Appendix_B - Appendix B Answers to Selected End-of-Chapter...

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Chapter 1 1A.5 Cash Flow from Dividends $10,000 $448.33 $9,551.67 Cash Flow from Interest $10,000 $2,205 $7,795 Cash Flow from Capital Gains $10,000 $1,102.50 $8,897.50 Chapter 2 2.1 Total Assets $128,000 2.2 Debt $50,000 Preferred Shares $30,000,000 Common Shares $110,000,000 Retained Earnings $22,000,000 2.3 $90,000 2.7 Cash flow from the firm ($1,000) (4,000) ($5,000) 2A.2 ROA 9%, ROE 22.5% 2A.3 ACP 54.58 days, APP 58.28 days Chapter 3 3.2 a. $3.24 million b. Total liabilities and stockholders’ equity $525 million c. Total liabilities and stockholders equity $574.26 million Chapter 4 4.1 $65,000 4.2 $73,600 4.5 a. 10% b. $15.00 c. $39.29 4.7 a. AE b. CF/BD The equity will appreciate to BE on the announcement. c. AF/AB Chapter 5 5.1 a. $1,628.89 b. $1,967.15 c. $2,653.30 d. The amount is more than twice owing to compound interest. With simple interest the amount would be exactly double. 5.2 a. $513.16 b. $1,818.18 c. $233.25 5.3 $1,000.00 today 5.5 $520,200 5.6 a. alternative 2 $20 million (2) vs. $10 million (1) b. alternative 2 $12.418 million (2) vs. $9.091 million (1) c. alternative 1 $8.333 million (1) vs. $8.038 million (2) d. 18.9% 5.7 Take the $115,000 from the Smiths today. $1,609,866.18 5.11 At 10% a negative NPV of $2,619.97 would be generated. Reject. At 9% a positive NPV of $6,567.93 is generated. Accept. 5.13 Value of holding car is $3,000/1.10 $1,000/1.10 $3,636.36, roommate s offer is $3,000. 5.15 $6,714.61 5.17 a. $1,822.12 b. $1,349.86 c. $1,648.72 d. $1,750.67 5.19 First Canadian Bank 5.21 a. $10,000.00 b. $4,545.45 c. $20,000.00 Answers to Selected End-of-Chapter Problems Appendix B
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5.22 $901.58 5.23 $45.00 5.25 $3,636,363.64 5.27 $333.33 5.29 NPV of $201.91 5.31 $1,658.98 5.32 9.06% a. $4,347.27 b. $17,824.65 5.35 Option one NPV $1,201,181; option two NPV $1,131,899. 5.37 No, NPV of policy is negative. 5.38 Present value of the lease and purchase option is $120,283.16. 5.39 $440,011 5.41 At 5% the NPV of engineering dominates accounting, but at 6% the NPVs reverse themselves and the decision. 5.42 $415,783.60 5.43 Revise the text book NPV of $3,041.91. 5.45 $174,276.93 5.49 $1,298,614 Chapter 6 6.1 a. $613.91 b. $385.54 c. $247.18 6.2 a. $1,000.00 (par) b. $828.41 (discount) c. $1,213.15 (premium) 6.3 a. $718.64 b. $883.64 6.5 9% 6.7 a. $1,000.00 b. $850.61, $887.00 c. $1,196.36, $1,134.20 6.9 a. 6.22% b. 8.77% 6.11 Bond formula is shown to be correct by using bond in table. 6.13 $28.89 6.15 a. $28.57 b. $46.54 6.17 $23.75 (cum dividend) 6.19 $29.40 6.21 $71.70 6.23 a. 8.4% b. $21.68 million 6.25 $4.82 a. Project A b. Project B Chapter 7 7.3 a. 56.25% b. Flaws with the AAR method are: 1. it uses net income (as opposed to cash flow) and book value from arbitrary accounting rules; 2. it ignores the time value of money; and 3. the AAR provides no guidance as to what is an acceptable rate of return, hence an arbitrary cutoff rate would be used. 7.5 44.44% 7.7 a. 16.69% b. Yes 7.9 a. 13.99% b. No c. Yes d. i. $359.95 ii. $466.82 e. Yes 7.11 a. $49,825, $44,643 b. 14.65% c. Accept project if the discount rate is less than or equal to 14.65% 7.13 a. 2.60, 1.52 b. If projects are independent can take both Alpha and Beta but if mutually exclusive take Alpha. 7.15 a. 1.18, 1.10, 1.15 b. $18,304, $19,707, $14,796 c. All d. A e. A B as it gives the highest combined NPV 7.19 a . A b . A c. Using the cash flows of (New Submarine Ride Deepwater Fishing) results in an IRR of 19.92%. Therefore, accept Ride as its return is greater than the required 15%. d . Under the NPV criterion take B with the higher NPV. 7.21 a. The worse case is to have $250,000 received at the end of year five in which case the NPV is $108,143 with b. the best case scenario is to have $249,999 received back immediately (called a flip) and $1 in five years from now with an NPV of $0.43 7.23 a. PIs are 1.63; 1.45, take HDTV b. NPVs are $630.35; $998.35, take Plasma c. Invest in Plasma given the higher NPV.
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