Solutions to Practice Problems; Chapters 12 and 13
12-15
EVA = Income earned (Cost of capital x Investment) = $1.2m [0.15 x ($4m + $2m + $8m)] = $1.2m
$2.1m = $0.9m
12-16
a.
False. The biases rarely wash out. For example, steady state income may not be m
Solutions to Practice Problems; Chapters 18 and 19
18-11
Financial slack is most valuable to growth companies with good but uncertain investment opportunities.
Slack means that financing can be raised quickly for positive-NPV investments. But too much fin
Solutions to Practice Problems; Chapters 20, 21 and 22
20-12
a.
The put places a floor on value of investment, i.e., less risky than buying stock. The risk
reduction comes at the cost of the option premium. Benefit from upside, but also lose on the
downsi
Solutions to Practice Problems; Chapter 31
31-9
a.
This is a version of the diversification argument. The high interest rates reflect the risk inherent
in the volatile industry. However, if the merger allows increased borrowing and provides
increased valu
Solutions to Practice Problems; Chapters 14-17
14-9
One would expect that the voting shares have a higher price because they have an added
benefit/responsibility that has value.
14-10
a.
Gross profits
Interest
EBT
Tax (at 35%)
Funds available to common sh
Solutions to Practice Problems; Chapters 10, 11 and 12
10-11
The spreadsheet shows the following results:
NPV
Pessimistic
Expected
Optimistic
Market Size
Market Share
-1.17
-10.39
3.43
3.43
8.04
17.26
Unit Price
-19.61
3.43
11.11
Unit Variable Cost
-11.93
Solutions to Practice Problems; Chapters 2, 3 and 4
2-13
a.
DF1
1
1 r1
b.
DF2
1
(1 r2 ) 2
c.
AF2 = DF1 + DF2 = 0.905 + 0.819 = 1.724
d.
PV of an annuity = C [Annuity factor at r% for t years]
Here: $24.65 = $10 [AF3]
AF3 = 2.465
e.
AF3 = DF1 + DF2 + DF3 =
Solutions to Practice Problems; Chapters 28, 29 and 30
28-20
Balance Sheet
Total liabilities + Equity = 235 Total assets = 235
Total current liabilities = 30 + 25 = 55
Current ratio = 1.4 Total current assets = 1.4 55 = 77
Cash ratio = 0.2 Cash = 0.2 55 =