Capital Budgeting and LongTerm Financing Decisions
FINANCE 5810

Fall 2015
Answer Capital Budgeting Reading Quiz  Chapters 16,17 and 18
1.
Martin Corporation is financed with 40% debt and 60% common equity. The after tax cost of debt is 10% and the cost of
common equity is 14%. What is Martins weighted average cost of capital?
Capital Budgeting and LongTerm Financing Decisions
FINANCE 5810

Fall 2015
Answer Key Practice Set Chapters 16,17,18
1.
2.
3.
4.
5.
6.
7.
8.
Using the rate function the YTM is 4.89%
The aftertax cost of debt is 3.67% = 4.89*(1.25)
The cost of existing preferred stock is 12.92% = 6.2/48
The cost of new preferred stock is 13.25%
Capital Budgeting and LongTerm Financing Decisions
FINANCE 5810

Fall 2015
Answer Key Practice Set Chapters 16,17,18
1.
2.
3.
4.
5.
6.
7.
8.
Using the rate function the YTM is 4.89%
The aftertax cost of debt is 3.67% = 4.89*(1.25)
The cost of existing preferred stock is 12.92% = 6.2/48
The cost of new preferred stock is 13.25%
Capital Budgeting and LongTerm Financing Decisions
FINANCE 5810

Fall 2015
Answer Key
Capital Budgeting Reading Quiz  Chapters 11 and 12
1.
The project proponent would be interested in the standard deviation (measure of dispersion) a case could also be made for the
range and possibly the semivariance for a non normally distri
Capital Budgeting and LongTerm Financing Decisions
FINANCE 5810

Fall 2015
Book Solutions for Chapters 1,2,3:
Problem 27 Calculating an economic profit
Investment in dollar
$
Required return in percent
Required return in dollars
$
Perpetual cash inflows
Required return in dollars
Economic loss
$
$
$
Problem 28 Calculating an e
Capital Budgeting and LongTerm Financing Decisions
FINANCE 5810

Fall 2015
Book Solutions for Chapters 4,and 5:
Problem 41 Application of Arbitrage
Year
0
1
2
Asset A
$900 $
1,000
Asset B
$400
$500
Asset C
$1,300 $
1,000
$500
Asset C would have to sell for $1,300 or there would be arbitrage opportunities that would drive it to
Capital Budgeting and LongTerm Financing Decisions
FINANCE 5810

Fall 2015
Problem 74 Selection between two investments when you CANNOT reuse the constraining resourse  Rare case in reality
Project T:
Years
0
1
2
3
4
Cashflows
50000
25000
25000
25000
Present value
$62,171
Net present value
$12,171
Project U:
Years
0
1
2
3
4
C
Capital Budgeting and LongTerm Financing Decisions
FINANCE 5810

Fall 2015
Problem 67 Net present value with year end cash flows:
Years
0
1
Initial outlay
100000
Cash inflows
30000
Total cash flow
100000
30000
Present value
$110,569
Net present value
$10,569
2
3
4
5
50000
50000
70000
70000
60000
60000
50000
50000
Problem 6
Capital Budgeting and LongTerm Financing Decisions
FINANCE 5810

Fall 2015
Problem 5
Year
Machine 1
Depreciation rate for five year equipment
Depreciation expense for machine 1
$
2011
82,000
0.1429
Machine 2
Depreciation rate for seven year equipment
Depreciation expense for machine 2
2012
# $
0.2449
$
$
Total depreciaition expe
Capital Budgeting and LongTerm Financing Decisions
FINANCE 5810

Fall 2015
Solutions for Practice Set for Chapters 4, and 5:
The best way to use this spreadsheet is to go to the cell and see what function or formula was used.
Problem 1
($916.26)
($971.07)
($1,093.45)
There is an inverse relationship between changes in interest r
Capital Budgeting and LongTerm Financing Decisions
FINANCE 5810

Fall 2015
Solutions for Practice Set for Chapters 1,2,3:
Please move the cursor to the cell below to see the function and the inputs to the functions.
Problem 1 Calculating an economic profit
Investment in dollars
$
2,400,000
Required return in percent
8.00%
Requir