5-9a.01

||$500(1.06) = $530.00.

-500FV = ?

Using a financial calculator, enter N = 1, I/YR = 6, PV = -500, PMT = 0, and FV = ? Solve for FV = $530.00.

b.012

|||$500(1.06)2 = $561.80.

-500FV = ?

Using a financial calculator, enter N = 2, I/YR = 6, PV = -500, PMT = 0, and FV = ? Solve for FV = $561.80.

c.01

||$500(1/1.06) = $471.70.

PV = ?500

Using a financial calculator, enter N = 1, I/YR = 6, PMT = 0, and FV = 500, and PV = ? Solve for PV = $471.70.

d.012

|||$500(1/1.06)2 = $445.00.

PV = ?500

Using a financial calculator, enter N = 2, I/YR = 6, PMT = 0, FV = 500, and PV = ? Solve for PV = $445.00.

5-10a.012345678910

|||||||||||$500(1.06)10 = $895.42.

-500FV = ?

Using a financial calculator, enter N = 10, I/YR = 6, PV = -500, PMT = 0, and FV = ? Solve for FV = $895.42.

b.012345678910

|||||||||||$500(1.12)10 = $1,552.92.

-500FV = ?

Using a financial calculator, enter N = 10, I/YR = 12, PV = -500, PMT = 0, and FV = ? Solve for FV = $1,552.92.

c.012345678910

|||||||||||$500/(1.06)10 = $279.20.

PV = ?500

Using a financial calculator, enter N = 10, I/YR = 6, PMT = 0, FV = 500, and PV = ? Solve for PV = $279.20.

d.012345678910

|||||||||||

PV = ?1,552.90

$1,552.90/(1.12)10 = $499.99.

Using a financial calculator, enter N = 10, I/YR = 12, PMT = 0, FV = 1552.90, and PV = ? Solve for PV = $499.99.

$1,552.90/(1.06)10 = $867.13.

Using a financial calculator, enter N = 10, I/YR = 6, PMT = 0, FV = 1552.90, and PV = ? Solve for PV = $867.13.

e.The present value is the value today of a sum of money to be received in the future. For example, the value today of $1,552.90 to be received 10 years in the future is about $500 at an interest rate of 12%, but it is approximately $867 if the interest rate is 6%. Therefore, if you had $500 today and invested it at 12%, you would end up with $1,552.90 in 10 years. The present value depends on the interest rate because the interest rate determines the amount of interest you forgo by not having the money today.

5-11a.200520062007200820092010

||||||

-612 (in millions)

With a calculator, enter N = 5, PV = -6, PMT = 0, FV = 12, and then solve for I/YR = 14.87%.

b.The calculation described in the quotation fails to consider the compounding effect of interest. It can be demonstrated to be incorrect as follows:

$6,000,000(1.20)5 = $6,000,000(2.48832) ADVANCE \l1= $14,929,920,

which is greater than $12 million. Thus, the annual growth rate is less than 20%; in fact, it is about 15%, as shown in Part a.

5-12These problems can all be solved using a financial calculator by entering the known values shown on the time lines and then pressing the I/YR button.

a.

01

||

+700-749

With a financial calculator, enter: N = 1, PV = 700, PMT = 0, and FV = -749. I/YR = 7%.

b.

01

||

-700+749

With a financial calculator, enter: N = 1, PV = -700, PMT = 0, and FV = 749. I/YR = 7%.

c.

0

10

|

|

+85,000-201,229

With a financial calculator, enter: N = 10, PV = 85000, PMT = 0, and FV = -201229. I/YR = 9%.

d.012345

||||||

+9,000-2,684.80-2,684.80-2,684.80-2,684.80-2,684.80

With a financial calculator, enter: N = 5, PV = 9000, PMT = -2684.80, and FV = 0. I/YR = 15%.

5-13a.

?

||

-200400

With a financial calculator, enter I/YR = 7, PV = -200, PMT = 0, and FV = 400. Then press the N key to find N = 10.24. Override I/YR with the other values to find N = 7.27, 4.19, and 1.00.

b.

?

||Enter: I/YR = 10, PV = -200, PMT = 0, and FV = 400.

-200400N = 7.27.

c.

?

||Enter: I/YR = 18, PV = -200, PMT = 0, and FV = 400.

-200400N = 4.19.

d.

?

||Enter: I/YR = 100, PV = -200, PMT = 0, and FV = 400.

-200 400N = 1.00.

5-14a.012345678910

|||||||||||

400400400400400400400400400400

FV = ?

With a financial calculator, enter N = 10, I/YR = 10, PV = 0, and PMT = -400. Then press the FV key to find FV = $6,374.97.

b.012345

||||||

200200200200200

FV = ?

With a financial calculator, enter N = 5, I/YR = 5, PV = 0, and PMT = -200. Then press the FV key to find FV = $1,105.13.

c.012345

||||||

400400400400400

FV = ?

With a financial calculator, enter N = 5, I/YR = 0, PV = 0, and PMT = -400. Then press the FV key to find FV = $2,000.

d.To solve Part d using a financial calculator, repeat the procedures discussed in Parts a, b, and c, but first switch the calculator to BEG mode. Make sure you switch the calculator back to END mode after working the problem.

1.

012345678910

|||||||||||

400400400400400400400400400400FV = ?

With a financial calculator on BEG, enter: N = 10, I/YR = 10, PV = 0, and PMT = -400. FV = $7,012.47.

2.

012345

||||||

200200200200200FV = ?

With a financial calculator on BEG, enter: N = 5, I/YR = 5, PV = 0, and PMT = -200. FV = $1,160.38.

3.

012345

||||||

400400400400400FV = ?

With a financial calculator on BEG, enter: N = 5, I/YR = 0, PV = 0, and PMT = -400. FV = $2,000.

5-15a.

012345678910

|||||||||||

PV = ?400400400400400400400400400400

With a financial calculator, simply enter the known values and then press the key for the unknown. Enter: N = 10, I/YR = 10, PMT = -400, and FV = 0. PV = $2,457.83.

b.

012345

||||||

PV = ?200200200200200

With a financial calculator, enter: N = 5, I/YR = 5, PMT = -200, and FV = 0. PV = $865.90.

c.

012345

||||||

PV = ?400400400400400

With a financial calculator, enter: N = 5, I/YR = 0, PMT = -400, and FV = 0. PV = $2,000.00.

d.1.

012345678910

|||||||||||

400400400400400400400400400400

PV = ?

With a financial calculator on BEG, enter: N = 10, I/YR = 10, PMT = -400, and FV = 0. PV = $2,703.61.

2.

012345

||||||

200200200200200

PV = ?

With a financial calculator on BEG, enter: N = 5, I/YR = 5, PMT = -200, and FV = 0. PV = $909.19.

3.

012345

||||||

400400400400400

PV = ?

With a financial calculator on BEG, enter: N = 5, I/YR = 0, PMT = -400, and FV = 0. PV = $2,000.00.

5-20Contract 1: PV=

= $2,727,272.73 + $2,479,338.84 + $2,253,944.40 + $2,049,040.37

= $9,509,596.34.

Using your financial calculator, enter the following data: CF0 = 0; CF1-4 = 3000000; I/YR = 10; NPV = ? Solve for NPV = $9,509,596.34.

Contract 2: PV=

= $1,818,181.82 + $2,479,338.84 + $3,005,259.20 + $3,415,067.28

= $10,717,847.14.

Alternatively, using your financial calculator, enter the following data: CF0 = 0; CF1 = 2000000; CF2 = 3000000; CF3 = 4000000; CF4 = 5000000; I/YR = 10; NPV = ? Solve for NPV = $10,717,847.14.

Contract 3: PV=

= $6,363,636.36 + $826,446.28 + $751,314.80 + $683,013.46

= $8,624,410.90.

Alternatively, using your financial calculator, enter the following data: CF0 = 0; CF1 = 7000000; CF2 = 1000000; CF3 = 1000000; CF4 = 1000000; I/YR = 10; NPV = ? Solve for NPV = $8,624,410.90.

Contract 2 gives the quarterback the highest present value; therefore, he should accept Contract 2.

3-3EBITDA$7,500,000(Given)

Depreciation 2,500,000Deprec. = EBITDA EBIT = $7,500,000 $5,000,000

EBIT$5,000,000EBIT = EBT + Int = $3,000,000 + $2,000,000

Interest 2,000,000(Given)

EBT$3,000,000

Taxes (40%) 1,200,000Taxes = EBT Tax rate

NI$1,800,000(Given)

3-4NI = $50,000,000; R/EY/E = $810,000,000; R/EB/Y = $780,000,000; Dividends = ?

R/EB/Y + NI Div= R/EY/E

$780,000,000 + $50,000,000 Div= $810,000,000

$830,000,000 Div= $810,000,000

$20,000,000= Div.

3-5 MVA= (P0 ( Number of common shares) ( BV of equity

$130,000,000= $60X ( $500,000,000

$630,000,000= $60X

X= 10,500,000 common shares.

3-6Book value of equity = $35,000,000.

Price per share (P0) = $30.00.

Common shares outstanding = 2,000,000 shares.

Market value of equity= P0 Common shares outstanding

= $30 2,000,000

= $60,000,000.

MVA= Market value of equity Book value of equity

= $60,000,000 $35,000,000

= $25,000,000.

3-7Statements b and d will decrease the amount of cash on a companys balance sheet. Statementa will increase cash through the sale of common stock. Selling stock provides cash through financing activities. On one hand, Statement c would decrease cash; however, it is also possible that Statement c would increase cash, if the firm receives a tax refund for taxes paid in a prior year.

3-10a.From the statement of cash flows the change in cash must equal cash flow from operating activities plus long-term investing activities plus financing activities. First, we must identify the change in cash as follows:

Cash at the end of the year$25,000

Cash at the beginning of the year 55,000

Change in cash-$30,000The sum of cash flows generated from operations, investment, and financing must equal a negative $30,000. Therefore, we can calculate the cash flow from operations as follows:

CF from operations ( CF from investing ( CF from financing= ( in cash

CF from operations ( $250,000 ( $170,000= -$30,000

CF from operations= $50,000.

b.Since we determined that the firms cash flow from operations totaled $50,000 in Part a of this problem, we can now calculate the firms net income as follows:

NI ( ( (

=

NI + $10,000 + $25,000 $100,000= $50,000

NI $65,000= $50,000

NI= $115,000.

3-11

Statement of Cash FlowsI.Operating Activities

Net income$5,000,000

Depreciation450,000

NWC 0

Net cash provided by operating activities$5,450,000II.Long-Term Investing Activities

Additions to property, plant, and equipment($5,500,000)

Net cash used in investing activities($5,500,000)

III.Financing Activities

Increase in long-term debt$1,000,000

Payment of common dividends (750,000)

Net cash provided by financing activities$ 250,000IV.Summary

Net increase in cash (Net sum of I., II., and III.)$ 200,000

Cash at beginning of year 100,000

Cash at end of year$ 300,0004-7Step 1:Calculate total assets from information given.

Sales = $6 million.

3.2(= Sales/TA

3.2(=

Assets= $1,875,000.

Step 2:Calculate net income.

There is 50% debt and 50% equity, so Equity = $1,875,000 ( 0.5 = $937,500.

ROE= NI/S ( S/TA ( TA/E

0.12= NI/$6,000,000 ( 3.2 ( $1,875,000/$937,500

0.12=

$720,000= 6.4NI

$112,500= NI.

4-10We are given ROA = 3% and Sales/Total assets = 1.5(.

From the DuPont equation:ROA= Profit margin ( Total assets turnover

3%= Profit margin(1.5)

Profit margin= 3%/1.5 = 2%.

We can also calculate the companys debt-to-assets ratio in a similar manner, given the facts of the problem. We are given ROA(NI/A) and ROE(NI/E); if we use the reciprocal of ROE we have the following equation:

Alternatively, using the DuPont equation:

ROE= ROA ( EM

5%= 3% ( EM

EM= 5%/3% = 5/3 = TA/E.

Take reciprocal: E/TA = 3/5 = 60%; therefore, D/A = 1 0.60 = 0.40 = 40%.

Thus, the firms profit margin = 2% and its debt-to-assets ratio = 40%.4-17TA = $5,000,000,000; T = 40%; EBIT/TA = 10%; ROA = 5%; TIE ?

Now use the income statement format to determine interest so you can calculate the firms TIE ratio.

EBIT$500,000,000See above.

INT 83,333,333EBT$416,666,667EBT = $250,000,000/0.6

Taxes (40%) 166,666,667NI$250,000,000See above.

TIE= EBIT/INT

= $500,000,000/$83,333,333

= 6.0.

4-18Present current ratio = = 2.5.

Minimum current ratio = = 2.0.

$1,312,500 + (NP= $1,050,000 + 2(NP

(NP= $262,500.

Short-term debt can increase by a maximum of $262,500 without violating a 2 to 1 current ratio, assuming that the entire increase in notes payable is used to increase current assets. Since we assumed that the additional funds would be used to increase inventory, the inventory account will increase to $637,500 and current assets will total $1,575,000, and current liabilities will total $787,500.

4-211.Total debt = (0.50)(Total assets) = (0.50)($300,000) = $150,000.

2.Accounts payable = Total debt Long-term debt= $150,000 $60,000

= $90,000.

3.Common stock= Debt Retained earnings

= $300,000 $150,000 $97,500 = $52,500.

4.Sales = (1.5)(Total assets) = (1.5)($300,000) = $450,000.

5.Inventories = Sales/5 = $450,000/5 = $90,000.

6.Accounts receivable= (Sales/365)(DSO) = ($450,000/365)(36.5) = $45,000.

7.Cash + Accounts receivable + Inventories= (1.8)(Accounts payable)

Cash + $45,000 + $90,000= (1.8)($90,000)

Cash + $135,000= $162,000

Cash= $27,000.

8.Fixed assets= Total assets (Cash + Accts rec. + Inventories)

= $300,000 ($27,000 + $45,000 + $90,000)

= $138,000.

9.Cost of goods sold = (Sales)(1 0.25) = ($450,000)(0.75) = $337,500.7-1With your financial calculator, enter the following:

N = 10; I/YR = YTM = 9%; PMT = 0.08 ( 1,000 = 80; FV = 1000; PV = VB = ?

PV = $935.82.

7-2VB = $985; M = $1,000; Int = 0.07 ( $1,000 = $70.

a.N = 10; PV = -985; PMT = 70; FV = 1000; YTM = ?

Solve for I/YR = YTM = 7.2157% ( 7.22%.

b.N = 7; I/YR = 7.2157; PMT = 70; FV = 1000; PV = ?

Solve for VB = PV = $988.46.

7-3The problem asks you to find the price of a bond, given the following facts: N = 2 ( 8 = 16; I/YR = 8.5/2 = 4.25; PMT = (0.09/2) 1,000 = 45; FV = 1000.

With a financial calculator, solve for PV = $1,028.60.

7-4With your financial calculator, enter the following to find YTM:

N = 10 ( 2 = 20; PV = -1100; PMT = 0.08/2 ( 1,000 = 40; FV = 1000; I/YR = YTM = ?

YTM = 3.31% ( 2 = 6.62%.

With your financial calculator, enter the following to find YTC:

N = 5 ( 2 = 10; PV = -1100; PMT = 0.08/2 ( 1,000 = 40; FV = 1050; I/YR = YTC = ?

YTC = 3.24% ( 2 = 6.49%.

Since the YTC is less than the YTM, investors would expect the bonds to be called and to earn the YTC.

7-5a.1.5%:Bond L:Input N = 15, I/YR = 5, PMT = 100, FV = 1000, PV = ?, PV = $1,518.98.

Bond S:Change N = 1, PV = ? PV = $1,047.62.

2.8%:Bond L:From Bond S inputs, change N = 15 and I/YR = 8, PV = ?, PV = $1,171.19.

Bond S:Change N = 1, PV = ? PV = $1,018.52.

3.12%:Bond L:From Bond S inputs, change N = 15 and I/YR = 12, PV = ?, PV = $863.78.

Bond S:Change N = 1, PV = ? PV = $982.14.

b.Think about a bond that matures in one month. Its present value is influenced primarily by the maturity value, which will be received in only one month. Even if interest rates double, the price of the bond will still be close to $1,000. A 1-year bonds value would fluctuate more than the one-month bonds value because of the difference in the timing of receipts. However, its value would still be fairly close to $1,000 even if interest rates doubled. A long-term bond paying semiannual coupons, on the other hand, will be dominated by distant receipts, receipts that are multiplied by 1/(1 + rd/2)t, and if rd increases, these multipliers will decrease significantly. Another way to view this problem is from an opportunity point of view. A 1month bond can be reinvested at the new rate very quickly, and hence the opportunity to invest at this new rate is not lost; however, the long-term bond locks in subnormal returns for a long period of time.

7-7

Percentage

Price at 8%Price at 7% Change

10-year, 10% annual coupon$1,134.20$1,210.716.75%

10-year zero463.19508.359.75

5-year zero680.58712.994.76

30-year zero99.38131.3732.19

$100 perpetuity1,250.001,428.5714.29

8-1

= (0.1)(-50%) + (0.2)(-5%) + (0.4)(16%) + (0.2)(25%) + (0.1)(60%)

= 11.40%.

(2 = (-50% 11.40%)2(0.1) + (-5% 11.40%)2(0.2) + (16% 11.40%)2(0.4)

+ (25% 11.40%)2(0.2) + (60% 11.40%)2(0.1)

(2 = 712.44; ( = 26.69%.

CV = = 2.34.

8-2

InvestmentBeta

$35,0000.8

40,0001.4

Total$75,000bp = ($35,000/$75,000)(0.8) + ($40,000/$75,000)(1.4) = 1.12.

8-3rRF = 6%; rM = 13%; b = 0.7; r = ?

r= rRF + (rM rRF)b

= 6% + (13% 6%)0.7

= 10.9%.

8-4rRF = 5%; RPM = 6%; rM = ?

rM = 5% + (6%)1 = 11%.

r when b = 1.2 = ?

r = 5% + 6%(1.2) = 12.2%.

8-5a.r = 11%; rRF = 7%; RPM = 4%.

r= rRF + (rM rRF)b

11%= 7% + 4%b

4%= 4%b

b= 1.

b.rRF = 7%; RPM = 6%; b = 1.

r= rRF + (rM rRF)b

= 7% + (6%)1

= 13%.

8-6a.

.

= 0.1(-35%) + 0.2(0%) + 0.4(20%) + 0.2(25%) + 0.1(45%)

= 14% versus 12% for X.

b.( = .

= (-10% 12%)2(0.1) + (2% 12%)2(0.2) + (12% 12%)2(0.4)

+ (20% 12%)2(0.2) + (38% 12%)2(0.1) = 148.8.

(X = 12.20% versus 20.35% for Y.

CVX = (X/X = 12.20%/12% = 1.02, while

CVY = 20.35%/14% = 1.45.

If Stock Y is less highly correlated with the market than X, then it might have a lower beta than Stock X, and hence be less risky in a portfolio sense.

8-12a.ri = rRF + (rM rRF)bi = 9% + (14% 9%)1.3 = 15.5%.

b.1.rRF increases to 10%:

rM increases by 1 percentage point, from 14% to 15%.

ri = rRF + (rM rRF)bi = 10% + (15% 10%)1.3 = 16.5%.

2.rRF decreases to 8%:

rM decreases by 1%, from 14% to 13%.

ri = rRF + (rM rRF)bi = 8% + (13% 8%)1.3 = 14.5%.

c.1.rM increases to 16%:

ri = rRF + (rM rRF)bi = 9% + (16% 9%)1.3 = 18.1%.

2.rM decreases to 13%:

ri = rRF + (rM rRF)bi = 9% + (13% 9%)1.3 = 14.2%.

8-17After additional investments are made, for the entire fund to have an expected return of 13%, the portfolio must have a beta of 1.5455 as shown below:

13%= 4.5% + (5.5%)b

b= 1.5455.

Since the funds beta is a weighted average of the betas of all the individual investments, we can calculate the required beta on the additional investment as follows:

1.5455= +

1.5455= 1.2 + 0.2X

0.3455= 0.2X

X= 1.7275.

8-21a.

= 0.1(-28%) + 0.2(0%) + 0.4(12%) + 0.2(30%) + 0.1(50%) = 13%.

rRF = 6%. (given)

Therefore, the SML equation is:

ri = rRF + (rM rRF)bi = 6% + (13% 6%)bi = 6% + (7%)bi.

b.First, determine the funds beta, bF. The weights are the percentage of funds invested in each stock:

A = $160/$500 = 0.32.

B = $120/$500 = 0.24.

C = $80/$500 = 0.16.

D = $80/$500 = 0.16.

E = $60/$500 = 0.12.

bF= 0.32(0.5) + 0.24(1.2) + 0.16(1.8) + 0.16(1.0) + 0.12(1.6)

= 0.16 + 0.288 + 0.288 + 0.16 + 0.192 = 1.088.

Next, use bF = 1.088 in the SML determined in Part a:

= 6% + (13% 6%)1.088 = 6% + 7.616% = 13.616%.

c.rN = Required rate of return on new stock = 6% + (7%)1.5 = 16.5%.

An expected return of 15% on the new stock is below the 16.5% required rate of return on an investment with a risk of b = 1.5. Since rN = 16.5% > = 15%, the new stock should not be purchased. The expected rate of return that would make the fund indifferent to purchasing the stock is 16.5%.

9-1D0 = $1.50; g1-3 = 7%; gn = 5%; D1 through D5 = ?

D1 = D0(1 + g1) = $1.50(1.07) = $1.6050.

D2 = D0(1 + g1)(1 + g2) = $1.50(1.07)2 = $1.7174.

D3 = D0(1 + g1)(1 + g2)(1 + g3) = $1.50(1.07)3 = $1.8376.

D4 = D0(1 + g1)(1 + g2)(1 + g3)(1 + gn) = $1.50(1.07)3(1.05) = $1.9294.

D5 = D0(1 + g1)(1 + g2)(1 + g3)(1 + gn)2 = $1.50(1.07)3(1.05)2 = $2.0259.

9-2D1 = $0.50; g = 7%; rs = 15%; = ?

9-3P0 = $20; D0 = $1.00; g = 6%; = ?; rs = ?

= P0(1 + g) = $20(1.06) = $21.20.

= + g

= + 0.06

= + 0.06 = 11.30%. rs = 11.30%.

9-4a.The horizon date is the date when the growth rate becomes constant. This occurs at the end of Year 2.

b.

0123

||||

1.251.501.801.89

37.80 =

The horizon, or continuing, value is the value at the horizon date of all dividends expected thereafter. In this problem it is calculated as follows:

c.The firms intrinsic value is calculated as the sum of the present value of all dividends during the supernormal growth period plus the present value of the terminal value. Using your financial calculator, enter the following inputs: CF0 = 0, CF1 = 1.50, CF2 = 1.80 + 37.80 = 39.60, I/YR = 10, and then solve for NPV = $34.09.

9-5The firms free cash flow is expected to grow at a constant rate, hence we can apply a constant growth formula to determine the total value of the firm.

Firm value= FCF1/(WACC gFCF)

= $150,000,000/(0.10 0.05)

= $3,000,000,000.

To find the value of an equity claim upon the company (share of stock), we must subtract out the market value of debt and preferred stock. This firm happens to be entirely equity funded, and this step is unnecessary. Hence, to find the value of a share of stock, we divide equity value (or in this case, firm value) by the number of shares outstanding.

Equity value per share= Equity value/Shares outstanding

= $3,000,000,000/50,000,000

= $60.

Each share of common stock is worth $60, according to the corporate valuation model.

9-8a.

b.

9-11First, solve for the current price.

= D1/(rs g)

= $0.50/(0.12 0.07)

= $10.00.

If the stock is in a constant growth state, the constant dividend growth rate is also the capital gains yield for the stock and the stock price growth rate. Hence, to find the price of the stock four years from today:

= P0(1 + g)4

= $10.00(1.07)4

= $13.10796 $13.11.

10-1rd(1 T) = 0.12(0.65) = 7.80%.

10-2Pp = $47.50; Dp = $3.80; rp = ?

rp= = = 8%.

10-340% Debt; 60% Common equity; rd = 9%; T = 40%; WACC = 9.96%; rs = ?

WACC= (wd)(rd)(1 T) + (wc)(rs)

0.0996= (0.4)(0.09)(1 0.4) + (0.6)rs

0.0996= 0.0216 + 0.6rs

0.078= 0.6rs

rs= 13%.

10-5Projects A, B, C, D, and E would be accepted since each projects return is greater than the firms WACC.

10-8Debt = 40%, Common equity = 60%.

P0 = $22.50, D0 = $2.00, D1 = $2.00(1.07) = $2.14, g = 7%.

rs = + g = + 7% = 16.51%.

WACC= (0.4)(0.12)(1 0.4) + (0.6)(0.1651)

= 0.0288 + 0.0991 = 12.79%.

10-17a.

rs= + g

0.09= + g

0.09= 0.06 + g

g= 3%.

b.Current EPS$5.400Alternatively:

Less: Dividends per share 3.600EPS1 = EPS0(1 + g) = $5.40(1.03) = $5.562.

Retained earnings per share$1.800

Rate of return( 0.090Increase in EPS$0.162

Plus: Current EPS 5.400Next years EPS$5.56211-1Financial calculator solution: Input CF0 = -52125, CF1-8 = 12000, I/YR = 12, and then solve for NPV = $7,486.68.

11-2Financial calculator solution: Input CF0 = -52125, CF1-8 = 12000, and then solve for IRR = 16%.

11-4Since the cash flows are a constant $12,000, calculate the payback period as: $52,125/$12,000 = 4.3438, so the payback is about 4 years.

11-5Project Ks discounted payback period is calculated as follows:

AnnualDiscounted @12%

PeriodCash Flows Cash Flows Cumulative

0($52,125)($52,125.00) ADVANCE \l2($52,125.00)

112,00010,714.29 ADVANCE \l2(41,410.71)

212,0009,566.33 ADVANCE \l2(31,844.38)

312,0008,541.36 ADVANCE \l2(23,303.02)

412,0007,626.22 ADVANCE \l2(15,676.80)

512,0006,809.12(8,867.68)

612,0006,079.57 ADVANCE \l2(2,788.11)

712,0005,428.19ADVANCE \l22,640.08

812,0004,846.60ADVANCE \l27,486.68

The discounted payback period is 6 + years, or 6.51 years.

11-6a.Project A: Using a financial calculator, enter the following:

CF0 = -25, CF1 = 5, CF2 = 10, CF3 = 17, I/YR = 5; NPV = $3.52.

Change I/YR = 5 to I/YR = 10; NPV = $0.58.

Change I/YR = 10 to I/YR = 15; NPV = -$1.91.

Project B: Using a financial calculator, enter the following:

CF0 = -20, CF1 = 10, CF2 = 9, CF3 = 6, I/YR = 5; NPV = $2.87.

Change I/YR = 5 to I/YR = 10; NPV = $1.04.

Change I/YR = 10 to I/YR = 15; NPV = -$0.55.

b.Using the data for Project A, enter the cash flows into a financial calculator and solve for IRRA = 11.10%. The IRR is independent of the WACC, so it doesnt change when the WACC changes.

Using the data for Project B, enter the cash flows into a financial calculator and solve for IRRB = 13.18%. Again, the IRR is independent of the WACC, so it doesnt change when the WACC changes.

c.At a WACC = 5%, NPVA > NPVB so choose Project A.

At a WACC = 10%, NPVB > NPVA so choose Project B.

At a WACC = 15%, both NPVs are less than zero, so neither project would be chosen.

12-8a.The $5,000 spent last year on exploring the feasibility of the project is a sunk cost and should not be included in the analysis.

13-2The optimal capital structure is that capital structure where WACC is minimized and stock price is maximized. Because Jacksons stock price is maximized at a 30% debt-to-capital ratio, the firms optimal capital structure is 30% debt and 70% equity. This is also the debt level where the firms WACC is minimized.

6%

6%

6%

6%

6%

12%

6%

12%

?

I/YR = ?

I/YR = ?

I/YR = ?

I/YR = ?

7%

10%

18%

100%

10%

5%

0%

10%

5%

0%

10%

5%

0%

10%

5%

0%

EMBED Equation.3

INT= EBIT EBT

= $500,000,000 $416,666,667.

rs = 10%

gn = 5%

gs = 20%

gs = 20%

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