merger and acquistion 2

profileShinum
TACC613_Assignment_Topics.pptx
Home>Business & Finance homework help>Accounting homework help>merger and acquistion 2

WACC Calculation | Comparables Valuation Target Standalone Valuation | Estimating Synergies

Mergers & Acquisitions

Topics Relevant for Assignment

1

M&A Valuation

OBJECTIVES

Understanding the basics of valuation in the context of M&A

TOPICS

Derivation of WACC

Comparable Company Valuation

DCF Valuation: Target Standalone Valuation Example: Rio

Estimating Revenue and Cost Synergies

2

WACC = (D/(D+E)) x [(1-T) x (Cost of Debt)] + (E/(D+E)) x ke where

D = Debt

E = Equity

T = Corporate marginal tax rate (i.e., 40%)

Cost of Debt = 5%

Rf = Risk free rate = 10-year U.S. treasury bond rate = 2.5%

Rm = Return on a broad based stock index

Rm – Rf = Equity risk premium = 5.5%

βl = Levered beta (from finance.yahoo.com) = 1.7

ke = Cost of Equity = Rf + βl(Rm – Rf)

= 2.5 + 1.7(5.5) = 11.9%

D/E = Target debt-to-equity = 30%

D/(D + E) = (D/E)/(1+D/E) = .30 / (1+.30) = .231

E/(D+E) = 1 – [D/(D+E)] = 1 - .231 = .769

 

WACC = .231 x [(1 - .4) x 5] + .769 x 11.9 = .693 + 9.15 = 9.84%

Calculating WACC

3

Valuing Total SA Using Comparable Integrated Oil Companies
 Target Valuation Based on Following Multiples (MVC/VIC)
Comparable Company Trailing P/Ea Forward P/Eb Price/Sales Price/Book Average
  Col. 1 Col. 2 Col. 3 Col. 4 Cols. 1–4
Exxon Mobil Corp. (XOM) 168.56 9.12 4.64 6.97  
British Petroleum (BP) 207.69 9.55 4.45 8.87  
Chevron Corp. (CVX) 136.30 9.01 5.79 7.49  
Royal Dutch Shell (RDS-B) 194.23 8.22 3.22 5.19  
ConocoPhillips (COP) 9.02 11.71 1.43 1.50  
Eni SpA (E) 12.90 14.01 .57 1.12  
PetroChina Co. (PTR) 9.21 8.20 .50 1.04  
Oil & Natural Gas Corp. (ONGC) 11.40 7.11 1.71 1.82  
Average Multiple (MVC/VIC) 93.66 9.62 2.79 4.25  
Total SA Value Indicators Dollars Per Share (VIT) $1.77 $8.93 $76.60 $41.45  
Equals Estimated Market Value of Target ($Billions)c $165.78 $85.87   $213.62 $176.16 $160.36
a Trailing 52-week averages. b Projected 52-week averages. c Billions of dollars. C Average multiple (MVC/VIC) x Total SA value indicator expressed in dollars per share (VIT). For example, using the price-to-trailing earnings multiple times Total SA trailing earnings per share = 93.66 x $1.77 = $165.78 billion. The estimated value of Total based on an average of the comparable companies’ estimates calculated using the four different market multiples is $160.36 billion, versus its actual March 14, 2014 market capitalization of $144.59 billion. Key Points: 1. Firm valuation differs significantly depending on valuation multiple used. 2. Valuation estimates require addition of a purchase price premium.

Comparable Company Example

4

4

5

Rio Corporation FCF forecasts

5

6

Rio Corporation Valuation Assumptions

6

Estimating Revenue Synergies

7

Estimating Revenue Synergies

8

Estimating Cost Synergies

Steps in estimating cost synergies

9

Estimating Cost Synergies

10

Estimating Cost Synergies Automotive Merger

11

Latest year

01234567

1Sales

83.689.595.8102.5106.6110.8115.2118.7

2Cost of goods sold63.166.271.376.379.983.18790.2

3EBITDA (1-2)20.523.324.526.126.627.728.228.5

4Depreciation3.39.910.611.311.812.312.713.1

5Profit before tax (EBIT) (3-4)17.213.413.914.814.915.415.515.4

6Tax64.74.95.25.25.45.45.4

7Profit after tax (5-6)11.28.799.69.71010.110

8

Investment in fixed assets /

CAPEX-11-14.6-15.5-16.6-15-15.6-16.2-15.9

9Investment in working capital-1-0.5-0.8-0.9-0.5-0.6-0.6-0.4

10Free cash flow (7+4+8+9)2.53.53.33.45.96.166.8

PV Free cash flow, years 1-620.3(Horizon value in year 6) 113.4

PV Horizon value67.6

PV of company87.9

Forecast

3.6

Inflation 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
1900 0.61 Inflation 0.61 1.22 1.2 1.79 1.75 0 0.57 3.29 1.11 -1.64 1.67 2.19 1.07 1.99 1.04 1.93 11.6 18.53 20.5 14.79 2.27 -10.65 -2.56 2.63 -0.23 3.85 -1.49 -2.08 -0.97 0.2 -6.03 -9.52 -10.3 0.51 2.03 2.99 1.21 3.1 -2.78 -0.48 0.96 9.72 9.29 3.16 2.11 2.25 18.16 9.01 2.71 -1.8 5.79 5.87 0.88 0.62 -0.5 0.37 2.86 3.02 1.76 1.5 1.48 0.67 1.22 1.65 1.19 1.92 3.35 3.04 4.72 6.11 5.49 3.36 3.41 8.8 12.2 7.01 4.81 6.77 9.03 13.31 12.4 8.94 3.87 3.8 3.95 3.77 1.13 4.41 4.42 4.65 6.11 3.06 2.9 2.75 2.67 2.54 3.32 1.7 1.61 2.68 3.39 1.55 2.38 1.9
1901 1.22
1902 1.2
1903 1.79
1904 1.75
1905 0
1906 0.57
1907 3.29
1908 1.11
1909 -1.64
1910 1.67
1911 2.19
1912 1.07
1913 1.99
1914 1.04
1915 1.93
1916 11.6
1917 18.53
1918 20.5
1919 14.79
1920 2.27
1921 -10.65
1922 -2.56
1923 2.63
1924 -0.23
1925 3.85
1926 -1.49
1927 -2.08
1928 -0.97
1929 0.2
1930 -6.03
1931 -9.52
1932 -10.3
1933 0.51
1934 2.03
1935 2.99
1936 1.21
1937 3.1
1938 -2.78
1939 -0.48
1940 0.96
1941 9.72
1942 9.29
1943 3.16
1944 2.11
1945 2.25
1946 18.16
1947 9.01
1948 2.71
1949 -1.8
1950 5.79
1951 5.87
1952 0.88
1953 0.62
1954 -0.5
1955 0.37
1956 2.86
1957 3.02
1958 1.76
1959 1.5
1960 1.48
1961 0.67
1962 1.22
1963 1.65
1964 1.19
1965 1.92
1966 3.35
1967 3.04
1968 4.72
1969 6.11
1970 5.49
1971 3.36
1972 3.41
1973 8.8
1974 12.2
1975 7.01
1976 4.81
1977 6.77
1978 9.03
1979 13.31
1980 12.4
1981 8.94
1982 3.87
1983 3.8
1984 3.95
1985 3.77
1986 1.13
1987 4.41
1988 4.42
1989 4.65
1990 6.11
1991 3.06
1992 2.9
1993 2.75
1994 2.67
1995 2.54
1996 3.32
1997 1.7
1998 1.61
1999 2.68
2000 3.39
2001 1.55
2002 2.38
2003 1.9

Table 6.1

Period
0 1 2 3 4 5 6 7
1 Capital Investment 10,000 (1,949)
2 Accumulated depreciation 1,583 3,167 4,750 6,333 7,917 9,500 - 0
3 Year-end book value 10,000 8,417 6,833 5,250 3,667 2,083 500 - 0
4 Working capital 550 1,289 3,261 4,890 3,583 2,002 - 0
5 Total book value (3+4) 10,000 8,967 8,122 8,511 8,557 5,666 2,502 - 0
6 Sales 523 12,887 32,610 48,901 35,834 19,717
7 Cost of goods sold 837 7,729 19,552 29,345 21,492 11,830
8 Other Costs 4,000 2,200 1,210 1,331 1,464 1,611 1,772
9 Depreciation 1,583 1,583 1,583 1,583 1,583 1,583
10 Pretax profit (6-7-8-9) (4,000) (4,097) 2,365 10,144 16,509 11,148 4,532 1,449
11 Tax at 35% (1,400) (1,434) 828 3,550 5,778 3,902 1,586 507
12 Profit after tax (10-11) 2,600 (2,663) 1,537 6,595 10,731 7,246 2,946 942

Table 6.2

Period
0 1 2 3 4 5 6 7
1 Sales 523 12,887 32,610 48,901 35,834 19,717
2 Cost of goods sold 837 7,729 19,552 29,345 21,492 11,830
3 Other costs 4,000 2,200 1,210 1,331 1,464 1,611 1,772
4 Tax on operations (1,400) (1,434) 828 3,550 5,778 3,902 1,586
5 Cash flow from operations (1-2-3-4) (2,600) (1,080) 3,120 8,177 12,314 8,829 4,529
6 Change in working capital (550) (739) (1,972) (1,629) 1,307 1,581 2,002
7 Capital investment and disposal (10,000) 1,442
8 Net cash flow (5+6+7) (12,600) (1,630) 2,381 6,205 10,685 10,136 6,110 3,444
9 Present value at 20% (12,600) (1,358) 1,654 3,591 5,153 4,074 2,046 961
Net Present value= +3520 (sum of 9)

Table 6.4

Tax Depreciation Schedules by Recovery-Period Class
Year(s) 3-Year 5-Year 7-Year 10-Year 15-Year 20-Year
1 33.33 20 14.29 10 5 3.75
2 44.45 32 24.49 18 9.5 7.22
3 14.81 19.2 17.49 14.4 8.55 6.68
4 7.41 11.52 12.49 11.52 7.7 6.18
5 11.52 8.93 9.22 6.93 5.71
6 5.76 8.92 7.37 6.23 5.28
7 8.93 6.55 5.9 4.89
8 4.45 6.55 5.9 4.52
9 6.56 5.9 4.46
10 6.55 5.9 4.46
11 3.29 5.9 4.46
12 5.9 4.46
13 5.91 4.46
14 5.9 4.46
15 5.91 4.46
16 2.99 4.46
17-20 4.46
21 2.23

Table 6.5

Period
0 1 2 3 4 5 6 7
1 Sales 523 12,887 32,610 48,901 35,834 19,717
2 Cost of goods sold 837 7,729 19,552 29,345 21,492 11,830
3 Other Costs 4,000 2,200 1,210 1,331 1,464 1,611 1,772
4 Tax depreciation 2,000 3,200 1,920 1,152 576
5 Pretax profit (1-2-3-4) (4,000) (4,514) 748 9,807 16,940 11,579 5,539 1,949
6 Taxes at 35% (1,400) (1,580) 262 3,432 5,929 4,053 1,939 682

Table 6.6

Period
0 1 2 3 4 5 6 7
1 Sales 523 12,887 32,610 48,901 35,834 19,717
2 Cost of goods sold 837 7,729 19,552 29,345 21,492 11,830
3 Other costs 4,000 2,200 1,210 1,331 1,464 1,611 1,772
4 Tax (1,400) (1,580) 262 3,432 5,929 4,053 1,939 682
5 Cash flow from operations (1-2-3-4) (2,600) (934) 3,686 8,295 12,163 8,678 4,176 (682)
6 Change in working capital (550) (739) (1,972) (1,629) 1,307 1,581 2,002
7 Capital investment and disposal (10,000) 1,949
8 Net cash flow (5+6+7) (12,600) (1,484) 2,947 6,323 10,534 9,985 5,757 3,269
9 Present Value= +3802 (sum of 9) (12,600) (1,237) 2,047 3,659 5,080 4,013 1,928 912
Net present value= +3802 (sum of 9)

7.1

Plotting data Fig 7.1
Equities Bonds Bills 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
1900 1.00 1.00 1.00 Equities 1.00 1.24 1.47 1.55 1.33 1.70 2.08 2.16 1.53 2.24 2.69 2.46 2.60 2.79 2.57 2.43 3.37 3.59 2.91 3.48 4.20 3.45 3.85 5.03 5.18 6.58 8.44 9.24 12.30 17.06 14.58 10.46 5.87 5.29 8.34 8.70 12.53 16.58 10.84 13.89 14.29 13.26 11.95 13.86 17.78 21.58 29.78 28.02 29.01 29.64 35.67 46.17 55.75 63.24 63.61 95.48 119.55 129.40 116.09 168.32 190.44 192.01 244.70 219.72 265.71 308.62 353.13 322.38 414.85 473.70 421.87 422.01 496.62 585.91 477.42 341.89 473.43 599.30 583.50 637.61 800.60 1,070.16 1,030.03 1,222.75 1,509.69 1,555.69 2,062.29 2,394.21 2,448.67 2,888.00 3,730.54 3,499.96 4,697.09 5,118.31 5,695.73 5,692.05 7,766.72 9,414.13 12,359.92 15,255.97 18,850.17 16,796.60 14,953.34 11,834.11 15,578.51
1901 1.24 1.04 1.04 Bonds 1.00 1.04 1.07 1.09 1.13 1.15 1.19 1.22 1.23 1.28 1.31 1.35 1.40 1.45 1.49 1.55 1.60 1.65 1.70 1.65 1.66 1.76 1.98 2.05 2.17 2.31 2.44 2.63 2.86 2.86 2.96 3.10 2.94 3.43 3.43 3.77 3.96 4.26 4.27 4.50 4.77 5.06 5.11 5.27 5.38 5.53 6.13 6.12 5.96 6.16 6.56 6.57 6.31 6.38 6.61 7.09 7.00 6.61 7.10 6.67 6.52 7.41 7.49 8.00 8.10 8.38 8.44 8.75 7.95 7.93 7.52 8.43 9.55 10.09 9.98 10.42 11.37 13.28 13.19 13.03 12.87 12.36 12.59 17.68 17.79 20.55 26.91 33.51 32.60 35.75 42.23 44.84 53.49 57.80 68.34 63.03 82.99 82.22 95.26 107.70 98.05 119.11 123.51 145.54 147.65
1902 1.47 1.07 1.09 Bills 1.00 1.04 1.09 1.14 1.20 1.25 1.31 1.38 1.47 1.53 1.59 1.67 1.73 1.81 1.91 2.01 2.08 2.14 2.24 2.37 2.50 2.70 2.88 3.02 3.18 3.31 3.44 3.55 3.66 3.79 3.98 4.07 4.11 4.15 4.17 4.17 4.18 4.19 4.20 4.20 4.20 4.20 4.20 4.21 4.23 4.24 4.26 4.27 4.29 4.33 4.38 4.43 4.50 4.57 4.65 4.69 4.77 4.88 5.04 5.12 5.27 5.41 5.52 5.67 5.85 6.06 6.29 6.59 6.87 7.23 7.70 8.21 8.57 8.90 9.51 10.27 10.87 11.42 12.01 12.87 14.20 15.80 18.12 20.04 21.80 23.95 25.79 27.38 28.88 30.71 33.29 35.89 37.89 39.22 40.36 41.93 44.28 46.59 49.04 51.42 53.82 57.00 59.18 60.15 60.77
1903 1.55 1.09 1.14
1904 1.33 1.13 1.20
1905 1.70 1.15 1.25
1906 2.08 1.19 1.31
1907 2.16 1.22 1.38
1908 1.53 1.23 1.47
1909 2.24 1.28 1.53
1910 2.69 1.31 1.59
1911 2.46 1.35 1.67
1912 2.60 1.40 1.73
1913 2.79 1.45 1.81
1914 2.57 1.49 1.91
1915 2.43 1.55 2.01
1916 3.37 1.60 2.08
1917 3.59 1.65 2.14
1918 2.91 1.70 2.24
1919 3.48 1.65 2.37
1920 4.20 1.66 2.50
1921 3.45 1.76 2.70
1922 3.85 1.98 2.88
1923 5.03 2.05 3.02
1924 5.18 2.17 3.18
1925 6.58 2.31 3.31
1926 8.44 2.44 3.44
1927 9.24 2.63 3.55
1928 12.30 2.86 3.66
1929 17.06 2.86 3.79
1930 14.58 2.96 3.98
1931 10.46 3.10 4.07
1932 5.87 2.94 4.11
1933 5.29 3.43 4.15
1934 8.34 3.43 4.17
1935 8.70 3.77 4.17
1936 12.53 3.96 4.18
1937 16.58 4.26 4.19
1938 10.84 4.27 4.20
1939 13.89 4.50 4.20
1940 14.29 4.77 4.20
1941 13.26 5.06 4.20
1942 11.95 5.11 4.20
1943 13.86 5.27 4.21
1944 17.78 5.38 4.23
1945 21.58 5.53 4.24
1946 29.78 6.13 4.26
1947 28.02 6.12 4.27
1948 29.01 5.96 4.29
1949 29.64 6.16 4.33
1950 35.67 6.56 4.38
1951 46.17 6.57 4.43
1952 55.75 6.31 4.50
1953 63.24 6.38 4.57
1954 63.61 6.61 4.65
1955 95.48 7.09 4.69
1956 119.55 7.00 4.77
1957 129.40 6.61 4.88
1958 116.09 7.10 5.04
1959 168.32 6.67 5.12
1960 190.44 6.52 5.27
1961 192.01 7.41 5.41
1962 244.70 7.49 5.52
1963 219.72 8.00 5.67
1964 265.71 8.10 5.85
1965 308.62 8.38 6.06
1966 353.13 8.44 6.29
1967 322.38 8.75 6.59
1968 414.85 7.95 6.87
1969 473.70 7.93 7.23
1970 421.87 7.52 7.70
1971 422.01 8.43 8.21
1972 496.62 9.55 8.57
1973 585.91 10.09 8.90
1974 477.42 9.98 9.51
1975 341.89 10.42 10.27
1976 473.43 11.37 10.87
1977 599.30 13.28 11.42
1978 583.50 13.19 12.01
1979 637.61 13.03 12.87
1980 800.60 12.87 14.20
1981 1,070.16 12.36 15.80
1982 1,030.03 12.59 18.12
1983 1,222.75 17.68 20.04
1984 1,509.69 17.79 21.80
1985 1,555.69 20.55 23.95
1986 2,062.29 26.91 25.79
1987 2,394.21 33.51 27.38
1988 2,448.67 32.60 28.88
1989 2,888.00 35.75 30.71
1990 3,730.54 42.23 33.29
1991 3,499.96 44.84 35.89
1992 4,697.09 53.49 37.89
1993 5,118.31 57.80 39.22
1994 5,695.73 68.34 40.36
1995 5,692.05 63.03 41.93
1996 7,766.72 82.99 44.28
1997 9,414.13 82.22 46.59
1998 12,359.92 95.26 49.04
1999 15,255.97 107.70 51.42
2000 18,850.17 98.05 53.82
2001 16,796.60 119.11 57.00
2002 14,953.34 123.51 59.18
2003 11,834.11 145.54 60.15
2004 15,578.51 147.65 60.77

7.2

Plotting data Fig 7.2
Equities Bonds Bills 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 0.916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
1900 1.00 1.00 1.00 Equities 1.00 1.23 1.44 1.51 1.27 1.59 1.95 2.01 1.38 2.00 2.44 2.20 2.27 2.41 2.18 2.04 2.77 2.64 1.81 1.80 1.89 1.52 1.89 2.54 2.55 3.24 4.01 4.45 6.05 8.47 7.23 5.52 3.42 3.44 5.39 5.52 7.72 10.08 6.39 8.43 8.71 8.01 6.58 6.98 8.68 10.32 13.92 11.09 10.53 10.48 12.84 15.71 17.92 20.14 20.14 30.37 37.89 39.87 34.72 49.47 55.15 54.79 69.36 61.53 73.20 84.02 94.32 83.31 104.05 113.45 95.22 90.29 102.80 117.28 87.84 56.06 72.54 87.61 79.90 80.08 88.74 105.53 93.24 106.56 126.75 125.65 160.51 184.26 180.50 203.87 251.65 222.51 289.74 306.82 332.30 323.44 430.40 504.92 651.82 791.78 952.74 821.14 719.86 556.47 719.03
1901 1.23 1.03 1.04 Bonds 1.00 1.03 1.05 1.06 1.07 1.08 1.11 1.14 1.11 1.15 1.19 1.21 1.22 1.25 1.26 1.30 1.32 1.21 1.06 0.85 0.75 0.77 0.97 1.04 1.07 1.14 1.16 1.27 1.41 1.42 1.47 1.64 1.71 2.23 2.22 2.39 2.44 2.59 2.52 2.73 2.91 3.06 2.81 2.66 2.63 2.65 2.87 2.42 2.16 2.18 2.36 2.23 2.03 2.03 2.09 2.25 2.22 2.04 2.12 1.96 1.89 2.12 2.12 2.24 2.23 2.28 2.25 2.26 1.99 1.90 1.70 1.80 1.98 2.02 1.84 1.71 1.74 1.94 1.81 1.64 1.43 1.22 1.14 1.54 1.49 1.66 2.09 2.58 2.40 2.52 2.85 2.85 3.30 3.46 3.99 3.58 4.60 4.41 5.02 5.59 4.96 5.82 5.95 6.84 6.81
1902 1.44 1.05 1.07 Bills 1.00 1.04 1.07 1.11 1.15 1.18 1.22 1.29 1.32 1.37 1.44 1.49 1.51 1.57 1.62 1.68 1.71 1.58 1.39 1.22 1.13 1.18 1.42 1.52 1.56 1.63 1.63 1.71 1.80 1.89 1.97 2.15 2.40 2.70 2.69 2.65 2.57 2.55 2.48 2.55 2.56 2.54 2.31 2.12 2.06 2.03 1.99 1.69 1.56 1.53 1.58 1.51 1.44 1.46 1.47 1.49 1.51 1.50 1.51 1.50 1.52 1.54 1.57 1.59 1.61 1.65 1.68 1.70 1.72 1.73 1.74 1.76 1.77 1.78 1.75 1.68 1.67 1.67 1.64 1.62 1.57 1.56 1.64 1.75 1.83 1.93 2.01 2.11 2.13 2.17 2.25 2.28 2.34 2.35 2.35 2.38 2.45 2.50 2.59 2.67 2.72 2.79 2.85 2.83 2.80
1903 1.51 1.06 1.11
1904 1.27 1.07 1.15
1905 1.59 1.08 1.18
1906 1.95 1.11 1.22
1907 2.01 1.14 1.29
1908 1.38 1.11 1.32
1909 2.00 1.15 1.37
1910 2.44 1.19 1.44
1911 2.20 1.21 1.49
1912 2.27 1.22 1.51
1913 2.41 1.25 1.57
1914 2.18 1.26 1.62
1915 2.04 1.30 1.68
0.916 2.77 1.32 1.71
1917 2.64 1.21 1.58
1918 1.81 1.06 1.39
1919 1.80 0.85 1.22
1920 1.89 0.75 1.13
1921 1.52 0.77 1.18
1922 1.89 0.97 1.42
1923 2.54 1.04 1.52
1924 2.55 1.07 1.56
1925 3.24 1.14 1.63
1926 4.01 1.16 1.63
1927 4.45 1.27 1.71
1928 6.05 1.41 1.80
1929 8.47 1.42 1.89
1930 7.23 1.47 1.97
1931 5.52 1.64 2.15
1932 3.42 1.71 2.40
1933 3.44 2.23 2.70
1934 5.39 2.22 2.69
1935 5.52 2.39 2.65
1936 7.72 2.44 2.57
1937 10.08 2.59 2.55
1938 6.39 2.52 2.48
1939 8.43 2.73 2.55
1940 8.71 2.91 2.56
1941 8.01 3.06 2.54
1942 6.58 2.81 2.31
1943 6.98 2.66 2.12
1944 8.68 2.63 2.06
1945 10.32 2.65 2.03
1946 13.92 2.87 1.99
1947 11.09 2.42 1.69
1948 10.53 2.16 1.56
1949 10.48 2.18 1.53
1950 12.84 2.36 1.58
1951 15.71 2.23 1.51
1952 17.92 2.03 1.44
1953 20.14 2.03 1.46
1954 20.14 2.09 1.47
1955 30.37 2.25 1.49
1956 37.89 2.22 1.51
1957 39.87 2.04 1.50
1958 34.72 2.12 1.51
1959 49.47 1.96 1.50
1960 55.15 1.89 1.52
1961 54.79 2.12 1.54
1962 69.36 2.12 1.57
1963 61.53 2.24 1.59
1964 73.20 2.23 1.61
1965 84.02 2.28 1.65
1966 94.32 2.25 1.68
1967 83.31 2.26 1.70
1968 104.05 1.99 1.72
1969 113.45 1.90 1.73
1970 95.22 1.70 1.74
1971 90.29 1.80 1.76
1972 102.80 1.98 1.77
1973 117.28 2.02 1.78
1974 87.84 1.84 1.75
1975 56.06 1.71 1.68
1976 72.54 1.74 1.67
1977 87.61 1.94 1.67
1978 79.90 1.81 1.64
1979 80.08 1.64 1.62
1980 88.74 1.43 1.57
1981 105.53 1.22 1.56
1982 93.24 1.14 1.64
1983 106.56 1.54 1.75
1984 126.75 1.49 1.83
1985 125.65 1.66 1.93
1986 160.51 2.09 2.01
1987 184.26 2.58 2.11
1988 180.50 2.40 2.13
1989 203.87 2.52 2.17
1990 251.65 2.85 2.25
1991 222.51 2.85 2.28
1992 289.74 3.30 2.34
1993 306.82 3.46 2.35
1994 332.30 3.99 2.35
1995 323.44 3.58 2.38
1996 430.40 4.60 2.45
1997 504.92 4.41 2.50
1998 651.82 5.02 2.59
1999 791.78 5.59 2.67
2000 952.74 4.96 2.72
2001 821.14 5.82 2.79
2002 719.86 5.95 2.85
2003 556.47 6.84 2.83
2004 719.03 6.81 2.80

7.3

Denmark 4.3
Belgium 4.7 Denmark Belgium Switzerland Spain Canada Ireland Germany UK Average Netherlands USA Sweden South Africa Australia France Japan Italy
Switzerland 5.1 4.3 4.7 5.1 5.3 5.8 5.9 5.9 6.3 6.4 6.6 7.6 8.1 8.2 8.6 9.3 10 10.7
Spain 5.3
Canada 5.8
Ireland 5.9
Germany 5.9
UK 6.3
Average 6.4
Netherlands 6.6
USA 7.6
Sweden 8.1
South Africa 8.2
Australia 8.6
France 9.3
Japan 10
Italy 10.7

7.4

1900 24.2%
1901 18.0%
1902 6.1% 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
1903 -14.6% 24.2% 18.0% 6.1% -14.6% 28.1% 22.1% 4.1% -29.3% 46.8% 20.0% -8.5% 5.7% 7.2% -7.8% -5.5% 38.8% 6.4% -18.9% 19.6% 20.6% -17.9% 11.6% 30.6% 3.0% 27.0% 28.3% 9.5% 33.1% 38.7% -14.6% -28.3% -43.9% -9.8% 57.6% 4.4% 44.0% 32.3% -34.6% 28.2% 2.9% -7.2% -9.9% 16.0% 28.3% 21.4% 38.0% -5.9% 3.6% 2.2% 20.3% 29.4% 20.8% 13.4% 0.6% 50.1% 25.2% 8.2% -10.3% 45.0% 13.1% 0.8% 27.4% -10.2% 20.9% 16.2% 14.4% -8.7% 28.7% 14.2% -10.9% 0.0% 17.7% 18.0% -18.5% -28.4% 38.5% 26.6% -2.6% 9.3% 25.6% 33.7% -3.8% 18.7% 23.5% 3.1% 32.6% 16.1% 2.3% 17.9% 29.2% -6.2% 34.2% 9.0% 11.3% -0.1% 36.5% 21.2% 31.3% 23.4% 23.6% -10.9% -11.0% -20.9%
1904 28.1%
1905 22.1%
1906 4.1%
1907 -29.3%
1908 46.8%
1909 20.0%
1910 -8.5%
1911 5.7%
1912 7.2%
1913 -7.8%
1914 -5.5%
1915 38.8%
1916 6.4%
1917 -18.9%
1918 19.6%
1919 20.6%
1920 -17.9%
1921 11.6%
1922 30.6%
1923 3.0%
1924 27.0%
1925 28.3%
1926 9.5%
1927 33.1%
1928 38.7%
1929 -14.6%
1930 -28.3%
1931 -43.9%
1932 -9.8%
1933 57.6%
1934 4.4%
1935 44.0%
1936 32.3%
1937 -34.6%
1938 28.2%
1939 2.9%
1940 -7.2%
1941 -9.9%
1942 16.0%
1943 28.3%
1944 21.4%
1945 38.0%
1946 -5.9%
1947 3.6%
1948 2.2%
1949 20.3%
1950 29.4%
1951 20.8%
1952 13.4%
1953 0.6%
1954 50.1%
1955 25.2%
1956 8.2%
1957 -10.3%
1958 45.0%
1959 13.1%
1960 0.8%
1961 27.4%
1962 -10.2%
1963 20.9%
1964 16.2%
1965 14.4%
1966 -8.7%
1967 28.7%
1968 14.2%
1969 -10.9%
1970 0.0%
1971 17.7%
1972 18.0%
1973 -18.5%
1974 -28.4%
1975 38.5%
1976 26.6%
1977 -2.6%
1978 9.3%
1979 25.6%
1980 33.7%
1981 -3.8%
1982 18.7%
1983 23.5%
1984 3.1%
1985 32.6%
1986 16.1%
1987 2.3%
1988 17.9%
1989 29.2%
1990 -6.2%
1991 34.2%
1992 9.0%
1993 11.3%
1994 -0.1%
1995 36.5%
1996 21.2%
1997 31.3%
1998 23.4%
1999 23.6%
2000 -10.9%
2001 -11.0%
2002 -20.9%

Fig 8.1

Price Change % Coca Cola Normal
-8.5615 0.0007 0
-8.1177 0 0
-7.6739 0.0002 0
-7.23 0 0
-6.7862 0.0002 0
-6.3424 0.0005 0.0001
-5.8986 0.0009 0.0002
-5.4548 0.0018 0.0005
-5.011 0.0007 0.0011
-4.5672 0.0023 0.0023
-4.1233 0.0016 0.0044
-3.6795 0.0048 0.008
-32357 0.0071 0.0136
-2.7919 0.0127 0.0217
-2.3481 0.0219 0.0325
-1.9043 0.032 0.0457
-1.4604 0.0519 0.0605
-1.0166 0.0807 0.0752
-0.5728 0.1067 0.0878
-0.129 0.1212 0.0964
0.3148 0.1309 0.0995
0.7586 0.1088 0.0964
1.2025 0.0926 0.0878
1.6463 0.0735 0.0752
2.0901 0.0489 0.0605
2.5339 0.03 0.0457
2.9777 0.0228 0.0325
3.4215 0.0134 0.0217
3.8654 0.0097 0.0136
4.3092 0.0055 0.008
4.753 0.0041 0.0044
5.1968 0.0037 0.0023
5.6406 0.0021 0.0011
6.0844 0.0014 0.0005
6.5283 0.0007 0.0002
6.9721 0.0009 0.0001
7.4159 0.0002 0
7.8597 0.0005 0
8.3035 0.0007 0
8.7473 0.0002 0

Fig 8.4

Std Dev r
18.2 10
17.88 10.25
17.65 10.5
17.51 10.75
17.48 11
17.53 11.25
17.69 11.5
17.94 11.75
18.27 12
18.69 12.25
19.2 12.5
19.77 12.75
20.41 13
21.12 13.25
21.87 13.5
22.68 13.75
23.53 14
24.43 14.25
25.35 14.5
26.31 14.75
27.3 15

Fig 8.9

Investor Beta Risk Premium, %
1 0.49 9
2 0.63 10
3 0.75 10
4 0.85 12
5 0.93 12
6 1.05 13
7 1.15 14
8 1.22 14
9 1.35 15
10 1.53 15
Mkt portfolio 1 12.2

Fig 8.10 A

Investor Beta Risk premium, %
1 0.49 11
2 0.63 13
3 0.75 15
4 0.85 16
5 0.93 17
6 1.06 18
7 1.17 20
8 1.24 21
9 1.37 22
10 1.53 25
Mkt portfolio 1 17.9

Fig 8.10 B

Investor Beta Risk premium, %
1 0.5 6
2 0.63 6
3 0.75 6
4 0.85 7
5 0.95 8
6 1.03 8
7 1.11 9
8 1.18 8
9 1.3 8
10 1.52 6
Mkt portfolio 1 6.8

Fig 8.11

1926 1 1 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
1927 0.97 0.94 1 0.97 1.01 0.72 0.69 0.72 0.75 1.12 1.41 1.59 1.83 1.58 1.76 1.85 1.88 1.79 1.89 2.46 2.88 3.64 3.49 3.23 2.94 3.03 3.09 2.94 2.75 2.71 2.66 2.49 2.47 2.41 2.76 2.91 2.84 2.86 2.59 2.43 2.39 2.94 3.02 4.54 5.65 4.86 4.3 4.57 4.01 3.05 3.03 3.49 3.97 4.89 5.58 6.72 7.1 7.61 8.28 9.44 8.63 8.55 7.69 6.89 7.36 6.47 5.54 6.45 6.96 7.48 7.51 6.98 6.85 6.6 5.06 5.65 5.33 6.85 7.14 9.15
1928 1.01 0.86 1 0.94 0.86 0.97 0.84 0.71 0.75 0.087 0.61 0.65 0.84 0.8 0.69 0.57 0.56 0.63 0.76 1.02 1.19 1.35 1.39 1.51 1.56 1.51 1.91 1.82 1.87 1.73 2.16 2.27 2.22 2.08 2.34 2.36 2.24 2.36 2.61 3.01 3.3 3.49 3.46 3.14 3.71 3.31 4.03 3.57 3.65 4.3 4.7 5.11 6.34 6.83 6.86 6.71 5.06 6.31 7.14 8.48 10.06 10.18 11.2 10.91 12.42 11.72 10.47 8.89 10.94 12.8 12.79 12.35 12.38 13.75 11.69 7.08 8.59 10.94 11.34 13.06
1929 0.72 0.97
1930 0.69 0.84
1931 0.72 0.71
1932 0.75 0.75
1933 1.12 0.087
1934 1.41 0.61
1935 1.59 0.65
1936 1.83 0.84
1937 1.58 0.8
1938 1.76 0.69
1939 1.85 0.57
1940 1.88 0.56
1941 1.79 0.63
1942 1.89 0.76
1943 2.46 1.02
1944 2.88 1.19
1945 3.64 1.35
1946 3.49 1.39
1947 3.23 1.51
1948 2.94 1.56
1949 3.03 1.51
1950 3.09 1.91
1951 2.94 1.82
1952 2.75 1.87
1953 2.71 1.73
1954 2.66 2.16
1955 2.49 2.27
1956 2.47 2.22
1957 2.41 2.08
1958 2.76 2.34
1959 2.91 2.36
1960 2.84 2.24
1961 2.86 2.36
1962 2.59 2.61
1963 2.43 3.01
1964 2.39 3.3
1965 2.94 3.49
1966 3.02 3.46
1967 4.54 3.14
1968 5.65 3.71
1969 4.86 3.31
1970 4.3 4.03
1971 4.57 3.57
1972 4.01 3.65
1973 3.05 4.3
1974 3.03 4.7
1975 3.49 5.11
1976 3.97 6.34
1977 4.89 6.83
1978 5.58 6.86
1979 6.72 6.71
1980 7.1 5.06
1981 7.61 6.31
1982 8.28 7.14
1983 9.44 8.48
1984 8.63 10.06
1985 8.55 10.18
1986 7.69 11.2
1987 6.89 10.91
1988 7.36 12.42
1989 6.47 11.72
1990 5.54 10.47
1991 6.45 8.89
1992 6.96 10.94
1993 7.48 12.8
1994 7.51 12.79
1995 6.98 12.35
1996 6.85 12.38
1997 6.6 13.75
1998 5.06 11.69
1999 5.65 7.08
2000 5.33 8.59
2001 6.85 10.94
2002 7.14 11.34
2003 9.15 13.06

Table 9.1

Beta equity Standard Error
Burlington Northern & Santa Fe 0.53 0.2
CSX Transportation 0.58 0.23
Norfolk Southern 0.47 0.28
Union Pacific Corp 0.47 0.19
Industry portfolio 0.49 0.18

Table 9.2

Ratio of Standard Deviations Correlation Coefficient Beta
Brazil 6.29 0.134 0.84
Egypt 5.67 0.104 0.59
India 6.1 0.173 1.05
Indonesia 7.29 0.176 1.28
Mexioco 3.92 0.131 0.51
Poland 3.21 0.264 0.85
Thailand 6.32 0.276 1.74
South Africa 4.04 0.211 0.85

TABLE 10.1

TABLE 10.1 Preliminary cash-flow forecasts
for Otabai's electric motor project
(figures in billions of yen)
Year 0 Years 1-10
Investment 15.00
Revenue 37.50
Variable cost 30.00
Fixed cost 3.00
Depreciation 1.50
Pretax Profit 3.00
Tax 1.05
Net profit 1.95
Operating cash flow 3.45
Net cash flow (15.00) 3.45
NPV 6.20
Notes:
Market size (million) 1.00
Market share % 0.10
Price per unit (yen) 375,000
Variable costs (yen) 300,000
Tax rate % 35
Cost of capital % 10

TABLE 10.2

TABLE 10.2 To undertake a sensitivity analysis of the electric scooter project, we set each variable in turn
to its most pessimistic or optimistic value and recalculate the NPV of the project
Operating cash flow (yen bn) =
Range net income + depreciation tax shield NPV (billions of yen)
Variable Pessimistic Expected Optimistic Pessimistic Expected Optimistic Pessimistic Expected Optimistic
Market size (million) 0.9 1 1.1 3.0 3.5 3.9 3.2 6.2 9.2
Market share 0.04 0.10 0.16 0.5 3.5 6.4 -11.8 6.2 24.2
Unit price (yen) 350,000 375,000 380,000 1.8 3.5 3.8 -3.8 6.2 8.2
Unit variable cost (yen) 360,000 300,000 275,000 -0.5 3.5 5.1 -17.8 6.2 16.2
Fixed cost (bns of yen) 4 3 2 2.8 3.5 4.1 2.2 6.2 10.2

TABLE 10.3

TABLE 10.3 How the NPV of the electric scooter project would be affected
by higher oil prices and a world recession
Cash Flows, Years 1- 10, billions of yen
Base Case High Oil Prices and Recession Case
Revenue 37.5 44.9
Variable cost 30 35.9
Fixed cost 3 3.5
Depreciation 1.5 1.5
Pretax Profit 3 4.0
Tax 1.05 1.4
Net profit 1.95 2.6
Net cash flow 3.45 4.1
PV of cash flows 21.2 25.1
NPV 6.2 10.1
Assumptions
Base Case High Oil Prices and Recession Case
Market size (million) 1 0.8
Market share 0.10 0.13
Unit price (yen) 375,000 431,300
Unit variable cost (yen) 300,000 345,000
Fixed cost (bns of yen) 3 3.5

TABLE 10.4

TABLE 10.4 NPV of electric scooter project under different assumptions about unit sales
(figures in billions of yen excepted as noted)
Outflows
Year 0 Years 1-10
Unit Sales, Revenues Variable Fixed PV PV
Thousands Years 1-10 Investment Costs Costs Taxes Inflows Outflows NPV
0 0 15 0 3 -2.25 0.0 19.6 -19.6
100 37.5 15 30 3 1.5 230.4 227.0 3.4
200 75.0 15 60 3 5.25 460.8 434.4 26.5
Notes:
Price per unit (yen) 375,000
Variable costs (yen) 300,000
Fixed costs (bns of yen) 3
Depreciation (bns of yen) 1.5
Tax rate % 50
Cost of capital % 10
TABLE 10.5 The electric scooter project's accounting profit under different assumptions about unit sales
(figures in billions of yen excepted as noted)
Unit Sales, Revenues Variable Fixed Total Profit
Thousands Years 1-10 Costs Costs Depreciation Taxes Costs after Tax
0 0 0 3 1.5 -2.25 2.25 -2.25
100 37.5 30 3 1.5 1.5 36.00 1.50
200 75.0 60 3 1.5 5.25 69.75 5.25

Table 10.1 (2)

Year 0 Year 1-10
Investment 15
1. Revenue 37.5
2. Variabke cost 30
3. Fixed cost 3
4. Depreciation 1.5
5. Pretax profit (1-2-3-4) 3
6. Tax 1.5
7. Net Profit (5-6) 1.5
8. Operating cash flow (4+7) 3
Net Cash Flow -15 3

Table 10.2 (2)

Range NPV, Billions
Variable Pessimistic Expected Optimistic Pessimistic Expected Optimistic
Market Size .9 million 1 million 1.1 million 1.1 3.4 5.7
Market share 0.04 0.1 0.16 -10.4 3.4 17.3
Unit price 350000 375000 380000 -4.2 3.4 5
Unit variable cost 360000 300000 275000 -15 3.4 11.1
Fixed cost 4 billion 3 billion 2 billion 0.4 3.4 6.5

Table 10.3 (2)

Cash Flows, Years 1-10, Billions
Base Case High Oil Prices and Recession Case
1 Revenue 37.5 44.9
2 Variable cost 30.0 35.9
3 Fixed cost 3.0 3.5
4 Depreciation 1.5 1.5
5 Pretax profit (1-2-3-4) 3.0 4.0
6 Tax 1.5 2.0
7 Net profit (5-6) 1.5 2.0
8 Net cash flow (4+7) 3.0 3.5
PV of cash flows 18.4 21.5
NPV 3.4 6.5
Assumptions
Base Case High Oil Prices and Recession Case
Market size 1 million .8 million
Market share 0.1 0.13
Unit Price 375000 431300
Unit variable cost 300000 345000
Fixed cost 3 billion 3.5 billion

Table 10.4 (2)

Inflows Outflows
Year 0 Years 1-10
Unit Sales, Thousands Revenue, Years 1-10 Investment Variable Costs Fixed Costs Taxes PV Inflows PV Outflows NPV
0 0 15 0 3 -2.25 0 19.6 -19.6
100 37.5 15 30 3 1.5 230.4 227 3.4
200 75 15 60 3 5.25 460.8 434.4 26.4

Table 10.5

Unit Sales, Thousands Revenue Variable Costs Fixed Costs Depreciation Taxes Total Costs Profit after Tax
0 0 0 3 1.5 -2.25 2.25 -2.25
100 37.5 30 3 1.5 1.5 36 1.5
200 75 60 3 1.5 5.25 69.75 5.25

Table 10.6

Year 0 Year 1-10
Investment 15.00
1. Revenue 37.50
2. Variable cost 12.00
3. Fixed cost 19.00
4. Depreciation 1.50
5. Pretax profit (1-2-3-4) 5.00
6.Tax 2.50
7. Net profit (5-6) 2.50
8. Operating cash flow (4+7) 4.00
Net cash flow (15.00) 4.00

Table 10.7

Year
0 1 2 3 4 17-May
Investment:
Land 30
Construction 20 30 10
Operations:
Rental 12 12 12
Share of retail sales 24 24 24
Operating and maintenance costs 2 4 4 10 10 10
Real estate taxes 2 2 3 4 4 4

Table 11.1

Year 0 Year 1 Year 2 Year 3-10
Investment 100 5 - 10
Production, Millions of pounds per year 0 0 40 80
Spread, dollars per pound 1.2 1.2 1.2 1.2
Net revenues 0 0 48 96
Production costs 0 0 30 30
Transport 0 0 4 8
Other costs 0 20 20 20
Cash flow -100 -20 -6 38
NPV (at r=8%) = $63.6 million

Table 11.2

Year 0 Year 1 Year 2 Year 3-10
Investment 100 5 - 10
Production, Millions of pounds per year 0 0 40 80
Spread, dollars per pound 0.95 0.95 0.95 0.95
Net revenues 0 0 38 76
Production costs 0 0 30 30
Transport 0 0 0 0
Other costs 0 20 20 20
Cash flow -100 -20 -12 26
NPV (at r=8%) = 0

Table 11.3

Year
0 1 2 3 4 5 - 10
Investment 100
Production, Millions of pounds per year 0 0 40 80 80 80
Spread, dollars per pound 1.2 1.2 1.2 1.2 1.1 0.95
Net revenues 0 0 48 96 88 76
Production costs 0 0 30 30 30 30
Transport 0 0 4 8 8 8
Other costs 0 20 20 20 20 20
Cash flow -100 -20 -6 38 30 18
NPV (at r= 8%)= -9.8

Table 11.4

Capacity, Millions of Units
Technology Industry Marvin Capital Cost per Unit ($) Manufacturing Cost per Unit ($) Salvage Value per Unit ($)
First generation (2014) 120 _ 17.5 5.5 2.5
Second generation (2022) 120 24 17.5 3.5 2.5

Table 12.1

Income Assets
Sales $550 Net working capital $80 5 - 10
Cost of goods sold 275 Property, plant, and equipment investment 1770
Selling, general, and administrative expenses 75 Less cumulative depreciation 360
200 Net investment 810
Taxes at 35% 70 Other assets 110
Net income $130 Total assets $1,000

Table 12.2

Econimic Value Added (EVA) Capital Invested Return on Capital Cost of Capital
Wal-Mart Stores 4,525 79,177 12.30% 6.60%
Johnson & Johnson 4,459 51,508 17.6 8.9
Microsoft 4,027 24,677 29.8 13.5
Merck 3,347 40,941 16.9 8.7
Coca Cola 2,729 20,503 20.1 6.7
Intel Corp. (57) 31,216 15.6 15.8
Dow Chemical (1,503) 44,158 3.6 7
Boeing (1,974) 50,046 2.2 6.1
Delta Airlines (2,288) 27,238 -0.9 7.5
Viacom (5,508) 96,515 3.5 9.2
IBM (7,505) 108,926 4.6 11.5

Table 12.3

Year
1 2 3 4 5 6
Cash flow 100 200 250 298 298 298
Book value at start of year, straight-line depreciation 1000 833 667 500 333 167
Book value at end of year, straight-line depreciation
Book depreciation 167 167 167 167 167
Book income -67 33 83 131 131
Book ROI -0.67 0.04 0.124 0.262 0.393 0.784
Forecasted EVA -167 -50 17 81 98 115

Table 12.4

Year
1 2 3 4 5 6
Cash flow
PV, at start of year, 10 percent discount rate 1000 1000 901 741 517 271
PV, at end of year, 10 percent discount rate
Economic depreciation 0 100 160 224 246 271
Economic income 100 100 90 74 52 27
Rate of return 0.1 0.1 0.1 0.1 0.1 0.1
Forecasted EVA (5-.1*2) 0 0 0 0 0 0

Table 12.5

Year
1 2 3 4 5 6
Book Income for store
1 -67 33 83 131 131 131
2 -67 33 83 131 131
3 -67 33 83 131
4 -67 33 83
5 -67 33
6 -67
Total book income -67 -34 49 180 311 442
Book value for store
1 1000 833 667 500 333 167
2 1000 833 667 500 333
3 1000 833 667 500
4 1000 833 667
5 1000 833
6 1000
Total book value 1000 1833 2500 3000 3333 3500
Book ROI for all stores -0.067 -0.019 0.02 0.06 0.093 0.126
EVA for all stores -167 -217 -201 -120 -22 92

Table 12.6

Income statement for 2004 Assets, December 31, 2004
Revenue $56.66 Net working capital $7.08
Raw materials cost $18.72
Operating cost $21.09 Investment in plant and equipment 69.33
Depreciation 4.5 Less accumulated depreciation 21.01
Pretax income 12.35 Net plant and equipment 48.32
Tax at 35% 4.32
Net income $8.03 Total assets $55.40

Table 12.7

Start of Year Market Value Cash Flow
1 19.69
2 17.99 $3.67
3 16.79 3
4 15.78 2.69
5 14.89 2.47
6 14.09 2.29
7 13.36 2.14
8 12.68 2.02
9 12.05 1.9
10 11.46 1.8
11 10.91 1.7
12 10.39 1.61
13 9.91 1.52
14 9.44 1.46
15 9.01 1.37
16 8.59 1.32

Fig 12.1

Basic Compensation Variable Bonus Options & Others Perks Benefits Australia Canada China Fance Germany India Italy Japan Mexico Netherlands Singapore Spain Sweden Switzerland United Kingdom United States
Australia 293 193.3 117.2 34.3 5.8 Basic Compensation 293 333.5 347.6 323.6 344.1 75.7 365.4 261.5 465.5 302.6 329.3 295 276.9 500 348.3 587.8
Canada 333.5 166.8 300.2 20 69.5 Variable Bonus 193.3 166.8 128.8 93.8 309.2 37.8 127.9 34.1 173.1 173.7 124.3 132.7 68.1 249.8 104.5 335.7
China 347.6 128.8 160.2 62.9 46.9 Options & Others 117.2 300.2 160.2 115.8 172.1 0 127.9 51 182.9 105.9 442.1 118 76.2 230.6 174.1 1087
Fance 323.6 93.8 115.8 46.9 155.2 Perks 34.3 20 62.9 46.9 21.9 84.4 24 37.3 67.6 19.9 33.7 12.3 12.8 24.9 49.6 108.5
Germany 344.1 309.2 172.1 21.9 107.5 Benefits 5.8 69.5 46.9 155.2 107.5 24.9 215.2 73.1 71.6 72.9 30 62 266.3 185.8 153.8 130
India 75.7 37.8 0 84.4 24.9
Italy 365.4 127.9 127.9 24 215.2
Japan 261.5 34.1 51 37.3 73.1
Mexico 465.5 173.1 182.9 67.6 71.6
Netherlands 302.6 173.7 105.9 19.9 72.9
Singapore 329.3 124.3 442.1 33.7 30
Spain 295 132.7 118 12.3 62
Sweden 276.9 68.1 76.2 12.8 266.3
Switzerland 500 249.8 230.6 24.9 185.8
United Kingdom 348.3 104.5 174.1 49.6 153.8
United States 587.8 335.7 1087 108.5 130

Fig 13.8

-21 Jan-73 -21 -21 -22.2 -16.4 -19.6 -21.7 -20.8 -4.5 4.3 -1.6 4.4 -1.3 8.4 -5.2 -11.8 3.8 -5.3 0.8 7 10.4 10.7 12.9 10.9 25.8 29.3 8.6 -4.3 -3.7 -2.1 -6.5 -10.7 -5.8 -8.5 -9.6 -8.6 -13.9 -14.6 -14 -7.4 -24.2 -36.6 -40.5 -33.7 -34.1 -26.5 -18.9 -24.1 -15.7 -20.1 -15.7 -20.4 -11.8 -11.7 -8.9 -8.8 -18 -18.7 -16 -17.5 -17.2 -13.3 -13.7 -11.3 -11.2 -11.3 -11.1 -8.7 -10.9 -9.6 -7 -5.8 -2.7 -0.5 0.5 5.1 1.2
-22.2 Feb-73 -22.2 Jan-73 Feb-73 Mar-73 Apr-73 May-73 Jun-73 Jul-73 Aug-73 Sep-73 Oct-73 Nov-73 Dec-73 Jan-74 Feb-74 Mar-74 Apr-74 May-74 Jun-74 Jul-74 Aug-74 Sep-74 Oct-74 Nov-74 Dec-74 Jan-75 Jan-78 Feb-78 Mar-78 Apr-78 May-78 Jun-78 Jul-78 Aug-78 Sep-78 Oct-78 Nov-78 Dec-78 Jan-79 Feb-79 Mar-79 Apr-79 May-79 Jun-79 Jul-79 Aug-79 Sep-79 Oct-79 Nov-79 Dec-79 Jan-80 Jan-83 Feb-83 Mar-83 Apr-83 May-83 Jun-83 Jul-83 Aug-83 Sep-83 Oct-83 Nov-83 Dec-83 Jan-84 Feb-84 Mar-84 Apr-84 May-84 Jun-84 Jul-84 Aug-84 Sep-84 Oct-84 Nov-84 Dec-84 Jan-85
-16.4 Mar-73 -16.4
-19.6 Apr-73 -19.6
-21.7 May-73 -21.7
-20.8 Jun-73 -20.8
-4.5 Jul-73 -4.5
4.3 Aug-73 4.3
-1.6 Sep-73 -1.6
4.4 Oct-73 4.4
-1.3 Nov-73 -1.3
8.4 Dec-73 8.4
-5.2 Jan-74 -5.2
-11.8 Feb-74 -11.8
3.8 Mar-74 3.8
-5.3 Apr-74 -5.3
0.8 May-74 0.8
7 Jun-74 7
10.4 Jul-74 10.4
10.7 Aug-74 10.7
12.9 Sep-74 12.9
10.9 Oct-74 10.9
25.8 Nov-74 25.8
29.3 Dec-74 29.3
8.6 Jan-75 8.6
-4.3 Jan-78 -4.3
-3.7 Feb-78 -3.7
-2.1 Mar-78 -2.1
-6.5 Apr-78 -6.5
-10.7 May-78 -10.7
-5.8 Jun-78 -5.8
-8.5 Jul-78 -8.5
-9.6 Aug-78 -9.6
-8.6 Sep-78 -8.6
-13.9 Oct-78 -13.9
-14.6 Nov-78 -14.6
-14 Dec-78 -14
-7.4 Jan-79 -7.4
-24.2 Feb-79 -24.2
-36.6 Mar-79 -36.6
-40.5 Apr-79 -40.5
-33.7 May-79 -33.7
-34.1 Jun-79 -34.1
-26.5 Jul-79 -26.5
-18.9 Aug-79 -18.9
-24.1 Sep-79 -24.1
-15.7 Oct-79 -15.7
-20.1 Nov-79 -20.1
-15.7 Dec-79 -15.7
-20.4 Jan-80 -20.4
-11.8 Jan-83 -11.8
-11.7 Feb-83 -11.7
-8.9 Mar-83 -8.9
-8.8 Apr-83 -8.8
-18 May-83 -18
-18.7 Jun-83 -18.7
-16 Jul-83 -16
-17.5 Aug-83 -17.5
-17.2 Sep-83 -17.2
-13.3 Oct-83 -13.3
-13.7 Nov-83 -13.7
-11.3 Dec-83 -11.3
-11.2 Jan-84 -11.2
-11.3 Feb-84 -11.3
-11.1 Mar-84 -11.1
-8.7 Apr-84 -8.7
-10.9 May-84 -10.9
-9.6 Jun-84 -9.6
-7 Jul-84 -7
-5.8 Aug-84 -5.8
-2.7 Sep-84 -2.7
-0.5 Oct-84 -0.5
0.5 Nov-84 0.5
5.1 Dec-84 5.1
1.2 Jan-85 1.2

Table 13.1

Month (A) Market Return (B) Executive Cheese Return (C) Paddington Beer Return
2002 -0.4 -1.9
Aug -0.4 -1.9 -0.5
Sep -12 -10.1 -17.2
Oct 8.5 8.1 9.8
Nov 3.2 7.5 16.5
Dec -5.5 4.3 6.7
2003
Jan -9.5 -5.3 -11.1
Feb 2.5 5.7 -7.3
Mar -1.2 -9.7 4.5
Apr 8.7 -4.7 23
May 3.1 -10 -1.1
June -0.4 -2.7 -1.2
July 3.1 0.1 6.2
Aug 0.1 3.4 12.4
Sep -1.7 5.6 -7.9
Oct 4.8 -2.2 11.5
Nov 1.3 -6.5 4.3
Dec 3.1 -0.2 3.4
2004
Jan -1.9 -3.7 4.1
Feb 2.3 -9 -14.1
Mar -2.4 7.3 -6.5
Apr 2.4 4.7 12.6
May -1.3 -7.1 -14.1

Fig 13.1 B

100
105.84
112.04
116.91
126.04
118.8
125.12
125.12
96.55
100.86
102.44
103.48
110.77
116.31
117.36
115.15
119.69
118.3
101.06
107.36
115.98
122.84
129.76
135.09
130.72
135.8
140.95
137.43
144.91
140.27
139.39
135.41
143.88
146.62
155.1
147.21
144.25
158.2
153.33
149.97
153.56
151.05
160.21
151.65
150.9
138.81
139.81
144.2
130.89
122.49
131.9
132.57
129.26
127.86
119.67
109.89
111.79
120.29
121.2

Fig 14.3

Book Debt ratio
Italy 71 Italy Italy Sweden Germany Austria France USA Belgium Japan Denmark Portugal Spain Finland Netherlands
Sweden 68 Sweden 71 68 67 65 64 63 62 61 59 57 57 53 48
Germany 67 Germany
Austria 65 Austria
France 64 France
USA 63 USA
Belgium 62 Belgium
Japan 61 Japan
Denmark 59 Denmark
Portugal 57 Portugal
Spain 57 Spain
Finland 53 Finland
Netherlands 48 Netherlands

Table 14.4

Common shares ($.25 par value per share) $108
Additional paid-in capital 317
Retained earnings 4433
Treasury shares 2880
Other adjustments 838
Net common equity 1199
Note:
Authorized shares 600
Issued sgares of which: 431
Outstanding shares 351
Treasury shares 80

Fig 14.4

Households 36.8 Households Pension Funds Insurance Companies Mutual Funds, etc. Rest of World Other
Pension Funds 21.1 36.8 21.1 7.4 21 10.4 3.2
Insurance Companies 7.4
Mutual Funds, etc. 21
Rest of World 10.4
Other 3.2
99.9

Fig 14.1

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Internal 92.3 86.1 108.9 89.5 90 87.4 78.7 83 76.7 79.1 73.9 75.4 81.2 100.3 91.2
Equity -26.8 -12.4 4.6 5.6 3.8 -6.9 -7.4 -5.9 -8.4 -25.5 -11 -11.9 -5.1 -4.8 -4.7
Debt 34.5 26.2 -13.4 5 6.2 19.5 28.7 22.9 31.7 46.4 37.1 36.5 23.9 4.6 13.5

Table 15.1

January 2003 to December 2003
Underwriter Value of Issues ($billion) Number of issues
Citigroup 543 1872
Morgan Stanley 395 1365
Merrill Lynch 380 1914
Lehman Brothers 354 1264
J.P. Morgan 354 1417

Table 15.3

Type Company Issue Amount ($ millions) Underwriter's spread
Common Stock:
IPO Buffalo Wild Wings 45 7.0% 7.00 0.07
IPO Carter's Inc. 119 7.0% 7 0.07
IPO Genitope Corp. 41 7.0% 7 0.07
IPO International Steel Group 462 6.5% 6.5 0.07
IPO Ipass 98 7.0% 7 0.07
- 0
Seasoned General Cable Corp. 41 5.5% 5.50 0.06
Seasoned Big 5 sporting Goods Corp. 94 5.0% 5 0.05
Seasoned Red Robin Goods Corp. 92 5.3% 5.25 0.05
Seasoned Gibraltar Steel 102 5.0% 5 0.05
Seasoned Interstate hotels 47 5.3% 5.25 0.05
- 0
Debt (cupon rate, type, maturity) : - 0
4.85% Fixed Rate Notes, 2011 Raytheon 500 0.6% 0.625 0.01
4.85% Notes, 2015 Procter & Gamble 150 0.5% 0.475 0.00
6.3% Notes, 2018 Eastman Chemical 248 0.8% 0.75 0.01
5.9% Senior Notes, 2008 Bausch & Lomb 50 1.0% 1 0.01
6.25% Convertible Senior Debentures, 2033 General Motors 4,000 1.8% 1.75 0.02

Fig 15.1

1993 3.7 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
1994 4.2 3.7 4.2 7.6 11.5 14.8 21.2 54.4 106.2 40.7 21.2 18.4
1995 7.6
1996 11.5
1997 14.8
1998 21.2
1999 54.4
2000 106.2
2001 40.7
2002 21.2
2003 18.4

Fig 15.2

China 256.9
Brazil 78.5
Korea 74.3
Greece 49
India 35.3
Switzerland 34.9
Mexico 33
Taiwan 31.1
Sweden 30.5
Singapore 29.6
Japan 28.4
Germany 27.7
Italy 21.7
USA 19.1
UK 17.4
Hing Kong 17.3
Australia 12.1
France 11.6
Spain 10.7
Netherlands 10.2
Canada 6.3

Table 16.3

Rate of Income Tax
15% 30% 47%
Operating income 100 100 100
Corporate tax (Tc = .3) 30 30 30
After tax income 70 70 70
Grossed-up dividend 100 100 100
Income Tax 15 30 47
Tax credit for corporate payment -30 -30 -30
Tax due from shareholder -15 0 17
Available to shareholder 85 70 53

Fig 16.1

Dividends Repurchases Earnings less purchases & Dividends
1980 71.1 8.2 104
1981 82.2 8 98
1982 92.8 12.6 64.2
1983 98.5 11.9 78.7
1984 106.2 34.2 89.8 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
1985 108.4 51.5 42 Repurchases 8.2 8 12.6 11.9 34.2 51.5 53.6 66.3 61.6 61.8 41 30.1 39.1 46.8 50.5 79.2 97.2 136 173.8 160.6 182 140.2 99.1
1986 121.1 53.6 17.4 Earnings less purchases & Dividends 104 98 64.2 78.7 89.8 42 17.4 38.1 80.1 55.8 35.9 15.1 31.4 46.7 143.7 132.2 158.1 132.2 37.2 122.8 193.8 4.5 73.1
1987 131.5 66.3 38.1 Dividends 71.1 82.2 92.8 98.5 106.2 108.4 121.1 131.5 150.4 140.7 113.7 148.9 148 161.1 169.5 189.8 203.8 192 226.5 200.5 211.3 202.1 108.2
1988 150.4 61.6 80.1 Dividends 71.1 82.2 92.8 98.5 106.2 108.4 121.1 131.5 150.4 140.7 113.7 148.9 148 161.1 169.5 189.8 203.8 192 226.5 200.5 211.3 202.1 108.2
1989 140.7 61.8 55.8
1990 113.7 41 35.9
1991 148.9 30.1 15.1
1992 148 39.1 31.4
1993 161.1 46.8 46.7
1994 169.5 50.5 143.7
1995 189.8 79.2 132.2
1996 203.8 97.2 158.1
1997 192 136 132.2
1998 226.5 173.8 37.2
1999 200.5 160.6 122.8
2000 211.3 182 193.8
2001 202.1 140.2 4.5
2002 108.2 99.1 73.1

Table 17.1

Data
Number of shares 1000
Price per share $10
Market value of shares $10,000
Outcomes
Operating income ($) 500 1000 1500 2000
Earning per share ($) 0.5 1 1.5 2
Return on shares(%) 5 10 15 20
Expected Outcome

Table 17.2

Data
Number of shares 500
Price per share $10
Market value of shares $5,000
Market value of debt $5,000
Interest at 10 percent $500
Outcomes
Operating income ($) $500 1000 1500 2000
Interest ($) $500 500 500 500
$0 500 1000 1500
Earning per share ($) $0 1 2 3
Return on shares(%) $0 10 20 30
Expected Outcome

Table 17.3

Operating Income ($)
500 1000 1500 2000
Earnings on two shares ($) 1 2 3 4
Less interest at 10% ($) 1 1 1 1
Net earnings on investment ($) 0 1 2 3
Return on $10 investment (%) 0 10 20 30
Expected Outcome

Table 17.4

If operating income falls from $1500 to $500 Change
No debt: Earnings per share $1.50 $0.50 ($1)
Return 15% 5% -10%
50% debt: Earnings per share $2 0 ($2)
Return 20% 0 -20%

table 18.1

Income Statement of Firm U Income Statement of Firm L
Earnings before interest and taxes $1,000 $1,000
Interest paid to bondholders - 0 80
Pretax income 1,000 920
Tax at 35% 350 322
Net income to stockholders 650 598
Total income to both bondholders and stockholders $0+650=$650 $80+598=$678
Interest tax shield (.35 x interest) $0 $28

Space baby

($ 1,000 s) All Equity 1/2 Debt
EBIT 900 900
Interest Pmt 0 100
Pretax Income 900 800
Taxes @ 35% 315 280
Net Cash Flow 585 520

Table 18.3 a

Book values
Net working capital 10,752 7,144 Long-term debt
21,460 Other long-term liabilities
Long-term assets 86,900 69,048 Equity
Total assets 97,652 97,652 Total value
Market values
Net working capital 10,752 7,144 Long-term debt
PV interest tax shield 2,500 21,460 Other long-term liabilities
Long-term assests 283,373 268,021 Equity
Total assets 296,625 296,625 Total value

Table 18.3 b

Book values
Net working capital 10,752 8,144 Long-term debt
21,460 Other long-term liabilities
Long-term assets 86,900 68,048 Equity
Total assets 97,652 97,652 Total value
Market values
Net working capital 10,752 8,144 Long-term debt
PV interest tax shield 2,850 21,460 Other long-term liabilities
Long-term assests 283,373 267,371 Equity
Total assets 296,975 296,975 Total value
Book values
Net working capital $10,752 $8,144 Long-term debt
21460 Other long-term liabilities
Long-term assets 86900 68048 Equity
Total assets $97,652 $97,652 Total value
Market values
Net working capital $10,752 $8,144 Long-term debt
PV interest tax shield 2850 21460 Other long-term liabilities
Long-term assests 283373 267371 Equity
Total assets $296,975 $296,975 Total value

Fig 18.1

Interest Equity Income
Income before tax $1 $1
Less corporate tax at Tc =.35 0 0.35
Income after corpotare tax 1 0.65
Personal tax at Tp = .35 and Tpe = .105 0.35 0.068
Income after all taxes $0.675 $0.582
Advantage to debt= $ .068

Table 19.1

Latest year Forecast
0 1 2 3 4 5 6 7
1 Sales 83.6 89.5 95.8 102.5 106.6 110.8 115.2 118.7
2 Cost of goods sold 63.1 66.2 71.3 76.3 79.9 83.1 87 90.2
3 EBITDA (1-2) 20.5 23.3 24.5 26.1 26.6 27.7 28.2 28.5
4 Depreciation 3.3 9.9 10.6 11.3 11.8 12.3 12.7 13.1
5 Profit before tax (EBIT) (3-4) 17.2 13.4 13.9 14.8 14.9 15.4 15.5 15.4
6 Tax 6 4.7 4.9 5.2 5.2 5.4 5.4 5.4
7 Profit after tax (5-6) 11.2 8.7 9 9.6 9.7 10 10.1 10
8 Investment in fixed assets / CAPEX -11 -14.6 -15.5 -16.6 -15 -15.6 -16.2 -15.9
9 Investment in working capital -1 -0.5 -0.8 -0.9 -0.5 -0.6 -0.6 -0.4
10 Free cash flow (7+4+8+9) 2.5 3.5 3.3 3.4 5.9 6.1 6 6.8
PV Free cash flow, years 1-6 20.3 (Horizon value in year 6) 113.4
PV Horizon value 67.6
PV of company 87.9
Assumptions
Sales growth (percent) 6.7 7 7 7 4 4 4 3
75.5 74 74.5 74.5 75 75 75.5 76
13.3 13 13 13 13 13 13 13
79.2 79 79 79 79 79 79 79
5 14 14 14 14 14 14 14
Tax rate, percent 35%
WACC 9%
Long term growth forecast 3%
Fixed assets and working capital
Gross fixed assets 95 109.6 125.1 141.8 156.8 172.4 188.6 204.5
Less accumulated depreciation 29 38.9 49.5 60.8 72.6 84.9 97.6 110.7
Net fixed assets 66 70.7 75.6 80.9 84.2 87.5 91 93.8
Depreciation 3.3 9.9 10.6 11.3 11.8 12.3 12.7 13.1
Working capital 11.1 11.6 12.4 13.3 13.9 14.4 15 15.4

Table 19.2

Latest year Forecast
0 1 2 3 4 5 6 7
10 Free cash flow (7+4-8-9) 2.5 3.5 3.2 3.4 5.9 6.1 6 6.8
PV Free cash flow, years 1-6 19.7
Pv Horizon value 64.6
Base-case PV of company 84.3
Debt 51 50 49 48 47 46 45
3.06 3 2.94 2.88 2.82 2.76
1.07 1.05 1.03 1.01 0.99 0.97
PV Interest tax shields 5
APV 89.3
Tax rate, percent 35%
Opportunity cost of capital 9.84%
WACC (To discount horizon value to year 6) 9%
Lomg term growth forecast 3%
Interest rate (years 1-6) 6%
After tax debt service 2.99 2.95 2.91 2.87 2.83 2.79

Table 19.5

Number of outstanding shares (N) 324.5 million
Price per share (P) $40.59
Beta 0.46
Treasury bill rate 1%
20-year Treasury bond rate 5.20%
Cost of debt (rD) 7%
Marginal tax rate 35%

Table 19.-

Current assets 899.1 Current liabilities 820.4
Net property, plant, and equipment 11260.1 Long-term debt 2327
Investments and other assets 256.9 Deferred taxes 1697.2
Other liabilities 1038.7
Shareholders' equity 6532.8
Total 12416.1 Total 12416.1

Fig 19.1

rd r re wacc
0 6 9.84 9.84 9.84
0.1 6 9.84 10.22 9.65
0.2 6 9.84 10.61 9.49
0.25 6 9.84 10.8 9.42
0.3 6 9.84 10.99 9.36
0.4 6 9.84 11.38 9.24
0.5 6 9.84 11.76 9.14
0.6 6 9.84 12.14 9.05
0.67 6 9.84 12.41 9
0.7 6.04 9.84 12.5 8.97
0.8 6.18 9.84 12.77 8.88
0.9 6.31 9.84 13.02 8.79
1 6.43 9.84 13.25 8.71
1.1 6.54 9.84 13.47 8.64
1.2 6.65 9.84 13.67 8.57
1.3 6.74 9.84 13.87 8.51
1.4 6.83 9.84 14.05 8.45
1.5 6.91 9.84 14.24 8.39

Table 20.1

Option Maturity Exercise Price Price of Call Option Price of Put Option
Apr-04 $50 $10.50 $1.25
55 6.7 2.5
60 3.85 4.6
65 1.95 7.7
70 0.9 11.65
Jul-04 $50 $11.30 $2.05
55 7.8 3.6
60 5.15 5.75
65 3.15 8.75
70 1.89 12.4
Jan-05 $50 $13.10 $3.45
55 10 5.2
60 7.3 7.5
65 5.2 10.4
70 3.65 13.75
Lomg term options are called 'LEAPS"

Fig 21.1

-69 -65 -60 -47 -39 -29 -19 -7 7 23 42
63 87 115 148 185 227
Bottom right histogram
Percent price changes: -60 -54 -47 -39 -29 -19 -7 7
Probability %: 0.15 0.69 2.29 5.65 10.72 15.97 18.93 17.95
Percent price changes: 23 42 63 87 115
Probability %: 13.62 8.22 3.9 1.42 0.39

Table 21.1

Changes per interval (%)
Intervals in a Year (1/h) Upside Downside Estimated Option Value
1.5 33.3 -25 8.83
3 22.6 -18.4 6.35
12 12.4 -11.1 6.99
52 5.8 -5.5 7.1
Black-Scholes value= 7.13

Table 21.2

Establishment Industries Digital Organics
INPUTS
Stock price(P) 22 22
Exercise price (EX) 25 25
Interest rate, percent ® 4 4
Maturity in years (t) 5 5
Annual standard deviation, percent () 24 36
Are these rates compounded annually (A) or continuously © ? a a
equivalent continously compounded rate, percent 3.92 3.92
INTERMEDIATE CALCULATIONS:
PV(EX) 20.5482 20.5482
d1=log[P/PV(EX)]/……. 0.3955 0.4873
d2=d1-….. -0.1411 -0.3177
N(d1)= delta 0.6538 0.687
N(d2) 0.4439 0.3754
OPTION VALUES:
Call value = N(d1) * P - N(d2)* PV(EX) 5.26 7.4
Put value = Call value + PV(EX) - S 3.81 5.95

Table 21.3

Year Interest Rate Market Return End-Year Dividend Yield
1984 11 -2.3 5.1
1985 15 44.1 4.6
1986 17.1 52.2 3.9
1987 14.1 -7.9 4.8
1988 11.7 11.9 5.4
1989 17.3 17.4 5.5
1990 15.9 -17.5 6
1991 11.1 34.2 3.8
1992 6.8 -2.3 3.8
1993 5.3 45.4 3.2
1994 5.4 -8.7 4.1
1995 8 20.2 3.9
1996 7.4 14.6 3.6
1997 5.5 12.2 3.6
1998 5 11.6 3.8
1999 4.9 19.3 3.5
2000 4.9 5 3.2
2001 4.8 10.1 3.3
2002 4.8 -8.1 4
2003 4.9 15.9 3.5

Fig 21.1 -2

-69 -65 -60 -54 -47 -39 -29 -19 -7 7 23 42
63 87 115 148 185 227

Table 22.1

Year
1982 1983 1984 1985 1986 1987
After-tax operating cash flow (1) 100 159 295 185 0
Capital investment (2) 450 0 0 0 0 0
Increase in working capital (3) 0 50 100 100 -125 -125
Net cash flow (1)-(2)-(3) -450 60 59 195 310 125
NPV at 20% = - $46.45, or about -$46 million

Table 23.2

Year Ct PV_Ct) at 2.75% Proportion of Total Value [PV(Ct)/V] Proportion of Total Value Time
55 53.53 0.049 0.0449
55 52.1 0.047 0.094
55 50.7 0.046 0.138
1055 946.51 0.858 3.433
V = 1102.83 1 Duration= 3.714 years

Fig 24.2

100 60 40 20
1 11.05 24 0 0
2 7.85 0.76 0.04 0
3 6.47 1.1 0.14 0
4 5.65 1.31 0.26 0
5 5.1 1.44 0.37 0.01
6 4.69 1.53 0.47 0.03
7 4.38 1.59 0.56 0.05
8 4.13 1.63 0.63 0.07
9 3.92 1.65 0.7 0.1
10 3.74 1.67 0.75 0.13
11 3.59 1.68 0.8 0.16
12 3.46 1.69 0.84 0.19
13 3.34 1.7 0.88 0.22
14 3.24 1.7 0.91 0.24
15 3.15 1.7 0.94 0.27
16 3.06 1.69 0.97 0.3
17 2.99 1.69 0.99 0.32
18 2.92 1.69 1.01 0.35
19 2.85 1.68 1.03 0.37
20 2.8 1.67 1.04 0.39
21 2.74 1.67 1.06 0.41
22 2.69 1.66 1.07 0.43
23 2.64 1.66 1.08 0.45
24 2.6 1.65 1.09 0.47
25 2.56 1.64 1.1 0.49

Table 24.2

Ratio AAA AA A BBB BB B CCC
EBIT interest cover 21.4 10.1 6.1 3.7 2.1 0.8 0.1
return on capital % 34.9 21.7 19.4 13.6 11.6 6.6 1
Gross profit margin % 27 22.1 18.6 15.4 15.9 11.9 11.9
Total debt/capital % 22.9 37.7 42.5 48.2 62.6 74.8 87.7

Table 24.3

Percentage Defaulting Within
Rating at Time of Issue 1 Year after issue 5 Years after Issue 10 Years after Issue
AAA 0 0.1 0.5
AAA 0 0.3 0.9
AAA 0.1 0.7 2
BBB 0.4 3.4 6.9
BBB 1.4 12.4 21
BBB 6.1 26.8 35.4
CCC 30.9 53 58.4

Fig 23.1

4/1/86 3.67 8.74
May-86 3.41 9.13
Jun-86 3.54 9.32
Jul-86 3.67 9.51
Aug-86 3.62 9.41
Sep-86 3.95 10.77
Oct-86 4.1 10.73
Nov-86 4.14 11
Dec-86 4.06 10.34
Jan-87 Jan-00 10.09
Feb-87 Jan-00 9.6
Mar-87 3.37 9.18
Apr-87 3.67 8.93
May-87 3.63 8.84
Jun-87 3.91 9.22
Jul-87 3.84 9.83
Aug-87 3.94 10.23
Sep-87 4.13 10.14
Oct-87 4.34 9.42
Nov-87 3.67 9.37
Dec-87 3.76 9.66
Jan-88 3.88 9.39
Feb-88 3.74 9.24
Mar-88 3.48 9.13
Apr-88 3.44 9.39
May-88 3.53 9.48
Jun-88 3.49 9.7
Jul-88 3.57 9.64
Aug-88 3.73 9.94
Sep-88 3.79 9.67
Oct-88 3.45 9.37
Nov-88 3.68 9.79
Dec-88 3.81
Jan-89 3.69
Feb-89 3.5
Mar-89 3.53
Apr-89 3.65
May-89 3.76
Jun-89 3.76
Jul-89 3.41
Aug-89 3.35
Sep-89 3.55
Oct-89 3.54
Nov-89 3.6
Dec-89 3.53
Jan-90 3.69
Feb-90 3.97
Mar-90 4.13
Apr-90 4.26
May-90 4.21
Jun-90 4.24
Jul-90 4.36
Aug-90 4.28
Sep-90 4.35
Oct-90 4.22
Nov-90 4.01
Dec-90 4.09
Jan-91 4.1
Feb-91 4.1
Mar-91 4.08
Apr-91 4.06
May-91 4.09
Jun-91 4.24
Jul-91 4.34
Aug-91 4.24
Sep-91 4.14
Oct-91 4.15
Nov-91 4.23
Dec-91 4.42
Jan-92 4.24
Feb-92 4.2
Mar-92 4.47
Apr-92 4.5
May-92 4.38
Jun-92 4.42
Jul-92 4.71
Aug-92 4.95
Sep-92 4
Oct-92 3.36
Nov-92 3.58
Dec-92 3.62
Jan-93 3.35
Feb-93 3.04
Mar-93 3.01
Apr-93 3.21
May-93 3.25
Jun-93 3.25
Jul-93 3.13
Aug-93 3.09
Sep-93 3.07
Oct-93 2.97
Nov-93 2.92
Dec-93 2.66
Jan-94 2.7
Feb-94 3.06
Mar-94 3.21
Apr-94 3.33
May-94 3.72
Jun-94 3.86
Jul-94 3.94
Aug-94 3.71
Sep-94 3.79
Oct-94 3.86
Nov-94 3.81
Dec-94 3.83
Jan-95 3.87
Feb-95 3.87
Mar-95 3.86
Apr-95 3.78
May-95 3.51
Jun-95 3.71
Jul-95 3.55
Aug-95 3.46
Sep-95 3.58
Oct-95 3.61
Nov-95 3.45
Dec-95 3.44
Jan-96 3.46
Feb-96 3.67
Mar-96
Apr-96
May-96
Jun-96
Jul-96
Aug-96
Sep-96
Oct-96
Nov-96
Dec-96
Jan-97
Feb-97
Mar-97
Apr-97
May-97
Jun-97
Jul-97
Aug-97
Sep-97
Oct-97
Nov-97
Dec-97
Jan-98
Feb-98
Mar-98
Apr-98
May-98
Jun-98
Jul-98
Aug-98
Sep-98
Oct-98
Nov-98
Dec-98
Jan-99
Feb-99
Mar-99
Apr-99
May-99
Jun-99
Jul-99
Aug-99
Sep-99
Oct-99
Nov-99
Dec-99
Jan-00
Feb-00
Mar-00
Apr-00
May-00
Jun-00
Jul-00
Aug-00
Sep-00
Oct-00
Nov-00
Dec-00
Jan-01
Feb-01
Mar-01
Apr-01
May-01
Jun-01
Jul-01
Aug-01
Sep-04
Oct-01
Nov-01

Fig 24.3

Assumptions

Sales growth (%)6.77774443

Costs (% of sales)75.57474.574.5757575.576

Working capital (% of sales)13.313131313131313

Net fixed assest (% of sales)79.279797979797979

Depreciation

(% of net fixed assets)514141414141414

Tax rate, percent35%

WACC9%

Long term growth forecast3%

Fixed assets and working

capital

Gross fixed assets95109.6125.1141.8156.8172.4188.6204.5

Less accumulated depreciation2938.949.560.872.684.997.6110.7

Net fixed assets6670.775.680.984.287.59193.8

Depreciation3.39.910.611.311.812.312.713.1

Working capital11.111.612.413.313.914.41515.4

3.6

Inflation 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
1900 0.61 Inflation 0.61 1.22 1.2 1.79 1.75 0 0.57 3.29 1.11 -1.64 1.67 2.19 1.07 1.99 1.04 1.93 11.6 18.53 20.5 14.79 2.27 -10.65 -2.56 2.63 -0.23 3.85 -1.49 -2.08 -0.97 0.2 -6.03 -9.52 -10.3 0.51 2.03 2.99 1.21 3.1 -2.78 -0.48 0.96 9.72 9.29 3.16 2.11 2.25 18.16 9.01 2.71 -1.8 5.79 5.87 0.88 0.62 -0.5 0.37 2.86 3.02 1.76 1.5 1.48 0.67 1.22 1.65 1.19 1.92 3.35 3.04 4.72 6.11 5.49 3.36 3.41 8.8 12.2 7.01 4.81 6.77 9.03 13.31 12.4 8.94 3.87 3.8 3.95 3.77 1.13 4.41 4.42 4.65 6.11 3.06 2.9 2.75 2.67 2.54 3.32 1.7 1.61 2.68 3.39 1.55 2.38 1.9
1901 1.22
1902 1.2
1903 1.79
1904 1.75
1905 0
1906 0.57
1907 3.29
1908 1.11
1909 -1.64
1910 1.67
1911 2.19
1912 1.07
1913 1.99
1914 1.04
1915 1.93
1916 11.6
1917 18.53
1918 20.5
1919 14.79
1920 2.27
1921 -10.65
1922 -2.56
1923 2.63
1924 -0.23
1925 3.85
1926 -1.49
1927 -2.08
1928 -0.97
1929 0.2
1930 -6.03
1931 -9.52
1932 -10.3
1933 0.51
1934 2.03
1935 2.99
1936 1.21
1937 3.1
1938 -2.78
1939 -0.48
1940 0.96
1941 9.72
1942 9.29
1943 3.16
1944 2.11
1945 2.25
1946 18.16
1947 9.01
1948 2.71
1949 -1.8
1950 5.79
1951 5.87
1952 0.88
1953 0.62
1954 -0.5
1955 0.37
1956 2.86
1957 3.02
1958 1.76
1959 1.5
1960 1.48
1961 0.67
1962 1.22
1963 1.65
1964 1.19
1965 1.92
1966 3.35
1967 3.04
1968 4.72
1969 6.11
1970 5.49
1971 3.36
1972 3.41
1973 8.8
1974 12.2
1975 7.01
1976 4.81
1977 6.77
1978 9.03
1979 13.31
1980 12.4
1981 8.94
1982 3.87
1983 3.8
1984 3.95
1985 3.77
1986 1.13
1987 4.41
1988 4.42
1989 4.65
1990 6.11
1991 3.06
1992 2.9
1993 2.75
1994 2.67
1995 2.54
1996 3.32
1997 1.7
1998 1.61
1999 2.68
2000 3.39
2001 1.55
2002 2.38
2003 1.9

Table 6.1

Period
0 1 2 3 4 5 6 7
1 Capital Investment 10,000 (1,949)
2 Accumulated depreciation 1,583 3,167 4,750 6,333 7,917 9,500 - 0
3 Year-end book value 10,000 8,417 6,833 5,250 3,667 2,083 500 - 0
4 Working capital 550 1,289 3,261 4,890 3,583 2,002 - 0
5 Total book value (3+4) 10,000 8,967 8,122 8,511 8,557 5,666 2,502 - 0
6 Sales 523 12,887 32,610 48,901 35,834 19,717
7 Cost of goods sold 837 7,729 19,552 29,345 21,492 11,830
8 Other Costs 4,000 2,200 1,210 1,331 1,464 1,611 1,772
9 Depreciation 1,583 1,583 1,583 1,583 1,583 1,583
10 Pretax profit (6-7-8-9) (4,000) (4,097) 2,365 10,144 16,509 11,148 4,532 1,449
11 Tax at 35% (1,400) (1,434) 828 3,550 5,778 3,902 1,586 507
12 Profit after tax (10-11) 2,600 (2,663) 1,537 6,595 10,731 7,246 2,946 942

Table 6.2

Period
0 1 2 3 4 5 6 7
1 Sales 523 12,887 32,610 48,901 35,834 19,717
2 Cost of goods sold 837 7,729 19,552 29,345 21,492 11,830
3 Other costs 4,000 2,200 1,210 1,331 1,464 1,611 1,772
4 Tax on operations (1,400) (1,434) 828 3,550 5,778 3,902 1,586
5 Cash flow from operations (1-2-3-4) (2,600) (1,080) 3,120 8,177 12,314 8,829 4,529
6 Change in working capital (550) (739) (1,972) (1,629) 1,307 1,581 2,002
7 Capital investment and disposal (10,000) 1,442
8 Net cash flow (5+6+7) (12,600) (1,630) 2,381 6,205 10,685 10,136 6,110 3,444
9 Present value at 20% (12,600) (1,358) 1,654 3,591 5,153 4,074 2,046 961
Net Present value= +3520 (sum of 9)

Table 6.4

Tax Depreciation Schedules by Recovery-Period Class
Year(s) 3-Year 5-Year 7-Year 10-Year 15-Year 20-Year
1 33.33 20 14.29 10 5 3.75
2 44.45 32 24.49 18 9.5 7.22
3 14.81 19.2 17.49 14.4 8.55 6.68
4 7.41 11.52 12.49 11.52 7.7 6.18
5 11.52 8.93 9.22 6.93 5.71
6 5.76 8.92 7.37 6.23 5.28
7 8.93 6.55 5.9 4.89
8 4.45 6.55 5.9 4.52
9 6.56 5.9 4.46
10 6.55 5.9 4.46
11 3.29 5.9 4.46
12 5.9 4.46
13 5.91 4.46
14 5.9 4.46
15 5.91 4.46
16 2.99 4.46
17-20 4.46
21 2.23

Table 6.5

Period
0 1 2 3 4 5 6 7
1 Sales 523 12,887 32,610 48,901 35,834 19,717
2 Cost of goods sold 837 7,729 19,552 29,345 21,492 11,830
3 Other Costs 4,000 2,200 1,210 1,331 1,464 1,611 1,772
4 Tax depreciation 2,000 3,200 1,920 1,152 576
5 Pretax profit (1-2-3-4) (4,000) (4,514) 748 9,807 16,940 11,579 5,539 1,949
6 Taxes at 35% (1,400) (1,580) 262 3,432 5,929 4,053 1,939 682

Table 6.6

Period
0 1 2 3 4 5 6 7
1 Sales 523 12,887 32,610 48,901 35,834 19,717
2 Cost of goods sold 837 7,729 19,552 29,345 21,492 11,830
3 Other costs 4,000 2,200 1,210 1,331 1,464 1,611 1,772
4 Tax (1,400) (1,580) 262 3,432 5,929 4,053 1,939 682
5 Cash flow from operations (1-2-3-4) (2,600) (934) 3,686 8,295 12,163 8,678 4,176 (682)
6 Change in working capital (550) (739) (1,972) (1,629) 1,307 1,581 2,002
7 Capital investment and disposal (10,000) 1,949
8 Net cash flow (5+6+7) (12,600) (1,484) 2,947 6,323 10,534 9,985 5,757 3,269
9 Present Value= +3802 (sum of 9) (12,600) (1,237) 2,047 3,659 5,080 4,013 1,928 912
Net present value= +3802 (sum of 9)

7.1

Plotting data Fig 7.1
Equities Bonds Bills 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
1900 1.00 1.00 1.00 Equities 1.00 1.24 1.47 1.55 1.33 1.70 2.08 2.16 1.53 2.24 2.69 2.46 2.60 2.79 2.57 2.43 3.37 3.59 2.91 3.48 4.20 3.45 3.85 5.03 5.18 6.58 8.44 9.24 12.30 17.06 14.58 10.46 5.87 5.29 8.34 8.70 12.53 16.58 10.84 13.89 14.29 13.26 11.95 13.86 17.78 21.58 29.78 28.02 29.01 29.64 35.67 46.17 55.75 63.24 63.61 95.48 119.55 129.40 116.09 168.32 190.44 192.01 244.70 219.72 265.71 308.62 353.13 322.38 414.85 473.70 421.87 422.01 496.62 585.91 477.42 341.89 473.43 599.30 583.50 637.61 800.60 1,070.16 1,030.03 1,222.75 1,509.69 1,555.69 2,062.29 2,394.21 2,448.67 2,888.00 3,730.54 3,499.96 4,697.09 5,118.31 5,695.73 5,692.05 7,766.72 9,414.13 12,359.92 15,255.97 18,850.17 16,796.60 14,953.34 11,834.11 15,578.51
1901 1.24 1.04 1.04 Bonds 1.00 1.04 1.07 1.09 1.13 1.15 1.19 1.22 1.23 1.28 1.31 1.35 1.40 1.45 1.49 1.55 1.60 1.65 1.70 1.65 1.66 1.76 1.98 2.05 2.17 2.31 2.44 2.63 2.86 2.86 2.96 3.10 2.94 3.43 3.43 3.77 3.96 4.26 4.27 4.50 4.77 5.06 5.11 5.27 5.38 5.53 6.13 6.12 5.96 6.16 6.56 6.57 6.31 6.38 6.61 7.09 7.00 6.61 7.10 6.67 6.52 7.41 7.49 8.00 8.10 8.38 8.44 8.75 7.95 7.93 7.52 8.43 9.55 10.09 9.98 10.42 11.37 13.28 13.19 13.03 12.87 12.36 12.59 17.68 17.79 20.55 26.91 33.51 32.60 35.75 42.23 44.84 53.49 57.80 68.34 63.03 82.99 82.22 95.26 107.70 98.05 119.11 123.51 145.54 147.65
1902 1.47 1.07 1.09 Bills 1.00 1.04 1.09 1.14 1.20 1.25 1.31 1.38 1.47 1.53 1.59 1.67 1.73 1.81 1.91 2.01 2.08 2.14 2.24 2.37 2.50 2.70 2.88 3.02 3.18 3.31 3.44 3.55 3.66 3.79 3.98 4.07 4.11 4.15 4.17 4.17 4.18 4.19 4.20 4.20 4.20 4.20 4.20 4.21 4.23 4.24 4.26 4.27 4.29 4.33 4.38 4.43 4.50 4.57 4.65 4.69 4.77 4.88 5.04 5.12 5.27 5.41 5.52 5.67 5.85 6.06 6.29 6.59 6.87 7.23 7.70 8.21 8.57 8.90 9.51 10.27 10.87 11.42 12.01 12.87 14.20 15.80 18.12 20.04 21.80 23.95 25.79 27.38 28.88 30.71 33.29 35.89 37.89 39.22 40.36 41.93 44.28 46.59 49.04 51.42 53.82 57.00 59.18 60.15 60.77
1903 1.55 1.09 1.14
1904 1.33 1.13 1.20
1905 1.70 1.15 1.25
1906 2.08 1.19 1.31
1907 2.16 1.22 1.38
1908 1.53 1.23 1.47
1909 2.24 1.28 1.53
1910 2.69 1.31 1.59
1911 2.46 1.35 1.67
1912 2.60 1.40 1.73
1913 2.79 1.45 1.81
1914 2.57 1.49 1.91
1915 2.43 1.55 2.01
1916 3.37 1.60 2.08
1917 3.59 1.65 2.14
1918 2.91 1.70 2.24
1919 3.48 1.65 2.37
1920 4.20 1.66 2.50
1921 3.45 1.76 2.70
1922 3.85 1.98 2.88
1923 5.03 2.05 3.02
1924 5.18 2.17 3.18
1925 6.58 2.31 3.31
1926 8.44 2.44 3.44
1927 9.24 2.63 3.55
1928 12.30 2.86 3.66
1929 17.06 2.86 3.79
1930 14.58 2.96 3.98
1931 10.46 3.10 4.07
1932 5.87 2.94 4.11
1933 5.29 3.43 4.15
1934 8.34 3.43 4.17
1935 8.70 3.77 4.17
1936 12.53 3.96 4.18
1937 16.58 4.26 4.19
1938 10.84 4.27 4.20
1939 13.89 4.50 4.20
1940 14.29 4.77 4.20
1941 13.26 5.06 4.20
1942 11.95 5.11 4.20
1943 13.86 5.27 4.21
1944 17.78 5.38 4.23
1945 21.58 5.53 4.24
1946 29.78 6.13 4.26
1947 28.02 6.12 4.27
1948 29.01 5.96 4.29
1949 29.64 6.16 4.33
1950 35.67 6.56 4.38
1951 46.17 6.57 4.43
1952 55.75 6.31 4.50
1953 63.24 6.38 4.57
1954 63.61 6.61 4.65
1955 95.48 7.09 4.69
1956 119.55 7.00 4.77
1957 129.40 6.61 4.88
1958 116.09 7.10 5.04
1959 168.32 6.67 5.12
1960 190.44 6.52 5.27
1961 192.01 7.41 5.41
1962 244.70 7.49 5.52
1963 219.72 8.00 5.67
1964 265.71 8.10 5.85
1965 308.62 8.38 6.06
1966 353.13 8.44 6.29
1967 322.38 8.75 6.59
1968 414.85 7.95 6.87
1969 473.70 7.93 7.23
1970 421.87 7.52 7.70
1971 422.01 8.43 8.21
1972 496.62 9.55 8.57
1973 585.91 10.09 8.90
1974 477.42 9.98 9.51
1975 341.89 10.42 10.27
1976 473.43 11.37 10.87
1977 599.30 13.28 11.42
1978 583.50 13.19 12.01
1979 637.61 13.03 12.87
1980 800.60 12.87 14.20
1981 1,070.16 12.36 15.80
1982 1,030.03 12.59 18.12
1983 1,222.75 17.68 20.04
1984 1,509.69 17.79 21.80
1985 1,555.69 20.55 23.95
1986 2,062.29 26.91 25.79
1987 2,394.21 33.51 27.38
1988 2,448.67 32.60 28.88
1989 2,888.00 35.75 30.71
1990 3,730.54 42.23 33.29
1991 3,499.96 44.84 35.89
1992 4,697.09 53.49 37.89
1993 5,118.31 57.80 39.22
1994 5,695.73 68.34 40.36
1995 5,692.05 63.03 41.93
1996 7,766.72 82.99 44.28
1997 9,414.13 82.22 46.59
1998 12,359.92 95.26 49.04
1999 15,255.97 107.70 51.42
2000 18,850.17 98.05 53.82
2001 16,796.60 119.11 57.00
2002 14,953.34 123.51 59.18
2003 11,834.11 145.54 60.15
2004 15,578.51 147.65 60.77

7.2

Plotting data Fig 7.2
Equities Bonds Bills 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 0.916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
1900 1.00 1.00 1.00 Equities 1.00 1.23 1.44 1.51 1.27 1.59 1.95 2.01 1.38 2.00 2.44 2.20 2.27 2.41 2.18 2.04 2.77 2.64 1.81 1.80 1.89 1.52 1.89 2.54 2.55 3.24 4.01 4.45 6.05 8.47 7.23 5.52 3.42 3.44 5.39 5.52 7.72 10.08 6.39 8.43 8.71 8.01 6.58 6.98 8.68 10.32 13.92 11.09 10.53 10.48 12.84 15.71 17.92 20.14 20.14 30.37 37.89 39.87 34.72 49.47 55.15 54.79 69.36 61.53 73.20 84.02 94.32 83.31 104.05 113.45 95.22 90.29 102.80 117.28 87.84 56.06 72.54 87.61 79.90 80.08 88.74 105.53 93.24 106.56 126.75 125.65 160.51 184.26 180.50 203.87 251.65 222.51 289.74 306.82 332.30 323.44 430.40 504.92 651.82 791.78 952.74 821.14 719.86 556.47 719.03
1901 1.23 1.03 1.04 Bonds 1.00 1.03 1.05 1.06 1.07 1.08 1.11 1.14 1.11 1.15 1.19 1.21 1.22 1.25 1.26 1.30 1.32 1.21 1.06 0.85 0.75 0.77 0.97 1.04 1.07 1.14 1.16 1.27 1.41 1.42 1.47 1.64 1.71 2.23 2.22 2.39 2.44 2.59 2.52 2.73 2.91 3.06 2.81 2.66 2.63 2.65 2.87 2.42 2.16 2.18 2.36 2.23 2.03 2.03 2.09 2.25 2.22 2.04 2.12 1.96 1.89 2.12 2.12 2.24 2.23 2.28 2.25 2.26 1.99 1.90 1.70 1.80 1.98 2.02 1.84 1.71 1.74 1.94 1.81 1.64 1.43 1.22 1.14 1.54 1.49 1.66 2.09 2.58 2.40 2.52 2.85 2.85 3.30 3.46 3.99 3.58 4.60 4.41 5.02 5.59 4.96 5.82 5.95 6.84 6.81
1902 1.44 1.05 1.07 Bills 1.00 1.04 1.07 1.11 1.15 1.18 1.22 1.29 1.32 1.37 1.44 1.49 1.51 1.57 1.62 1.68 1.71 1.58 1.39 1.22 1.13 1.18 1.42 1.52 1.56 1.63 1.63 1.71 1.80 1.89 1.97 2.15 2.40 2.70 2.69 2.65 2.57 2.55 2.48 2.55 2.56 2.54 2.31 2.12 2.06 2.03 1.99 1.69 1.56 1.53 1.58 1.51 1.44 1.46 1.47 1.49 1.51 1.50 1.51 1.50 1.52 1.54 1.57 1.59 1.61 1.65 1.68 1.70 1.72 1.73 1.74 1.76 1.77 1.78 1.75 1.68 1.67 1.67 1.64 1.62 1.57 1.56 1.64 1.75 1.83 1.93 2.01 2.11 2.13 2.17 2.25 2.28 2.34 2.35 2.35 2.38 2.45 2.50 2.59 2.67 2.72 2.79 2.85 2.83 2.80
1903 1.51 1.06 1.11
1904 1.27 1.07 1.15
1905 1.59 1.08 1.18
1906 1.95 1.11 1.22
1907 2.01 1.14 1.29
1908 1.38 1.11 1.32
1909 2.00 1.15 1.37
1910 2.44 1.19 1.44
1911 2.20 1.21 1.49
1912 2.27 1.22 1.51
1913 2.41 1.25 1.57
1914 2.18 1.26 1.62
1915 2.04 1.30 1.68
0.916 2.77 1.32 1.71
1917 2.64 1.21 1.58
1918 1.81 1.06 1.39
1919 1.80 0.85 1.22
1920 1.89 0.75 1.13
1921 1.52 0.77 1.18
1922 1.89 0.97 1.42
1923 2.54 1.04 1.52
1924 2.55 1.07 1.56
1925 3.24 1.14 1.63
1926 4.01 1.16 1.63
1927 4.45 1.27 1.71
1928 6.05 1.41 1.80
1929 8.47 1.42 1.89
1930 7.23 1.47 1.97
1931 5.52 1.64 2.15
1932 3.42 1.71 2.40
1933 3.44 2.23 2.70
1934 5.39 2.22 2.69
1935 5.52 2.39 2.65
1936 7.72 2.44 2.57
1937 10.08 2.59 2.55
1938 6.39 2.52 2.48
1939 8.43 2.73 2.55
1940 8.71 2.91 2.56
1941 8.01 3.06 2.54
1942 6.58 2.81 2.31
1943 6.98 2.66 2.12
1944 8.68 2.63 2.06
1945 10.32 2.65 2.03
1946 13.92 2.87 1.99
1947 11.09 2.42 1.69
1948 10.53 2.16 1.56
1949 10.48 2.18 1.53
1950 12.84 2.36 1.58
1951 15.71 2.23 1.51
1952 17.92 2.03 1.44
1953 20.14 2.03 1.46
1954 20.14 2.09 1.47
1955 30.37 2.25 1.49
1956 37.89 2.22 1.51
1957 39.87 2.04 1.50
1958 34.72 2.12 1.51
1959 49.47 1.96 1.50
1960 55.15 1.89 1.52
1961 54.79 2.12 1.54
1962 69.36 2.12 1.57
1963 61.53 2.24 1.59
1964 73.20 2.23 1.61
1965 84.02 2.28 1.65
1966 94.32 2.25 1.68
1967 83.31 2.26 1.70
1968 104.05 1.99 1.72
1969 113.45 1.90 1.73
1970 95.22 1.70 1.74
1971 90.29 1.80 1.76
1972 102.80 1.98 1.77
1973 117.28 2.02 1.78
1974 87.84 1.84 1.75
1975 56.06 1.71 1.68
1976 72.54 1.74 1.67
1977 87.61 1.94 1.67
1978 79.90 1.81 1.64
1979 80.08 1.64 1.62
1980 88.74 1.43 1.57
1981 105.53 1.22 1.56
1982 93.24 1.14 1.64
1983 106.56 1.54 1.75
1984 126.75 1.49 1.83
1985 125.65 1.66 1.93
1986 160.51 2.09 2.01
1987 184.26 2.58 2.11
1988 180.50 2.40 2.13
1989 203.87 2.52 2.17
1990 251.65 2.85 2.25
1991 222.51 2.85 2.28
1992 289.74 3.30 2.34
1993 306.82 3.46 2.35
1994 332.30 3.99 2.35
1995 323.44 3.58 2.38
1996 430.40 4.60 2.45
1997 504.92 4.41 2.50
1998 651.82 5.02 2.59
1999 791.78 5.59 2.67
2000 952.74 4.96 2.72
2001 821.14 5.82 2.79
2002 719.86 5.95 2.85
2003 556.47 6.84 2.83
2004 719.03 6.81 2.80

7.3

Denmark 4.3
Belgium 4.7 Denmark Belgium Switzerland Spain Canada Ireland Germany UK Average Netherlands USA Sweden South Africa Australia France Japan Italy
Switzerland 5.1 4.3 4.7 5.1 5.3 5.8 5.9 5.9 6.3 6.4 6.6 7.6 8.1 8.2 8.6 9.3 10 10.7
Spain 5.3
Canada 5.8
Ireland 5.9
Germany 5.9
UK 6.3
Average 6.4
Netherlands 6.6
USA 7.6
Sweden 8.1
South Africa 8.2
Australia 8.6
France 9.3
Japan 10
Italy 10.7

7.4

1900 24.2%
1901 18.0%
1902 6.1% 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
1903 -14.6% 24.2% 18.0% 6.1% -14.6% 28.1% 22.1% 4.1% -29.3% 46.8% 20.0% -8.5% 5.7% 7.2% -7.8% -5.5% 38.8% 6.4% -18.9% 19.6% 20.6% -17.9% 11.6% 30.6% 3.0% 27.0% 28.3% 9.5% 33.1% 38.7% -14.6% -28.3% -43.9% -9.8% 57.6% 4.4% 44.0% 32.3% -34.6% 28.2% 2.9% -7.2% -9.9% 16.0% 28.3% 21.4% 38.0% -5.9% 3.6% 2.2% 20.3% 29.4% 20.8% 13.4% 0.6% 50.1% 25.2% 8.2% -10.3% 45.0% 13.1% 0.8% 27.4% -10.2% 20.9% 16.2% 14.4% -8.7% 28.7% 14.2% -10.9% 0.0% 17.7% 18.0% -18.5% -28.4% 38.5% 26.6% -2.6% 9.3% 25.6% 33.7% -3.8% 18.7% 23.5% 3.1% 32.6% 16.1% 2.3% 17.9% 29.2% -6.2% 34.2% 9.0% 11.3% -0.1% 36.5% 21.2% 31.3% 23.4% 23.6% -10.9% -11.0% -20.9%
1904 28.1%
1905 22.1%
1906 4.1%
1907 -29.3%
1908 46.8%
1909 20.0%
1910 -8.5%
1911 5.7%
1912 7.2%
1913 -7.8%
1914 -5.5%
1915 38.8%
1916 6.4%
1917 -18.9%
1918 19.6%
1919 20.6%
1920 -17.9%
1921 11.6%
1922 30.6%
1923 3.0%
1924 27.0%
1925 28.3%
1926 9.5%
1927 33.1%
1928 38.7%
1929 -14.6%
1930 -28.3%
1931 -43.9%
1932 -9.8%
1933 57.6%
1934 4.4%
1935 44.0%
1936 32.3%
1937 -34.6%
1938 28.2%
1939 2.9%
1940 -7.2%
1941 -9.9%
1942 16.0%
1943 28.3%
1944 21.4%
1945 38.0%
1946 -5.9%
1947 3.6%
1948 2.2%
1949 20.3%
1950 29.4%
1951 20.8%
1952 13.4%
1953 0.6%
1954 50.1%
1955 25.2%
1956 8.2%
1957 -10.3%
1958 45.0%
1959 13.1%
1960 0.8%
1961 27.4%
1962 -10.2%
1963 20.9%
1964 16.2%
1965 14.4%
1966 -8.7%
1967 28.7%
1968 14.2%
1969 -10.9%
1970 0.0%
1971 17.7%
1972 18.0%
1973 -18.5%
1974 -28.4%
1975 38.5%
1976 26.6%
1977 -2.6%
1978 9.3%
1979 25.6%
1980 33.7%
1981 -3.8%
1982 18.7%
1983 23.5%
1984 3.1%
1985 32.6%
1986 16.1%
1987 2.3%
1988 17.9%
1989 29.2%
1990 -6.2%
1991 34.2%
1992 9.0%
1993 11.3%
1994 -0.1%
1995 36.5%
1996 21.2%
1997 31.3%
1998 23.4%
1999 23.6%
2000 -10.9%
2001 -11.0%
2002 -20.9%

Fig 8.1

Price Change % Coca Cola Normal
-8.5615 0.0007 0
-8.1177 0 0
-7.6739 0.0002 0
-7.23 0 0
-6.7862 0.0002 0
-6.3424 0.0005 0.0001
-5.8986 0.0009 0.0002
-5.4548 0.0018 0.0005
-5.011 0.0007 0.0011
-4.5672 0.0023 0.0023
-4.1233 0.0016 0.0044
-3.6795 0.0048 0.008
-32357 0.0071 0.0136
-2.7919 0.0127 0.0217
-2.3481 0.0219 0.0325
-1.9043 0.032 0.0457
-1.4604 0.0519 0.0605
-1.0166 0.0807 0.0752
-0.5728 0.1067 0.0878
-0.129 0.1212 0.0964
0.3148 0.1309 0.0995
0.7586 0.1088 0.0964
1.2025 0.0926 0.0878
1.6463 0.0735 0.0752
2.0901 0.0489 0.0605
2.5339 0.03 0.0457
2.9777 0.0228 0.0325
3.4215 0.0134 0.0217
3.8654 0.0097 0.0136
4.3092 0.0055 0.008
4.753 0.0041 0.0044
5.1968 0.0037 0.0023
5.6406 0.0021 0.0011
6.0844 0.0014 0.0005
6.5283 0.0007 0.0002
6.9721 0.0009 0.0001
7.4159 0.0002 0
7.8597 0.0005 0
8.3035 0.0007 0
8.7473 0.0002 0

Fig 8.4

Std Dev r
18.2 10
17.88 10.25
17.65 10.5
17.51 10.75
17.48 11
17.53 11.25
17.69 11.5
17.94 11.75
18.27 12
18.69 12.25
19.2 12.5
19.77 12.75
20.41 13
21.12 13.25
21.87 13.5
22.68 13.75
23.53 14
24.43 14.25
25.35 14.5
26.31 14.75
27.3 15

Fig 8.9

Investor Beta Risk Premium, %
1 0.49 9
2 0.63 10
3 0.75 10
4 0.85 12
5 0.93 12
6 1.05 13
7 1.15 14
8 1.22 14
9 1.35 15
10 1.53 15
Mkt portfolio 1 12.2

Fig 8.10 A

Investor Beta Risk premium, %
1 0.49 11
2 0.63 13
3 0.75 15
4 0.85 16
5 0.93 17
6 1.06 18
7 1.17 20
8 1.24 21
9 1.37 22
10 1.53 25
Mkt portfolio 1 17.9

Fig 8.10 B

Investor Beta Risk premium, %
1 0.5 6
2 0.63 6
3 0.75 6
4 0.85 7
5 0.95 8
6 1.03 8
7 1.11 9
8 1.18 8
9 1.3 8
10 1.52 6
Mkt portfolio 1 6.8

Fig 8.11

1926 1 1 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
1927 0.97 0.94 1 0.97 1.01 0.72 0.69 0.72 0.75 1.12 1.41 1.59 1.83 1.58 1.76 1.85 1.88 1.79 1.89 2.46 2.88 3.64 3.49 3.23 2.94 3.03 3.09 2.94 2.75 2.71 2.66 2.49 2.47 2.41 2.76 2.91 2.84 2.86 2.59 2.43 2.39 2.94 3.02 4.54 5.65 4.86 4.3 4.57 4.01 3.05 3.03 3.49 3.97 4.89 5.58 6.72 7.1 7.61 8.28 9.44 8.63 8.55 7.69 6.89 7.36 6.47 5.54 6.45 6.96 7.48 7.51 6.98 6.85 6.6 5.06 5.65 5.33 6.85 7.14 9.15
1928 1.01 0.86 1 0.94 0.86 0.97 0.84 0.71 0.75 0.087 0.61 0.65 0.84 0.8 0.69 0.57 0.56 0.63 0.76 1.02 1.19 1.35 1.39 1.51 1.56 1.51 1.91 1.82 1.87 1.73 2.16 2.27 2.22 2.08 2.34 2.36 2.24 2.36 2.61 3.01 3.3 3.49 3.46 3.14 3.71 3.31 4.03 3.57 3.65 4.3 4.7 5.11 6.34 6.83 6.86 6.71 5.06 6.31 7.14 8.48 10.06 10.18 11.2 10.91 12.42 11.72 10.47 8.89 10.94 12.8 12.79 12.35 12.38 13.75 11.69 7.08 8.59 10.94 11.34 13.06
1929 0.72 0.97
1930 0.69 0.84
1931 0.72 0.71
1932 0.75 0.75
1933 1.12 0.087
1934 1.41 0.61
1935 1.59 0.65
1936 1.83 0.84
1937 1.58 0.8
1938 1.76 0.69
1939 1.85 0.57
1940 1.88 0.56
1941 1.79 0.63
1942 1.89 0.76
1943 2.46 1.02
1944 2.88 1.19
1945 3.64 1.35
1946 3.49 1.39
1947 3.23 1.51
1948 2.94 1.56
1949 3.03 1.51
1950 3.09 1.91
1951 2.94 1.82
1952 2.75 1.87
1953 2.71 1.73
1954 2.66 2.16
1955 2.49 2.27
1956 2.47 2.22
1957 2.41 2.08
1958 2.76 2.34
1959 2.91 2.36
1960 2.84 2.24
1961 2.86 2.36
1962 2.59 2.61
1963 2.43 3.01
1964 2.39 3.3
1965 2.94 3.49
1966 3.02 3.46
1967 4.54 3.14
1968 5.65 3.71
1969 4.86 3.31
1970 4.3 4.03
1971 4.57 3.57
1972 4.01 3.65
1973 3.05 4.3
1974 3.03 4.7
1975 3.49 5.11
1976 3.97 6.34
1977 4.89 6.83
1978 5.58 6.86
1979 6.72 6.71
1980 7.1 5.06
1981 7.61 6.31
1982 8.28 7.14
1983 9.44 8.48
1984 8.63 10.06
1985 8.55 10.18
1986 7.69 11.2
1987 6.89 10.91
1988 7.36 12.42
1989 6.47 11.72
1990 5.54 10.47
1991 6.45 8.89
1992 6.96 10.94
1993 7.48 12.8
1994 7.51 12.79
1995 6.98 12.35
1996 6.85 12.38
1997 6.6 13.75
1998 5.06 11.69
1999 5.65 7.08
2000 5.33 8.59
2001 6.85 10.94
2002 7.14 11.34
2003 9.15 13.06

Table 9.1

Beta equity Standard Error
Burlington Northern & Santa Fe 0.53 0.2
CSX Transportation 0.58 0.23
Norfolk Southern 0.47 0.28
Union Pacific Corp 0.47 0.19
Industry portfolio 0.49 0.18

Table 9.2

Ratio of Standard Deviations Correlation Coefficient Beta
Brazil 6.29 0.134 0.84
Egypt 5.67 0.104 0.59
India 6.1 0.173 1.05
Indonesia 7.29 0.176 1.28
Mexioco 3.92 0.131 0.51
Poland 3.21 0.264 0.85
Thailand 6.32 0.276 1.74
South Africa 4.04 0.211 0.85

TABLE 10.1

TABLE 10.1 Preliminary cash-flow forecasts
for Otabai's electric motor project
(figures in billions of yen)
Year 0 Years 1-10
Investment 15.00
Revenue 37.50
Variable cost 30.00
Fixed cost 3.00
Depreciation 1.50
Pretax Profit 3.00
Tax 1.05
Net profit 1.95
Operating cash flow 3.45
Net cash flow (15.00) 3.45
NPV 6.20
Notes:
Market size (million) 1.00
Market share % 0.10
Price per unit (yen) 375,000
Variable costs (yen) 300,000
Tax rate % 35
Cost of capital % 10

TABLE 10.2

TABLE 10.2 To undertake a sensitivity analysis of the electric scooter project, we set each variable in turn
to its most pessimistic or optimistic value and recalculate the NPV of the project
Operating cash flow (yen bn) =
Range net income + depreciation tax shield NPV (billions of yen)
Variable Pessimistic Expected Optimistic Pessimistic Expected Optimistic Pessimistic Expected Optimistic
Market size (million) 0.9 1 1.1 3.0 3.5 3.9 3.2 6.2 9.2
Market share 0.04 0.10 0.16 0.5 3.5 6.4 -11.8 6.2 24.2
Unit price (yen) 350,000 375,000 380,000 1.8 3.5 3.8 -3.8 6.2 8.2
Unit variable cost (yen) 360,000 300,000 275,000 -0.5 3.5 5.1 -17.8 6.2 16.2
Fixed cost (bns of yen) 4 3 2 2.8 3.5 4.1 2.2 6.2 10.2

TABLE 10.3

TABLE 10.3 How the NPV of the electric scooter project would be affected
by higher oil prices and a world recession
Cash Flows, Years 1- 10, billions of yen
Base Case High Oil Prices and Recession Case
Revenue 37.5 44.9
Variable cost 30 35.9
Fixed cost 3 3.5
Depreciation 1.5 1.5
Pretax Profit 3 4.0
Tax 1.05 1.4
Net profit 1.95 2.6
Net cash flow 3.45 4.1
PV of cash flows 21.2 25.1
NPV 6.2 10.1
Assumptions
Base Case High Oil Prices and Recession Case
Market size (million) 1 0.8
Market share 0.10 0.13
Unit price (yen) 375,000 431,300
Unit variable cost (yen) 300,000 345,000
Fixed cost (bns of yen) 3 3.5

TABLE 10.4

TABLE 10.4 NPV of electric scooter project under different assumptions about unit sales
(figures in billions of yen excepted as noted)
Outflows
Year 0 Years 1-10
Unit Sales, Revenues Variable Fixed PV PV
Thousands Years 1-10 Investment Costs Costs Taxes Inflows Outflows NPV
0 0 15 0 3 -2.25 0.0 19.6 -19.6
100 37.5 15 30 3 1.5 230.4 227.0 3.4
200 75.0 15 60 3 5.25 460.8 434.4 26.5
Notes:
Price per unit (yen) 375,000
Variable costs (yen) 300,000
Fixed costs (bns of yen) 3
Depreciation (bns of yen) 1.5
Tax rate % 50
Cost of capital % 10
TABLE 10.5 The electric scooter project's accounting profit under different assumptions about unit sales
(figures in billions of yen excepted as noted)
Unit Sales, Revenues Variable Fixed Total Profit
Thousands Years 1-10 Costs Costs Depreciation Taxes Costs after Tax
0 0 0 3 1.5 -2.25 2.25 -2.25
100 37.5 30 3 1.5 1.5 36.00 1.50
200 75.0 60 3 1.5 5.25 69.75 5.25

Table 10.1 (2)

Year 0 Year 1-10
Investment 15
1. Revenue 37.5
2. Variabke cost 30
3. Fixed cost 3
4. Depreciation 1.5
5. Pretax profit (1-2-3-4) 3
6. Tax 1.5
7. Net Profit (5-6) 1.5
8. Operating cash flow (4+7) 3
Net Cash Flow -15 3

Table 10.2 (2)

Range NPV, Billions
Variable Pessimistic Expected Optimistic Pessimistic Expected Optimistic
Market Size .9 million 1 million 1.1 million 1.1 3.4 5.7
Market share 0.04 0.1 0.16 -10.4 3.4 17.3
Unit price 350000 375000 380000 -4.2 3.4 5
Unit variable cost 360000 300000 275000 -15 3.4 11.1
Fixed cost 4 billion 3 billion 2 billion 0.4 3.4 6.5

Table 10.3 (2)

Cash Flows, Years 1-10, Billions
Base Case High Oil Prices and Recession Case
1 Revenue 37.5 44.9
2 Variable cost 30.0 35.9
3 Fixed cost 3.0 3.5
4 Depreciation 1.5 1.5
5 Pretax profit (1-2-3-4) 3.0 4.0
6 Tax 1.5 2.0
7 Net profit (5-6) 1.5 2.0
8 Net cash flow (4+7) 3.0 3.5
PV of cash flows 18.4 21.5
NPV 3.4 6.5
Assumptions
Base Case High Oil Prices and Recession Case
Market size 1 million .8 million
Market share 0.1 0.13
Unit Price 375000 431300
Unit variable cost 300000 345000
Fixed cost 3 billion 3.5 billion

Table 10.4 (2)

Inflows Outflows
Year 0 Years 1-10
Unit Sales, Thousands Revenue, Years 1-10 Investment Variable Costs Fixed Costs Taxes PV Inflows PV Outflows NPV
0 0 15 0 3 -2.25 0 19.6 -19.6
100 37.5 15 30 3 1.5 230.4 227 3.4
200 75 15 60 3 5.25 460.8 434.4 26.4

Table 10.5

Unit Sales, Thousands Revenue Variable Costs Fixed Costs Depreciation Taxes Total Costs Profit after Tax
0 0 0 3 1.5 -2.25 2.25 -2.25
100 37.5 30 3 1.5 1.5 36 1.5
200 75 60 3 1.5 5.25 69.75 5.25

Table 10.6

Year 0 Year 1-10
Investment 15.00
1. Revenue 37.50
2. Variable cost 12.00
3. Fixed cost 19.00
4. Depreciation 1.50
5. Pretax profit (1-2-3-4) 5.00
6.Tax 2.50
7. Net profit (5-6) 2.50
8. Operating cash flow (4+7) 4.00
Net cash flow (15.00) 4.00

Table 10.7

Year
0 1 2 3 4 17-May
Investment:
Land 30
Construction 20 30 10
Operations:
Rental 12 12 12
Share of retail sales 24 24 24
Operating and maintenance costs 2 4 4 10 10 10
Real estate taxes 2 2 3 4 4 4

Table 11.1

Year 0 Year 1 Year 2 Year 3-10
Investment 100 5 - 10
Production, Millions of pounds per year 0 0 40 80
Spread, dollars per pound 1.2 1.2 1.2 1.2
Net revenues 0 0 48 96
Production costs 0 0 30 30
Transport 0 0 4 8
Other costs 0 20 20 20
Cash flow -100 -20 -6 38
NPV (at r=8%) = $63.6 million

Table 11.2

Year 0 Year 1 Year 2 Year 3-10
Investment 100 5 - 10
Production, Millions of pounds per year 0 0 40 80
Spread, dollars per pound 0.95 0.95 0.95 0.95
Net revenues 0 0 38 76
Production costs 0 0 30 30
Transport 0 0 0 0
Other costs 0 20 20 20
Cash flow -100 -20 -12 26
NPV (at r=8%) = 0

Table 11.3

Year
0 1 2 3 4 5 - 10
Investment 100
Production, Millions of pounds per year 0 0 40 80 80 80
Spread, dollars per pound 1.2 1.2 1.2 1.2 1.1 0.95
Net revenues 0 0 48 96 88 76
Production costs 0 0 30 30 30 30
Transport 0 0 4 8 8 8
Other costs 0 20 20 20 20 20
Cash flow -100 -20 -6 38 30 18
NPV (at r= 8%)= -9.8

Table 11.4

Capacity, Millions of Units
Technology Industry Marvin Capital Cost per Unit ($) Manufacturing Cost per Unit ($) Salvage Value per Unit ($)
First generation (2014) 120 _ 17.5 5.5 2.5
Second generation (2022) 120 24 17.5 3.5 2.5

Table 12.1

Income Assets
Sales $550 Net working capital $80 5 - 10
Cost of goods sold 275 Property, plant, and equipment investment 1770
Selling, general, and administrative expenses 75 Less cumulative depreciation 360
200 Net investment 810
Taxes at 35% 70 Other assets 110
Net income $130 Total assets $1,000

Table 12.2

Econimic Value Added (EVA) Capital Invested Return on Capital Cost of Capital
Wal-Mart Stores 4,525 79,177 12.30% 6.60%
Johnson & Johnson 4,459 51,508 17.6 8.9
Microsoft 4,027 24,677 29.8 13.5
Merck 3,347 40,941 16.9 8.7
Coca Cola 2,729 20,503 20.1 6.7
Intel Corp. (57) 31,216 15.6 15.8
Dow Chemical (1,503) 44,158 3.6 7
Boeing (1,974) 50,046 2.2 6.1
Delta Airlines (2,288) 27,238 -0.9 7.5
Viacom (5,508) 96,515 3.5 9.2
IBM (7,505) 108,926 4.6 11.5

Table 12.3

Year
1 2 3 4 5 6
Cash flow 100 200 250 298 298 298
Book value at start of year, straight-line depreciation 1000 833 667 500 333 167
Book value at end of year, straight-line depreciation
Book depreciation 167 167 167 167 167
Book income -67 33 83 131 131
Book ROI -0.67 0.04 0.124 0.262 0.393 0.784
Forecasted EVA -167 -50 17 81 98 115

Table 12.4

Year
1 2 3 4 5 6
Cash flow
PV, at start of year, 10 percent discount rate 1000 1000 901 741 517 271
PV, at end of year, 10 percent discount rate
Economic depreciation 0 100 160 224 246 271
Economic income 100 100 90 74 52 27
Rate of return 0.1 0.1 0.1 0.1 0.1 0.1
Forecasted EVA (5-.1*2) 0 0 0 0 0 0

Table 12.5

Year
1 2 3 4 5 6
Book Income for store
1 -67 33 83 131 131 131
2 -67 33 83 131 131
3 -67 33 83 131
4 -67 33 83
5 -67 33
6 -67
Total book income -67 -34 49 180 311 442
Book value for store
1 1000 833 667 500 333 167
2 1000 833 667 500 333
3 1000 833 667 500
4 1000 833 667
5 1000 833
6 1000
Total book value 1000 1833 2500 3000 3333 3500
Book ROI for all stores -0.067 -0.019 0.02 0.06 0.093 0.126
EVA for all stores -167 -217 -201 -120 -22 92

Table 12.6

Income statement for 2004 Assets, December 31, 2004
Revenue $56.66 Net working capital $7.08
Raw materials cost $18.72
Operating cost $21.09 Investment in plant and equipment 69.33
Depreciation 4.5 Less accumulated depreciation 21.01
Pretax income 12.35 Net plant and equipment 48.32
Tax at 35% 4.32
Net income $8.03 Total assets $55.40

Table 12.7

Start of Year Market Value Cash Flow
1 19.69
2 17.99 $3.67
3 16.79 3
4 15.78 2.69
5 14.89 2.47
6 14.09 2.29
7 13.36 2.14
8 12.68 2.02
9 12.05 1.9
10 11.46 1.8
11 10.91 1.7
12 10.39 1.61
13 9.91 1.52
14 9.44 1.46
15 9.01 1.37
16 8.59 1.32

Fig 12.1

Basic Compensation Variable Bonus Options & Others Perks Benefits Australia Canada China Fance Germany India Italy Japan Mexico Netherlands Singapore Spain Sweden Switzerland United Kingdom United States
Australia 293 193.3 117.2 34.3 5.8 Basic Compensation 293 333.5 347.6 323.6 344.1 75.7 365.4 261.5 465.5 302.6 329.3 295 276.9 500 348.3 587.8
Canada 333.5 166.8 300.2 20 69.5 Variable Bonus 193.3 166.8 128.8 93.8 309.2 37.8 127.9 34.1 173.1 173.7 124.3 132.7 68.1 249.8 104.5 335.7
China 347.6 128.8 160.2 62.9 46.9 Options & Others 117.2 300.2 160.2 115.8 172.1 0 127.9 51 182.9 105.9 442.1 118 76.2 230.6 174.1 1087
Fance 323.6 93.8 115.8 46.9 155.2 Perks 34.3 20 62.9 46.9 21.9 84.4 24 37.3 67.6 19.9 33.7 12.3 12.8 24.9 49.6 108.5
Germany 344.1 309.2 172.1 21.9 107.5 Benefits 5.8 69.5 46.9 155.2 107.5 24.9 215.2 73.1 71.6 72.9 30 62 266.3 185.8 153.8 130
India 75.7 37.8 0 84.4 24.9
Italy 365.4 127.9 127.9 24 215.2
Japan 261.5 34.1 51 37.3 73.1
Mexico 465.5 173.1 182.9 67.6 71.6
Netherlands 302.6 173.7 105.9 19.9 72.9
Singapore 329.3 124.3 442.1 33.7 30
Spain 295 132.7 118 12.3 62
Sweden 276.9 68.1 76.2 12.8 266.3
Switzerland 500 249.8 230.6 24.9 185.8
United Kingdom 348.3 104.5 174.1 49.6 153.8
United States 587.8 335.7 1087 108.5 130

Fig 13.8

-21 Jan-73 -21 -21 -22.2 -16.4 -19.6 -21.7 -20.8 -4.5 4.3 -1.6 4.4 -1.3 8.4 -5.2 -11.8 3.8 -5.3 0.8 7 10.4 10.7 12.9 10.9 25.8 29.3 8.6 -4.3 -3.7 -2.1 -6.5 -10.7 -5.8 -8.5 -9.6 -8.6 -13.9 -14.6 -14 -7.4 -24.2 -36.6 -40.5 -33.7 -34.1 -26.5 -18.9 -24.1 -15.7 -20.1 -15.7 -20.4 -11.8 -11.7 -8.9 -8.8 -18 -18.7 -16 -17.5 -17.2 -13.3 -13.7 -11.3 -11.2 -11.3 -11.1 -8.7 -10.9 -9.6 -7 -5.8 -2.7 -0.5 0.5 5.1 1.2
-22.2 Feb-73 -22.2 Jan-73 Feb-73 Mar-73 Apr-73 May-73 Jun-73 Jul-73 Aug-73 Sep-73 Oct-73 Nov-73 Dec-73 Jan-74 Feb-74 Mar-74 Apr-74 May-74 Jun-74 Jul-74 Aug-74 Sep-74 Oct-74 Nov-74 Dec-74 Jan-75 Jan-78 Feb-78 Mar-78 Apr-78 May-78 Jun-78 Jul-78 Aug-78 Sep-78 Oct-78 Nov-78 Dec-78 Jan-79 Feb-79 Mar-79 Apr-79 May-79 Jun-79 Jul-79 Aug-79 Sep-79 Oct-79 Nov-79 Dec-79 Jan-80 Jan-83 Feb-83 Mar-83 Apr-83 May-83 Jun-83 Jul-83 Aug-83 Sep-83 Oct-83 Nov-83 Dec-83 Jan-84 Feb-84 Mar-84 Apr-84 May-84 Jun-84 Jul-84 Aug-84 Sep-84 Oct-84 Nov-84 Dec-84 Jan-85
-16.4 Mar-73 -16.4
-19.6 Apr-73 -19.6
-21.7 May-73 -21.7
-20.8 Jun-73 -20.8
-4.5 Jul-73 -4.5
4.3 Aug-73 4.3
-1.6 Sep-73 -1.6
4.4 Oct-73 4.4
-1.3 Nov-73 -1.3
8.4 Dec-73 8.4
-5.2 Jan-74 -5.2
-11.8 Feb-74 -11.8
3.8 Mar-74 3.8
-5.3 Apr-74 -5.3
0.8 May-74 0.8
7 Jun-74 7
10.4 Jul-74 10.4
10.7 Aug-74 10.7
12.9 Sep-74 12.9
10.9 Oct-74 10.9
25.8 Nov-74 25.8
29.3 Dec-74 29.3
8.6 Jan-75 8.6
-4.3 Jan-78 -4.3
-3.7 Feb-78 -3.7
-2.1 Mar-78 -2.1
-6.5 Apr-78 -6.5
-10.7 May-78 -10.7
-5.8 Jun-78 -5.8
-8.5 Jul-78 -8.5
-9.6 Aug-78 -9.6
-8.6 Sep-78 -8.6
-13.9 Oct-78 -13.9
-14.6 Nov-78 -14.6
-14 Dec-78 -14
-7.4 Jan-79 -7.4
-24.2 Feb-79 -24.2
-36.6 Mar-79 -36.6
-40.5 Apr-79 -40.5
-33.7 May-79 -33.7
-34.1 Jun-79 -34.1
-26.5 Jul-79 -26.5
-18.9 Aug-79 -18.9
-24.1 Sep-79 -24.1
-15.7 Oct-79 -15.7
-20.1 Nov-79 -20.1
-15.7 Dec-79 -15.7
-20.4 Jan-80 -20.4
-11.8 Jan-83 -11.8
-11.7 Feb-83 -11.7
-8.9 Mar-83 -8.9
-8.8 Apr-83 -8.8
-18 May-83 -18
-18.7 Jun-83 -18.7
-16 Jul-83 -16
-17.5 Aug-83 -17.5
-17.2 Sep-83 -17.2
-13.3 Oct-83 -13.3
-13.7 Nov-83 -13.7
-11.3 Dec-83 -11.3
-11.2 Jan-84 -11.2
-11.3 Feb-84 -11.3
-11.1 Mar-84 -11.1
-8.7 Apr-84 -8.7
-10.9 May-84 -10.9
-9.6 Jun-84 -9.6
-7 Jul-84 -7
-5.8 Aug-84 -5.8
-2.7 Sep-84 -2.7
-0.5 Oct-84 -0.5
0.5 Nov-84 0.5
5.1 Dec-84 5.1
1.2 Jan-85 1.2

Table 13.1

Month (A) Market Return (B) Executive Cheese Return (C) Paddington Beer Return
2002 -0.4 -1.9
Aug -0.4 -1.9 -0.5
Sep -12 -10.1 -17.2
Oct 8.5 8.1 9.8
Nov 3.2 7.5 16.5
Dec -5.5 4.3 6.7
2003
Jan -9.5 -5.3 -11.1
Feb 2.5 5.7 -7.3
Mar -1.2 -9.7 4.5
Apr 8.7 -4.7 23
May 3.1 -10 -1.1
June -0.4 -2.7 -1.2
July 3.1 0.1 6.2
Aug 0.1 3.4 12.4
Sep -1.7 5.6 -7.9
Oct 4.8 -2.2 11.5
Nov 1.3 -6.5 4.3
Dec 3.1 -0.2 3.4
2004
Jan -1.9 -3.7 4.1
Feb 2.3 -9 -14.1
Mar -2.4 7.3 -6.5
Apr 2.4 4.7 12.6
May -1.3 -7.1 -14.1

Fig 13.1 B

100
105.84
112.04
116.91
126.04
118.8
125.12
125.12
96.55
100.86
102.44
103.48
110.77
116.31
117.36
115.15
119.69
118.3
101.06
107.36
115.98
122.84
129.76
135.09
130.72
135.8
140.95
137.43
144.91
140.27
139.39
135.41
143.88
146.62
155.1
147.21
144.25
158.2
153.33
149.97
153.56
151.05
160.21
151.65
150.9
138.81
139.81
144.2
130.89
122.49
131.9
132.57
129.26
127.86
119.67
109.89
111.79
120.29
121.2

Fig 14.3

Book Debt ratio
Italy 71 Italy Italy Sweden Germany Austria France USA Belgium Japan Denmark Portugal Spain Finland Netherlands
Sweden 68 Sweden 71 68 67 65 64 63 62 61 59 57 57 53 48
Germany 67 Germany
Austria 65 Austria
France 64 France
USA 63 USA
Belgium 62 Belgium
Japan 61 Japan
Denmark 59 Denmark
Portugal 57 Portugal
Spain 57 Spain
Finland 53 Finland
Netherlands 48 Netherlands

Table 14.4

Common shares ($.25 par value per share) $108
Additional paid-in capital 317
Retained earnings 4433
Treasury shares 2880
Other adjustments 838
Net common equity 1199
Note:
Authorized shares 600
Issued sgares of which: 431
Outstanding shares 351
Treasury shares 80

Fig 14.4

Households 36.8 Households Pension Funds Insurance Companies Mutual Funds, etc. Rest of World Other
Pension Funds 21.1 36.8 21.1 7.4 21 10.4 3.2
Insurance Companies 7.4
Mutual Funds, etc. 21
Rest of World 10.4
Other 3.2
99.9

Fig 14.1

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Internal 92.3 86.1 108.9 89.5 90 87.4 78.7 83 76.7 79.1 73.9 75.4 81.2 100.3 91.2
Equity -26.8 -12.4 4.6 5.6 3.8 -6.9 -7.4 -5.9 -8.4 -25.5 -11 -11.9 -5.1 -4.8 -4.7
Debt 34.5 26.2 -13.4 5 6.2 19.5 28.7 22.9 31.7 46.4 37.1 36.5 23.9 4.6 13.5

Table 15.1

January 2003 to December 2003
Underwriter Value of Issues ($billion) Number of issues
Citigroup 543 1872
Morgan Stanley 395 1365
Merrill Lynch 380 1914
Lehman Brothers 354 1264
J.P. Morgan 354 1417

Table 15.3

Type Company Issue Amount ($ millions) Underwriter's spread
Common Stock:
IPO Buffalo Wild Wings 45 7.0% 7.00 0.07
IPO Carter's Inc. 119 7.0% 7 0.07
IPO Genitope Corp. 41 7.0% 7 0.07
IPO International Steel Group 462 6.5% 6.5 0.07
IPO Ipass 98 7.0% 7 0.07
- 0
Seasoned General Cable Corp. 41 5.5% 5.50 0.06
Seasoned Big 5 sporting Goods Corp. 94 5.0% 5 0.05
Seasoned Red Robin Goods Corp. 92 5.3% 5.25 0.05
Seasoned Gibraltar Steel 102 5.0% 5 0.05
Seasoned Interstate hotels 47 5.3% 5.25 0.05
- 0
Debt (cupon rate, type, maturity) : - 0
4.85% Fixed Rate Notes, 2011 Raytheon 500 0.6% 0.625 0.01
4.85% Notes, 2015 Procter & Gamble 150 0.5% 0.475 0.00
6.3% Notes, 2018 Eastman Chemical 248 0.8% 0.75 0.01
5.9% Senior Notes, 2008 Bausch & Lomb 50 1.0% 1 0.01
6.25% Convertible Senior Debentures, 2033 General Motors 4,000 1.8% 1.75 0.02

Fig 15.1

1993 3.7 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
1994 4.2 3.7 4.2 7.6 11.5 14.8 21.2 54.4 106.2 40.7 21.2 18.4
1995 7.6
1996 11.5
1997 14.8
1998 21.2
1999 54.4
2000 106.2
2001 40.7
2002 21.2
2003 18.4

Fig 15.2

China 256.9
Brazil 78.5
Korea 74.3
Greece 49
India 35.3
Switzerland 34.9
Mexico 33
Taiwan 31.1
Sweden 30.5
Singapore 29.6
Japan 28.4
Germany 27.7
Italy 21.7
USA 19.1
UK 17.4
Hing Kong 17.3
Australia 12.1
France 11.6
Spain 10.7
Netherlands 10.2
Canada 6.3

Table 16.3

Rate of Income Tax
15% 30% 47%
Operating income 100 100 100
Corporate tax (Tc = .3) 30 30 30
After tax income 70 70 70
Grossed-up dividend 100 100 100
Income Tax 15 30 47
Tax credit for corporate payment -30 -30 -30
Tax due from shareholder -15 0 17
Available to shareholder 85 70 53

Fig 16.1

Dividends Repurchases Earnings less purchases & Dividends
1980 71.1 8.2 104
1981 82.2 8 98
1982 92.8 12.6 64.2
1983 98.5 11.9 78.7
1984 106.2 34.2 89.8 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
1985 108.4 51.5 42 Repurchases 8.2 8 12.6 11.9 34.2 51.5 53.6 66.3 61.6 61.8 41 30.1 39.1 46.8 50.5 79.2 97.2 136 173.8 160.6 182 140.2 99.1
1986 121.1 53.6 17.4 Earnings less purchases & Dividends 104 98 64.2 78.7 89.8 42 17.4 38.1 80.1 55.8 35.9 15.1 31.4 46.7 143.7 132.2 158.1 132.2 37.2 122.8 193.8 4.5 73.1
1987 131.5 66.3 38.1 Dividends 71.1 82.2 92.8 98.5 106.2 108.4 121.1 131.5 150.4 140.7 113.7 148.9 148 161.1 169.5 189.8 203.8 192 226.5 200.5 211.3 202.1 108.2
1988 150.4 61.6 80.1 Dividends 71.1 82.2 92.8 98.5 106.2 108.4 121.1 131.5 150.4 140.7 113.7 148.9 148 161.1 169.5 189.8 203.8 192 226.5 200.5 211.3 202.1 108.2
1989 140.7 61.8 55.8
1990 113.7 41 35.9
1991 148.9 30.1 15.1
1992 148 39.1 31.4
1993 161.1 46.8 46.7
1994 169.5 50.5 143.7
1995 189.8 79.2 132.2
1996 203.8 97.2 158.1
1997 192 136 132.2
1998 226.5 173.8 37.2
1999 200.5 160.6 122.8
2000 211.3 182 193.8
2001 202.1 140.2 4.5
2002 108.2 99.1 73.1

Table 17.1

Data
Number of shares 1000
Price per share $10
Market value of shares $10,000
Outcomes
Operating income ($) 500 1000 1500 2000
Earning per share ($) 0.5 1 1.5 2
Return on shares(%) 5 10 15 20
Expected Outcome

Table 17.2

Data
Number of shares 500
Price per share $10
Market value of shares $5,000
Market value of debt $5,000
Interest at 10 percent $500
Outcomes
Operating income ($) $500 1000 1500 2000
Interest ($) $500 500 500 500
$0 500 1000 1500
Earning per share ($) $0 1 2 3
Return on shares(%) $0 10 20 30
Expected Outcome

Table 17.3

Operating Income ($)
500 1000 1500 2000
Earnings on two shares ($) 1 2 3 4
Less interest at 10% ($) 1 1 1 1
Net earnings on investment ($) 0 1 2 3
Return on $10 investment (%) 0 10 20 30
Expected Outcome

Table 17.4

If operating income falls from $1500 to $500 Change
No debt: Earnings per share $1.50 $0.50 ($1)
Return 15% 5% -10%
50% debt: Earnings per share $2 0 ($2)
Return 20% 0 -20%

table 18.1

Income Statement of Firm U Income Statement of Firm L
Earnings before interest and taxes $1,000 $1,000
Interest paid to bondholders - 0 80
Pretax income 1,000 920
Tax at 35% 350 322
Net income to stockholders 650 598
Total income to both bondholders and stockholders $0+650=$650 $80+598=$678
Interest tax shield (.35 x interest) $0 $28

Space baby

($ 1,000 s) All Equity 1/2 Debt
EBIT 900 900
Interest Pmt 0 100
Pretax Income 900 800
Taxes @ 35% 315 280
Net Cash Flow 585 520

Table 18.3 a

Book values
Net working capital 10,752 7,144 Long-term debt
21,460 Other long-term liabilities
Long-term assets 86,900 69,048 Equity
Total assets 97,652 97,652 Total value
Market values
Net working capital 10,752 7,144 Long-term debt
PV interest tax shield 2,500 21,460 Other long-term liabilities
Long-term assests 283,373 268,021 Equity
Total assets 296,625 296,625 Total value

Table 18.3 b

Book values
Net working capital 10,752 8,144 Long-term debt
21,460 Other long-term liabilities
Long-term assets 86,900 68,048 Equity
Total assets 97,652 97,652 Total value
Market values
Net working capital 10,752 8,144 Long-term debt
PV interest tax shield 2,850 21,460 Other long-term liabilities
Long-term assests 283,373 267,371 Equity
Total assets 296,975 296,975 Total value
Book values
Net working capital $10,752 $8,144 Long-term debt
21460 Other long-term liabilities
Long-term assets 86900 68048 Equity
Total assets $97,652 $97,652 Total value
Market values
Net working capital $10,752 $8,144 Long-term debt
PV interest tax shield 2850 21460 Other long-term liabilities
Long-term assests 283373 267371 Equity
Total assets $296,975 $296,975 Total value

Fig 18.1

Interest Equity Income
Income before tax $1 $1
Less corporate tax at Tc =.35 0 0.35
Income after corpotare tax 1 0.65
Personal tax at Tp = .35 and Tpe = .105 0.35 0.068
Income after all taxes $0.675 $0.582
Advantage to debt= $ .068

Table 19.1

Latest year Forecast
0 1 2 3 4 5 6 7
1 Sales 83.6 89.5 95.8 102.5 106.6 110.8 115.2 118.7
2 Cost of goods sold 63.1 66.2 71.3 76.3 79.9 83.1 87 90.2
3 EBITDA (1-2) 20.5 23.3 24.4 26.1 26.6 27.7 28.2 28.5
4 Depreciation 3.3 9.9 10.6 11.3 11.8 12.3 12.7 13.1
5 Profit before tax (EBIT) (3-4) 17.2 13.4 13.8 14.8 14.9 15.4 15.5 15.4
6 Tax 6 4.7 4.8 5.2 5.2 5.4 5.4 5.4
7 Profit after tax (5-6) 11.2 8.7 9 9.6 9.7 10 10.1 10
8 Investment in fixed assets 11 14.6 15.5 16.6 15 15.6 16.2 15.9
9 Investment in working capital 1 0.5 0.8 0.9 0.5 0.6 0.6 0.4
10 Free cash flow (7+4-8-9) 2.5 3.5 3.2 3.4 5.9 6.1 6 6.8
PV Free cash flow, years 1-6 20.3
PV Horizon value 67.6
PV of company 87.9
Assumptions
Sales growth (%) 6.7 7 7 7 4 4 4 3
Costs (% of sales) 75.5 74 74.5 74.5 75 75 75.5 76
Working capital (% of sales) 13.3 13 13 13 13 13 13 13
Net fixed assest (% of sales) 79.2 79 79 79 79 79 79 79
Depreciation (% of net fixed assets) 5 14 14 14 14 14 14 14
Tax rate, percent 35%
WACC 9%
Long term growth forecast 3%
Fixed assets and working capital
Gross fixed assets 95 109.6 125.1 141.8 156.8 172.4 188.6 204.5
Less accumulated depreciation 29 38.9 49.5 60.8 72.6 84.9 97.6 110.7
Net fixed assets 66 70.7 75.6 80.9 84.2 87.5 91 93.8
Depreciation 3.3 9.9 10.6 11.3 11.8 12.3 12.7 13.1
Working capital 11.1 11.6 12.4 13.3 13.9 14.4 15 15.4

Table 19.2

Latest year Forecast
0 1 2 3 4 5 6 7
10 Free cash flow (7+4-8-9) 2.5 3.5 3.2 3.4 5.9 6.1 6 6.8
PV Free cash flow, years 1-6 19.7
Pv Horizon value 64.6
Base-case PV of company 84.3
Debt 51 50 49 48 47 46 45
3.06 3 2.94 2.88 2.82 2.76
1.07 1.05 1.03 1.01 0.99 0.97
PV Interest tax shields 5
APV 89.3
Tax rate, percent 35%
Opportunity cost of capital 9.84%
WACC (To discount horizon value to year 6) 9%
Lomg term growth forecast 3%
Interest rate (years 1-6) 6%
After tax debt service 2.99 2.95 2.91 2.87 2.83 2.79

Table 19.5

Number of outstanding shares (N) 324.5 million
Price per share (P) $40.59
Beta 0.46
Treasury bill rate 1%
20-year Treasury bond rate 5.20%
Cost of debt (rD) 7%
Marginal tax rate 35%

Table 19.-

Current assets 899.1 Current liabilities 820.4
Net property, plant, and equipment 11260.1 Long-term debt 2327
Investments and other assets 256.9 Deferred taxes 1697.2
Other liabilities 1038.7
Shareholders' equity 6532.8
Total 12416.1 Total 12416.1

Fig 19.1

rd r re wacc
0 6 9.84 9.84 9.84
0.1 6 9.84 10.22 9.65
0.2 6 9.84 10.61 9.49
0.25 6 9.84 10.8 9.42
0.3 6 9.84 10.99 9.36
0.4 6 9.84 11.38 9.24
0.5 6 9.84 11.76 9.14
0.6 6 9.84 12.14 9.05
0.67 6 9.84 12.41 9
0.7 6.04 9.84 12.5 8.97
0.8 6.18 9.84 12.77 8.88
0.9 6.31 9.84 13.02 8.79
1 6.43 9.84 13.25 8.71
1.1 6.54 9.84 13.47 8.64
1.2 6.65 9.84 13.67 8.57
1.3 6.74 9.84 13.87 8.51
1.4 6.83 9.84 14.05 8.45
1.5 6.91 9.84 14.24 8.39

Table 20.1

Option Maturity Exercise Price Price of Call Option Price of Put Option
Apr-04 $50 $10.50 $1.25
55 6.7 2.5
60 3.85 4.6
65 1.95 7.7
70 0.9 11.65
Jul-04 $50 $11.30 $2.05
55 7.8 3.6
60 5.15 5.75
65 3.15 8.75
70 1.89 12.4
Jan-05 $50 $13.10 $3.45
55 10 5.2
60 7.3 7.5
65 5.2 10.4
70 3.65 13.75
Lomg term options are called 'LEAPS"

Fig 21.1

-69 -65 -60 -47 -39 -29 -19 -7 7 23 42
63 87 115 148 185 227
Bottom right histogram
Percent price changes: -60 -54 -47 -39 -29 -19 -7 7
Probability %: 0.15 0.69 2.29 5.65 10.72 15.97 18.93 17.95
Percent price changes: 23 42 63 87 115
Probability %: 13.62 8.22 3.9 1.42 0.39

Table 21.1

Changes per interval (%)
Intervals in a Year (1/h) Upside Downside Estimated Option Value
1.5 33.3 -25 8.83
3 22.6 -18.4 6.35
12 12.4 -11.1 6.99
52 5.8 -5.5 7.1
Black-Scholes value= 7.13

Table 21.2

Establishment Industries Digital Organics
INPUTS
Stock price(P) 22 22
Exercise price (EX) 25 25
Interest rate, percent ® 4 4
Maturity in years (t) 5 5
Annual standard deviation, percent () 24 36
Are these rates compounded annually (A) or continuously © ? a a
equivalent continously compounded rate, percent 3.92 3.92
INTERMEDIATE CALCULATIONS:
PV(EX) 20.5482 20.5482
d1=log[P/PV(EX)]/……. 0.3955 0.4873
d2=d1-….. -0.1411 -0.3177
N(d1)= delta 0.6538 0.687
N(d2) 0.4439 0.3754
OPTION VALUES:
Call value = N(d1) * P - N(d2)* PV(EX) 5.26 7.4
Put value = Call value + PV(EX) - S 3.81 5.95

Table 21.3

Year Interest Rate Market Return End-Year Dividend Yield
1984 11 -2.3 5.1
1985 15 44.1 4.6
1986 17.1 52.2 3.9
1987 14.1 -7.9 4.8
1988 11.7 11.9 5.4
1989 17.3 17.4 5.5
1990 15.9 -17.5 6
1991 11.1 34.2 3.8
1992 6.8 -2.3 3.8
1993 5.3 45.4 3.2
1994 5.4 -8.7 4.1
1995 8 20.2 3.9
1996 7.4 14.6 3.6
1997 5.5 12.2 3.6
1998 5 11.6 3.8
1999 4.9 19.3 3.5
2000 4.9 5 3.2
2001 4.8 10.1 3.3
2002 4.8 -8.1 4
2003 4.9 15.9 3.5

Fig 21.1 -2

-69 -65 -60 -54 -47 -39 -29 -19 -7 7 23 42
63 87 115 148 185 227

Table 22.1

Year
1982 1983 1984 1985 1986 1987
After-tax operating cash flow (1) 100 159 295 185 0
Capital investment (2) 450 0 0 0 0 0
Increase in working capital (3) 0 50 100 100 -125 -125
Net cash flow (1)-(2)-(3) -450 60 59 195 310 125
NPV at 20% = - $46.45, or about -$46 million

Table 23.2

Year Ct PV_Ct) at 2.75% Proportion of Total Value [PV(Ct)/V] Proportion of Total Value Time
55 53.53 0.049 0.0449
55 52.1 0.047 0.094
55 50.7 0.046 0.138
1055 946.51 0.858 3.433
V = 1102.83 1 Duration= 3.714 years

Fig 24.2

100 60 40 20
1 11.05 24 0 0
2 7.85 0.76 0.04 0
3 6.47 1.1 0.14 0
4 5.65 1.31 0.26 0
5 5.1 1.44 0.37 0.01
6 4.69 1.53 0.47 0.03
7 4.38 1.59 0.56 0.05
8 4.13 1.63 0.63 0.07
9 3.92 1.65 0.7 0.1
10 3.74 1.67 0.75 0.13
11 3.59 1.68 0.8 0.16
12 3.46 1.69 0.84 0.19
13 3.34 1.7 0.88 0.22
14 3.24 1.7 0.91 0.24
15 3.15 1.7 0.94 0.27
16 3.06 1.69 0.97 0.3
17 2.99 1.69 0.99 0.32
18 2.92 1.69 1.01 0.35
19 2.85 1.68 1.03 0.37
20 2.8 1.67 1.04 0.39
21 2.74 1.67 1.06 0.41
22 2.69 1.66 1.07 0.43
23 2.64 1.66 1.08 0.45
24 2.6 1.65 1.09 0.47
25 2.56 1.64 1.1 0.49

Table 24.2

Ratio AAA AA A BBB BB B CCC
EBIT interest cover 21.4 10.1 6.1 3.7 2.1 0.8 0.1
return on capital % 34.9 21.7 19.4 13.6 11.6 6.6 1
Gross profit margin % 27 22.1 18.6 15.4 15.9 11.9 11.9
Total debt/capital % 22.9 37.7 42.5 48.2 62.6 74.8 87.7

Table 24.3

Percentage Defaulting Within
Rating at Time of Issue 1 Year after issue 5 Years after Issue 10 Years after Issue
AAA 0 0.1 0.5
AAA 0 0.3 0.9
AAA 0.1 0.7 2
BBB 0.4 3.4 6.9
BBB 1.4 12.4 21
BBB 6.1 26.8 35.4
CCC 30.9 53 58.4

Fig 23.1

4/1/86 3.67 8.74
May-86 3.41 9.13
Jun-86 3.54 9.32
Jul-86 3.67 9.51
Aug-86 3.62 9.41
Sep-86 3.95 10.77
Oct-86 4.1 10.73
Nov-86 4.14 11
Dec-86 4.06 10.34
Jan-87 Jan-00 10.09
Feb-87 Jan-00 9.6
Mar-87 3.37 9.18
Apr-87 3.67 8.93
May-87 3.63 8.84
Jun-87 3.91 9.22
Jul-87 3.84 9.83
Aug-87 3.94 10.23
Sep-87 4.13 10.14
Oct-87 4.34 9.42
Nov-87 3.67 9.37
Dec-87 3.76 9.66
Jan-88 3.88 9.39
Feb-88 3.74 9.24
Mar-88 3.48 9.13
Apr-88 3.44 9.39
May-88 3.53 9.48
Jun-88 3.49 9.7
Jul-88 3.57 9.64
Aug-88 3.73 9.94
Sep-88 3.79 9.67
Oct-88 3.45 9.37
Nov-88 3.68 9.79
Dec-88 3.81
Jan-89 3.69
Feb-89 3.5
Mar-89 3.53
Apr-89 3.65
May-89 3.76
Jun-89 3.76
Jul-89 3.41
Aug-89 3.35
Sep-89 3.55
Oct-89 3.54
Nov-89 3.6
Dec-89 3.53
Jan-90 3.69
Feb-90 3.97
Mar-90 4.13
Apr-90 4.26
May-90 4.21
Jun-90 4.24
Jul-90 4.36
Aug-90 4.28
Sep-90 4.35
Oct-90 4.22
Nov-90 4.01
Dec-90 4.09
Jan-91 4.1
Feb-91 4.1
Mar-91 4.08
Apr-91 4.06
May-91 4.09
Jun-91 4.24
Jul-91 4.34
Aug-91 4.24
Sep-91 4.14
Oct-91 4.15
Nov-91 4.23
Dec-91 4.42
Jan-92 4.24
Feb-92 4.2
Mar-92 4.47
Apr-92 4.5
May-92 4.38
Jun-92 4.42
Jul-92 4.71
Aug-92 4.95
Sep-92 4
Oct-92 3.36
Nov-92 3.58
Dec-92 3.62
Jan-93 3.35
Feb-93 3.04
Mar-93 3.01
Apr-93 3.21
May-93 3.25
Jun-93 3.25
Jul-93 3.13
Aug-93 3.09
Sep-93 3.07
Oct-93 2.97
Nov-93 2.92
Dec-93 2.66
Jan-94 2.7
Feb-94 3.06
Mar-94 3.21
Apr-94 3.33
May-94 3.72
Jun-94 3.86
Jul-94 3.94
Aug-94 3.71
Sep-94 3.79
Oct-94 3.86
Nov-94 3.81
Dec-94 3.83
Jan-95 3.87
Feb-95 3.87
Mar-95 3.86
Apr-95 3.78
May-95 3.51
Jun-95 3.71
Jul-95 3.55
Aug-95 3.46
Sep-95 3.58
Oct-95 3.61
Nov-95 3.45
Dec-95 3.44
Jan-96 3.46
Feb-96 3.67
Mar-96
Apr-96
May-96
Jun-96
Jul-96
Aug-96
Sep-96
Oct-96
Nov-96
Dec-96
Jan-97
Feb-97
Mar-97
Apr-97
May-97
Jun-97
Jul-97
Aug-97
Sep-97
Oct-97
Nov-97
Dec-97
Jan-98
Feb-98
Mar-98
Apr-98
May-98
Jun-98
Jul-98
Aug-98
Sep-98
Oct-98
Nov-98
Dec-98
Jan-99
Feb-99
Mar-99
Apr-99
May-99
Jun-99
Jul-99
Aug-99
Sep-99
Oct-99
Nov-99
Dec-99
Jan-00
Feb-00
Mar-00
Apr-00
May-00
Jun-00
Jul-00
Aug-00
Sep-00
Oct-00
Nov-00
Dec-00
Jan-01
Feb-01
Mar-01
Apr-01
May-01
Jun-01
Jul-01
Aug-01
Sep-04
Oct-01
Nov-01

Fig 24.3