Corporate Finance2010-2

Corporate Finance, 3e (Berk/DeMarzo)Chapter 20 Financial OptionsOption Basics1) Which of the following statements is FALSEA) A call option gives the owner the right to buy the asset.B) A put option gives the owner the right to sell the asset.C) A financial option contract gives the writer the right (but not the obligation) to purchase or sell an asset at a fixed price at some future date.D) A stock option gives the holder the option to buy or sell a share of stock on or before a given date for a given price.Answer: C-Explanation: C) A financial option contract gives the owner the right (but not the obligation) to purchase or sell an asset at a fixed price at some future date. Diff: 1Section: Option BasicsSkill: Conceptual2) Which of the following statements is FALSEA) When a holder of an option enforces the agreement and buys or sells a share of stock at the agreed-upon price, he is exercising the option.B) There are two kinds of options. European options allow their holders to exercise the option on any date up to and including a final date called the expiration date.C) Because an option is a contract between two parties, for every owner of a financial option, there is also an option writer, the person who takes the other side of the contract.D) The price at which the holder buys or sells the share of stock when the option is exercised is called the strike price or exercise price.Answer: B~Explanation: B) There are two kinds of options. American options allow their holders to exercise the option on any date up to and including a final date called the expiration date.Diff: 1Section: Option BasicsSkill: Conceptual3) Which of the following statements is FALSEA) The option buyer, also called the option holder, holds the right to exercise the option and has a long position in the contract.B) The market price of the option is also called the exercise price.C) If the payoff from exercising an option immediately is positive, the option is said to be in-the-money.D) As with other financial assets, options can be bought and sold. Standard stock options are traded on organized exchanges, while more specialized options are sold through dealers.Answer: B'Explanation: B) The market price of the option is also called the option premium. Diff: 2Section: Option BasicsSkill: Conceptual4) Which of the following statements is FALSEA) A holder would not exercise an in-the-money option.B) The option seller, also called the option writer, sells (or writes) the option and has a short position in the contract.C) Because the long side has the option to exercise, the short side has an obligation to fulfill the contract.D) When the exercise price of an option is equal to the current price of the stock, the option is said to be at-the-money.Answer: AExplanation: A) A holder would not exercise an out-of-the-money option.:Diff: 2Section: Option BasicsSkill: Conceptual5) Which of the following statements is FALSEA) Options also allow investors to speculate, or place a bet on the direction in which they believe the market is likely to move.B) Options where the strike price and the stock price are very far apart are referred to as deep in-the-money or deep out of-the-money.C) Call options with strike prices above the current stock price are in-the-money, as are put options with strike prices below the current stock price.D) European options allow their holders to exercise the option only on the expiration date—holders cannot exercise before the expiration date.Answer: CExplanation: C) Call options with strike prices below the current stock price are in-the money, as are put options with strike prices above the current stock price. )Diff: 2Section: Option Basics Skill: Conceptual6) The writer of a call option has:A) the obligation to sell a security for a given price.B) the obligation to buy a security for a given price.C) the right to sell a security for a given price.D) the right to buy a security for a given price.Answer: ADiff: 1，Section: Option BasicsSkill: Definition7) The holder of a put option has:A) the obligation to sell a security for a given price.B) the right to buy a security for a given price.C) the right to sell a security for a given price.D) the obligation to buy a security for a given price.Answer: CDiff: 1Section: Option Basics—Skill: Definition8) Using options to reduce risk is called:A) speculation.B) a naked position.C) hedging.D) a covered position.Answer: CDiff: 1Section: Option BasicsSkill: Definition?9) Using options to place a bet on the direction in which you believe the market is likely to move is called:A) speculation.B) hedging.C) a covered position.D) a naked position.Answer: ADiff: 1Section: Option BasicsSkill: DefinitionUse the table for the question(s) below.'Consider the following information on options from the CBOE for Merck:10) Assume you want to buy one option contract that with an exercise price closest to being at-the-money and that expires January 2009. The current price that you would have to pay for such a contract is:A) $680B) $380C) $650D) $420Answer: AExplanation: A) One contract is for 100 shares. The option closest to being at the money has an exercise price of $ and currently has an ask price of $. Since you are buying the option, you will have to pay the ask price. So $ × 100 shares per contract = $680Diff: 2）Section: Option BasicsSkill: Analytical11) The open interest for January 2009 put option that is closest to beingat-the-money is:A) 7174B) 982C) 319D) 8422Answer: ADiff: 2Section: Option Basics…Skill: Analytical12) How many of the January 2009 put options are in the moneyA) 1B) 3C) 2D) 4Answer: CExplanation: C) For a put option to be in the money, its current stock price must be less than the exercise price. The current stock price for Merck is $, so only the put options with strike prices of $ and $ are in the money. So there are two put options in the money.Diff: 1Section: Option BasicsSkill: Analytical)13) How many of the January 2009 call options are in the moneyA) 2B) 4C) 1D) 3Answer: BExplanation: B) For a call option to be in the money, its current stock price must be greater than the exercise price. The current stock price for Merck is $, so the call options with strike prices of $, $, $, and $ are in the money. So there are four call options in the money.Diff: 1Section: Option BasicsSkill: Analytical\14) The market price of an option is called the:A) American premium.B) European premium.C) option premium.D) exercising premium.Answer: CDiff: 1Section: Option BasicsSkill: Definition~15) As the seller of an option, you receive the:A) exercise price.B) strike price.C) risk premium.D) option premium. Answer: DDiff: 1Section: Option Basics Skill: DefinitionUse the table for the question(s) below.|Consider the following information on options from the CBOE for Merck:16) You have decided to sell (write) 5 January 2009 put options on Merck with an exercise price of $45 per share. How much money will you receive and are these contracts in or out of the moneyAnswer: If you write 5 put option contracts you will receive 5 × 100 (shares per contract) × $ (since you are selling you get bid price) = $2,950. These options are in the money since the exercise price is greater than the current market price. Diff: 2Section: Option BasicsSkill: Analytical17) You have decided to buy 10 January 2009 call options on Merck with an exercise price of $45 per share. How much will this transaction cost you and are these contracts in or out of the moneyAnswer: If you buy 10 call option contracts you will pay 10 × 100 (shares per contract) × $ (since you are buying you pay the ask price) = $4,500. These optio ns are out of the money since the exercise price is greater than the current market price.~Diff: 2Section: Option BasicsSkill: AnalyticalOption Payoffs at Expiration1) The payoff to the holder of a call option is given by:A) C = max(S - K, 0)B) C = min(K, 0)C) C = max(K - S, 0)D) C = min(K - S, 0)，Answer: ADiff: 1Section: Option Payoffs at ExpirationSkill: Conceptual2) The payoff to the holder of a put option is given by:A) P = max(K - S, 0)B) P= max(S - K, 0)C) P = min(S - K, 0)D) P = max(K, 0)Answer: ADiff: 1|Section: Option Payoffs at ExpirationSkill: ConceptualUse the figure for the question(s) below.3) This graph depicts the payoffs of:A) a short position in a put option at expiration.B) a short position in a call option at expiration.C) a long position in a put option at expiration.D) a long position in a call option at expiration. Answer: B、Diff: 1Section: Option Payoffs at ExpirationSkill: ConceptualUse the figure for the question(s) below.4) This graph depicts the payoffs of:A) a long position in a put option at expiration.B) a short position in a call option at expiration.C) a short position in a put option at expiration.D) a long position in a call option at expiration.Answer: A\Diff: 1Section: Option Payoffs at ExpirationSkill: Conceptual5) An option strategy in which you hold a long position in both a put and a call option with the same strike price is called:A) a strangle.B) portfolio insurance.C) a butterfly spread.D) a straddle.Answer: DDiff: 2—Section: Option Payoffs at ExpirationSkill: Definition6) Which of the following statements is FALSEA) Because a short position in an option is the other side of a long position, the profits from a short position in an option are just the negative of the profits of a long position.B) The deeper out-of-the-money the put option is, the less negative its beta, and the higher is its expected return.C) Although payouts on a long position in an option contract are never negative, the profit from purchasing an option and holding it to expiration could well be negative because the payout at expiration might be less than the initial cost of the option.D) The put position has a higher return in states with low stock prices; that is, if the stock has a positive beta, the put has a negative beta.Answer: BExplanation: B) The deeper out-of-the-money the put option is, the less negative its beta, and the lower is its expected return.Diff: 3Section: Option Payoffs at Expiration&Skill: Conceptual7) You pay $ for a call option on Luther Industries that expires in three months with a strike price of $. Three months later, at expiration, Luther Industries is trading at $ per share. Your profit per share on this transaction is closest to:A) -$B) $C) -$D) $Answer: CExplanation: C) At expiration you will choose to exercise the option since the option is in the money. Your payoff will be $41 - $40 = $1 for exercising the option however to calculate the profit we need to subtract the option premium so:Profit = $ - $ = -$\Diff: 2Section: Option Payoffs at ExpirationSkill: Analytical8) Graph the payoff at expiration of a short position in a put option with a strike price of $20.Answer:Diff: 2Section: Option Payoffs at ExpirationSkill: Graphing9) You are long both a put option and a call option on Rockwood stock with the same expiration date. The exercise price of the call option is $40 and the exercise price of the put option is $30. Graph the payoff of the combination of options at expiration.）Answer:This option strategy is known as a strangle.Diff: 2Section: Option Payoffs at ExpirationSkill: GraphingPut-Call Parity1) Consider the following equation:C = P + S - PV(K) - PV(Div)|In this equation the term S refers to:A) the payoff of a zero coupon bond.B) the strike price of the option.C) the value of the call option.D) the stock's current price. Answer: DDiff: 1Section: Put-Call ParitySkill: Conceptual2) Consider the following equation:…C = P + S - PV(K) - PV(Div)In this equation the term C refers to:A) the value of the call option.B) the stock's current price.C) the payoff of a zero coupon bond.D) the strike price of the option. Answer: ADiff: 1Section: Put-Call ParitySkill: Conceptual：3) Consider the following equation:C = P + S - PV(K) - PV(Div)In this equation the term K refers to:A) the value of the call option.B) the strike price of the option.C) the price of a zero coupon bond.D) the stock's current price. Answer: CDiff: 2}Section: Put-Call ParitySkill: Conceptual4) Luther Industries is currently trading for $27 per share. The stock pays no dividends. A one-year European put option on Luther with a strike price of $30 is currently trading for $. If the risk-free interest rate is 6% per year, then the price of a one-year European call option on Luther with a strike price of $30 will be closest to:A) $B) $C) $D) $Answer: AExplanation: A) C = P + S - PV(K) - PV(Div)C = $ + $27 - - $0 = $Diff: 2？Section: Put-Call ParitySkill: Analytical5) Rose Industries is currently trading for $47 per share. The stock pays no dividends. A one-year European call option on Luther with a strike price of $45 is currently trading for $. If the risk-free interest rate is 6% per year, then calculate the price of a one-year European put option on Luther with a strike price of $45.Answer: C = P + S - PV(K) - PV(Div)$ = P + $47 - - $0P = $ - $47 + = $Diff: 2Section: Put-Call ParitySkill: Analytical￥Factors Affecting Option Prices1) Suppose that Nielson Motors stock is trading for $50 per share and that Nielson pays no dividends. What is the maximum possible price for a call option on Nielson MotorsA) $0B) $20C) $50D) infiniteAnswer: DExplanation: D) Since Nielson Motors stock has unlimited upside potential, theprice for the call option is unlimited. Diff: 1Section: Factors Affecting Option Prices ？Skill: Analytical2) Suppose that Nielson Motors stock is trading for $50 per share and that Nielson pays no dividends. What is the minimum possible price for an American put option on Nielson Motors with a strike price of $70A) $0B) $20C) $50D) infiniteAnswer: BExplanation: B) P = K - S + C - dis(K) where K - S is the intrinsic value and C - dis(K) is the time value. Since the American option can be exercised early, it should never have a negative time value. Therefore its minimum price should be equal to its intrinsic value of K - S = $70 - $50 = $20Diff: 1Section: Factors Affecting Option PricesSkill: Analytical、3) Which of the following will NOT increase the value of a put optionA) An increase in the time to maturityB) A decrease in the stock priceC) A decrease in the stock's volatilityD) An increase in the exercise priceAnswer: CDiff: 1Section: Factors Affecting Option PricesSkill: Conceptual、4) Which of the following statements is FALSEA) Put-call parity gives the price of a European call option in terms of the price of a European put, the underlying stock, and a zero-coupon bond.B) For a given strike price, the value of a call option is higher if the current price of the stock is higher, as there is a greater likelihood the option will end up in-the-money.C) The value of an otherwise identical call option is higher if the strike price the holder must pay to buy the stock is higher.D) Because a put is the right to sell the stock, puts with a lower strike price are less valuable.Answer: CExplanation: C) The value of an otherwise identical call option is higher if the strike price the holder must pay to buy the stock is lower.Diff: 2Section: Factors Affecting Option PricesSkill: Conceptual>5) Which of the following statements is FALSEA) The intrinsic value of an option is the value it would have if it expired immediately.B) A European option cannot be worth less than its American counterpart.C) Put options increase in value as the stock price falls.D) A put option cannot be worth more than its strike price.Answer: BDiff: 2Section: Factors Affecting Option PricesSkill: Conceptual6) Which of the following statements is FALSEA) Because an American option cannot be worth less than its intrinsic value, it cannot have a negative time value.%B) An American option with a later exercise date cannot be worth less than an otherwise identical American option with an earlier exercise date.C) The value of an option generally decreases with the volatility of the stock.D) The intrinsic value is the amount by which the option is currently in-the money or 0 if the option is out-of-the-money.Answer: CExplanation: C) The value of an option generally increases with the volatility of the stock.Diff: 2Section: Factors Affecting Option PricesSkill: Conceptual7) KD Industries stock is currently trading at $32 per share. Consider a put option on KD stock with a strike price of $30. The intrinsic value of this put option is:A) $0…B) -$2C) $2D) $30Answer: AExplanation: A) Intrinsic value = max(K - S, 0) = max(30 - 32, 0) = $0Diff: 1Section: Factors Affecting Option PricesSkill: Analytical8) KD Industries stock is currently trading at $32 per share. Consider a put option on KD stock with a strike price of $30. The maximum value of this put option is:A) $0。

CHAPTER 2How to Calculate Present ValuesAnswers to Problem Sets1. If the discount factor is .507, then .507*1.126 = $12. 125/139 = .8993. PV = 374/(1.09)9 = 172.204. PV = 432/1.15 + 137/(1.152) + 797/(1.153) = 376 + 104 + 524 = $1,0035. FV = 100*1.158 = $305.906. NPV = -1,548 + 138/.09 = -14.67 (cost today plus the present value oftheperpetuity)7. PV = 4/(.14-.04) = $408. a. PV = 1/.10 = $10b. Since the perpetuity will be worth $10 in year 7, and since thatis roughlydouble the present value, the approximate PV equals $5.PV = (1 / .10)/(1.10)7 = 10/2= $5 (approximately)c. A perpetuity paying $1 starting now would be worth $10, whereas aperpetuity starting in year 8 would be worth roughly $5. Thedifference between these cash flows is therefore approximately $5.PV = 10 – 5= $5 (approximately)d. PV = C/(r-g) = 10,000/(.10-.05) = $200,000.9. a. PV = 10,000/(1.055) = $7,835.26 (assuming the cost of the car doesnotappreciate over those five years).b. You need to set aside (12,000 × 6-year annuity factor) = 12,000× 4.623 =$55,476.c. At the end of 6 years you would have 1.086 × (60,476 - 55,476) = $7,934.10. a. FV = 1,000e .12x5 = 1,000e .6 = $1,822.12.b. PV = 5e -.12 x 8 = 5e -.96 = $1.914 millionc. PV = C (1/r – 1/re rt ) = 2,000(1/.12 – 1/.12e .12 x15) = $13,912 11.a. FV = 10,000,000x(1.06)4 = 12,624,770b. FV = 10,000,000x(1 + .06/12)(4x12) = 12,704,892c. FV = 10,000,000xe (4x.06) = 12,712,492 12.a. PV = $100/1.0110= $90.53b. PV = $100/1.1310 = $29.46c. PV = $100/1.2515 = $ 3.52d.PV = $100/1.12 + $100/1.122 + $100/1.123 = $240.1813. a. ⇒=+=0.905r 11DF 11r 1 = 0.1050 = 10.50%b. 0.819(1.105)1)r (11DF 2222==+=c. AF 2 = DF 1 + DF 2 = 0.905 + 0.819 = 1.724d.PV of an annuity = C [Annuity factor at r% for t years]Here: $24.65 = $10[AF 3]AF= 2.4653e. AF3= DF 1 + DF 2 + DF 3 = AF 2 + DF 32.465 = 1.724 + DF 3 DF 3 = 0.74114. The present value of the 10-year stream of cash inflows is:6$886,739.6(1.14)0.1410.141 $170,000PV 10=⎥⎦⎤⎢⎣⎡⨯-⨯= Thus:NPV = –$800,000 + $886,739.66 = +$86,739.66At the end of five years, the factory’s value will be the present value of the five remaining $170,000 cash flows:6$583,623.7(1.14)0.1410.141 $170,000PV 5=⎥⎦⎤⎢⎣⎡⨯-⨯= 15.$23,696.151.12$50,0001.12$68,0001.12$80,0001.12$92,0001.12$92,000 1.12$85,0001.12$80,0001.12$75,0001.12$57,0001.12$50,000$380,000(1.12)C NPV 109876543210t t t =++++++++++-==∑=016. a.Let S t = salary in year t∑=-=301t t1t (1.08)(1.05)40,000PV 3$760,662.5(1.08).05)-(.08(1.05).05)-(.081 43030=⎥⎦⎤⎢⎣⎡⨯-⨯=000,0b.PV(salary) x 0.05 = $38,033.13Future value = $38,018.96 x (1.08)30 = $382,714.30c.$38,980.30 (1.08)0.0810.081$C (1.08)0.0810.081 C $r)(1r 1r 1 C PV 2020t =⎥⎥⎦⎤⎢⎢⎣⎡⨯-=⎥⎦⎤⎢⎣⎡⨯-⨯=⎥⎦⎤⎢⎣⎡+⨯-⨯=382,714.30382,714.3017.Period Present Value400,000.01 +100,000/1.12 = + 89,285.71 2 +200,000/1.122 = +159,438.783 +300,000/1.123 = +213,534.07Total = NPV = $62,258.5618. We can break this down into several different cash flows, such that thesum of these separate cash flows is the total cash flow. Then, the sum of the present values of the separate cash flows is the present value of the entire project. (All dollar figures are in millions.)▪ Cost of the ship is $8 million PV = $8 million▪Revenue is $5 million per year, operating expenses are $4 million. Thus, operating cash flow is $1 million per year for 15 years.million $8.559(1.08)0.0810.081 million 1$PV 15=⎥⎦⎤⎢⎣⎡⨯-⨯= ▪Major refits cost $2 million each, and will occur at times t = 5 and t = 10.PV = ($2 million)/1.085 + ($2 million)/1.0810= $2.288 million▪Sale for scrap brings in revenue of $1.5 million at t = 15.PV = $1.5 million/1.0815 = $0.473 millionAdding these present values gives the present value of the entire project:NPV = $8 million + $8.559 million $2.288 million + $0.473 millionNPV = $1.256 million19. a. PV = $100,000b. PV = $180,000/1.125 = $102,136.83c. PV = $11,400/0.12 = $95,000d. 4$107,354.2(1.12)0.1210.121 $19,000PV 10=⎥⎦⎤⎢⎣⎡⨯-⨯= e.PV = $6,500/(0.120.05) = $92,857.14Prize (d) is the most valuable because it has the highest present value.20. Mr. Basset is buying a security worth $20,000 now. That is its presentvalue. The unknown is the annual payment. Using the present value of an annuity formula, we have:$2,653.90 (1.08)0.0810.081000,20$C (1.08)0.0810.081 C 000,20$r)(1r 1r 1 C PV 1212t =⎥⎥⎦⎤⎢⎢⎣⎡⨯-=⎥⎦⎤⎢⎣⎡⨯-⨯=⎥⎦⎤⎢⎣⎡+⨯-⨯=21. Assume the Zhangs will put aside the same amount each year. Oneapproach to solving this problem is to find the present value of the cost of the boat and then equate that to the present value of the money saved. From this equation, we can solve for the amount to be put aside each year.PV(boat) = $20,000/(1.10)5 = $12,418PV(savings) = Annual savings ⎥⎦⎤⎢⎣⎡⨯-⨯5(1.10)0.1010.101 Because PV(savings) must equal PV(boat):Annual savings 418,12$ =⎥⎦⎤⎢⎣⎡⨯-⨯5(1.10)0.1010.101Annual savings$3,276(1.10)0.1010.101$12,4185=⎥⎦⎤⎢⎣⎡⨯-= Another approach is to use the future value of an annuity formula:$20,0005.10)(1 savings Annual =⎥⎥⎦⎤⎢⎢⎣⎡-+⨯10.1Annual savings = $ 3,27622. The fact that Ka ngaroo Autos is offering “free credit” tells us whatthe cash payments are; it does not change the fact that money has time value. A 10% annual rate of interest is equivalent to a monthly rate of 0.83%:r monthly = r annual /12 = 0.10/12 = 0.0083 = 0.83%The present value of the payments to Kangaroo Autos is:8$8,93(1.0083)0.008310.00831$300$1,00030=⎥⎦⎤⎢⎣⎡⨯-⨯+ A car from Turtle Motors costs $9,000 cash. Therefore, KangarooAutos offers the better deal, i.e., the lower present value of cost.23. The NPVs are:at 5% $25,011(1.05)$320,0001.05$100,000$170,000NPV 2=+--=⇒at 10% $3,554(1.10)320,0001.10$100,000$170,000NPV 2=+--=⇒ at 15% $14,991(1.15)320,0001.15$100,000$170,000NPV 2-=+--=⇒ The figure below shows that the project has zero NPV at about 11%.As a check, NPV at 11% is:$371(1.11)320,0001.11$100,000$170,000NPV 2-=+--=$1,428.570.07$100r C PV ===b.This is worth the PV of stream (a) plus the immediate payment of$100:PV = $100 + $1,428.57 = $1,528.57c.The continuously compounded equivalent to a 7% annually compounded rate is approximately 6.77%, because:e 0.0677 = 1.0700 Thus:$1,477.100.0677$100r C PV ===Note that the pattern of payments in part (b) is more valuable than the pattern of payments in part (c). It is preferable to receive cash flows at the start of every year than to spread thereceipt of cash evenly over the year; with the former pattern of payment, you receive the cash more quickly.25. a.PV = $1 billion/0.08 = $12.5 billionb. PV = $1 billion/(0.08 – 0.04) = $25.0 billionc.billion $9.818(1.08)0.0810.081billion $1PV 20=⎥⎦⎤⎢⎣⎡⨯-⨯= d.The continuously compounded equivalent to an 8% annually compounded rate is approximately 7.7% , because:e 0.0770 = 1.0800 Thus:billion $10.203e 0.07710.0771billion $1PV )(0.077)(20=⎥⎦⎤⎢⎣⎡⨯-⨯= This result is greater than the answer in Part (c) because theendowment is now earning interest during the entire year.26. With annual compounding: FV = $100(1.15)20 = $1,636.65With continuous compounding: FV = $100e (0.15×20) = $2,008.5527. One way to approach this problem is to solve for the present value of:(1) $100 per year for 10 years, and (2) $100 per year in perpetuity, with the first cash flow at year 11.If this is a fair deal, these present values must be equal, and thus we can solve for the interest rate (r).The present value of $100 per year for 10 years is:⎥⎦⎤⎢⎣⎡+⨯-⨯=10r)(1(r)1r 1$100PV The present value, as of year 10, of $100 per year forever, with thefirst payment in year 11, is: PV 10 = $100/r At t = 0, the present value of PV 10 is:⎥⎦⎤⎢⎣⎡⨯⎥⎦⎤⎢⎣⎡+=r $100r)(11PV 10 Equating these two expressions for present value, we have:⎥⎦⎤⎢⎣⎡⨯⎥⎦⎤⎢⎣⎡+=⎥⎦⎤⎢⎣⎡+⨯-⨯r $100r)(11r)(1(r)1r 1$1001010 Using trial and error or algebraic solution, we find that r = 7.18%.28. Assume the amount invested is one dollar.Let A represent the investment at 12%, compounded annually.Let B represent the investment at 11.7%, compounded semiannually. Let C represent the investment at 11.5%, compounded continuously.After one year:FV A = $1 (1 + 0.12)1 = $1.1200 FV B = $1 (1 + 0.0585)2 = $1.1204FV C = $1e (0.1151)= $1.1219After five years:FV A = $1 (1 + 0.12)5 = $1.7623 FV B = $1 (1 + 0.0585)10 = $1.7657FV C = $1e (0.1155)= $1.7771After twenty years:FV A = $1 (1 + 0.12)20 = $9.6463 FV B = $1 (1 + 0.0585)40 = $9.7193FV C = $1e (0.11520)= $9.9742The preferred investment is C.29. Because the cash flows occur every six months, we first need tocalculate the equivalent semi-annual rate. Thus, 1.08 = (1 + r/2)2 => r = 7.85 semi-annually compounded APR. Therefore the rate for six months is 7.85/2 or 3.925%:081,846039251039250103925010001000001009$).(..,$,$PV =⎥⎦⎤⎢⎣⎡⨯-⨯+=30. a. Each installment is: $9,420,713/19 = $495,827$4,761,724(1.08)0.0810.081$495,827PV 19=⎥⎦⎤⎢⎣⎡⨯-⨯=b.If ERC is willing to pay $4.2 million, then:⎥⎦⎤⎢⎣⎡+⨯-⨯=19r)(1r 1r 1$495,827$4,200,000 Using Excel or a financial calculator, we find that r = 9.81%.31. a. 3$402,264.7(1.08)0.0810.081$70,000PV 8=⎥⎦⎤⎢⎣⎡⨯-⨯=b.Year Beginning-of-Year Balance Year-end Interest on Balance Total Year-end Payment Amortization of Loan End-of-Year Balance 1 402,264.73 32,181.18 70,000.00 37,818.82 364,445.91 2 364,445.91 29,155.67 70,000.00 40,844.33 323,601.58 3 323,601.58 25,888.13 70,000.00 44,111.87 279,489.71 4 279,489.71 22,359.18 70,000.00 47,640.82 231,848.88 5 231,848.88 18,547.91 70,000.00 51,452.09 180,396.79 6 180,396.79 14,431.74 70,000.00 55,568.26 124,828.54 7 124,828.54 9,986.28 70,000.00 60,013.72 64,814.82864,814.825,185.1970,000.0064,814.810.0132. This is an annuity problem with the present value of the annuityequal to $2 million (as of your retirement date), and theinterest rate equal to 8% with 15 time periods. Thus, your annual level of expenditure (C) is determined as follows:$233,659 (1.08)0.0810.081$2,000,000C (1.08)0.0810.081 C $2,000,000r)(1r 1r 1 C PV 1515t =⎥⎥⎦⎤⎢⎢⎣⎡⨯-=⎥⎦⎤⎢⎣⎡⨯-⨯=⎥⎦⎤⎢⎣⎡+⨯-⨯=With an inflation rate of 4% per year, we will still accumulate $2million as of our retirement date. However, because we want to spend a constant amount per year in real terms (R, constant for all t), the nominal amount (Ct ) must increase each year. For each year t: R = Ct/(1 + inflationrate)tTherefore:PV [all Ct] = PV [all R (1 + inflation rate)t] = $2,000,000$2,000,0000.08)(1.04)0(1....08)0(10.04)(10.08)(1.04)0(1R 15152211=⎥⎦⎤⎢⎣⎡+++++++++⨯ R[0.9630 + 0.9273 + . . . + 0.5677] = $2,000,000 R 11.2390 = $2,000,000R = $177,952 Alternatively, consider that the real rate is03846.1=-++0.04)(1.08)0(1. Then, redoing the steps above using the real rate gives a real cash flow equal to:$177,952=⎥⎥⎦⎤⎢⎢⎣⎡⨯-= (1.03846)0.0384610.038461$2,000,000C 15Thus C 1 = ($177,9521.04) = $185,070, C 2 = $192,473, etc.33. a.9$430,925.8(1.055)0.05510.0551$50,000PV 12=⎥⎦⎤⎢⎣⎡⨯-⨯=b. The annually compounded rate is 5.5%, so the semiannual rate is:(1.055)(1/2) – 1 = 0.0271 = 2.71%Since the payments now arrive six months earlier than previously:PV = $430,925.89 × 1.0271 = $442,603.9834. In three years, the balance in the mutual fund will be:FV = $1,000,000 × (1.035)3 = $1,108,718The monthly shortfall will be: $15,000 – ($7,500 + $1,500) = $6,000Annual withdrawals from the mutual fund will be: $6,000 × 12 = $72,000 Assume the first annual withdrawal occurs three years from today, when the balance in the mutual fund will be $1,108,718. Treating thewithdrawals as an annuity due, we solve for t as follows: r)(1r)(1r 1r 1C PV t +⨯⎥⎦⎤⎢⎣⎡+⨯-⨯=1.035(1.035)0.03510.0351$72,000$1,108,718t ⨯⎥⎦⎤⎢⎣⎡⨯-⨯= Using Excel or a financial calculator, we find that t = 22.5 years.35. a. PV = 2/.12 = $16.667 millionb. PV = 939.14$=⎥⎦⎤⎢⎣⎡⨯-⨯20(1.12)0.1210.121$2millionc. PV = 2/(.12-.03) = $22.222 milliond. PV = 061.18$=⎥⎦⎤⎢⎣⎡⨯-⨯2020(1.12).03)-(0.12 1.03.03)-(0.121$2million36. a. Using the Rule of 72, the time for money to double at 12% is72/12, or 6 years. More precisely, if x is the number ofyears for money to double, then:(1.12)x = 2Using logarithms, we find:x (ln 1.12) = ln 2x = 6.12 yearsb. With continuous compounding for interest rate r and time period x:e r x = 2Taking the natural logarithm of each side:r x = ln(2) = 0.693Thus, if r is expressed as a percent, then x (the time for moneyto double) is: x = 69.3/(interest rate, in percent).37. Spreadsheet exercise.38. a. This calls for the growing perpetuity formula with a negativegrowth rate (g = –0.04):million $14.290.14million $20.04)(0.10million $2PV ==--=b. The pipeline’s value at year 20 (i.e., at t = 20), assuming itscash flows last forever, is:gr g)(1C g r C PV 2012120-+=-= With C 1 = $2 million, g = –0.04, and r = 0.10:million $6.3140.14million $0.8840.140.04)(1million)($2PV 2020 ==-⨯= Next, we convert this amount to PV today, and subtract it from the answer to Part (a):million $13.35(1.10)million $6.314million $14.29PV 20=-=（注：可编辑下载，若有不当之处，请指正，谢谢!）。

Chapter 1: introduction to corporate financeCorporate finance（financial management）：公司财务、公司金融、财务管理Capital budgeting：资本预算Capital structure：资本结构Working capital management：流动资本管理Sole proprietorship：独资制、单一业主制Partnership：合伙制Corporation：公司、股份公司Profit maximization ：利润最大化Agency relation：委托代理关系Agency problem：委托代理问题Managerial compensation：管理层报酬Corporate control：公司控制Primary market ：一级市场、发行市场Secondary market：二级市场、交易市场Chapter 2: financial statements, taxes and cash flow Financial statements: 财务报表Cash flow:现金流Accounting value:会计Net income：净利润Depreciation:折旧The balance sheet：资产负债表The income statement 损益表Current asset流动资产Fixed asset固定资产Inventory存货Current liabilities流动负债Bond债券Bondholder债券持有人Shareholder’s equity/common equity/owner’s equity股东权益Balance sheet identity资产负债表等式Net working capital 营运资本Capital spending:资本支出Liquidity：流动性Generally accepted accounting principles：公认会计准则Historical cost：历史成本The income statement：损益表Operating cash flow：经营现金流Earnings per share（EPS）每股收益Earnings before interest and taxes(EBIT):息税前利润Revenue ：收入Chapter 3: working with financial statementsShort-term solvency/liquidity ratios ：短期偿债能力、流动比率Long-term solvency/financial leverage ratios：长期偿债能力、财务杠杆比率Asset management or turnover ratios：资产周转比率Profitability ratios：盈利比率Market value ratios：市场价值比率Quick (acid-test ratio)：速动比率/酸性比率Debt-equity ratio：债务权益比Equity multiplier：权益乘数Long-term debt ratio：长期债务比率Inventory turnover：存货周转率Days’ sales in inventory：存货周转天数Receivables turnover ：应收账款周转率Days’ sales in receivables：应收账款周转天数Return on assets：资产报酬率Return on equity：权益报酬率Price-earning ratio ：市盈率Market-to-book ratio ：市净率Chapter 5 and chapter 6: discounted cash flow valuationtime value of money: 货币时间价值future value：终值compounding/interest on interest：复利/利滚利present value：现值discount rate：贴现率discounted cash flow (DCF) valuation：贴现现金流股价Annuities：年金Perpetuities：永续年金Preferred stock：优先股Common stock:普通股Interest-only loan：纯利息贷款Amortized loan：分期偿还贷款Chapter 7 and chapter 8: interest rates ,bond valuation and stock valuation Bond:债券Bond’s coupons：债券票面利息Face value/ par value：面值Par value bond：平价债券Bond’s time to maturity：债券到期Yield to maturity (YTM)：到期收益率Discount bond：折价债券Premium bond: 溢价债券Interest rate risk：利率风险Semiannual coupons：一年付息两次债券Zero coupon bond：零息债券Floating-rate bond：浮动利率债券Common stock:普通股The dividend growth model：股利增长模型Cumulative voting：累计投票Straight voting：直接选举Chapter 9: net present value and other investment criteria Net present value: 净现值Payback rule：回收期Discounted payback：折现回收期average accounting return：平均会计报酬率Internal rate of return：内部报酬率Mutually exclusive investments：互斥投资项目Profitability index：获利能力指数Chapter 10 and chapter 11:Making capital investment decisions and project analysis Incremental cash flows:增量现金流Sunk costs：沉没成本Opportunity costs：机会成本Side effects：副作用Financing costs：融资成本Scenario analysis：情境分析Sensitivity analysis：敏感性分析Simulation analysis：模拟分析Break-even analysis：盈亏分析Fixed costs：固定成本Variable costs：变动成本Average cost versus marginal cost：平均成本/边际成本Operating leverage：经营杠杆Financial leverage：财务杠杆Chapter 12 and chapter 13: risk and return Risk premium：风险溢价Variability of returns：报酬率的变动Standard deviation：标准差Variance：方差Normal distribution：正态分布Arithmetic averages：算术均值Geometric averages：几何均值Capital market efficiency：资本市场有效性The efficient markets hypothesis (EMH)：有效市场假说Weak form efficient：弱有效Semi strong form efficient：半强有效Strong form efficient：强有效Chapter 12: return, risk and the security market lineExpected portfolio returns：期望组合收益率Portfolio risk：组合风险Security market line：证券市场线Diversification：多元化Portfolio risk：组合风险Systematic risk：系统风险Unsystematic risk：非系统风险Capital asset pricing model (CAPM)Chapter 14: cost of capital Weighted average cost of capital (WACC)Cost of capital：资本成本Cost of equity：股权成本Risk-free rate：无风险收益率Market risk premium：市场风险溢价Flotation costs：发行成本Chapter 15: raising capitalVenture capital:风险资本Private equity：私募股权Public company/listed company：上市公司Go public：上市General cash offer：现金发行Rights offer：认股权发行/配股Initial public offering：首次公开发行Underwriter：承销商Chapter 16 and chapter 17: capital structure policy and dividend policy Bankruptcy costs ：破产成本Static theory of capital structure：资本结构静态权衡理论Pecking-order theory：啄食理论Cash dividend：现金股利Stock dividend ：股票股利Announcement date：宣告日Ex-dividend date：除息日Record date ：登记日Stock repurchase：股票回购Stock split：股票分拆。

(完整word版)CorporateFinance重点知识整理第一章导论1. 公司目标：为所有者创造价值公司价值在于其产生现金流能力。

2。

财务管理的目标：最大化现有股票的每股现值。

3。

公司理财可以看做对一下几个问题进行研究：1。

资本预算:公司应该投资什么样的长期资产。

2. 资本结构：公司如何筹集所需要的资金。

3. 净运营资本管理:如何管理短期经营活动产生的现金流。

4. 公司制度的优点:有限责任,易于转让所有权，永续经营。

缺点：公司税对股东的双重课税。

第二章会计报表与现金流量资产= 负债+ 所有者权益（非现金项目有折旧、递延税款）EBIT（经营性净利润）= 净销售额—产品成本—折旧EBITDA = EBIT + 折旧及摊销现金流量总额CF(A) = 经营性现金流量—资本性支出—净运营资本增加额= CF(B）+ CF（S)经营性现金流量OCF = 息税前利润+ 折旧- 税资本性输出= 固定资产增加额+ 折旧净运营资本= 流动资产- 流动负债第三章财务报表分析与财务模型1. 短期偿债能力指标（流动性指标）流动比率= 流动资产/流动负债（一般情况大于一）速动比率= （流动资产—存货)/流动负债(酸性实验比率）现金比率= 现金/流动负债流动性比率是短期债权人关心的，越高越好；但对公司而言,高流动性比率意味着流动性好，或者现金等短期资产运用效率低下。

对于一家拥有强大借款能力的公司，看似较低的流动性比率可能并非坏的信号2。

长期偿债能力指标（财务杠杆指标)负债比率= (总资产—总权益)/总资产or （长期负债+ 流动负债)/总资产权益乘数= 总资产/总权益= 1 + 负债权益比利息倍数= EBIT/利息现金对利息的保障倍数（Cash coverage radio）= EBITDA/利息3。

资产管理或资金周转指标存货周转率= 产品销售成本/存货存货周转天数= 365天/存货周转率应收账款周转率= （赊）销售额/应收账款总资产周转率= 销售额/总资产= 1/资本密集度4. 盈利性指标销售利润率= 净利润/销售额资产收益率ROA = 净利润/总资产权益收益率ROE = 净利润/总权益(完整word版)CorporateFinance重点知识整理5. 市场价值度量指标市盈率= 每股价格/每股收益EPS 其中EPS = 净利润/发行股票数市值面值比= 每股市场价值/每股账面价值企业价值EV = 公司市值+ 有息负债市值- 现金EV乘数= EV/EBITDA6. 杜邦恒等式ROE = 销售利润率（经营效率）x总资产周转率(资产运用效率）x权益乘数(财杠）ROA = 销售利润率x总资产周转率7. 销售百分比法假设项目随销售额变动而成比例变动，目的在于提出一个生成预测财务报表的快速实用方法。

Chapter 061.The changes in a firm's future cash flows that are a direct consequence of accepting a project arecalled _____ cash flows.A. i ncrementalB. s tand-aloneC. o pportunityD. n et present valueE. e rosion2.The annual annuity stream of payments with the same present value as a project's costs is calledthe project's _____ cost.A. i ncrementalB. s unkC. o pportunityD. e rosionE. e quivalent annual3. A cost that has already been paid, or the liability to pay has already been incurred, is a(n):A. s alvage value expense.B. n et working capital expense.C. s unk cost.D. o pportunity cost.E. e rosion cost.4.The most valuable investment given up if an alternative investment is chosen is a(n):A. s alvage value expense.B. n et working capital expense.C. s unk cost.D. o pportunity cost.E. e rosion cost.5. A decrease in a firm’s current cash flows resulting from the implementation of a new project isreferred to as:A. s alvage value expenses.B. n et working capital expenses.C. s unk costs.D. o pportunity costs.E. e rosion costs.6.The depreciation method currently allowed under U.S. tax law governing the accelerated write-offof property under various lifetime classifications is called _____ depreciation.A. F IFOB. M ACRSC. s traight-lineD. s um-of-years digitsE. c urvilinear7.The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense iscalled the:A. a ftertax depreciation savings.B. d epreciable basis.C. d epreciation tax shield.D. o perating cash flow.E. a ftertax salvage value.8.The cash flow from a project is computed as the:A. n et operating cash flow generated by the project, less any sunk costs and erosion costs.B. s um of the incremental operating cash flow and aftertax salvage value of the project.C. n et income generated by the project, plus the annual depreciation expense.D. s um of the incremental operating cash flow, capital spending, and net working capital cashflows incurred by the project.E. s um of the sunk costs, opportunity costs, and erosion costs of the project.9.Interest rates or rates of return on investments that have been adjusted for the effects of inflationare called _____ rates.A. r ealB. n ominalC. e ffectiveD. s trippedE. c oupon10.The increase you realize in buying power as a result of owning an investment is referred to as the_____ rate of return.A. i nflatedB. r ealizedC. n ominalD. r ealE. r isk-free11.The pro forma income statement for a cost reduction project:A. w ill reflect a reduction in the sales of the firm.B. w ill generally reflect no incremental sales.C. h as to be prepared reflecting the total sales and expenses of the entire firm.D. c annot be prepared due to the lack of any project related sales.E. w ill always reflect a negative project operating cash flow.12.One purpose of identifying all of the incremental cash flows related to a proposed project is to:A. i solate the total sunk costs so they can be evaluated to determine if the project will add valueto the firm.B. e liminate any cost which has previously been incurred so that it can be omitted from theanalysis of the project.C. m ake each project appear as profitable as possible for the firm.D. i nclude both the proposed and the current operations of a firm in the analysis of the project.E. i dentify any and all changes in the cash flows of the firm for the past year so they can beincluded in the analysis.13.Sunk costs include any cost that:A. w ill change if a project is undertaken.B. w ill be incurred if a project is accepted.C. h as previously been incurred and cannot be changed.D. w ill be paid to a third party and cannot be refunded for any reason whatsoever.E. w ill occur if a project is accepted and once incurred, cannot be recouped.14.You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up andyou are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) _____ cost.A. o pportunityB. f ixedC. i ncrementalD. s unkE. r elevant15.Erosion can be explained as the:A. a dditional income generated from the sales of a newly added product.B. l oss of current sales due to a new project being implemented.C. l oss of revenue due to employee theft.D. l oss of revenue due to customer theft.E. l oss of cash due to the expenses required to fix a parking lot after a heavy rain storm.16.Which one of these is an example of erosion that should be included in project analysis?A. T he anticipated loss of current sales when a new product is launched.B. T he expected decline in sales as a new product ages.C. T he reduction in your sales that occurs when a competitor introduces a new product.D. T he sudden loss of sales due to a major employer in your community implementing massivelayoffs.E. T he reduction in sales price that will most likely be required to sell inventory that has aged.17.Which one of the following should be excluded from the analysis of a project?A. e rosion costsB. i ncremental fixed costsC. i ncremental variable costsD. s unk costsE. o pportunity costs18.All of the following are anticipated effects of a proposed project. Which of these should be considered when computing the cash flow for the final year of a project?A. o perating cash flow and salvage valuesB. s alvage values and net working capital recoveryC.operating cash flow, net working capital recovery, salvage valuesD. n et working capital recovery and operating cash flowE.operating cash flow only19.Changes in the net working capital:A. c an affect the cash flows of a project every year of the project's life.B. o nly affect the initial cash flows of a project.C. a re included in project analysis only if they represent cash outflows.D. a re generally excluded from project analysis due to their irrelevance to the total project.E. a ffect the initial and the final cash flows of a project but not the cash flows of the middle years.20.The net working capital of a firm will decrease if there is:A. a decrease in accounts payable.B. a n increase in inventory.C. a decrease in accounts receivable.D. a n increase in the firm's checking account balance.E. a decrease in fixed assets. working capital:A. c an be ignored in project analysis because any expenditure is normally recouped by the end ofthe project.B. r equirements generally, but not always, create a cash inflow at the beginning of a project.C. e xpenditures commonly occur at the end of a project.D. i s frequently affected by the additional sales generated by a new project.E. i s the only expenditure where at least a partial recovery can be made at the end of a project.22.A company which uses the MACRS system of depreciation:A. w ill have equal depreciation costs each year of an asset's life.B. w ill expense the largest percentage of the cost during an asset’s first year of life.C. c an depreciate the cost of land, if it so desires.D. w ill write off the entire cost of an asset over the asset's class life.E. c annot expense any of the cost of a new asset during the first year of the asset's life.23.Champion Toys just purchased some MACRS 5-year property at a cost of $230,000. TheMACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. The book value of the asset as of the end of Year 2 can be calculated as:A. $230,000 × (1 −.20 −.32).B. $230,000 × ([1 - (.20 × .32)].B. $230,000 × (1 - .20) × (1 - .32).C. $230,000 / (1 - .20 - .32).D. $230,000 - ($230,000 × .20 × .32).24.Pete’s Garage just purchased some equipment at a cost of $650,000. What is the propermethodology for computing the depreciation expense for Year 3 if the equipment is classified as 5-year property for MACRS? The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively.A. $650,000 ×(1 − .20) ×(1 −.32) ×(1 −.192)B. $650,000 ×(1 − .20) ×(1 −.32)C. $650,000 ×(1 − .20) ×(1 − .32) × .192)D. $650,000 ×(1 −.192)E. $650,000 ×.19225.The book value of an asset is primarily used to compute the:A. a nnual depreciation tax shield.B. a mount of cash received from the sale of an asset.C. a mount of tax saved annually due to the depreciation expense.D. a mount of tax due on the sale of an asset.E. c hange in depreciation needed to reflect the market value of the asset.26.The salvage value of an asset creates an aftertax cash flow in an amount equal to the:A. s ales price of the asset.B. s ales price minus the book value.C. s ales price minus the tax due based on the sales price minus the book value.D. s ales price plus the tax due based on the sales price minus the book value.E. s ales price plus the tax due based on the book value minus the sales price.27.The pretax salvage value of an asset is equal to the:A. b ook value if straight-line depreciation is used.B. b ook value if MACRS depreciation is used.C. m arket value minus the book value.D. b ook value minus the market value.E. m arket value.28.A project's operating cash flow will increase when the:A. d epreciation expense increases.B. s ales projections are lowered.C. i nterest expense is lowered.D. n et working capital requirement increases.E. e arnings before interest and taxes decreases.29.The cash flows of a project should:A. b e computed on a pretax basis.B. i nclude all sunk costs and opportunity costs.C. i nclude all incremental and opportunity costs.D. b e applied to the year when the related expense or income is recognized by GAAP.E. i nclude all financing costs related to new debt acquired to finance the project.30.Assume a firm has no interest expense or extraordinary items. Given this, the operating cash flow can be computed as:A. E BIT - Taxes.B. E BIT × (1 - Tax rate) + Depreciation × Tax rate.C. (Sales - Costs) × (1 - Tax rate).D. E BIT - Depreciation + Taxes.E.Net income + Depreciation.31.The bottom-up approach to computing the operating cash flow applies only when:A. b oth the depreciation expense and the interest expense are equal to zero.B. t he interest expense is equal to zero.C. t he project is a cost-cutting project.D. n o fixed assets are required for the project.E. t axes are ignored and the interest expense is equal to zero.32.The top-down approach to computing the operating cash flow:A. i gnores all noncash items.B. a pplies only if a project produces sales.C. c an only be used if the entire cash flows of a firm are included.D. i s equal to Sales −Costs −Taxes + Depreciation.E. i ncludes the interest expense related to a project.33.For a profitable firm, an increase in which one of the following will increase the operating cashflow?A. e mployee salariesB. o ffice rentC. b uilding maintenanceD. d epreciationE. e quipment rental34.Tax shield refers to a reduction in taxes created by:A. a reduction in sales.B. a n increase in interest expense.C. n oncash expenses.D. a project's incremental expenses.E. o pportunity costs.35.A project which is designed to improve the manufacturing efficiency of a firm but will generate noadditional sales revenue is referred to as a(n) _____ project.A. s unk costB. o pportunityC. c ost-cuttingD. r evenue-cuttingE. r evenue-generating36.Toni's Tools is comparing machines to determine which one to purchase. The machines sell fordiffering prices, have differing operating costs, differing machine lives, and will be replaced when worn out. These machines should be compared using:A. n et present value only.B. b oth net present value and the internal rate of return.C. t heir equivalent annual costs.D. t he depreciation tax shield approach.E. t he replacement parts approach.37.The equivalent annual cost method is useful in determining:A. t he annual operating cost of a machine if the annual maintenance is performed versus whenthe maintenance is not performed as recommended.B. t he tax shield benefits of depreciation given the purchase of new assets for a project.C. o perating cash flows for cost-cutting projects of equal duration.D. w hich one of two machines to acquire given equal machine lives but unequal machine costs.E. w hich one of two machines to purchase when the machines are mutually exclusive, havedifferent machine lives, and will be replaced once they are worn out.38.Marshall's purchased a corner lot five years ago at a cost of $498,000 and then spent $63,500 ongrading and drainage so the lot could be used for storing outdoor inventory. The lot was recently appraised at $610,000. The company now wants to build a new retail store on the site. Thebuilding cost is estimated at $1.1 million. What amount should be used as the initial cash flow for this building project?A. $1,661,500B. $1,100,000C. $1,208,635D. $1,710,000E. $1,498,00039.Samson's purchased a lot four years ago at a cost of $398,000. At that time, the firm spent$289,000 to build a small retail outlet on the site. The most recent appraisal on the propertyplaced a value of $629,000 on the property and building. Samson’s now wants to tear down the original structure and build a new strip mall on the site at an estimated cost of $2.3 million. What amount should be used as the initial cash flow for new project?A. $2,987,000B. $2,242,000C. $2,058,000D. $2,300,000E. $2,929,00040.Jamestown Ltd. currently produces boat sails and is considering expanding its operations toinclude awnings. The expansion would require the use of land the firm purchased three years ago at a cost of $142,000 that is currently valued at $137,500. The expansion could use someequipment that is currently sitting idle if $6,700 of modifications were made to it. The equipment originally cost $139,500 six years ago, has a current book value of $24,700, and a current market value of $39,000. Other capital purchases costing $780,000 will also be required. What is the amount of the initial cash flow for this expansion project?A. $953,400B. $962,300C. $948,900D. $927,800E. $963,20041.The Boat Works currently produces boat sails and is considering expanding its operations toinclude awnings. The expansion would require the use of land the firm purchased three years ago at a cost of $197,000 that is currently valued at $209,500. The expansion could use someequipment that is currently sitting idle if $7,500 of modifications were made to it. The equipment originally cost $387,500 five years ago, has a current book value of $132,700, and a current market value of $139,000. Other capital purchases costing $520,000 will also be required. What is the value of the opportunity costs that should be included in the initial cash flow for theexpansion project?A. $425,000B. $485,000C. $329,700D. $348,500E. $537,20042.Walks Softly sells customized shoes. Currently, it sells 14,800 pairs of shoes annually at anaverage price of $59 a pair. It is considering adding a lower-priced line of shoes that will be priced at $39 a pair. Walks Softly estimates it can sell 6,000 pairs of the lower-priced shoes but will sell 3,500 less pairs of the higher-priced shoes by doing so. What annual sales revenue should be used when evaluating the addition of the lower-priced shoes?A. $27,500B. $24,000C. $31,300D. $789,100E. $900,70043.Foamsoft sells customized boat shoes. Currently, it sells 16,850 pairs of shoes annually at anaverage price of $79 a pair. It is considering adding a lower-priced line of shoes which sell for $49a pair. Foamsoft estimates it can sell 5,000 pairs of the lower-priced shoes but will sell 1,250 lesspairs of the higher-priced shoes by doing so. What is the estimated value of the erosion cost that should be charged to the lower-priced shoe project?A. $138,750B. $146,250C. $98,750D. $52,000E. $123,24044.Sue purchased a house for $89,000, spent $56,000 upgrading it, and currently had it appraised at$212,900. The house is being rented to a family for $1,200 a month, the maintenance expenses average $200 a month, and the property taxes are $4,800 a year. If she sells the house she will incur $20,000 in expenses. She is considering converting the house into professional officespace. What opportunity cost, if any, should she assign to this property if she has been renting it for the past two years? A. $178,500A. $120,000B. $185,000C. A NSD. $192,900D. $232,90045.Jamie's Motor Home Sales currently sells 1,100 Class A motor homes, 2,200 Class C motorhomes, and 2,800 pop-up trailers each year. Jamie is considering adding a mid-range camper and expects that if she does so she can sell 1,500 of them. However, if the new camper is added, Jamie expects that her Class A sales will decline to 850 units while the Class C camper sales decline to 2,000. The sales of pop-ups will not be affected. Class A motor homes sell for anaverage of $140,000 each. Class C homes are priced at $59,500 and the pop-ups sell for $5,000 each. The new mid-range camper will sell for $42,900. What is the erosion cost of adding the mid-range camper?A. $54,250,000B. $46,900,000C. $53,750,000D. $63,150,000E. $78,750,00046.Ernie's Electrical is evaluating a project which will increase sales by $50,000 and costs by$30,000. The project will cost $150,000 and will be depreciated straight-line to a zero book value over the 10-year life of the project. The applicable tax rate is 34 percent. What is the operating cash flow for this project?A. $19,200B. $15,000C. $21,300D. $17,900E. $18,30047.Kurt's Cabinets is looking at a project that will require $80,000 in fixed assets and another$20,000 in net working capital. The project is expected to produce sales of $110,000 withassociated costs of $70,000. The project has a 4-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35 percent. What is the operating cash flow for this project?A. $7,000B. $13,000C. $27,000D. $33,000E. $40,00048.Peter's Boats has sales of $760,000 and a profit margin of 5 percent. The annual depreciationexpense is $80,000. What is the amount of the operating cash flow if the company has no long-term debt?A. $34,000B. $86,400C. $118,000D. $120,400E. $123,90049.Samoa's Tools has sales of $760,000 and a profit margin of 8 percent. The annual depreciationexpense is $50,000. What is the amount of the operating cash flow if the company has no long-term debt?A. $50,000B. $60,800C. $110,800D. $810,000E. $930,00050.Le Place has sales of $439,000, depreciation of $32,000, and net working capital of $56,000. Thefirm has a tax rate of 34 percent and a profit margin of 6 percent. The firm has no interestexpense. What is the amount of the operating cash flow?A. $49,384B. $52,616C. $54,980D. $58,340E. $114,34051.The By-Way has sales of $435,000, costs of $254,000, depreciation of $35,000, interest expenseof $22,000, and taxes of $43,400. What is the amount of the operating cash flow?A. $115,600B. $157,900C. $137,600D. $322,100E. $114,34052.Ben's Border Café is considering a project that will produce sales of $16,000 and increase cashexpenses by $10,000. If the project is implemented, taxes will increase from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is the amount of the operating cash flow using the top-down approach?A. $4,000B. $4,500C. $6,000D. $7,500E. $8,50053.Camille's Café is considering a project that will not produce any sales but will decrease cashexpenses by $12,000. If the project is implemented, taxes will increase from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is the amount of the operating cash flow using the top-down approach?A. $15,000B. $10,500C. $5,500D. $17,500E. $13,50054.Ronnie's Coffee House is considering a project which will produce sales of $6,000 and increasecash expenses by $2,500. If the project is implemented, taxes will increase by $1,300. The additional depreciation expense will be $1,000. An initial cash outlay of $2,000 is required for net working capital. What is the amount of the operating cash flow using the top-down approach?A. $200B. $1,500C. $2,200D. $3,500E. $4,20055.A project will increase sales by $60,000 and cash expenses by $51,000. The project will cost$40,000 and will be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 35 percent. What is the operating cash flow of the project using the tax shield approach?A. $5,850B. $8,650C. $9,350D. $9,700E. $10,35056.A project will increase sales by $140,000 and cash expenses by $95,000. The project will cost$100,000 and will be depreciated using the straight-line method to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 34 percent. What is the value of the depreciation tax shield?A. $8,500B. $17,000C. $22,500D. $25,000E. $37,75057.Lee's Furniture just purchased $24,000 of fixed assets that are classified as 5-year MACRSproperty. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. What is the amount of the depreciation expense for the third year?A. $2,304B. $2,507C. $2,765D. $4,608E. $4,80058.Lew just purchased $67,600 of equipment that is classified as 5-year MACRS property. TheMACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. What will the book value of this equipment be at the end of four years should he decide to resell the equipment at that point in time?A. $11,681.28B. $18,280.20C. $17,040.00D. $19,468.80E. $22,672.0059.Northern Enterprises just purchased $1,900 of fixed assets that are classified as 3-year MACRSproperty. The MACRS rates are 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent for Years 1 to 4, respectively. What is the amount of the depreciation expense for Year 2?A. $562.93B. $633.27C. $719.67D. $844.36E. $1,477.6360.The Galley purchased some 3-year MACRS property two years ago at a cost of $19,800. TheMACRS rates are 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent. The firm no longer uses this property so is selling it today at a price of $13,500. What is the amount of the pretax profit on the sale?A. $11,140.48B. $9,098.46C. $10,500.00D. $8,016.67E. $10,702.4061.Three years ago, you purchased some 5-year MACRS equipment at a cost of $135,000. TheMACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. You sold the equipment today for $82,500. Which of these statements is correct if your tax rate is 34 percent?A. T he tax due on the sale is $14,830.80.B. T he book value today is $40,478.C. T he book value today is $37,320.D. T he taxable amount on the sale is $47,380.E. T he tax refund from the sale is $13,219.20.62.Custom Cars purchased some $39,000 of fixed assets two years ago that are classified as 5-yearMACRS property. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent,11.52 percent, and 5.76 percent for Years 1 to 6, respectively. The tax rate is 34 percent. If theassets are sold today for $19,000, what will be the aftertax cash flow from the sale?A. $16,358.88B. $17,909.09C. $18,720.00D. $18,904.80E. $19,000.0063.Winslow Motors purchased $225,000 of MACRS 5-year property. The MACRS rates are 20percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. The tax rate is 34 percent. If the firm sells the asset after five years for $10,000, what will be the aftertax cash flow from the sale?A. $8,993.60B. $8,880.20C. $11,006.40D. $7,770.40E. $12,892.0064.A project is expected to create operating cash flows of $26,500 a year for four years. The initialcost of the fixed assets is $62,000. These assets will be worthless at the end of the project. An additional $3,000 of net working capital will be required throughout the life of the project. What is the project's net present value if the required rate of return is 12 percent?A. $19,208.11B. $14,028.18C. $15,306.09D. $17,396.31E. $21,954.1765.A project will produce operating cash flows of $45,000 a year for four years. During the life of theproject, inventory will be lowered by $30,000 and accounts receivable will increase by $15,000.Accounts payable will decrease by $10,000. The project requires the purchase of equipment at an initial cost of $120,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $25,000 aftertax cash inflow. At the end of the project, net working capital will return to its normal level. What is the net present value of this project given a required return of 15 percent?A. $23,483.48B. $16,117.05C. $24,909.09D. $22,037.86E. $19,876.0266.A project will produce an operating cash flow of $7,300 a year for three years. The initialinvestment for fixed assets will be $11,600, which will be depreciated straight-line to zero over the asset’s 4-year life. The project will require an initial $500 in net working capital plus an additional $500 every year with all net working capital levels restored to their original levels when the project ends. The fixed assets can be sold for an estimated $2,500 at the end of the project, the tax rate is 34 percent, and the required rate of return is 12 percent. What is the net present value of the project?A. $7,532.27B. $9,896.87C. $7,072.72D. $6,353.41E. $8,398.2967.Matty's Place is considering the installation of a new computer system that will cut annualoperating costs by $12,000. The system will cost $42,000 to purchase and install. This system is expected to have a 5-year life and will be depreciated to zero using straight-line depreciation.What is the amount of the earnings before interest and taxes for each year of this project?A. −$20,400B. $5,400C. $3,600D. $12,000E. $8,400。

MSc Finance; MSc Finance and AccountingProblem set #2:Bond Yields, Yield curves and premiums; Tax Savings from DebtDr. Maria BoutchkovaWinter Semester 2011Use the Normal distribution table at the end of this document to solve the two following problems.Problem 1 (Hillier 5.11 modified)In March 2009 the auto firm DaimlerChrysler issued a 15-month bond with a face value of€1,000, and a coupon rate of 6.875%, paid every quarter. The issue price was €999.70.A.(5 points) Draw the time line of the bond and ALL of its associated cash flows.B.(5 points) Calculate the yield to maturity of the bond at the time of issuance.C.(6 points) Consider the table below giving the default spreads required for differentbond ratings for the same maturity. Sketch the yield curve of DaimlerChrysler relative to the Treasury yield curve. What must be DaimlerChrysler’s bond rating?Rating Typical Default Spread(aka Default risk premium)AAA 0.35%AA 0.50%A+ 0.70%A 0.85%A- 1.00%BBB 1.50%BB+ 2.00%BB 2.50%B+ 3.25%B 4.00%MN7032, Corporate Finance Problem set #2 Dr. Maria Boutchkova University of Leicester, School of Management 2010-2011 B- 6.00%CCC 8.00%CC 10.00%C 12.00%D 20.00%15 month U.S. Treasury bonds 0.90%30 year U.S. Treasury bonds 4.90%D.(4 points) Suppose the German government announces a subsidy in the form of a taxexemption for bondholders of DaimlerChrysler, who on average pay 25% rate incometax. What will be the coupon rate DaimlerChrysler can offer that will make investorsindifferent between holding the original bond in the problem and the tax exempt bond. Problem 2 (Damodaran 7.18)MVP, a manufacturing firm with no debt outstanding and a market value of $100 million, is considering borrowing $40 million and buying back stock. Assuming that the interest rate on the debt is 9 percent and that the firm faces a tax rate of 35 percent and nothing else changes, answer the following questions:A.(3 points) Estimate the annual interest tax savings each year from the debt.B.(2 points) Estimate the present value of interest tax savings, assuming that the debtchange is permanent.C.(3 points) Estimate the present value of interest tax savings, assuming that the debt willbe taken on for ten years only.D.(5 points) What will happen to the present value of interest tax savings if interest ratesdrop tomorrow to 7 percent but the debt itself is fixed rate debt?Page 2 of 2。