CHAPTER 1 INTRODUCTION TO CORPORATE FINANCE
Answers to Concepts Review and Critical Thinking Questions
1.
Capital budgeting (deciding whether to expand a manufacturing plant), capital structure (decid
NI / TA = .12 NI / TA = .11 NI = .12(TA) NI = .11(TA) Since ROE = NI / E, we can substitute the above equations into the ROE formula, which yields: ROE = .12(TA) / .65(TA) = .12 / .65 = 18.46% ROE = .
EAR = [1 + .3333]52 1 = 313,916,515.69% 23. Here we need to find the interest rate that equates the perpetuity cash flows with the PV of the cash flows. Using the PV of a perpetuity equation: PV = C /
[email protected] yrs: PVA = $5,300cfw_[1 (1/1.07)75 ] / .07 = $75,240.70 To find the PV of a perpetuity, we use the equation: PV = C / r PV = $5,300 / .07 = $75,714.29 Notice that as the length of the annuity p
CHAPTER 5 INTRODUCTION TO VALUATION: THE TIME VALUE OF MONEY
Solutions to Questions and Problems Basic 1. The simple interest per year is: $5,000 .08 = $400 So after 10 years you will have: $400 10 =
FV = PV(1 + r)t FV = $50(1.045)105 = $5,083.71 13. To answer this question, we can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will
FV = $364,518 = $18,400(1.17)t; t = ln($364,518 / $18,400) / ln 1.17 = 19.02 years FV = $173,439 = $21,500(1.15)t; t = ln($173,439 / $21,500) / ln 1.15 = 14.94 years 6. To answer this question, we can
CHAPTER 4 LONG-TERM FINANCIAL PLANNING AND GROWTH
Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to sp
excess debt will be: Excess debt = $733,676 697,080 = $54,596 To make the balance sheet balance, the company will have to increase its assets. We will put this amount in an account called excess cash,
Capital intensity ratio = Fixed assets / Full capacity sales Capital intensity ratio = $413,000 / $1,161,250 Capital intensity ratio = .35565 The fixed assets required at full capacity sales is the ca
Internal growth rate = .0660 or 6.60% Using the formula ROA b, and beginning of period assets: Internal growth rate = .0814 .8684 Internal growth rate = .0707 or 7.07% 25. Assuming costs vary with sal
FV in 10 years = $4,500[1 + (.093/365)]10(365) = $11,403.94 FV in 20 years = $4,500[1 + (.093/365)]20(365) = $28,899.97 18. For this problem, we simply need to find the PV of a lump sum using the equa
Total interest over life of the loan = $3,360 + 2,787.27 + 2,168.71 + 1,500.68 + 779.20 Total interest over life of the loan = $10,595.86 56. This amortization table calls for equal principal payments
FVAdue = (1 + r) FVA FVAdue = (1 + .11)$62,278.01 FVAdue = $69,128.60 c. Assuming a positive interest rate, the present value of an annuity due will always be larger than the present value of an ordin
in the problem is only relevant to determine the total interest under the terms given. The interest rate for the cash flows of the loan is: PVA = $25,000 = $2,416.67cfw_(1 [1 / (1 + r)]12 ) / r Again
To find the interest rate at which the firm will break even, we need to find the interest rate using the PV (or FV) of a lump sum. Using the PV equation for a lump sum, we get: $94,000 = $165,000 / (
43. We are given the total PV of all four cash flows. If we find the PV of the three cash flows we know, and subtract them from the total PV, the amount left over must be the PV of the missing cash fl
Since your salary grows at 4 percent, you deposit will also grow at 4 percent. We can use the present value of a growing perpetuity equation to find the value of your deposits today. Doing so, we find
Using the EAR and the number of years to find the FV, we get: FV in one year = $1(1.1498)1 = $1.15 FV in two years = $1(1.1498)2 = $1.32 Either method is correct and acceptable. We have simply made su
29. The total interest paid by First Simple Bank is the interest rate per period times the number of periods. In other words, the interest by First Simple Bank paid over 10 years will be: .07(10) = .7
So, the equity at the end of the year was: Ending equity = $135,000 + 16,500 Ending equity = $151,500 The ROE based on the end of period equity is: ROE = $19,000 / $151,500 ROE = .1254 or 12.54% The p
ROE = (PM)(TAT)(EM) ROE = (.048)(1.25)(1 + 1.86) ROE = .1714 or 17.14% Now we can calculate the retention ratio as: b = 1 .30 b = .70 Finally, putting all the numbers we have calculated into the susta
19. We have all the variables to calculate ROE using the DuPont identity except the equity multiplier. Remember that the equity multiplier is one plus the debt-equity ratio. If we find ROE, we can sol
CHAPTER 3 WORKING WITH FINANCIAL STATEMENTS
Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space an
9.
If a company is growing by opening new stores, then presumably total revenues would be rising. Comparing total sales at two different points in time might be misleading. Same-store sales control fo
b.
Cash ratio represents the ability of the firm to completely pay off its current liabilities with its most liquid asset (cash). c. Total asset turnover measures how much in sales is generated by eac
CHAPTER 2 FINANCIAL STATEMENTS, TAXES AND CASH FLOW
Answers to Concepts Review and Critical Thinking Questions
1.
Liquidity measures how quickly and easily an asset can be converted to cash without si
9.
If a company raises more money from selling stock than it pays in dividends in a particular period, its cash flow to stockholders will be negative. If a company borrows more than it pays in interes