tut5solutions(1) - FINS 5514 Week 5: Estimating Risk in...

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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)[1-1/(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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20. 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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tut5solutions(1) - FINS 5514 Week 5: Estimating Risk in...

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