FINS 5514
Week 5: Estimating Risk in Capital Budgeting
1. d
2. c
3. a
4. c
5. d
92
.
16
$
P
100
,
1
$
295
,
3
$
500
,
1
−
+
=
; P = $19.85
6. a
Percentage change in OCF = 2.1 ×  .04 = .084; The OCF decreases by 8.4
percent.
7. c
Sales for the best case scenario = 4,000 × 1.10 × $12.00 × 1.04 = $54,912
8. a
Net income for the base case scenario = {[4000 × ($12  $7)]  $12,000 
$2,500} × {1  .34} = $3,630
9. b
EBIT for best case scenario = [4,000 × 1.10] × [($12 × 1.04) – ($7 × .97)] –
($12,000 × .98) $2,500 = $10,776
10. a
EBIT for worst case scenario = [4,000 × .90] × [($12 × .96) – ($7 × 1.03)] –
($12,000 × 1.02) $2,500 = $776
Tax = $776 × .34 = $263.84
OCF for worst case scenario = $776 + $2,500  $263.84 = $3,012.16 = $3,012
11. c Re = ($1.50 ÷ $43.20) + .03 = .0647 = 6.47 percent
12. b Re = .035 + (1.06 × .07) = .1092 = 10.92 percent
13. d Rp = (.085 × $100) ÷ $72 = .1181 = 11.81 percent
14. c
98 = (2.50)[11/(1+r)
12
/r] + 100/(1+r)
12
Solve for r, r=5.39
15. d WACC = [(1.0 ÷ 1.4) × .11] + [(.4 ÷ 1.4) × .09 × (1
−
.34)] = .078571 + .016971
=.0955 = 9.55 percent
16. d .10 = .04 + (1.20 × mrp); mrp = .05; RProject = .04 + (.97 × .05) = .0885 =
8.85%
17. a
18. b
19. d
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View Full Document20. a Common: 15,000 × $21 = $315,000; Preferred = 5,000 × $42 = $210,000; Debt
= $200,000 × .98 = $196,000; Total = $315,000 + $210,000 + $196,000 = $721,000;
Weight Common = $315,000 ÷ $721,000 = .4369 = 44 percent
Chapter 11 Questions
11.
We know that the DOL is the percentage change in OCF divided by the
percentage change in quantity sold. Since we have the original and new quantity
sold, we can use the DOL equation to find the percentage change in OCF. Doing
so, we find:
DOL = %
Δ
OCF / %
Δ
Q
Solving for the percentage change in OCF, we get:
%
Δ
OCF = (DOL)(%
Δ
Q)
%
Δ
OCF = 2.5[(46,000 – 40,000)/40,000]
%
Δ
OCF = 37.5%
The new level of operating leverage is lower since FC/OCF is smaller.
17.
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 Three '11
 No
 OCF, Best, worst and average case

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