Chapter 25 - Leasing
CHAPTER 25
Leasing
Answers to Problem Sets
1.
A, c; B, d or i; C, b or e; D, f; E, a; F, h; G, g.
2.
a, b, d, f, and h (though there may be other ways to reduce AMT).
3.
a.
The lessor must charge enough to cover the present value of t
Chapter 20 - Understanding Options
CHAPTER 20
Understanding Options
Answers to Problem Sets
1.
Call; exercise; put; European.
2.
Figure 20.13a represents a call seller; Figure 20.13b represents a call buyer.
3.
a.
The exercise price of the put option (i.e
Chapter 21 - Valuing Options
CHAPTER 21
Valuing Options
Answers to Problem Sets
1.
a.
Using risk-neutral method, (p X 20) + (1 - p)(-16.7) = 1, p = .48.
Value of call =
b.
Delta =
.48 8 .52 0 3.8
1.01
=
8
.544
14.7
c.
d.
Possible stock prices with call op
Chapter 24 - The Many Different Kinds of Debt
CHAPTER 24
The Many Different Kinds of Debt
Answers to Problem Sets
1.
a.
b.
c.
d.
e.
High-grade utility bonds
Industrial holding companies
Industrial bonds
Railroads
Asset-backed security.
a.
Decreases
b.
Imp
Chapter 23 - Credit Risk and the Value of Corporate Debt
CHAPTER 23
Credit Risk and the Value of Corporate Debt
Answers to Problem Sets
1.
Promised yield = 12.72%; expected yield = 9.37%.
2.
a.
b.
Increase
Increase
3.
Put option on companys assets with an
Chapter 22 - Real Options
CHAPTER 22
Real Options
Answers to Problem Sets
1.
a.
Increase value (unless the cash flows from the Mark II needed to be
discounted at a higher rate).
b.
Increase value.
c.
Reduce value.
2.
The company can buy furniture and rese
Chapter 19 - Financing and Valuation
CHAPTER 19
Financing and Valuation
Answers to Problem Sets
1.
Market values of debt and equity are D = .9 X 75 = $67.5 million and E = 42 X 2.5
= $105 million.
D/V = .39.
WACC = .09(1 - .35).39 + .18(.61) = .1325, or 1
Chapter 17 - Does Debt Policy Matter?
CHAPTER 17 Does Debt Policy Matter? Answers to Problem Sets 1. Note the market value of Copperhead is far in excess of its book value:
Ms. Kraft owns .625% of the firm, which proposes to increase common stock to $17 m
Chapter 18 - How Much Should a Corporation Borrow?
CHAPTER 18
How Much Should a Corporation Borrow?
Answers to Problem Sets
1.
The calculation assumes that the tax rate is fixed, that debt is fixed and
perpetual, and that investors personal tax rates on i
Chapter 16 - Payout Policy
CHAPTER 16
Payout Policy
Answers to Problem Sets
1.
a.
A1, B5; A2, B4; A3, B3; A4, B1; A5, B2
b.
On August 12, the ex-dividend date
c.
(.35 X 4)/52 = .027, or 2.7%
d.
(.35 X 4)/4.56 =.31, or 3.1%
e.
The price would fall to 52/1.
Chapter 08 - Portfolio Theory and the Capital Asset Pricing Model
CHAPTER 8 Portfolio Theory and the Capital Asset Pricing Model Answers to Problem Sets 1. a. b. c. 7% 27% with perfect positive correlation; 1% with perfect negative correlation; 19.1% with
Chapter 06 - Making Investment Decisions with the Net Present Value Rule
CHAPTER 6
Making Investment Decisions with
the Net Present Value Rule
Answers to Problem Sets
1.
a, b, d, g, h.
2.
Real cash flow = 100,000/1.04 = $96,154; real discount rate = 1.08/
Chapter 15 - How Corporations Issue Securities
CHAPTER 15
How Corporations Issue Securities
Answers to Problem Sets
1.
a.
Further sale of an already publicly traded stock
b.
U.S. bond issue by foreign corporation
c.
Bond issue by industrial company
d.
Bon
Chapter 12 - Agency Problems, Compensation, and Performance Measurement
CHAPTER 12
Agency Problems, Compensation,
and Performance Measurement
Answers to Problem Sets
1.
a.
True
b.
True
c.
False
d.
True
a.
Agency costs: value lost when managers do not act
Chapter 14 - An Overview of Corporate Financing
CHAPTER 14
An Overview of Corporate Financing
Answers to Problem Sets
1.
a.
False
b.
True
c.
True
a.
40,000/.50 = 80,000 shares
b.
78,000 shares
c.
2,000 shares are held as Treasury stock
d.
20,000 shares
e.
Chapter 10 - Project Analysis
CHAPTER 10
Project Analysis
Answers to Problem Sets
1.
a.
False
b.
True
c.
True
a.
Cash-flow forecasts overstated.
b.
One project proposal may be ranked below another simply because cash
flows are based on different forecasts
Chapter 13 - Efficient Markets and Behavioral Finance
CHAPTER 13
Efficient Markets and Behavioral Finance
Answers to Problem Sets
1.
2.
3.
c
Weak, semistrong, strong, strong, weak.
a.
False
b.
False
c.
True
d.
False
e.
False
f.
True
a.
False
b.
False
c.
T
Chapter 11 - Investment, Strategy, and Economic Rents
CHAPTER 11
Investment, Strategy, and Economic Rents
Answers to Problem Sets
1.
a.
False
b.
True
c.
True
d.
False
2.
$15
3.
First consider whether renting the building and opening the Taco Palace is
pos
Chapter 09 - Risk and the Cost of Capital
CHAPTER 9 Risk and the Cost of Capital Answers to Problem Sets 1. 2. Overestimate Company cost of capital = 10 x .4 + (10 + .5 x 8) x .6 = 12.4% After-tax WACC = (1 - .35) x 10 x .4 + (10 + .5 x 8) x .6 = 11.0% .2
Chapter 03 - Valuing Bonds
CHAPTER 3
Valuing Bonds
Answers to Problem Sets
1.
Does not change
b.
Price falls
c.
Yield rises.
a.
If the coupon rate is higher than the yield, then investors must be
expecting a decline in the capital value of the bond over i
Chapter 07 - Introduction to Risk and Return
CHAPTER 7
Introduction to Risk and Return
Answers to Problem Sets
1.
Expected payoff is $100 and expected return is zero. Variance is 20,000 (%
squared) and standard deviation is 141%.
2.
a.
Standard deviation
Chapter 04 - The Value of Common Stocks
CHAPTER 4
The Value of Common Stocks
Answers to Problem Sets
1.
a.
True
b.
True
2.
Investors who buy stocks may get their return from capital gains as well as
dividends. But the future stock price always depends on
Chapter 05 - Net Present Value and Other Investment Criteria
CHAPTER 5
Net Present Value and Other Investment Criteria
Answers to Problem Sets
1.
a.
A = 3 years, B = 2 years, C = 3 years
b.
B
c.
A, B, and C
d.
B and C (NPVB = $3,378; NPVC = $2,405)
e.
Tru
Chapter 01 - Goals and Governance of the Firm
CHAPTER 1
Goals and Governance of the Firm
Answers to Problem Sets
1.
a.
real
b.
executive airplanes
c.
brand names
d.
financial
e.
bonds
f.
investment
g.
capital budgeting
h.
financing
2.
c, d, e, and g are r
Chapter 02 - How to Calculate Present Values
CHAPTER 2
How to Calculate Present Values
Answers to Problem Sets
1. If the discount factor is .507, then .507*1.126 = $1
2. 125/139 = .899
3.
PV = 374/(1.09)9 = 172.20
4.
PV = 432/1.15 + 137/(1.152) + 797/(1.1