QuickAnswersLong(1).doc

Selected Answers to Numeric Problems Note to the student: These Quick Answers are not intended to lead you to the solution to the questions and problems in your textbook. These are only to let you know if you have the correct final answer. In some cases (for long problems), a few key intermediate answers are given. As such, most intermediate answers, and all questions requiring discussion are not included. Note to the instructor: If you want to use the textbook problems as assignments and you have the ability to selectively give students access to the Solutions and these Quick Answers (for example through WebCT), you might give students access to these Quick Answers to reduce anxiety without unduly compromising the value of the assignment. Then, after the assignment is due, you can give them access to the full Solution. Chapter 2: Accounting Statements and Cash Flow 2.1 Common stock = 88,000 Total liabilities&equity = 128,000 2.2 Total $212,000,000 2.3 Taxes = 51000 Net income = 99,000 2.4 a. net income 20X1 = -94500; net income 20X2 = -53,200 b. Operating CF 20X2 = $205,500; Operating CF 20X1 = $146,800 2.6 a. Net operating income = $400,000 b. Earnings before taxes = $300,000 c. Net income = $195,000 d. Operating Cash flow = $395,000 2.7 Cash flows from the firm -5000 Cash flows to investors of the firm -5000 Chapter 3: Long-term Financial Planning and Growth 3.1 Total Assets $16,875,000 Total Liabs & CS $16,875,000 3.2 a. EFN = $3.24 million b. Total liabilities = $525 million c. Total liabilities = 574.26 3.3 a. sustainable growth = 5.26% 3.4 a. EFN = 2,880,000 b. Total liabilities and equity = $38,400,000 c. 3.45% Chapter 4: Net Present Value 4.1 a. $1,628.89 b. $1,967.15 c. $2,653.30 4.2 a. $513.16 b. $1,818.18 c. $233.25 4.3 PV(C0) = $1,000 PV(C10) = $926.39 4.4 $92.30 4.5 $187,780.23 4.6 a. PV(Alternative 1) = $10,000,000 PV(Alternative 2) = $20,000,000 b. PV(Alternative 1) = $9,090,909.10 PV(Alternative 2) = $12,418,426.46 c. PV(Alternative 1) = $8,333,333.33 PV(Alternative 2) = $8,037,551.44 d. The two alternatives are equally attractive when discounted at 18.921 percent. 4.7 PV(Smith) = $115,000 PV(Jones) = $112,697.22 4.8 a. $214.55 b. $463.20 c. $680.59 4.9 The most she would be willing to pay for the property is $1,609,866.18. 4.10 a. PV(Investment) = $900,000 PV(Cash Inflows) = $875,865.52 b. NPV = -$24,134.48 c. NPV = -$4,033.18 4.11 NPV @10% = -$2,619.97 NPV @9% = $6,567.93 4.12 a. NPV = -$4,117.08 b. The firm will break even on the item with an 8.447 percent discount rate. 4.13 PV(Aunt) = $3,571.43 PV(Roommate) = $3,500 4.14 The interest rate required is 18.921%. 4.15 The value of the account at the end of seven years will be $6,714.61. 4.16 a. FV = $1,259.71 b. FV = $1,265.32 c. FV = $1,270.24 d. FV = $1,271.25 4.17 a. FV = $1,822.12 b. FV = $1,349.86 c. FV = $1,648.72 d. FV = $1,750.67 4.18 The PV of the cash flow is $1,528.36. 4.19 EAY(Bank America) = 4.16% eAY(Bank USA) = 4.13% 4.20 The price of the consol is $800. 4.21 a. $10,000 b. $4,545.45. c. $20,000. 4.22 The PV as of the end of year 5 is $901.58. 4.23 The price of the stock is $45. 4.24 PV = $16.67 4.25 PV = $3,636,363.64 4.26 discount rate is 50%. 4.27 The price of the security is $333.33. 4.28 $13.25 4.29 NPV = $201.91 4.30 PV = $16,834.95 4.31 PV(Year 0) = $1,658.98 4.32 0.090626 = r 4.33 a.$4,347.27 b. PV = $17,824.65 4.34 $11,980.88 4.35 PV = $1,201,180.55 b.PV = $1,131,898.53 4.36 C = $2,544.79 4.37 NPV = -$545.88 4.38 PV(Lease) = -$120,283.16 4.39 FV = $440,011.02 4.40 NPV = $282.78 4.41 a. NPV(Engineer) = $352,535.14 NPV(Accountant) = $345,958.20 b. NPV(Engineer) = $292,418.30 NPV(Accountant) = $292,947.73 4.42 PV(Offer) = $415,783.60 4.43 NPV = $3,041.91 4.44 Ian needs to save $58,396.23 annually from year 11 to year 30 in order to meet his objectives. 4.45 PV(Contract) = $174,276.73. 4.46 $293.18 = C 4.47 Repayment = $5,867.91. 4.48 PV = $3,429.38. 4.49 NPV(Contract) = $5,051,154.24. The equivalent annual salary from year 1984 through 1988 is $1,298,613.65. 4.50 PV(Balloon) = $291,439.54. 4.51 $186.43 = C 4.52 PV $4,352.43. Chapter 5: How to Value Bonds and Stocks 5.1 a. $613.91 b. $385.54 c. $247.19 5.2 a. $1,000 b. $828.41 c. $1,231.15 5.3 a. $718.65 b. $883.64 5.4 $846.33 5.5 0.09 5.6 a. 0.1236 b. $748.49 c. $906.15 5.7 a. PA = $1,000 PB = $1,000 b. PA = $850.61 PB = $887.00 c. PA = $1,196.36 PB = $1,134.20 5.8 a. P = $1,000 / (1+i) b. (1+i) = (1+r) (1+Inflation) 5.9 a. r = 0.0622 b. r = 0.0877 5.10 a. $18,033.86 b. $3,888.89 5.11 a. True. b. True c. True. d. False. e. True. 5.12 a. True. b. False. c. True. d. True. 5.13 $28.89 5.14 a. True. b. False. c. True. d. True. EPS = $3.83 5.15 r = 0.084 5.16 2,754 5.17 a. $28.57 b. $46.54 5.18 $26.93 5.19 $23.75 5.20 $47.62 5.21 $29.40 5.22 $14.09 5.23 $71.70 5.24 $2.49 5.25 a. 8.4% b. $21,680,000 5.26 0.1627 5.27 $4.82 5.28 a. $15.75 b. NPVGO = $15.43. 5.29 a. $33.33 b. $38,623,188.41 c. $35.26 5.30 a. $28.57 b. $64.30 5.31 a. 7.5 b. 8.33 Appendix to Chapter 5 5A.1 a. $914.87 b. 10.97% 5A.2 $945.66 5A.3 The one-year forward rate over the second year is 11.01%. 5A.4 a. f2 = 9.04% b. f3 = 16.25% Chapter 6: Some Alternative Investment Rules 6.1 a. Project A has a payback period of two years. Project B has a payback period of three years. b. Project A= -$388.96 Project B = $53.83 6.2 a. 6.67 b. The discounted payback period is 12 years. c. NPV = $500,000 6.3 a. 56.25% 6.4 Average Accounting Return = 11.5% 6.5 44%. 6.6 IRR(Project A) = 0.1289 IRR(Project B) = 0.1289 6.7 a. IRR = 0.0693 b. No 6.8 IRR(Project A) = 1.88 IRR(Project B) = 0.362 6.9 a. IRR = 0.1399 b. Reject the offer when the discount rate is less than the IRR. c. Accept the offer when the discount rate is greater than the IRR. d. NPV(10%) = -$359.95 NPV(20%) = $466.82 e. Yes 6.10 a. IRR(Project A) = 0.2569 IRR(Project B) = 0.1943 d. The incremental IRR is 19.1%. f. NPV(Project A) = $689.98 NPV(Project B) = $5,671.08 6.11 a. PV(A) = $49,824.62 PV(B) = -$44,642.86 b. IRR(Project C) = 0.1465 6.12 False. 6.13 a. PI(A) = 2.6 PI(B) = 1.5 6.15 a. PI(A) = 1.183 PI(B) = 1.099 PI(C) =1.148 b. NPV (A) = $18,303.57 NPV(B) = $19,706.63 NPV(C) =$14,795.92 d. PI(B – A) = 1.014 6.16 PI = 1.04 6.18 a. Payback Period Early Edition = 2.11 Payback Period Late Edition =2.25 b. New Sunday Early Edition IRR = 0.1676 New Saturday Late Edition IRR = 0.1429 c. IRR = 0.1102 d. The average accounting return for the New Sunday Early Edition is 58.3%. The average accounting return for the New Saturday Late Edition is 66.7%. 6.19 a. The discounted payback period for deepwater fishing is three years. The discounted payback period for the submarine ride is three years. b. The IRR of the deepwater fishing project is 24.3%. The IRR of the submarine ride is 21.46%. c. IRR = 0.1992 d. The NPV of the deepwater fishing project is $96,687.76. The NPV of the submarine ride project is $190,630.39. 6.20 a. 0.185565 b. Yes. Chapter 7: Net Present Value and Capital Budgeting 7.3 a. Incremental Net Income: Year 0 $0; Year 1 $1,650; Year 2 $1,650; Year 3 $1,650; Year 4 $1,650 b. Incremental cash flow : Year 0 -$10,200; Year 1 $4,100; Year 2 $4,100; Year 3 $4,250; Year 4 $4,350 c. NPV = $2,519 7.4 $13,348,256 7.5 NPVA = -$4,324 NPVB = -$3,991 7.6 NPV = $129,870 7.7 NPV = -$11,232 7.8 NPV = $84,709 7.9 The least that the firm should charge for its initial lease payment is $523,117. 7.10 NPV = $89,514 7.11 The maximum price that MMC should be willing to pay for the equipment is $74,510. 7.12 a. Net Investment = -$16,200,000 b. After-Tax Incremental Cash Flows: -16,200,000 13,029,600 15,028,800 13,628,800 19,895,744 c. IRR = 0.7948 d. NPV = $27,772,577 7.13 NPVA = $1,446 NPVB = $120 7.14 The nominal cash flow at year 5 is $158,226. 7.15 PV Project = -$20,576 7.16 PV = $705,882 7.17 NPV = $1,291,044 7.18 NPV = $45,614,647 7.19 Value of the firm = $91,520,000 7.20 NPV = $2,171,596 7.21 Headache-only medicine: NPV = $11,767,030 Headache and Arthritis medicine: NPV = $27,226,206 7.22 PV = $150,100 7.23 EAC = -$22,344 7.24 EAC = -$16,286 7.25 EAC = -$14,980 7.26 The equivalent annual cost of model XX40 is $374. The equivalent annual cost of model RH45 is $339. 7.27 Facility 1: EAC = -$368,951 Facility 2: EAC = -$426,487 7.28 NPV(Option 1) = -$1,606,950 NPV(Option 2) = -631,636 7.29 SAL 5000 Total EAC = -$11,870 DET 1000 Total EAC = -$14,920 7.30 EVF EAC = $47,456 AEH EAC = $49,591 7.31 Mixer X EAB = $11,772 Mixer Y EAB = $13,407 7.32 Tamper A EAC = -$276,446 Tamper B EAC = -$254,338 7.33 The equivalent annual cost of the new autoclave is $615. The cost of the old autoclave in terms of end-of-year 1 dollars is $340. The cost of the old autoclave in terms of end-of-year 2 dollars is $435. The cost of the old autoclave in terms of end-of-year 3 dollars is $477. The cost of the old autoclave in terms of end-of-year 4 dollars is $620. Chapter 8: Strategy and Analysis in Using Net Present Value 8.1 NPV(Test Market) = $12,130,434.78 8.2 NPV(Go Directly) = $600,000 NPV(Focus Group) = $720,000 NPV(Consulting Firm) = $680,000 8.3 NPV(Lower Prices) = -$1,547,500 NPV(Lobbyist) = -$1,300,000 8.4 The break-even sales price of the calculator is $66. 8.5 The distributor must sell 350 televisions per year to break even. 8.6 a. 281,250 abalones per year b. Total Profit = $15,600 8.7 The present value break-even point is 297,657 abalones. 8.8 The present value break-even point is 20,532 units. 8.9 The break-even purchase price is $61,981.06. 8.10 a. Pessimistic: NPV = -$123,021.71 expected: NPV = $247,814.18 Optimistic: NPV = $653,146.42 b. NPV = $259,312.96 8.11 Pessimistic: NPV = -$675,701.68 expected: NPV = $399,304.88 Optimistic: NPV = $1,561,468.43 The expected NPV of the project is $428,357.21. 8.12 a. NPV = $608,425.33 b. The revised NPV is $699,334.42. c. The option value of abandonment is $90,909.09. 8.13 a. NPV = $738,494,417.11 b. $12,403,973.08 = C1 Chapter 9: Capital Market Theory: An Overview 9.1 a. Capital Gain = $500 b. Total Dollar Gain = $1,500 c. Rt+1 =0.0811 9.2 a. Capital Gain = $450 b. Total Dollar Gain = $1,050 c. Rt+1 = 0.1010 e. Dividend Yield = 0.0577 9.3 The percentage return is –20.48%. 9.4 Rt+2 = 0.0529 9.5 a. r = 0.0883 b. r = 0.03 c. r = 0.0262 d. r = 0.00679 9.6 E(R) = 0.104 9.7 General Materials: (0.99) P0 Standard Fixtures: (0.99) P0 9.8 The five-year holding-period return is 98.64 percent. 9.9 E(R) = 0.044 9.10 a. The expected return on the market is 10.55 percent. The expected return on Treasury bills is 3.5 percent. b. The expected risk premium is 7.05 percent. 9.11 a. The average return is 15.9 percent. b. The standard deviation of the portfolio is 0.1708. 9.12 b. The average risk premium is 8.49 percent. 9.13 a. E(R) = 0.088 b. The standard deviation is 0.03311. 9.14 a. The expected return on the market is 15.3 percent. b. The expected return on Tribli stock is 6.28 percent. 9.15 a. The expected return on Belinkie Enterprises stock is 5.75 percent. The expected return on Overlake Company stock is 9 percent. b. The variance of Belinkie Enterprises stock is 0.000421. The variance of Overlake Company stock is 0.00115. 9.16 a. The average return on small-company stocks is 15.42 percent. The average return on the market index is 16.04 percent. b. The standard deviation of the small-company returns is 0.33249. The standard deviation of the market index is 0.47352. 9.17 The average return on common stocks is 18.33 percent. The variance of the common stock returns is 0.018372. The average return on small stocks is 20.90 percent. The variance of the small stock returns is 0.029734. The average return on long-term corporate bonds is 16.01 percent. The variance of the long-term corporate bond returns is 0.029522. The average return on long-term government bonds is 15.68 percent. The variance of the long-term government bond returns is 0.02868. The average return on the Treasury bills is 9.86 percent. The variance of the Treasury bill returns is 0.00075. 9.18 a. The average return on small-company stocks is 8.95 percent. The average return on U.S. Treasury bills is 6.63 percent. b. The standard deviation of small-company stocks is .2340. The standard deviation of the Treasury bill returns is 0.0119. 9.19 The range in which 95 percent of the returns will fall is between 0.5 percent and 34.5 percent. Chapter 10: Return and Risk: The Capital Asset Pricing Model (CAPM) 10.1 a. 10.57% b. Standard Deviation (s) = 7.20% 10.2 a. Expected ReturnA = 10.80% Expected ReturnB = 9.33% b. Standard DeviationA = 3.80% Standard DeviationB = 12.02% c. Covariance(RA, RB) = 0.004539 Correlation(RA,RB) = 0.9937 10.3 a. Expected ReturnHB = 7.33% Expected ReturnSB = 6.08% b. The standard deviation of Highbear’s stock returns is 5.80%. The standard deviation of Slowbear’s stock returns is 0.75%. c. The covariance between the returns on Highbull’s stock and Slowbear’s stock is 0.000425. The correlation between the returns on Highbull’s stock and Slowbear’s stock is 0.9770. 10.4 The weight of Atlas stock in the portfolio is 2/3. The weight of Babcock stock in the portfolio is 1/3. 10.5 a. E(RP) = 16.20% b. The standard deviation of the portfolio equals 8.23% 10.6 a. E(RP) = 21% The standard deviation (sP) of the portfolio equals 14.42% b. sP = 10.58% 10.7 a. The expected return on her portfolio is 18%. The standard deviation of her portfolio is 13.54%. b. The expected return on her portfolio is 16.67%. The standard deviation of her portfolio is 10.00%. 10.8 a. The expected return on Stock A is 7%. The standard deviation of the returns on Stock A is 0%. The expected return on Stock B is 11.50%. The standard deviation of the returns on Stock B is 10.50%. b. The covariance between the returns on Stock A and Stock B is 0. The correlation between the returns on Stock A and Stock B is 0. c. The expected return of an equally weighted portfolio is 9.25%. The standard deviation of the returns on an equally weighted portfolio is 5.25%. 10.9 a. The expected return on the portfolio is 17%. The standard deviation of the portfolio is 10.61%. b. The expected ret