment is $72,759.60 [= $101,055 (1 - 0.28)].AValue = $446,000 + $72,759.60 30.010= $446,000 + $72,759.60 (9.4269)= $1,131,897.47Since option one has a higher PV, you should choose it.et r be the rate of interest you must earn.$10,000(1 + r)12 = $80,000(1 + r)12= 8r = 0.18921 = 18.921%First compute the present value of all the payments you must make for your children’s educati on. The value as of one year before matriculation of one child’s education isA= $21,000 (2.8550) = $59,955.$21,000 415.0This is the value of the elder child’s education fourteen years from now. It is the value of the younger child’s education sixteen years from today. The present value of these isPV = $59,955 / 1.1514 + $59,955 / 1.1516= $14,880.44You want to make fifteen equal payments into an account that yields 15% so that the present value of the equal payments is $14,880.44.A= $14,880.44 / 5.8474 = $2,544.80Payment = $14,880.44 / 15.015This problem applies the growing annuity formula. The first payment is$50,000(1.04)2(0.02) = $1,081.60.PV = $1,081.60 [1 / (0.08 - 0.04) - {1 / (0.08 - 0.04)}{1.04 / 1.08}40]= $21,064.28This is the present value of the payments, so the value forty years from today is$21,064.28 (1.0840) = $457,611.46se the discount factors to discount the individual cash flows. Then compute the NPV of the project. NoticeYou can still use the factor tables to compute their PV. Essentially, they form cash flows that are a six year annuity less a two year annuity. Thus, the appropriate annuity factor to use with them is 2.6198 (= 4.3553 - 1.7355).Year Cash Flow Factor PV0.9091 $636.371$70020.8264 743.769003 1,000 ⎤4 1,000 ⎥ 2.6198 2,619.805 1,000 ⎥6 1,000 ⎦7 1,250 0.5132 641.508 1,375 0.4665 641.44Total $5,282.87NPV = -$5,000 + $5,282.87= $282.87Purchase the machine.Chapter 5: How to Value Bonds and StocksThe amount of the semi-annual interest payment is $40 (=$1,000 ⨯ 0.08 / 2). There are a total of 40 periods;i.e., two half years in each of the twenty years in the term to maturity. The annuity factor tables can be usedto price these bonds. The appropriate discount rate to use is the semi-annual rate. That rate is simply the annual rate divided by two. Thus, for part b the rate to be used is 5% and for part c is it 3%.A+F/(1+r)40PV=C Tra. $40 (19.7928) + $1,000 / 1.0440 = $1,000Notice that whenever the coupon rate and the market rate are the same, the bond is priced at par.b. $40 (17.1591) + $1,000 / 1.0540 = $828.41Notice that whenever the coupon rate is below the market rate, the bond is priced below par.c. $40 (23.1148) + $1,000 / 1.0340 = $1,231.15Notice that whenever the coupon rate is above the market rate, the bond is priced above par.a. The semi-annual interest rate is $60 / $1,000 = 0.06. Thus, the effective annual rate is 1.062 - 1 =0.1236 = 12.36%.A+ $1,000 / 1.0612b. Price = $30 12.006= $748.48A+ $1,000 / 1.0412c. Price = $30 1204.0= $906.15Note: In parts b and c we are implicitly assuming that the yield curve is flat. That is, the yield in year 5applies for year 6 as well.rice = $2 (0.72) / 1.15 + $4 (0.72) / 1.152 + $50 / 1.153= $36.31The number of shares you own = $100,000 / $36.31 = 2,754 sharesPrice = $1.15 (1.18) / 1.12 + $1.15 (1.182) / 1.122 + $1.152 (1.182) / 1.123+ {$1.152 (1.182)(1.06) / (0.12 - 0.06)} / 1.123= $26.95[Insert before last sentence of question: Assume that dividends are a fixed proportion of earnings.] Dividend one year from now = $5 (1 - 0.10) = $4.50Price = $5 + $4.50 / {0.14 - (-0.10)}= $23.75Since the current $5 dividend has not yet been paid, it is still included in the stock price.Chapter 6: Some Alternative Investment Rulesa. Payback period of Project A = 1 + ($7,500 - $4,000) / $3,500 = 2 yearsPayback period of Project B = 2 + ($5,000 - $2,500 -$1,200) / $3,000 = 2.43 yearsProject A should be chosen.b. NPV A = -$7,500 + $4,000 / 1.15 + $3,500 / 1.152 + $1,500 / 1.153 = -$388.96NPV B = -$5,000 + $2,500 / 1.15 + $1,200 / 1.152 + $3,000 / 1.153 = $53.83Project B should be chosen.a. Average Investment:($16,000 + $12,000 + $8,000 + $4,000 + 0) / 5 = $8,000Average accounting return:$4,500 / $8,000 = 0.5625 = 56.25%b. 1. AAR does not consider the timing of the cash flows, hence it does not consider the timevalue of money.2. AAR uses an arbitrary firm standard as the decision rule.3. AAR uses accounting data rather than net cash flows.aAverage Investment = (8000 + 4000 + 1500 + 0)/4 = 3375.00Average Net Income = 2000(1-0.75) = 1500=> AAR = 1500/3375=44.44%a. Solve x by trial and error:-$8,000 + $4,000 / (1 + x) + $3000 / (1 + x)2 + $2,000 / (1 + x)3 = 0x = 6.93%b. No, since the IRR (6.93%) is less than the discount rate of 8%.Alternatively, the NPV @ a discount rate of 0.08 = -$136.62.a. Solve r in the equation:$5,000 - $2,500 / (1 + r) - $2,000 / (1 + r)2 - $1,000 / (1 + r)3- $1,000 / (1 + r)4 = 0By trial and error,IRR = r = 13.99%b. Since this problem is the case of financing, accept the project if the IRR is less than the required rate of return.IRR = 13.99% > 10%Reject the offer.c. IRR = 13.99% < 20%Accept the offer.d. When r = 10%:NPV = $5,000 - $2,500 / 1.1 - $2,000 / 1.12 - $1,000 / 1.13 - $1,000 / 1.14When r = 20%:NPV = $5,000 - $2,500 / 1.2 - $2,000 / 1.22 - $1,000 / 1.23 - $1,000 / 1.24= $466.82Yes, they are consistent with the choices of the IRR rule since the signs of the cash flows change only once.A/ $160,000 = 1.04PI = $40,000 715.0Since the PI exceeds one accept the project.Chapter 7: Net Present Value and Capital BudgetingSince there is uncertainty surrounding the bonus payments, which McRae might receive, you must use the expected value of McRae’s bonuses in the computation of the PV of his contract. McRae’s salary plus the expected value of his bonuses in years one through three is$250,000 + 0.6 ⨯ $75,000 + 0.4 ⨯ $0 = $295,000.Thus the total PV of his three-year contract isPV = $400,000 + $295,000 [(1 - 1 / 1.12363) / 0.1236]+ {$125,000 / 1.12363} [(1 - 1 / 1.123610 / 0.1236]= $1,594,825.68EPS = $800,000 / 200,000 = $4NPVGO = (-$400,000 + $1,000,000) / 200,000 = $3Price = EPS / r + NPVGO= $4 / 0.12 + $3=$36.33Year 0 Year 1 Year 2 Year 3 Year 4 Year 51. Annual Salary$120,000 $120,000 $120,000 $120,000 $120,000 Savings2. Depreciation 100,000 160,000 96,000 57,600 57,6003. Taxable Income 20,000 -40,000 24,000 62,400 62,4004. Taxes 6,800 -13,600 8,160 21,216 21,2165. Operating Cash Flow113,200 133,600 111,840 98,784 98,784 (line 1-4)$100,000 -100,0006. ∆ Net workingcapital7. Investment $500,000 75,792*8. Total Cash Flow -$400,000 $113,200 $133,600 $111,840 $98,784 $74,576*75,792 = $100,000 - 0.34 ($100,000 - $28,800)NPV = -$400,000+ $113,200 / 1.12 + $133,600 / 1.122 + $111,840 / 1.123+ $98,784 / 1.124 + $74,576 / 1.125= -$7,722.52Real interest rate = (1.15 / 1.04) - 1 = 10.58%NPV A = -$40,000+ $20,000 / 1.1058 + $15,000 / 1.10582 + $15,000 / 1.10583= $1,446.76NPV B = -$50,000+ $10,000 / 1.15 + $20,000 / 1.152 + $40,000 / 1.153= $119.17Choose project A.PV = $120,000 / {0.11 - (-0.06)}t = 0 t = 1 t = 2 t = 3 t = 4 t = 5 t = 6 ...$12,000 $6,000 $6,000 $6,000$4,000$12,000 $6,000 $6,000 ...The present value of one cycle is:A+ $4,000 / 1.064PV = $12,000 + $6,000 306.0= $12,000 + $6,000 (2.6730) + $4,000 / 1.064= $31,206.37The cycle is four years long, so use a four year annuity factor to compute the equivalent annual cost (EAC).AEAC = $31,206.37 / 406.0= $31,206.37 / 3.4651= $9,006The present value of such a stream in perpetuity is$9,006 / 0.06 = $150,100o evaluate the word processors, compute their equivalent annual costs (EAC).BangAPV(costs) = (10 ⨯ $8,000) + (10 ⨯ $2,000) 414.0= $80,000 + $20,000 (2.9137)= $138,274EAC = $138,274 / 2.9137= $47,456IOUAPV(costs) = (11 ⨯ $5,000) + (11 ⨯ $2,500) 3.014- (11 ⨯ $500) / 1.143= $55,000 + $27,500 (2.3216) - $5,500 / 1.143= $115,132EAC = $115,132 / 2.3216= $49,592BYO should purchase the Bang word processors.Chapter 8: Strategy and Analysis in Using Net Present ValueThe accounting break-even= (120,000 + 20,000) / (1,500 - 1,100)= 350 units. The accounting break-even= 340,000 / (2.00 - 0.72)= 265,625 abalonesb. [($2.00 ⨯ 300,000) - (340,000 + 0.72 ⨯ 300,000)] (0.65)= $28,600This is the after tax profit.Chapter 9: Capital Market Theory: An Overviewa. Capital gains = $38 - $37 = $1 per shareb. Total dollar returns = Dividends + Capital Gains = $1,000 + ($1*500) = $1,500 On a per share basis, this calculation is $2 + $1 = $3 per sharec. On a per share basis, $3/$37 = 0.0811 = 8.11% On a total dollar basis, $1,500/(500*$37) = 0.0811 = 8.11%d. No, you do not need to sell the shares to include the capital gains in the computation of the returns. The capital gain is included whether or not you realize the gain. Since you could realize the gain if you choose, you should include it.The expected holding period return is:()[]%865.1515865.052$/52$75.54$50.5$==-+There appears to be a lack of clarity about the meaning of holding period returns. The method used in the answer to this question is the one used in Section 9.1. However, the correspondence is not exact, because in this question, unlike Section 9.1, there are cash flows within the holding period. The answer above ignores the dividend paid in the first year. Although the answer above technically conforms to the eqn at the bottom of Fig. 9.2, the presence of intermediate cash flows that aren’t accounted for renders th is measure questionable, at best. There is no similar example in the body of the text, and I have never seen holding period returns calculated in this way before.Although not discussed in this book, there are two generally accepted methods of computing holding period returns in the presence of intermediate cash flows. First, the time weighted return calculates averages (geometric or arithmetic) of returns between cash flows. Unfortunately, that method can’t be used here, because we are not given the va lue of the stock at the end of year one. Second, the dollar weighted measure calculates the internal rate of return over the entire holding period. Theoretically, that method can be applied here, as follows: 0 = -52 + 5.50/(1+r) + 60.25/(1+r)2 => r = 0.1306.This produces a two year holding period return of (1.1306)2 – 1 = 0.2782. Unfortunately, this book does not teach the dollar weighted method.In order to salvage this question in a financially meaningful way, you would need the value of the stock at the end of one year. Then an illustration of the correct use of the time-weighted return would be appropriate. A complicating factor is that, while Section 9.2 illustrates the holding period return using the geometric return for historical data, the arithmetic return is more appropriate for expected future returns.E(R) = T-Bill rate + Average Excess Return = 6.2% + (13.0% -3.8%) = 15.4%. Common Treasury Realized Stocks Bills Risk Premium -7 32.4% 11.2% 21.2%-6 -4.9 14.7 -19.6-5 21.4 10.5 10.9 -4 22.5 8.8 13.7 -3 6.3 9.9 -3.6 -2 32.2 7.7 24.5 Last 18.5 6.2 12.3 b. The average risk premium is 8.49%.49.873.125.246.37.139.106.192.21=++-++- c. Yes, it is possible for the observed risk premium to be negative. This can happen in any single year. The.b.Standard deviation = 03311.0001096.0=.b.Standard deviation = = 0.03137 = 3.137%.b.Chapter 10: Return and Risk: The Capital-Asset-Pricing Model (CAPM)a. = 0.1 (– 4.5%) + 0.2 (4.4%) + 0.5 (12.0%) + 0.2 (20.7%) = 10.57%b.σ2 = 0.1 (–0.045 – 0.1057)2 + 0.2 (0.044 – 0.1057)2 + 0.5 (0.12 – 0.1057)2+ 0.2 (0.207 – 0.1057)2 = 0.0052σ = (0.0052)1/2 = 0.072 = 7.20%Holdings of Atlas stock = 120 ⨯ $50 = $6,000 ⨯ $20 = $3,000Weight of Atlas stock = $6,000 / $9,000 = 2 / 3Weight of Babcock stock = $3,000 / $9,000 = 1 / 3a. = 0.3 (0.12) + 0.7 (0.18) = 0.162 = 16.2%σP 2= 0.32 (0.09)2 + 0.72 (0.25)2 + 2 (0.3) (0.7) (0.09) (0.25) (0.2)= 0.033244σP= (0.033244)1/2 = 0.1823 = 18.23%a.State Return on A Return on B Probability1 15% 35% 0.4 ⨯ 0.5 = 0.22 15% -5% 0.4 ⨯ 0.5 = 0.23 10% 35% 0.6 ⨯ 0.5 = 0.34 10% -5% 0.6 ⨯ 0.5 = 0.3b. = 0.2 [0.5 (0.15) + 0.5 (0.35)] + 0.2[0.5 (0.15) + 0.5 (-0.05)]+ 0.3 [0.5 (0.10) + 0.5 (0.35)] + 0.3 [0.5 (0.10) + 0.5 (-0.05)]= 0.135= 13.5%Note: The solution to this problem requires calculus.Specifically, the solution is found by minimizing a function subject to a constraint. Calculus ability is not necessary to understand the principles behind a minimum variance portfolio.Min { X A2 σA2 + X B2σB2+ 2 X A X B Cov(R A , R B)}subject to X A + X B = 1Let X A = 1 - X B. Then,Min {(1 - X B)2σA2 + X B2σB2+ 2(1 - X B) X B Cov (R A, R B)}Take a derivative with respect to X B.d{∙} / dX B = (2 X B - 2) σA2+ 2 X B σB2 + 2 Cov(R A, R B) - 4 X B Cov(R A, R B)Set the derivative equal to zero, cancel the common 2 and solve for X B.X BσA2- σA2+ X B σB2 + Cov(R A, R B) - 2 X B Cov(R A, R B) = 0X B = {σA2 - Cov(R A, R B)} / {σA2+ σB2 - 2 Cov(R A, R B)}andX A = {σB2 - Cov(R A, R B)} / {σA2+ σB2 - 2 Cov(R A, R B)}Using the data from the problem yields,X A = 0.8125 andX B = 0.1875.a. Using the weights calculated above, the expected return on the minimum variance portfolio isE(R P) = 0.8125 E(R A) + 0.1875 E(R B)= 0.8125 (5%) + 0.1875 (10%)= 5.9375%b. Using the formula derived above, the weights areX A = 2 / 3 andX B = 1 / 3c. The variance of this portfolio is zero.σP 2= X A2 σA2 + X B2σB2+ 2 X A X B Cov(R A , R B)= (4 / 9) (0.01) + (1 / 9) (0.04) + 2 (2 / 3) (1 / 3) (-0.02)= 0This demonstrates that assets can be combined to form a risk-free portfolio.14.2%= 3.7%+β(7.5%) ⇒β = 1.40.25 = R f + 1.4 [R M– R f] (I)0.14 = R f + 0.7 [R M– R f] (II)(I) – (II)=0.11 = 0.7 [R M– R f] (III)[R M– R f ]= 0.1571Put (III) into (I) 0.25 = R f + 1.4[0.1571]R f = 3%[R M– R f ]= 0.1571R M = 0.1571 + 0.03= 18.71%a. = 4.9% + βi (9.4%)βD= Cov(R D, R M) / σM 2 = 0.0635 / 0.04326 = 1.468= 4.9 + 1.468 (9.4) = 18.70%Weights:X A = 5 / 30 = 0.1667X B = 10 / 30 = 0.3333X C = 8 / 30 = 0.2667X D = 1 - X A - X B - X C = 0.2333Beta of portfolio= 0.1667 (0.75) + 0.3333 (1.10) + 0.2667 (1.36) + 0.2333 (1.88)= 1.293= 4 + 1.293 (15 - 4) = 18.22%a. (i) βA= ρA,MσA / σMρA,M= βA σM / σA= (0.9) (0.10) / 0.12= 0.75(ii) σB= βB σM / ρB,M= (1.10) (0.10) / 0.40= 0.275(iii) βC= ρC,MσC / σM= (0.75) (0.24) / 0.10= 1.80(iv) ρM,M= 1(v) βM= 1(vi) σf= 0(vii) ρf,M= 0(viii) βf= 0b. SML:E(R i) = R f + βi {E(R M) - R f}= 0.05 + (0.10) βiSecurity βi E(R i)A 0.13 0.90 0.14B 0.16 1.10 0.16C 0.25 1.80 0.23Security A performed worse than the market, while security C performed better than the market.Security B is fairly priced.c. According to the SML, security A is overpriced while security C is under-priced. Thus, you could invest in security C while sell security A (if you currently hold it).a. The typical risk-averse investor seeks high returns and low risks. To assess thetwo stocks, find theReturns:State of economy ProbabilityReturn on A*Recession 0.1 -0.20 Normal 0.8 0.10 Expansion0.10.20* Since security A pays no dividend, the return on A is simply (P 1 / P 0) - 1. = 0.1 (-0.20) + 0.8 (0.10) + 0.1 (0.20) = 0.08 = 0.09 This was given in the problem.Risk:R A - (R A -)2 P ⨯ (R A -)2 -0.28 0.0784 0.00784 0.02 0.0004 0.00032 0.12 0.0144 0.00144 Variance 0.00960Standard deviation (R A ) = 0.0980βA = {Corr(R A , R M ) σ(R A )} / σ(R M ) = 0.8 (0.0980) / 0.10= 0.784βB = {Corr(R B , R M ) σ(R B )} / σ(R M ) = 0.2 (0.12) / 0.10= 0.24The return on stock B is higher than the return on stock A. The risk of stock B, as measured by itsbeta, is lower than the risk of A. Thus, a typical risk-averse investor will prefer stock B.b. = (0.7) + (0.3) = (0.7) (0.8) + (0.3) (0.09) = 0.083σP 2= 0.72 σA 2 + 0.32 σB 2 + 2 (0.7) (0.3) Corr (R A , R B ) σA σB = (0.49) (0.0096) + (0.09) (0.0144) + (0.42) (0.6) (0.0980) (0.12) = 0.0089635 σP = = 0.0947 c. The beta of a portfolio is the weighted average of the betas of the components of the portfolio. βP = (0.7) βA + (0.3) βB = (0.7) (0.784) + (0.3) (0.240) = 0.621Chapter 11:An Alternative View of Risk and Return: The Arbitrage Pricing Theorya. Stock A:()()R R R R R A A A m m Am A=+-+=+-+βεε105%12142%...Stock B:()()R R R R R B B m m Bm B=+-+=+-+βεε130%098142%...Stock C:()R R R R R C C C m m Cm C=+-+=+-+βεε157%137142%)..(.b.()[]()[]()[]()()()()()()[]()()CB A m cB A m c m B m A m CB A P 25.045.030.0%2.14R 1435.1%925.1225.045.030.0%2.14R 37.125.098.045.02.130.0%7.1525.0%1345.0%5.1030.0%2.14R 37.1%7.1525.0%2.14R 98.0%0.1345.0%2.14R 2.1%5.1030.0R 25.0R 45.0R 30.0R ε+ε+ε+-+=ε+ε+ε+-+++++=ε+-++ε+-++ε+-+=++= c.i.()R R R A B C =+-==+-==+-=105%1215%142%)1113%09815%142%)137%157%13715%142%168%..(..46%.(......ii.R P =+-=12925%1143515%142%)138398%..(..To determine which investment investor would prefer, you must compute the variance of portfolios created bymany stocks from either market. Note, because you know that diversification is good, it is reasonable to assume that once an investor chose the market in which he or she will invest, he or she will buy many stocks in that market.Known:E EF ====001002 and and for all i.i σσεε..Assume: The weight of each stock is 1/N; that is, X N i =1/for all i.If a portfolio is composed of N stocks each forming 1/N proportion of the portfolio, the return on the portfolio is 1/N times the sum of the returns on the N stocks. Recall that the return on each stock is 0.1+βF+ε.()()()()()()[]()()()()()()()[]()[]()[]()()[]()()()()()j i 2j i 22j i i 2222222222P P P P iP ,0.04Corr 0.01,Cov s =isvariance the ,N as limit In the ,Cov 1/N 1s 1/N s )(1/N 1/N F 2F E 1/N F E 0.10.1/N F 0.1E R E R E R Var 0.101/N 00.1E 1/N F E 0.11/N F 0.1E R E 1/N F 0.1F 0.1(1/N)R 1/N R εε+β=εε+β∞⇒εε-+ε+β=ε∑+εβ+β=ε+β=-ε+β+=-==+β+=ε+β+=ε∑+β+=ε+β+=ε+β+==∑∑∑∑∑∑∑∑()()()()()()Thus,F R f E R E R Var R Corr Var R Corr ii ip P p i j PijR 1i =++=++===+=+010*********002250040002500412212111222.........,,εεεεεεa.()()()()Corr Corr Var R Var R i j i j p pεεεε112212000225000225,,..====Since Var ()()R p 1 Var R 2p 〉, a risk averse investor will prefer to invest in the second market.b. Corr ()()εεεε112090i j j ,.,== and Corr 2i()()Var R Var R pp120058500025==..。