APPENDIX B: ANSWERS TO SELECTED PROBLEMS

Appendix B
Answers to Selected Problems
Chapter 1
1. a. $50,000 outflow
b. $2,000 inflow each year
3. a. Dividend: $63,000
Salary: $90,000

Chapter 2
3. $15,600
4. $220,000; $398,000
5. a. $11,400; b. ($17,500)
8. b. $380,000; $603,750; $577,500
9. $36,250,000
10. $400,000
12. Increase of $110,000
15. ROE changes from 8.3% to 9.5%
19. Total Equity = $9,425,000
21. 35.9%
24. a.$80,840
b.$11,798
c. 14.6%, 25%
25. $31,492
29. a.$5,550
b. $9,250
c. $18,340
d. $26,150
e. $1,827,500
f. $4,800,000
g. $6,043,000
h. $8,225,000
31. $527,000
33. $2,798,200

Chapter 3
7. ($285,000)
8. $6,385,000
11. a. ($840); ($668); ($583)
15. a. $4,375,000; b. $625,000
16. a. $2.75 M; b. 14.2x
17. $875,000
18. 80%
19.Inv $400, A/R $250
24. EVA =($645,000); ROE = 12.6%

Chapter 4
4. Debt $272; Equity: $64
Debt:Equity is 4.25:1
8. 13%
9. a. $1,329
b. $1,660
c. $1,445
10. $437,667
12. 37.5%
14. a. COGS: $30,000 $33,925 $38,280 $43,320 $49,000 $55,000
b. A/R: $11,181, $11,000, $10,556, $10,938, $11,111
c. Inventory: $8,481 $7,656 $7,720 $7,538 $7,857
15. a. $7,300,000
b. $48,442
c. $17.6M
19. $54,500

Chapter 5
5. 11.5%
6. 13.5%
8. 3%
9. 5%
10. 3%
11. 4%
12. 9%; 11%
13. a. 4%; 1%;
b. 11%; 12%
14. 1 Yr: 3%; 5 Yr: 3.5%; 10 Yr: 3.35%

Chapter 6
1. $1,532.02

2. $15023.75

5. $23,278.92
9. 9% - 10%

12. 12%

15. $52,160.18

16. a. $8,273.25
b. $8,081.55
c. $6,686.55
d. $14,851.80
17. a. $7,722
b.$6,989
c.$7,885
d.$5,851
18. a. 11%
b. 6%
c. 8%
d. 18%
19. a. 4 years
b. 4 years
c. 3 years
20. a. 15%
b. 7.9 years
c. 6.6 years
21. a. 1) $18,900
2) $18,573
3) $18,264
4) $17,972
22. a. 5%
b. 7.4%
23. a. $2,015.69
b. $3,940.15
24. a. $174.47,
b. $8,723.50
25. a. $7,994.81
b. $6,913.79
c. $6,433.38
26. $4,704.55
27. 12%
28. 13 years 9 months
30. 19.56%
31. $27,597.20
35. 18%
40. 20 years
41. Principal $8,224.55 Interest $2,567.29
44. $6,784.04
45. 6 years 6 months, 5 months less time
46. a. $95 m
48. a. $18,179.70;
b. $2,118.10
49. $3,199.82
50. $301.40
52. a. $13,484.19;
b. 21.23%
53. $46,712.61
54. $513.35
56. $20,131.66
57. $22,094.45
59. a. $14,033.17

Chapter 7
1. $850.64
2. $1,426.98
3. a. $849.52
b. $1,197.94
d. $1,000.00
4. a. $1,153.75
b. $816.00
c. $1,385.94
d. $1,515.96
e. $859.23
5. a. 10.4%
b. 8.6%
c. 6.5%
d. 9.2%
e. 5.8%
6. a. $656.77
b. $659.42
c. $985.16
8. Old $824.36
New $654.93
9. $1,815.93
12. a. $1,000.00
c. Old $852.52
New $515.42
13. a. 12%;
b. 6%;
 c. 8%
14. 10%
15. 27
16. a. $13.61, $14.71
17. a. $1,508.85
b. $1,857.91
18. with call $1,347.52
without call $1,718.39
19. Yes. Price $1,373.88
Cost to refund $1,240
20. $106.87
22. as stock $1,300
as bond $1,296.90
24. a. 41%
b. 66.7%
c. $171.64
d. Basic: $1.50
Diluted: $1.49
25. $2.90
27. b. before: 53.3.%
after: 80.0 %
29. b. before: 34.3.%
after: 47.5 %
30. a. $18,003;
b. 10.25%
31. $17,402

Chapter 8
1. Stock A: 3.87%; 14.67%; 18.54%
2. $31.15
3. $69.92
4. $44.08
5. $53.00
6. a. $78.75
7. a. $124.33, $93.25, $74.60
d. (1) $92.25, $73.80, $61.50
(2) $73.20, $61.00, $52.29
8. a. $405.00
9. a. $412.50;
c. $116.25
10. $60.06
11. a. $72.98
b. $96.86
12. $87.59
17. $63.64
18. 7.5%
19. $25, $50, $100
20. 47.4%
21. a. $2
b. $2
c. in the money
d. $33,000
e. $4,000
f. make $4,000
g. $4,000
h. $3,000
i. $4,000
j. ($4,000)

Chapter 9
1. a. 23.3%
b. 15.0%; c. -12.7%
2. No. k = 20.9%
3. a. 416; 53.33; .128
4. b. 5; 1.58; .316
5. 11.0%, 13.0%, 3.6%, .33
6. 10%, 2.12%, .21
7. 10%
8. 36.98%
10. 9.4%
11. 5.52%; 6.69%
13. .956; 1.026
14. 1.1
15 a. .67; b. 7.2%
19. a. 12%
20. kM
kRF 10% 11% 12%
5% 9.0% 9.8% 10.6%
6% 9.2% 10.0% 10.8%
7% 9.4% 10.2% 11.0%
23.a. $34.46
b. $15.63
24. a. $42.74
b.
g .
bA 5% 6% 7%
1.2 $38.60 $45.69 $55.83
1.3 $36.53 $42.74 $51.54
1.4 $34.61 $40.15 $47.86
25. a. 8.2%;
b. 7.0%,
c. $39.62
26. 9%
27. $11.41 to $38.93
28. 6.8%
29. Current price: $18.90
Proposed price $20.64

Chapter 10
2. a. 2 years,
b. $52
c. 1.07
3. a. $844.35
b. ($6,195.35)
c. ($5,818.51)
4. a. Payback = 2.5 years
b. NPV=$628
c. PI=1.08
5. IRR=12%
6. 16%
7. a. 7%
b. 4%
8. NPV IRR
a. ($5,437.29) 6%
b. $3,207.98 12%
c. $2,583.05 14%
9. NPV IRR
a. ($392.80) 10%
b. ($573.50) 9%
c. ($211.30) 11%
10. a. $364
b. 15%
11. a. 2.6 years
b. $3,803
c. 16% (approx)
d. 1.15
12. a. $3,363.72, 1.10
b. 10%
c. $3,017.08, .91
d 5 years
13. a. 3.6 years
b. 12%
c. $3,871
14. k NPV PI IRR
a. 8% $467 1.09 11%
12% ($208) .96
b. 8% $3,201 1.1
11% .07 11% 11%
12% ($674) .98
c. 8% $8,665 1 1.11
10% 10%
12% ($6,764)
.91 .91
d. 8% $4,721 1.13
12% 12%
12% $168 1.00
16. a. A: 1.7 years B: 3.5 years
b. A: $10,407 B: $12,385
c. A: 35% B: 25%
d. Chain A to 9 yrs: NPV=$23,088
e. A: $4,333 B: $2,324
18. a. $73,119.84
b. $72.039.42
19. a. $39,744.85
b. $79,005.64
c. 2.71%
d. 13
e. $301,644.55
20. 22.11%; 21.19%; 4.01%; 9.93%; 12.78%
21. a. ($98,443.13)
22. a. A=15.24%, B=10.86%
25.a. 6.44 yrs; 10.75%; $57,954, 1.15
26. $15,129; ($16,226)
27. projects D, C, and B

Chapter 11
1. C1  C4 $21,000
C5  C6 $17,000
3. $89,000
4. $141,600
5. $58,840
6. C0 C1 C2
($50,000) $11,300 $11,300
 C3 C4
$11,300 $26,500

7. C0 C1–C4 C5
($10,000) $72,000 $1,720,000
9. $6,033.90
13. a. C0 C1
($500,000) $100,000
C2–C5 C6–C8
$139,000 $104,000
b. 3.9years,$108,000,1.22
14.Years Cash Flow ($000)
0 ($1,000)
1-4 ($140)
5-6 ($90)
7-10 $435
15. $156,400
17. Years Cash Flow
0 ($163,600)
1–4 $15,200
5 $15,600)
18. a. C0 C1-C5 C6
($150,000) $38,450 $27,950
b. 3.9 years, $11,534
19. a. C0 C1
($45,840) $7,300
C2 C3
$7,430 $8,685
C4 C5
$8,815 $8,945
C6 C7
$4,875 $5,005
C8
$5,135
NPV =($9,732)
b. NPV = $6,413
20. a. ($000)
C0 C1 C2
($270) $12 $45
C3 C4 C5 C6
$61 $86 $106 $120
b. 4.6 yrs
c. ($4,000)
e. $98,000
f. $503,000
21. a. ($000)
C0 C1 C2
($2,256) ($62) $338
C3 C4 C5 C6
$630 $996 $1,094 $1,027
b. 4.3 yrs, $380, 14%, 1.17, 14%

Chapter 12
1. $867,500 to $2,114,100
2. ($26,980)
3. $395,419; $92,103; ($211,213)
4. $122.435
5. a. Most likely:$6,000; .1250
b. Best: $52,000; .015625
Worst: ($41,000); .015625
6. a. Best: $360,995; .01080
Worst: $94,517; .00788
b. Most likely: $211,995: .01575
9. ($000)
a. Path NPV Prob.
1 $2,895 .18
2 $1,356 .42
3 ($1,937) .32
4 ($2,399) .08
b. $279
10. ($000)
a. Path NPV Prob.
1 $2,895 .18
2 $1,356 .42
3 ($398) .40
b. $931.6
13. b. ($M)
a. Path NPV Prob.
1 $21.0 .42
2 $7.5 .18
3 ($0.6) .28
4 ($6.0) .12
c. $9.28
14 Nothing, $.97 M
15. a. $4.73 M; b. $.21 M
16. No, NPV = ($930,625)

Chapter 13
1. Debt 34.8%, Preferred 17.3%, Equity 47.9%
2. 16.8%
3. Debt 37.7%, Preferred 8.7%, Equity 53.6%
4. Debt 35.2%, Preferred 7.8%, Equity 57.0%
5. Book, 7.96%; Market, 8.16%
6. a. Market 17.9%, Book 15.3%
. Debt 62.3%, Preferred 7.1%, Equity 30.6%
8. Debt 41.5%, Preferred 6.9%, Equity 51.6%
9. Book Market
Debt 23.5% 16.5%
Preferred 29.4% 21.2%
Equity 47.1% 62.3%
10. a. 4.34%; b. $1101.45
11. 7.44%
13. 15.91%
14. 10.52%
15. 12.39%
16. a. 22%; b. 24.2%
18. RE 16.3%
New 17.3%
19 . 13.2%
21. CAPM: 9.8%
Risk premium: 10.5%
Gordon Model: 10.35%
Recommend about 10.2
22. 11.08%
24. a. 16.2%
b. $12.3 M
c. 17.6%
d. 18.6%
e. $16 M
25.a. Book Market
Debt 24.7% 31.4%
Preferred 3.7% 4.8%
Equity 71.6% 63.8%
b. 6%
c. 10.2%
d. CAPM: 13.5%
Dividend growth: 14.0%
Risk premium: 13%–15%, or 14%
e. 15.1%
f. 11.4%
g. $4.2M
h. 12.1%
i. $6.7M
j. 12.9%
m. 12.9%
n. No
26. a. WACC: 9.2%
b. Break for equity: $13.9M
WACC: 9.6%
Break for debt: $20.0M
WACC: 9.8%
c. $16.7M

Chapter 14
1. a. 11.0%; $.55
4. Debt Net Inc ROE EPS
 0 $1,650 13.8% $1.10
20% $1,434 14.9% $1.20
40% $1,218 16.9% $1.35
60% $1,002 20.9% $1.67
80% $786 32.8% $2.62
5. ROCE = 10.6%
Afert tax cost of debt Debt = 7.4%
6. a. ROCE = 10.86% >12% (.62) =10.6%
b. Debt Net Inc ROE EPS DFL
15% $1,956 11.5% $4.60 1.11
30% $1,740 12.4% $4.97 1.25
45% $1,524 13.9% $5.54 1.43
60% $1,308 16.4% $6.54 1.66
75% $1,092 21.8% $8.74 1.99
7. Current Proposed
a. EPS $2.29 $3.48
b. DFL 1.08 1.56
c. DEBT 5% 10% 25%
Current EPS $2.17 $2.04 $1.67
Proposed EPS $3.21 $2.94 $2.12
10. a. $7; 21.9%
b. 20,000. 60%, $312,000, 5,$3.12
11. a. $1 per unit, or $20,000
b. 6.0, 4.3, 3.5
12. $30; 60%; $312,000; 5; $3.12
13. a. $35.20; 64%; $402,000; 4.4; $4.02
14. Without With
DFL 1.15 1.25
DTL 5.75 5.5

15. Without With

Units 80,000 81,137
$4,000,000 $4,462,535
16. a. 35%; $6,285,714
b. 1.625; 2.692; 4.375
c. $24; ($2.25)
17. With Without
a. $11,701 $11,251
b. 1.75 1.20
c. 2.86 2.67
d. 5.0 3.2
18. $171,250,000

Chapter 15
1. a. $3.71
b. $51.94 $.56 11 shares
3. a. $20
b. $10,000
c. 500
d. $409,500
Yes.
4. Year 1 = 241 shares
Year 2 = 233 shares
5. $1.00
6. $1.05 M
7. 1.2%
8. 30%
9. a. 2,000 @ $44.00
b. 3,000 @ $29.33
c. 1,500 @ $58.67
d. 750 @ $117.33
e. 1,666 @ $52.80
10. a. $2.50
13. a. $600,000; $600,000
b. $60,000
14. a. $.80
b. 9.8 million; $2.04
c. $40.80, $.80
15. a. 4.44%
b. 222,222
c. $1.5169
d. $22.75
16. $1.25

Chapter 16
1. $729,700
2. days; 51 days
3. a) $3,600,000
b) $2,400,000
c) $1,666,667
4. 36.5%; 36.5%; 9.125%; 60.833%; 24.333%
6. $50,523.25
7. $35,695
8. $874,500
9. $176,594
10. 10%
11. a. 8.125%
b. 13.333%
 c. 12.353%
d. 18.667%
e. 12.143%
13. $6.8M; 34%
14. 36%
15. a. $16.5 M
b. 110%
d. 70.67%
16. 37%
17. 24%
18. Savings: $3,000
Cost: $4,500
19. Savings: $33,288
Cost: $18,000
1.62 days

20. Savings: $61,000

Indifferent. at:$3.89
21. 3.23 days
22. a. New contribution: $1,494,000
New bad debts: $1,394,000
23. a. Oper. Inc. improves: $1.77M
c. No. Oper. Inc. lower: $3.38M
25. 191 , 26
26. a. 581; b. 34.4, b. $1,307
27. $16

Chapter 17
1. a. $26,194,400
b. $87.31
c. 2.4253
2. Value: $51.08 per share
3. 14.954M
5. a. $2,634,870, $13.17
b. $3,500,000, $17.50
c. $4,375,000, $21.88
6. a. $60.57 b. $16.84
7. 9.3%; 19.9%; 29.8%
8. $45,708
9. a. 13%
 b. $2,400,000
c. $8,441,000, $13,023,000, $15,510,000
d. $33.76, $52.09, $62.04
e. $73.85
10. Price $125.30, Premium=102.10%
11. a. 76.6%
12. Debt: $215M
Equity: $25M
13. a. ($1.00M); b. $.35M
14. $0.31

Chapter 18
1. a. $116,777.25
b. $308,347.20
c. $ 88,666.20
d. $1,037,551.28
e. ‘$16,646.52
2. a. 53,810,109Japanese yen
b. ,54,886,852 Japanese yen
4. a. 1.0699 euros/$
b. 3.8670 Israeli shekels/$
c. 0.6044 British pounds/$
d. 106.12 Japanese yen/$
7. $7,041
8. a. $10,000; b. $25,000
9. a. $9,000 gain
c. $3,600 additional tax
10. American quote: £114,783
French Quote:£142,886
11. a. Loss of $354,167 b. Translation c. Tax impact: $0.00