Unit 1
UNIT 1- ANSWERS
| UNIT 1: TEXTBOOK PROBLEMS | ||
| CHAPTER 2: PROBLEM 1 | ||
| Current Assets | $7,300 | |
| Net Fixed Assets | $26,200 | |
| Current Liabilities | $5,700 | |
| Long-Term Debt | $12,900 | |
| Shareholder Equity = | ||
| Net Working Capital = | ||
| CHAPTER 2: PROBLEM 2 | ||
| Income Statement | ||
| Sales | $675,300 | |
| Costs | $297,800 | |
| Depreciation Expense | $45,100 | |
| EBIT | $0 | |
| Interest Expense | $20,700 | |
| EBT | $0 | |
| Taxes @ 35% | $0 | |
| Net Income = | $356,800 | Havings issues here I think I should do 35% of this #. |
| Cash Dividends | $62,000 | |
| Addition to Retained Earnings = | $0 | |
| Tax Rate = | 35% | |
| CHAPTER 2: PROBLEM 4 | ||
| Taxable Income | $315,000 | |
| Table 2.3 | ||
| Taxable Income | Taxable Income (cont) | Tax Rate |
| 0 | 50,000 | 15% |
| 50,001 | 75,000 | 25% |
| 75,001 | 100,000 | 34% |
| 100,001 | 335,000 | 39% |
| 335,001 | 10,000,000 | 34% |
| 10,000,001 | 15,000,000 | 35% |
| 15,000,001 | 18,333,333 | 38% |
| 18,333,334 | + | 35% |
| Income Taxes = | $0 | |
| Average Tax Rate = | 0.00% | |
| Marginal Tax Rate = | 0% | (Note: No formula needed. Just input the correct rate from the Tax Rate column) |
| CHAPTER 2: PROBLEM 5 | ||
| Sales | $29,200 | |
| Costs | $10,400 | |
| Depreciation Expense | $1,800 | |
| EBIT | $0 | |
| Interest Expense | $1,050 | |
| EBT | $0 | |
| Taxes @ 40% | $0 | |
| Net Income | $0 | |
| Tax Rate | 40% | |
| Operating Cash Flow = | $0 | |
| CHAPTER 3: PROBLEM 2 | ||
| Debt/Equity Ratio | 0.65 | |
| Return on Assets | 9.80% | |
| Total Equity | $850,000 | |
| Equity Multiplier = | 0.00 | |
| Return on Equity = | 0.00% | |
| Net Income = | $0 | |
| CHAPTER 3: PROBLEM 6 | ||
| ROE | 16% | |
| Payout Ratio | 25% | |
| Retention Ratio | 0.00% | (Note: You must calculate the retention ratio first then the sustainable growth rate) |
| Sustainable Growth Rate = | 0.00% |
UNIT 2- ANSWERS
| UNIT 2: TEXTBOOK PROBLEMS | ||||
| CHAPTER 4: PROBLEM 2 (a thru c) | ||||
| A. | B. | C. | ||
| Present Value | 3,200 | 3,200 | 3,200 | |
| Interest Rate | 6% | 8% | 6% | |
| Number of Years | 10 | 10 | 20 | |
| Future Value = | $5,731 | $6,909 | $10,263 | |
| CHAPTER 4: PROBLEM 3 | ||||
| A. | B. | C. | D. | |
| Future Value = | 15,451 | 51,557 | 886,073 | 550,164 |
| Interest Rate | 7% | 9% | 14% | 16% |
| Number of Years | 12 | 8 | 19 | 24 |
| Present Value = | $6,860 | $25,875 | $73,498 | $15,614 |
| CHAPTER 4: PROBLEM 4 | ||||
| A. | B. | C. | D. | |
| Present Value = | 217 | 432 | 41,000 | 54,382 |
| Future Value | 307 | 896 | 162,181 | 483,500 |
| Number of Years | 3 | 10 | 13 | 26 |
| Interest Rate | 12.26% | 7.57% | 11.16% | 8.77% |
| CHAPTER 4: PROBLEM 5 | ||||
| A. | B. | C. | D. | |
| Present Value = | 625 | 810 | 18,400 | 21,500 |
| Future Value | 1,284 | 4,341 | 402,662 | 173,439 |
| Interest Rate | 9% | 11% | 7% | 10% |
| Number of Years (or Periods) | 8.35 | 16.09 | 45.61 | 21.91 |
| CHAPTER 4: PROBLEM 11 | ||||
| Discount Rate | 5% | 13% | 18% | |
| Year 1: | $960 | $960 | $960 | |
| Year 2: | $840 | $840 | $840 | |
| Year 3: | $1,935 | $1,935 | $1,935 | |
| Year 4: | $1,350 | $1,350 | $1,350 | |
| Present Value @ 5%, 13%, and 18% = | $4,458 | $3,676 | $3,291 | (Note: Use the built-in NPV formula in Excel) |
| CHAPTER 5: PROBLEM 2 | ||||
| A. | ||||
| Settlement | 1/1/10 | (Think of Settlement as the beginning of the duration of the bond) | ||
| Maturity | 12/31/35 | (Think of Maturity as the end of the duration of the bond) | ||
| Rate | 7% | (Coupon Rate) | ||
| YTM | 7% | (Yield to Maturity or Required Rate of Return) | ||
| Redemption | 100 | (Bonds Face Value, Par Value, or Fair Price; Note that is $100, not $1,000. You make the adjustments by multiplying the answer by 10) | ||
| Frequency | 2 | (Coupon payments are semiannual, so you put in a 2. If they are annual, then you input a 1) | ||
| Basis | (Always leave it blank) | |||
| Bond Price | 100.00 | (The answer. But you need to multiply it by 10 to get the actual bond price) | ||
| Multiply by 10 | 1000.00 | (Microsoft gives the bond price in 2 digits. You need to multiply it by 10 to get the actual bond price) | ||
| CHAPTER 5: PROBLEM 3 | ||||
| Settlement | 1/1/10 | (Think of Settlement as the beginning of the duration of the bond) | ||
| Maturity | 12/31/25 | (Think of Maturity as the end of the duration of the bond) | ||
| Rate | 6.8 | (Coupon Rate) | ||
| Pr | 105 | (The bonds price per $100 face value) | ||
| Redemption | 100 | (Bonds Face Value, Par Value, or Fair Price; Note that is $100, not $1,000) | ||
| Frequency | 2 | (Coupon payments are semiannual, so you put in a 2. If they are annual, then you input a 1) | ||
| Basis: | (Always leave it blank) | |||
| YTM | 641.27% | |||
| CHAPTER 6: PROBLEM 2 | ||||
| Dividend Payment | $1.99 | |||
| Dividend Growth Rate | 4.50% | |||
| ZYX Stock Price | $31 | |||
| Required Return = | 6.71% | |||
| CHAPTER 6: PROBLEM 4 | ||||
| Dividend | $2.65 | |||
| Dividend increase per year | 4.75% | |||
| Required Return (Return on Investment) | 11% | |||
| Stock Price = | $24.04 |
UNIT 3- ANSWERS
| UNIT 3: TEXTBOOK PROBLEMS | |||
| CHAPTER 7: PROBLEM 1b | |||
| Project A | Project B | ||
| Discount Rate | 15% | 15% | |
| Year 0 | ($14,500) | ($9,800) | |
| Year 1 | $8,500 | $4,700 | |
| Year 2 | $6,800 | $4,200 | |
| Year 3 | $2,800 | $4,100 | |
| NPV = | ($125.87) | $158.58 | (Note: You will choose the project that has the highest NPV since it creates the most wealth) |
| CHAPTER 7: PROBLEM 2 | |||
| Year | A. | B. | C. |
| 0 | $3,200 | $4,600 | $7,900 |
| 1 | $825 | $825 | $825 |
| 2 | $825 | $825 | $825 |
| 3 | $825 | $825 | $825 |
| 4 | $825 | $825 | $825 |
| 5 | $825 | $825 | $825 |
| 6 | $825 | $825 | $825 |
| 7 | $825 | $825 | $825 |
| 8 | $825 | $825 | $825 |
| Payback Period = | 3.88 | 5.58 | 9.58 |
| CHAPTER 7: PROBLEM 8 | |||
| Year | Project A | Project B | |
| 0 | ($5,200) | ($3,600) | |
| 1 | 1,800 | 1,300 | |
| 2 | 3,200 | 2,100 | |
| 3 | 2,200 | 1,800 | |
| IRR = | 17.57% | 19.72% | |
| CHAPTER 7: PROBLEM 9 | |||
| Discount Rate | 15% | ||
| Year | |||
| 0 (Initial Cost) | ($185,000) | $185,000 | |
| 1 | 62,000 | ||
| 2 | 62,000 | ||
| 3 | 62,000 | ||
| 4 | 62,000 | ||
| 5 | 62,000 | ||
| 6 | 62,000 | ||
| 7 | 62,000 | ||
| First find the NPV | $14,374 | (Use the built-in NPV formula in Excel but exclude using the Year 0 cash outflow) | |
| Now calculate the Profitability Index | (1.00) | (Use the positive amount of the initial cost in cell C44 in the formula. You would only accept the project if the Profitability Index is above 1) | |
| CHAPTER 8: PROBLEM 1 | |||
| Cost of Souffle Maker | $27,000 | ($27,000) | |
| Economic Life | 6 | years | |
| # of Souffles produced per year | 2,300 | ||
| Cost to make each Souffle | $2 | ||
| Price of each Souffle | $7 | ||
| Discount Rate | 14% | ||
| Tax Rate | 34% | ||
| Step 1: First calculate the Operating Cash Flow | $8,220 | ||
| Step 2: Place the answer you get for your Operating Cash Flow in the year 1 thru year 6 cells below | |||
| Year 1 | $8,220 | ||
| Year 2 | $8,220 | ||
| Year 3 | $8,220 | ||
| Year 4 | $8,220 | ||
| Year 5 | $8,220 | ||
| Year 6 | $8,220 | ||
| Step 3: Now find the NPV. Be sure to include the initial cost by using cell C58 as it is negative | |||
| NPV = | $4,964.85 | (You will accept the project if the NPV is positive) |
UNIT 4- ANSWERS
| UNIT 4: TEXTBOOK PROBLEMS | |||||
| CHAPTER 10: PROBLEM 1 | |||||
| Beginning Stock Price | $73 | ||||
| Ending Stock Price | $82 | ||||
| Dividend | $1.20 | ||||
| Percentage Total Return = | 13.97% | ||||
| CHAPTER 10: PROBLEM 12 | |||||
| Stock Return the past 5 years | -18.35% | 14.72% | 28.47% | 6.48% | 16.81% |
| Holding Period Return for the Stock = | 49.67% | (Note: Subtract your answer by 1 to obtain the correct percentage answer) | |||
| CHAPTER 10: PROBLEM 14 | |||||
| Price of Preferred Stock Last Year | $94.83 | ||||
| Current Price of Preferred Stock | $96.20 | ||||
| Preferred Stock Dividend | 4.20% | ||||
| Face Value of Preferred Stock | $100 | ||||
| Total Return = | 132.62 | ||||
| CHAPTER 10: PROBLEM 15 | |||||
| Stock Price 3 Months Ago | $41.75 | ||||
| Current Stock Price | $44.07 | ||||
| First calculate the total return for the 3 months | 55.24 | ||||
| Then calculate the APR by multiplying the answer in cell B35 by 4 | 220.95 | ||||
| EAR (Effective Annual Rate) = | 17.89% | ||||
| CHAPTER 11: PROBLEM 2 | |||||
| Stock A | $3,900 | ||||
| Stock B | $5,700 | ||||
| Total Value of the Portfolio | $9,600 | ||||
| Expected Return on Stock A | 9.50% | ||||
| Expected Return on Stock B | 15.20% | ||||
| Expected Return on the Portfolio = | 48.98% | ||||
| CHAPTER 11: PROBLEM 12 | |||||
| Beta | 0.85 | ||||
| Expected Return on the Market | 11.50% | ||||
| Risk-Free Rate | 3.40% | ||||
| Expected Return on the Stock = | 85.275400% | ||||
| CHAPTER 12: PROBLEM 1 | |||||
| Beta | 1.21 | ||||
| Risk-Free Rate | 3.50% | ||||
| Expected Return on the Market | 11% | ||||
| Cost of Equity = | 121.82500% | ||||
| CHAPTER 12: PROBLEM 5 | |||||
| Common Stock weight | 70% | ||||
| Debt weight | 30% | ||||
| Cost of Equity | 13% | ||||
| Cost of Debt | 6% | ||||
| Tax Rate | 35% | ||||
| WACC = | 10.27% |
UNIT 5- ANSWERS
| UNIT 5: TEXTBOOK PROBLEMS | ||
| CHAPTER 16: PROBLEM 1 | ||
| Dividend | $6.30 | |
| Dividend Tax | 25% | |
| Stock Price | $83 | |
| Step 1: Calculate the After-Tax Dividend | $4.73 | |
| Step 2: Ex-Dividend Price = | $1.58 | |
| CHAPTER 16: PROBLEM 4 (a thru d) | ||
| # of shares of stock outstanding | 270,000 | |
| Stock Price | $73 | |
| A. | $43.80 | 5 |
| 3 | ||
| B. | $63.48 | 1 |
| 1.15 | ||
| C. | $51.23 | 1 |
| 1.425 | ||
| D. | $41.71 | 4 |
| 7 | ||
| CHAPTER 16: PROBLEM 7 | ||
| Stock Dividend | 25% | |
| # of shares of stock outstanding | 25,000 | |
| Market Value Balance Sheet: | ||
| Cash | $145,000 | |
| Fixed Assets | $598,000 | |
| Total | $743,000 | |
| Debt | $127,000 | |
| Equity | $616,000 | |
| Total | $743,000 | |
| Find the market price of stock by using the equity and # of shares outstanding | $24.64 | |
| New shares outstanding = | 6,250 | |
| New Stock price = | $253.66 | |
| CHAPTER 16: PROBLEM 16a | ||
| Dividend | $2.05 | |
| Payout Ratio | 40% | |
| Earnings Per Share | $6.20 | |
| Adjustment Rate | 0.3 | |
| Dividend 1 year from now = | $2.18 |
UNIT 6- ANSWERS
| UNIT 6: TEXTBOOK PROBLEMS | |||
| CHAPTER 18: PROBLEM 2 | |||
| Net Worth | $13,205 | ||
| Long-term Debt | $8,200 | ||
| Net Working Capital (Excluding Cash) | $3,205 | ||
| Fixed Assets | $17,380 | ||
| Current Liabilities | $1,630 | ||
| Cash = | $6,580 | ||
| Net Working Capital (Including Cash) = | $9,785 | ||
| Current Assets = | $12,990 | ||
| CHAPTER 19: PROBLEM 1 (a thru d) | |||
| # of shares outstanding | 490,000 | ||
| Current Stock Price | $75 | ||
| # of new shares outstanding in the future (rights offering) | 80,000 | ||
| Price of New Stock (or rights) | $71 | ||
| A. New Market Value of the Company = | $42,430,000 | ||
| B. # of Rights Needed = | $530.38 | rights per new share | |
| C. Ex-Rights Price = | $3.63 | ||
| D. Value of the Right = | $526.74 | ||
| CHAPTER 20: PROBLEM 4a | |||
| Spot exchange rate for the Canadian Dollar | $1.04 | ||
| 6 month forward rate | $1.06 | ||
| U.S. Dollar | $1.00 | ||
| One Canadian Dollar is worth | $1.0192 | (If amount is below 1, then the U.S. Dollar is worth more and vice versa) | |
| CHAPTER 20: PROBLEM 5a | |||
| Japanese Yen Exchange Rate= | 89 | = | $1 |
| British Pound Exchange Rate= | 1 | = | $1.62 |
| Cross Rate in terms of Yen per Pound = | $54.94 |