CHAPTER 3
UNDERSTANDING FINANCIAL STATEMENTS
Problem 1
a. Marketable securities are valued at book or market, whichever is lower. Hence
marketable securities are probably assessed at close to market value. Near-cash must
also be close to market value. Cas
CHAPTER 10
FROM EARNINGS TO CASH FLOWS
Problem 1
a. Effective tax rate = 0.25! 12.5/50
After-tax operating income =
37.5
1
EBIT (1-t)
$41.25
Reinvestment
$16.50
FCFF
$24.75
Terminal value
Present Value
$22.30
Firm Value
$449.49
b. Marginal tax rate rate =
CHAPTER 2- SOLUTIONS INTRODUCTION TO VALUATION
Problem 1 A. False. The reverse is generally true. B. True. The value of an asset is an increasing function of its cash flows. C. True. The value of an asset is an increasing function of its life. D. False. G
Solutions to Investment Valuation
34
CHAPTER 9
MEASURING EARNINGS
Problem 1
Year
Operating Lease
Present Value at 7%
Expense
1
90
84.11215
2
90
78.60949
3
85
69.38532
4
80
61.03162
5
80
57.03889
6-10
75
219.2538
Sum of present values
569.4313
The debt val
CHAPTER 1 - SOLUTIONS INTRODUCTION TO VALUATION
Problem 1 e. All of the above Problem 2 d. Value is determined by investor perceptions, but it is also determined by the underlying earnings and cash flows. Perceptions must be based upon reality. Problem 3
CHAPTER 8
ESTIMATING RISK PARAMETERS AND COSTS OF FINANCING
Problem 1
We use the CAPM:
The Expected Return on the stock = 0.058 + 0.95(0.0876) = 0.1412 = 14.12%.
Since the investor is a short-term investor, we use the T-bill rate, and the arithmetic mean.
CHAPTER 7
RISKLESS RATES AND RISK PREMIUMS
Problem 1
I would use the U.S. treasury bond rate. There is country risk but it is best shown as part
of the risk premium.
Problem 2
Because it exposes you to reinvestment risk the rate will be different in 6 mon
CHAPTER 6
MARKET EFFICIENCY DEFINITION, TESTS AND EVIDENCE
Problem 1
(a) Resources are allocated among firms efficiently (i.e. put to best use)
(f) No group of investors will do better than the market consistently after adjusting for risk
and transactions
CHAPTER 5
OPTION PRICING THEORY AND MODELS
Problem 1
A. The values of the option parameters are as follows:
S = $83
K = $85
t = 0.25
r = 3.80%
Variance = 0.09
Value of call = $4.42
B. To replicate this call, you would have to:
Buy 0.4919 Shares of Stock (
Chapter 1 Entrepreneurship Fundamentals Successful E's recognize and develop a viable business opportunity, have confidence in the market potential for their new products and services, and are committed to running the race. They keep success in sight even