Intermediate step
Current stock price
$22.50
g
6.00%
F
5.00%
r
e
= D
1
/(P
0
*(1 – F)) + g
12.43%
xxvii .
(Comp: 11.2,11.8) NPV and payback--nonalgorithmic
First, find the missing t = 0 cash flow.
If payback = 2.5 years, this implies that the t = 0 cash flow must be
CF
0
+ $2,000 + $3,000 + (0.5)$3,000 = 0, so
CF
0
= -$2,000 – $3,000 – (0.5)$3,000 = -$6,500. Then
NPV = -$6,500 +
12
.
1
000
,
2
$
+
2
)
12
.
1
(
000
,
3
$
+
3
)
12
.
1
(
000
,
3
$
+
4
)
12
.
1
(
500
,
1
$
=
$765.91
xxviii
.
(11.6) MIRR (constant cash flows; 3 years)
WACC:
10.00%
Year:
0
1
2
3
Cash flows:
-$800
$350
$350
$350
TV = Sum of compounded inflows:
Compounded values, FVs:
$423.50
$385.00
$350.00
$1,158.50
MIRR =
13.14%
Found as discount rate that equates PV of TV to cost, discounted back 3 years @ 10%
MIRR =
13.14%
Alternative calculation, using Excel's MIRR function
xxix
.
(8.5) Constant growth valuation

D
0
$1.75
r
s
12.0%
g
4.0%
D
1
= D
0
(1 + g) =
$1.82
Intermediate step used to find answer
P
0
= D
1
/(r
s
– g)
$22.75
xxx
.
(8.5) Constant growth dividend
Stock price
$25.00
Required return
11.50%
Growth rate
7.00%
P
0
= D
1
/(r
s
– g), so D
1
= P
0
(r
s
– g) =
$1.13
Intermediate step
Last dividend = D
1
/(1 + g)
$1.05
xxxi
.
(7.5) Required rate of return
IP:
4.00%
Real rate:
3.00%
RP
M
:
5.00%
Beta:
1.00
Required return = 3% + 4% + 1.0(5%) =
12.00%
xxxii
.
Use CAPM to determine the market risk premium with data given
r
s
= r
RF
+ RP
M
× b
Stock
12.60%
= 5.00% + RP
M
× 1.49
7.60%
= RP
M
× 1.49
5.10%
= RP
M
xxxiii
.
N
6
PV
$1,150
PMT
$85
FV
$1,000
Current yield =
7.39%
xxxiv
.
EPS
$3.50
BVPS
$22.75
Shares outstanding
215,000
Debt ratio
46.0%
Total equity
$4,891,250
Total assets
$9,057,870
Total debt
$4,166,620
xxxv
.
(2.17) Loan amortization: interest
Find the required payment:

N
10
I
7.0%
PV
$75,000
FV
$0
PMT
$10,678.31
Amortization schedule (first 2 years)
Year
Beg. Balance
Payment
Interest
Principal
End. Balance
1
75,000.00
10,678.31
5,250.00
5,428.31
69,571.69
2
69,571.69
10,678.31
4,870.02
5,808.29
63,763.39

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- Fall '11
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