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

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 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 03 - Valuing Bonds
CHAPTER 3
Valuing Bonds
Answers to Problem Sets
Does not change
Price falls
c.
2.
a.
b.
1.
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

Chapter 09 - Risk and the Cost of Capital
CHAPTER 9
Risk and the Cost of Capital
Answers to Problem Sets
1.
Overestimate
2.
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%
3.

Chapter 08 - Portfolio Theory and the Capital Asset Pricing Model
CHAPTER 8
Portfolio Theory and the Capital Asset Pricing Model
Answers to Problem Sets
a.
7%
b.
27% with perfect positive correlation; 1% with perfect negative correlation;
19.1% with no co

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/