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Corporate Finance

Ross, Westerfield, and Jaffe


10th edition
Case Solutions
Input boxes in tan
Output boxes in yellow
Given data in blue
Calculations in red
Answers in green
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Chapter 2
Cash Flows at Warf Computer, Inc.
Input area:

Balance Sheet (in $ thousan


2012
Current assets
Cash and equivalents
Accounts receivable
Inventories
Other
Total current assets
Fixed assets
Property, plant, and equipment
Less accumulated depreciation
Net property, plant, and equipment
Intangible assets and others
Total fixed assets

348
551
493
71
1,463

3,191
1,031
2,160
610
2,770

Total assets

4,233

Acquisition of fixed assets


Sale of fixed assets
New debt issued
Debt retired
New stock issued
Stock repurchased

$
$
$
$
$
$

1,140
330
175
151
12
48

Income Statement (in $ thousands)


Sales
$
Cost of goods sold
Selling, general, and administrative
Depreciation

5,813
3,430
652
191

Operating income
Other income
EBIT
Interest expense
Pretax income
Taxes
Current
Deferred
Net income

896

Dividends
Retained earnings

$
$

225
671

1,598
191
467
1,322

$
$
$

1,140
(330)
810

2,770
2,151
191
810

$
$

1,540
58
1,598
105
1,493
597

Output area:

Operating cash flow


Earnings before interest and taxes
Depreciation
-Current taxes
Operating cash flow

Net capital spending


Acquisition of fixed assets
Sale of fixed assets
Capital spending
Alternatively,
Ending fixed assets
-Beginning fixed assets
Depreciation
Capital spending

Net working capital cash flow


Ending NWC
Beginning NWC
NWC cash flow

Cash flow from assets


OCF
-Net capital spending
-Change in NWC
Cash flow from assets

Cash flow to creditors


Interest
Retirement of debt
Debt service
Proceeds from sale of long-term debt
Total
Alternatively
Beginning long-term debt
Ending long-term debt
Interest
Total

Cash flow to stockholders


Dividends
Repurchase of stock
Cash to stockholders
Proceeds from new stock issue
Total
Alternatively
Beginning total equity
Ending total equity
Dividends

$
$

$
$
$

$
$
$

874
704
170

1,322
810
170
342

105
151
256
(175)
81

883
(907)
105
81

225
48
273
(12)
261

1,848
(2,483)
225

Retained earnings
$

671
261

Statement of cash flows


Operations
Net income
Depreciation
Deferred taxes
Changes in assets and liabilities
Accounts receivable
Inventories
Accounts payable
Accrued expenses
Other
Total cash flow from operations
Investing activties
Acquisition of fixed assets
Sale of fixed assets
Total cash flow from investing activities
Financing activties
Retirement of debt
Proceeds of long-term debt
Notes payable
Dividends
Repurchase of stock
Proceeds from new stock issues
Total cash flow from financing activities
Change in cash (on balance sheet)

$
$

896
191
130
(37)
17
20
(118)
(11)
1,088

(1,140)
330
(810)

(151)
175
6
(225)
(48)
12
(231)

47

Balance Sheet (in $ thousands)


2011
Current liabilities
$
301
Accounts payable
514
Notes payable
510
Accrued expenses
60
Total current liabilities
$
1,385
Long-term liabilities
Deferred taxes
$
2,446
Long-term debt
840
Total long-term liabilities
$
1,606
545
Stockholders equity
$
2,151
Preferred stock
Common stock
Capital surplus
Accumulated retained earnings
Less treasury stock
Total equity

3,536

Total liabilities and


shareholders equity

2012
$

2011
314 $
85
190
589 $

294
79
308
681

254 $
907
1,161 $

124
883
1,007

16 $
97
611
1,904
145
2,483 $

16
97
599
1,233
97
1,848

4,233 $

3,536

$
$

$
$

467
130

Chapter 3
Ratios and Financial Planning at East Coast Yachts
Input area:

Tax rate

40%

Sales
COGS
Other expenses
Depreciation
EBIT
Interest
Taxable income
Taxes (40%)
Net income

234,300,000
165,074,000
27,991,000
7,644,000
33,591,000
4,212,600
29,378,400
11,751,360
17,627,040

Dividends
Add to RE

$
$

10,576,224
7,050,816

3,650,700
6,567,600
7,363,700
17,582,000

Fixed assets
Net PP&E

112,756,900

Total assets

130,338,900

Growth rate
Minimum FA purchase

$
$

Assets
Current Assets
Cash
Accounts rec.
Inventory
Total CA

Output area:

20%
30,000,000

1) Current ratio
Quick ratio
Total asset turnover
Inventory turnover
Receivables turnover
Debt ratio
Debt-equity ratio
Equity multiplier
Interest coverage
Profit margin
Return on assets
Return on equity

0.74
0.43
1.80
22.42
35.68
0.49
0.97
1.97
7.97
7.52%
13.52%
26.64%

3) Retention ratio
Sustainable growth rate

0.40
11.93%

Sales
COGS
Other expenses
Depreciation
EBIT
Interest
Taxable income
Taxes (40%)
Net income

Dividends
Add to RE

12,346,669
8,231,113

4,086,102
7,350,886
8,241,933
19,678,921

$
$
$

262,243,846
184,761,590
31,329,353
7,644,000
38,508,902
4,212,600
34,296,302
13,718,521
20,577,781

Assets
Current Assets
Cash
Accounts rec.
Inventory
Total CA

Fixed assets

Net PP&E
Total Assets

$
$

126,204,879
145,883,800

EFN

4,488,478

Current ratio
Quick ratio
Total asset turnover
Inventory turnover
Receivables turnover
Debt ratio
Debt-equity ratio
Equity multiplier
Interest coverage
Profit margin
Return on assets
Return on equity
4) Sales
COGS
Other expenses
Depreciation
EBIT
Interest
Taxable income
Taxes (40%)
Net income

0.74
0.43
1.80
22.42
35.68
0.49
0.90
1.96
9.14
7.85%
14.11%
27.66%
$

$
$
$

Dividends
Add to RE

281,160,000
198,088,800
33,589,200
7,644,000
41,838,000
4,212,600
37,625,400
15,050,160
22,575,240

13,545,144
9,030,096

4,380,840
7,881,120
8,836,440
21,098,400

Assets
Current Assets
Cash
Accounts rec.
Inventory
Total CA

Fixed assets
Net PP&E
Total Assets

$
$

135,308,280
156,406,680

EFN

12,299,824

5) EFN if minimum FA purchase is

$ 30,000,000

Depreciation as a percentage of fixed assets


New fixed assets
New depreciation
Sales
COGS
Other expenses
Depreciation
EBIT
Interest
Taxable income
Taxes (40%)
Net income

Dividends
Add to RE

12,812,992
8,541,995

4,380,840
7,881,120
8,836,440
21,098,400

Fixed assets
Net PP&E

142,756,900

Total Assets

163,855,300

EFN

20,236,545

$
$
$

281,160,000
198,088,800
33,589,200
9,677,756
39,804,244
4,212,600
35,591,644
14,236,658
21,354,987

Assets
Current Assets
Cash
Accounts rec.
Inventory
Total CA

oast Yachts

Liabilities & Equity


Current liabilities
Accounts payable
$
7,753,000
Notes payable
15,936,300
Total CL
$
23,689,300
Long-term debt

40,480,000

Shareholder equity
Common stock
Retained earnings
Total equity

6,200,000
59,969,600
66,169,600

Total L&E

130,338,900

Liabilities & Equity


Current liabilities
Accounts payable
$
8,677,663
Notes payable
17,836,947
Total CL
$
26,514,610
Long-term debt
Shareholder equity
Common stock
Retained earnings
Total equity

40,480,000

6,200,000
68,200,713
74,400,713

Total L&E

141,395,323

Liabilities & Equity


Current liabilities
Accounts payable
$
9,303,600
Notes payable
19,123,560
Total CL
$
28,427,160
Long-term debt

40,480,000

Shareholder equity
Common stock
Retained earnings

6,200,000
68,999,696

Total equity
Total L&E

$
$

75,199,696

144,106,856

6.78%
142,756,900
9,677,756

Liabilities & Equity


Current liabilities
Accounts payable
$
9,303,600
Notes payable
19,123,560
Total CL
$
28,427,160
Long-term debt
Shareholder equity
Common stock
Retained earnings
Total equity
Total L&E

40,480,000

$
$

6,200,000
68,511,595
74,711,595

143,618,755

Chapter 4
The MBA Decision
Input area:

Current salary
Years until retirement
Salary increase
Tax rate
Wilton
Tuition per year
Books & Supplies
Starting salary
Signing bonus
Salary increase
Tax rate
Mount Perry
Tuition per year
Books & Supplies
Signing bonus
Starting salary
Salary increase
Tax rate
Both schools
Health insurance
Room & board increase

65,000
40
3%
26%

$
$
$
$

70,000
3,000
110,000
20,000
4%
31%

$
$
$
$

85,000
4,500
18,000
92,000
3.5%
29%

$
$

3,000
2,000

Discount rate

6.50%

Output area:

3. Current job
Aftertax income
Present value of salary

48,100.00

1,013,223.78

Wilton MBA
PV of tuition & expenses

(151,239.44)

Aftertax bonus

13,800.00

PV of bonus

12,166.90

Aftertax salary

75,900.00

PV of salary in two years

1,804,927.68

Value of salary today

1,591,331.25

PV of attending Wilton

1,452,258.71

Mount Perry MBA


PV of tuition & expenses

(94,500.00)

PV of signing bonus

12,000.00

Aftertax salary

65,320.00

PV of salary in one year

1,462,896.46

PV of salary today

1,373,611.70

PV of attending Mt. Perry

1,291,111.70

1,152,296.31

Value in 2 years

1,306,963.29

Aftertax beginning salary

54,959.83

Pretax beginning salary

79,651.92

5. Current job PV minus


bonus after Wilton costs

Chapter 5
Bullock Gold Mining
Input area:

Year
0
1
2
3
4
5
6
7
8
9

$
$
$
$
$
$
$
$
$
$

Required return

Cash flow
(750,000,000)
130,000,000
180,000,000
190,000,000
245,000,000
205,000,000
155,000,000
135,000,000
95,000,000
(75,000,000)
12%

Output area:

Payback period

4.02

IRR
IRR

14.72% =IRR(D8:D17)
-60.88% =IRR(D8:D17,-0.99)

MIRR

13.05% =MIRR(D8:D17,D19,D19)

Profitability index
NPV

1.09 =NPV(D19,D9:D17)/-D8
$

67,747,130.88 =NPV(D19,D9:D17)+D8

(D8:D17,-0.99)

R(D8:D17,D19,D19)

V(D19,D9:D17)/-D8

V(D19,D9:D17)+D8

Chapter 6
Bethesda Mining
Input area:
Land cost
Aftertax land value
Equipment
Equipment salvage
Contract sales/tons
Contract $/ton
Year 1 production
Year 2 production
Year 3 production
Year 4 production
Spot market $/ton
Variable cost/ton
Fixed costs
NWC percent
Reclamation costs
Charitable expense
Tax rate
Required return
Year 1 depreciation
Year 2 depreciation
Year 3 depreciation
Year 4 depreciation

$
$
$

5,000,000
5,500,000
85,000,000
60%
500,000
$82
620,000
680,000
730,000
590,000
$76
$31
$4,100,000
5%
$2,700,000
$6,000,000
38%
12%
14.29%
24.49%
17.49%
12.49%

(85,000,000)
(5,500,000)
(2,506,000)
($93,006,000)

Output area:

Time 0 cash flow


Equipment
Land
NWC
Total
Sales
Contract
Spot
Total

$
$

Year 1
41,000,000 $
9,120,000
50,120,000 $

Year 2
41,000,000 $
13,680,000
54,680,000 $

Year 3
41,000,000
17,480,000
58,480,000

Sales
VC
FC
Dep
EBT
Tax
NI
+ Dep
OCF

58,480,000
22,630,000
4,100,000
14,866,500
16,883,500
6,415,730
10,467,770
14,866,500
25,334,270

Beginning NWC
Ending NWC
NWC cash flow

$
$

2,506,000 $
2,734,000
(228,000) $

2,734,000 $
2,924,000
(190,000) $

2,924,000
2,392,000
532,000

Total cash flow

21,003,670 $

26,010,270 $

25,866,270

Book value

72,853,500 $

52,037,000 $

37,170,500

Salvage

$
$
$

50,120,000
19,220,000
4,100,000
12,146,500
14,653,500
5,568,330
9,085,170
12,146,500
21,231,670

MV
BV
Taxes

$
$
$

Salvage CF

$
Time
0
1
2
3
4
5
6

Profitability index
Average accounting return
IRR
IRR
NPV

54,680,000
21,080,000
4,100,000
20,816,500
8,683,500
3,299,730
5,383,770
20,816,500
26,200,270

$
$

51,000,000
26,554,000
(9,289,480)
41,710,520
Cash flow
(93,006,000)
21,003,670
26,010,270
25,866,270
63,915,790
(1,674,000)
2,280,000
1.0615
10.58%
14.39%
14.39%
5,718,491.29

72,880,210
(20,125,790.00)

Year 4
$ 41,000,000
6,840,000
$ 47,840,000

Year 5

Year 6

$ 47,840,000
18,290,000
4,100,000
10,616,500
$ 14,833,500
5,636,730
$ 9,196,770
10,616,500
$ 19,813,270
$

2,392,000

2,392,000

2,700,000

$ (2,700,000)
(1,026,000)
(2,280,000)
$ (1,674,000) $ 2,280,000
$ (1,674,000) $ 2,280,000

$ 22,205,270 $ (1,674,000) $
$ 26,554,000

0.315

2,280,000

Chapter 6
Goodweek Tires, Inc.
Input area:

Research and development


Test marketing cost
Initial equipment cost
Equipment salvage value
OEM market:
Price
Variable cost
Automobile production
Growth rate
Market share
Replacement market:
Price
Variable cost
Market sales
Growth rate
Market share
Price increase above inflation
VC increase above inflation
Marketing and general costs
Tax rate
Inflation rate
Required return
Initial NWC
NWC percentage of sales
Year 1 depreciation
Year 2 depreciation
Year 3 depreciation
Year 4 depreciation

$
$
$
$

10,000,000
5,000,000
160,000,000
65,000,000

$
$

41
29
6,200,000
2.50%
11.00%

$
$

62
29
32,000,000
2.00%
8.00%

1%
1%
43,000,000
40.00%
3.25%
13.40%
9,000,000
15%
14.29%
24.49%
17.49%
12.49%

Output area:

Nominal price increase


Nominal VC increase

4.28%
4.28%
Year 0

OEM:
Automobiles sold
Tires for automobiles sold
SuperTread tires sold
Price
Replacement market:
Total tires sold in market
SuperTread tires sold
Price
Revenue:
OEM market
Replacement market
Total

6,200,000
24,800,000
2,728,000
41.00

32,000,000
2,560,000
62.00

$
$

Variable costs:
OEM market
Replacement market
Total

$
$

Revenue
Variable costs
Marketing and general costs
Depreciation
EBT
Tax
Net income
OCF
New working capital:
Beginning
Ending
NWC cash flow

Year 1

79,112,000
74,240,000
153,352,000

$
$

270,568,000
153,352,000
43,000,000
22,864,000
51,352,000
20,540,800
30,811,200
53,675,200

0 $
9,000,000
(9,000,000) $

9,000,000
40,585,200
(31,585,200)

111,848,000
158,720,000
270,568,000

Book value of equipment


Aftertax salvage value:
Market value
Taxes
Total

$
$

160,000,000 $

137,136,000

65,000,000
(6,006,400)
58,993,600
Year 0
$

Year 1
53,675,200

(160,000,000)
(9,000,000)
(169,000,000) $

(31,585,200)
22,090,000

Discounted cash flow

(169,000,000) $

19,479,718

NPV
IRR
Profitability index

Operating cash flow


Capital spending
Net working capital
Total cash flows

53,274,694.74
24.04%
1.3152

Year 2

Year 3

Year 4

6,355,000
25,420,000
2,796,200
42.76 $

6,513,875
26,055,500
2,866,105
44.59 $

6,676,722
26,706,888
2,937,758
46.50

32,640,000
2,611,200
64.66 $

33,292,800
2,663,424
67.42 $

33,958,656
2,716,692
70.31

119,553,838 $
168,827,528
288,381,366 $

127,790,574 $
179,578,718
307,369,292 $

136,594,786
191,014,560
327,609,346

84,562,471 $
78,967,715
163,530,185 $

86,676,532 $
77,239,296
163,915,828 $

88,843,446
78,784,082
167,627,528

288,381,366
163,530,185
44,397,500
39,184,000
41,269,680
16,507,872
24,761,808
63,945,808

307,369,292
163,915,828
45,840,419
27,984,000
69,629,045
27,851,618
41,777,427
69,761,427

$
$

327,609,346
167,627,528
47,330,232
19,984,000
92,667,586
37,067,034
55,600,551
75,584,551

43,257,205 $
46,105,394
(2,848,189) $

46,105,394
46,105,394

$
$

$
$
$

$
$
$

$
$

$
$
$

40,585,200 $
43,257,205
(2,672,005) $

97,952,000 $

69,968,000 $

49,984,000

Year 2
63,945,808 $

Year 3
69,761,427 $

(2,672,005)
61,273,803 $

(2,848,189)
66,913,238 $

Year 4
75,584,551
58,993,600
46,105,394
180,683,545

47,648,445 $
$
$
$

45,885,227 $
113,013,389
(55,986,611)
(0.512)

109,261,305

Chapter 7
Bunyan Lumber, LLC
Input area:

Total acreage
Years since original planting
1P pond value
2P pond value
3P pond value
Cash flow/acre from thinning
Years from today for harvest
to begin
20
25
30
35
Defect rate
Tractor cost (MBF)
Road (MBF)
Sale preparation and
and administrative (MBF)
Excavator piling/acre
Broadcast burning/acre
Site preparation/acre
Planting costs/acre

$
$
$
$

$
$

5%
140
50

18

$
$
$
$

150
300
145
225

Nominal required return


Inflation rate
Tax rate
Conservation fund
Conservation fund growth

Output area:

5,000
20
620
605
595
1,000
Harvest (MBF)
per acre
14.1
16.4
17.3
18.1

10.00%
3.70%
35%
$

250,000
3.20%

1P
16%
20%
22%
24%

Real required return


Cash flow from thinning

6.08%
$

Harvest in

5,000,000
20

years

Revenue
Tractor cost
Road
Sale preparation & admin
Excavator piling
Broadcast burning
Site preparation
Planting costs
EBIT
Taxes
Net income (OCF)

40,359,135
9,870,000
3,525,000
1,269,000
750,000
1,500,000
725,000
1,125,000
21,595,135
7,558,297
14,036,838

PV of first harvest

4,315,098

Next thinning will occur in


The effective real interest rate for this period is
The real rate in the conservation fund is
The effective real interest rate for the
conservation fund for this period is

40 years, and will reoccur at this sam


958.17%
6.59%

Aftertax cost of convservation


Value of conservation at harvest

$
$

(162,500.00)
(176,226.22)

PV of future thinnings
PV of future harvests
PV of conservation fund

$
$
$

521,825.80
450,345.94
(49,182.52)

Total NPV

5,238,087.63

Harvest in
Revenue
Tractor cost
Road

25
$

47,051,600
11,480,000
4,100,000

1183.87%

years

Sale preparation & admin


Excavator piling
Broadcast burning
Site preparation
Planting costs
EBIT
Taxes
Net income (OCF)
PV of first harvest

1,476,000
750,000
1,500,000
725,000
1,125,000
25,895,600
9,063,460
16,832,140

3,852,930

Next thinning will occur in


45 years, and will reoccur at this sam
The effective real interest rate for this period is
1321.11%
The effective real interest rate for the
conservation fund for this period is
1666.38%
Value of conservation at harvest $
(172,251.67)
PV of future thinnings
PV of future harvests
PV of conservation fund

$
$
$

378,470.46
291,644.04
(34,941.27)

Total NPV

4,488,103.20

Harvest in

30

years

Revenue
Tractor cost
Road
Sale preparation & admin
Excavator piling
Broadcast burning
Site preparation
Planting costs
EBIT
Taxes
Net income (OCF)

49,699,440
12,110,000
4,325,000
1,557,000
750,000
1,500,000
725,000
1,125,000
27,607,440
9,662,604
17,944,836

PV of first harvest

3,058,593

Next thinning will occur in


The effective real interest rate for this period is

50 years, and will reoccur at this sam


1808.52%

The effective real interest rate for the


conservation fund for this period is
Value of conservation at harvest $

2330.24%
(169,473.53)

PV of future thinnings
PV of future harvests
PV of conservation fund

$
$
$

276,469.34
169,121.42
(24,986.89)

Total NPV

3,479,196.45

Harvest in

35

years

Revenue
Tractor cost
Road
Sale preparation & admin
Excavator piling
Broadcast burning
Site preparation
Planting costs
EBIT
Taxes
Net income (OCF)

52,057,863
12,670,000
4,525,000
1,629,000
750,000
1,500,000
725,000
1,125,000
29,133,863
10,196,852
18,937,011

PV of first harvest

2,403,388

Next thinning will occur in


55 years, and will reoccur at this sam
The effective real interest rate for this period is
2463.10%
The effective real interest rate for the
conservation fund for this period is
3243.60%
Value of conservation at harvest $
(167,509.87)
PV of future thinnings
PV of future harvests
PV of conservation fund

$
$
$

202,995.97
97,575.62
(17,950.88)

Total NPV

2,686,008.85

2P
36%
40%
43%
45%

3P
48%
40%
35%
31%

nd will reoccur at this same interval.

nd will reoccur at this same interval.

nd will reoccur at this same interval.

nd will reoccur at this same interval.

Chapter 8
Financing East Coast Yachts Expansion Plans with a Bond Issue
Input area:

Years to maturity
Required return
Amount needed
Face value

$
$

20
6.50%
50,000,000
1,000

Coupon rate
Tax rate

6.50%
35%

Year bond is called


Spread above Treasury
Treasury rate at call
Treasury rate at call

7
0.40%
4.80%
8.20%

Output area:

2) Price of coupon bond


# of coupon bonds needed

1,000
50,000

Price of zero coupon bond


# of zeroes needed

278.23
179,707

3) Repayment of coupon bonds

50,000,000

Repayment of zeroes

179,707,000

4) Year 1 interest payments:


Pretax coupon payment
Aftertax coupon payment

$
$

3,250,000
2,112,500

Value of zero in one year


Zero coupon growth
Zero coupon bond

$
296.60
$
18.37
$ (1,155,707.98)

Cash outflow

Cash inflow

During the life of a bond, the zero generates cash inflows to the firm

in the form of the interest tax shield of debt.


5) Make whole price

1,121.73

Make whole price

837.53

a Bond Issue

Chapter 9
Stock Valuation at Ragan Engines
Input area:

Shares owned by each sibling


Ragan EPS
Dividend to each sibling
Ragan ROE
Ragan required return

$
$

150,000
5.35
320,000
21%
18%

Blue Ribband Motors Corp.


Bon Voyage Marine, Inc.
Nautilus Marine Engines
Industry average

EPS
1.19 $
1.26
(0.27)
0.73 $

Nautilus EPS w/o write-off

2.07

Output area:

1) Total earnings
Payout ratio
Retention ratio
Growth rate
Total dividends next year
Total equity value
Value per share
2) Industry EPS
Industry payout ratio
Industry retention ratio
Industry growth rate
Year
1

$
$

1,605,000.00
39.88%
60.12%
12.63%
720,807.48
13,413,286.96

44.71

1.51
28.98%
71.02%
7.81%

Total dividends
720,807.48

DPS
0.19
0.55
0.57
0.44

2
3
4
5
6

$
$
$
$
$

811,817.84
914,319.33
1,029,762.82
1,159,782.41
1,250,384.00

Stock value in Year 5


Total stock value today

$
$

17,395,308.29
11,655,749.48

Value per share

38.85

3) Industry PE

12.00

Ragan PE (original assumption)

8.36

Ragan PE (revised assumption)

7.26

Stock price implied by


industry PE
4) Total earnings
Cash cow value
Percentage not attributable to
growth opportunities
Percentage attributable to
growth opportunities
5) ROE

64.19

1,605,000.00

10,700,000.00

91.80%

8.20%
12.99%

Stock price
$
16.32
13.94
23.97
$
18.08

ROE
10.00%
12.00%
N/A
11.00%

R
12.00%
17.00%
16.00%
15.00%

Chapter 10
A Job at East Coast Yachts
Input area:

Bledsoe S&P 500 Index Fund


Bledsoe Small-Cap Fund
Bledsoe Large Company Stock Fund
Bledsoe Bond Fund
Risk-free rate
Company stock expected return
Company stock standard deviation

10-year annual return


9.18%
14.12%
8.58%
6.45%
3.20%
16.00%
65.00%

Output area:

Bledsoe S&P 500 Index Fund


Bledsoe Small-Cap Fund
Bledsoe Large Company Stock Fund
Bledsoe Bond Fund
Company stock

0.2927
0.4345
0.2259
0.3299
0.1969

Standard deviation
20.43%
25.13%
23.82%
9.85%

Chapter 11
A Job at East Coast Yachts, Part 2
Input area:

Bledsoe Large Company Stock Fund


Bledsoe Bond Fund
Risk-free rate

10-year annual return


8.58%
6.45%
3.20%

Correlation

0.15

Output area:

Weight of stock fund


0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Dominant portfolio:
Weight of stock fund
Weight of bond fund
Standard deviation
Expected return
Minumum variance portfolio:
Weight of large cap stock fund
Weight of bond fund
Expected return
Variance

Portfolio E(R)
6.45%
6.66%
6.88%
7.09%
7.30%
7.52%
7.73%
7.94%
8.15%
8.37%
8.58%

20.82%
79.18%
9.85%
6.89%

10.41%
89.59%
6.67%
0.009059

Standard deviation

9.52%

Sharpe optimal portfolio: (Using Solver)


Weight of large cap stock fund
Sharpe ratio

19.76%
0.3751

Weight of large cap stock fund


Weight of bond fund
Expected return
Standard deviation
Sharpe ratio

19.76%
80.24%
6.87%
9.79%
0.3751

Investment Opportunity Set


10.00%
8.00%
6.00%
Portfolio Expected Return

4.00%
2.00%

0.00%
5.00% 10.00%15.00%20.00%25.00
Portfolio Standard Deviation

Standard deviation
23.82%
9.85%

Portfolio standard
deviation
9.8500%
9.5182%
9.8006%
10.6484%
11.9417%
13.5536%
15.3843%
17.3648%
19.4493%
21.6077%
23.8200%

nt Opportunity Set

10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
5.00% 10.00%15.00%20.00%25.00%
Portfolio Standard Deviation

Microsoft Excel 12.0 Answer Report


Worksheet: [Jaffe 9th edition Case Solutions.xlsx]Chapter 11
Report Created: 1/5/2009 12:23:05 PM

Target Cell (Max)


Cell
Name
$D$46 Sharpe ratio Portfolio E(R)

Original Value Final Value


0.266304
0.317133

Adjustable Cells
Cell
Name
$D$45 Weight of large cap stock fund Portfolio E(R)

Original Value Final Value


0.00%
22.54%

Constraints
NONE

Chapter 12
The Fama-French Multi-Factor Model and Mutual Fund Returns
Input area:

200605
200606
200607
200608
200609
200610
200611
200612
200701
200702
200703
200704
200705
200706
200707
200708
200709
200710
200711
200712
200801
200802
200803
200804
200805
200806
200807
200808
200809
200810
200811
200812
200901
200902

Mkt-RF

SMB

HML

-0.44
-0.59
2.09
1.53
3.3
1.95
0.68
1.5
-1.78
0.87
3.55
3.48
-1.87
-3.57
0.75
3.77
2.26
-5.27
-0.7
-6.44
-2.33
-1.21
4.94
2.22
-8.03
-1.47
0.99
-9.96
-18.54
-8.55
2.06
-7.75
-10.12

-0.47
-3.91
0.79
-1.19
1.68
0.7
-0.9
0.04
1.39
-0.19
-2.11
-0.07
0.65
-2.71
-0.13
-2.47
0.08
-2.74
0.06
-0.76
-0.54
0.85
-1.53
2.87
1.08
3.71
3.76
-0.24
-2.12
-3.62
4.04
-0.91
-0.41

1.48
3.28
-1.72
-0.45
0.48
0.46
2.55
-0.09
0.31
0.32
-0.96
-0.08
-1.05
-2.97
-2.35
-2.09
-1.98
-0.99
-0.07
3.05
0
0.19
0.07
-0.31
-1.05
3.61
1.46
4.48
-3.13
-4.93
-1.28
-9.93
-6.73

FMAGX
RF Adj Close
$ 71.68
0.4 $ 71.15
0.4 $ 68.92
0.42 $ 70.58
0.41 $ 71.37
0.41 $ 73.46
0.42 $ 75.36
0.4 $ 74.96
0.44 $ 77.11
0.38 $ 75.84
0.43 $ 76.47
0.44 $ 80.15
0.41 $ 83.41
0.4 $ 83.06
0.4 $ 81.55
0.42 $ 82.49
0.32 $ 87.61
0.32 $ 92.28
0.34 $ 88.78
0.27 $ 89.09
0.21 $ 81.11
0.13 $ 79.81
0.17 $ 78.07
0.17 $ 83.16
0.17 $ 85.70
0.17 $ 78.53
0.15 $ 75.44
0.12 $ 75.38
0.15 $ 61.83
0.08 $ 48.48
0.02 $ 42.98
0.09 $ 45.09
0 $ 41.69
0.01 $ 38.52

FLPSX
Adj Close
$
31.35
$
30.97
$
30.60
$
31.17
$
31.63
$
32.73
$
34.10
$
34.72
$
35.14
$
35.05
$
35.62
$
36.79
$
38.23
$
37.88
$
36.19
$
35.93
$
36.88
$
37.98
$
35.60
$
35.77
$
33.99
$
33.65
$
33.04
$
34.72
$
35.94
$
32.80
$
32.34
$
32.68
$
28.82
$
23.05
$
21.03
$
22.84
$
21.38
$
19.41

200903
200904
200905
200906
200907
200908
200909
200910
200911
200912
201001
201002
201003
201004
201005
201006
201007
201008
201009
201010
201011
201012
201101
201102
201103
201104
201105

8.76
11.04
6.73
-0.28
8.24
3.18
4.52
-2.84
5.74
2.92
-3.71
3.54
6.44
2.02
-8
-5.21
7.24
-4.4
9.24
3.89
0.58
6.77
2.02
3.85
0.29
2.82
-1.47

0.74
5.14
-2.61
2.64
2.48
-0.58
2.36
-4.27
-2.83
5.88
0.43
1.41
1.59
5
-0.03
-2.05
-0.08
-2.92
3.97
0.91
3.72
0.8
-2.42
1.78
2.71
-0.19
-0.39

2.55
5.74
0.44
-2.48
4.83
7.62
1.5
-4.38
0.12
0.74
0.57
2.75
2.02
3.14
-2.36
-4.28
0.13
-1.71
-3.14
-2.14
-0.61
3.53
0.94
1.37
-1.31
-2.35
-2.27

0.01
0.01
0
0
0.01
0.01
0
0
0
0
0
0
0
0
0.01
0.01
0.01
0.01
0.01
0.01
0.01
0.01
0
0.01
0
0
0

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

43.88
49.88
52.99
52.26
56.84
58.07
61.15
57.83
60.99
63.64
60.86
62.69
66.84
67.85
62.35
58.32
61.27
57.64
63.89
66.20
67.10
71.57
72.73
75.75
75.45
77.35
75.63

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

21.04
24.09
25.61
25.59
27.86
29.08
30.20
29.34
30.48
31.77
31.25
32.35
34.42
35.30
32.57
31.02
32.92
31.58
34.60
35.93
36.00
38.38
38.89
40.28
40.76
42.57
42.08

Output area:

200605
200606
200607
200608
200609
200610
200611
200612
200701

Mkt-RF
-0.0044
-0.0059
0.0209
0.0153
0.0330
0.0195
0.0068
0.0150
-0.0178

Risk premium for mutual funds


SMB
HML FMAGX FLPSX
BSCFX
-0.0047 0.0148 -0.0114
-0.0161
-0.0176
-0.0391 0.0328 -0.0353
-0.0159
-0.0682
0.0079 -0.0172
0.0199
0.0144
0.0181
-0.0119 -0.0045
0.0071
0.0107
0.0289
0.0168 0.0048
0.0252
0.0307
0.0536
0.0070 0.0046
0.0217
0.0377
0.0245
-0.0090 0.0255 -0.0093
0.0142
0.0055
0.0004 -0.0009
0.0243
0.0077
0.0345
0.0139 0.0031 -0.0203
-0.0064
-0.0110

200702
200703
200704
200705
200706
200707
200708
200709
200710
200711
200712
200801
200802
200803
200804
200805
200806
200807
200808
200809
200810
200811
200812
200901
200902
200903
200904
200905
200906
200907
200908
200909
200910
200911
200912
201001
201002
201003
201004
201005
201006
201007
201008

0.0087
0.0355
0.0348
-0.0187
-0.0357
0.0075
0.0377
0.0226
-0.0527
-0.0070
-0.0644
-0.0233
-0.0121
0.0494
0.0222
-0.0803
-0.0147
0.0099
-0.0996
-0.1854
-0.0855
0.0206
-0.0775
-0.1012
0.0876
0.1104
0.0673
-0.0028
0.0824
0.0318
0.0452
-0.0284
0.0574
0.0292
-0.0371
0.0354
0.0644
0.0202
-0.0800
-0.0521
0.0724
-0.0440
0.0924

-0.0019
-0.0211
-0.0007
0.0065
-0.0271
-0.0013
-0.0247
0.0008
-0.0274
0.0006
-0.0076
-0.0054
0.0085
-0.0153
0.0287
0.0108
0.0371
0.0376
-0.0024
-0.0212
-0.0362
0.0404
-0.0091
-0.0041
0.0074
0.0514
-0.0261
0.0264
0.0248
-0.0058
0.0236
-0.0427
-0.0283
0.0588
0.0043
0.0141
0.0159
0.0500
-0.0003
-0.0205
-0.0008
-0.0292
0.0397

0.0032
-0.0096
-0.0008
-0.0105
-0.0297
-0.0235
-0.0209
-0.0198
-0.0099
-0.0007
0.0305
0.0000
0.0019
0.0007
-0.0031
-0.0105
0.0361
0.0146
0.0448
-0.0313
-0.0493
-0.0128
-0.0993
-0.0673
0.0255
0.0574
0.0044
-0.0248
0.0483
0.0762
0.0150
-0.0438
0.0012
0.0074
0.0057
0.0275
0.0202
0.0314
-0.0236
-0.0428
0.0013
-0.0171
-0.0314

0.0040
0.0437
0.0366
-0.0082
-0.0222
0.0073
0.0589
0.0501
-0.0413
0.0008
-0.0917
-0.0173
-0.0235
0.0635
0.0288
-0.0854
-0.0408
-0.0020
-0.1813
-0.2167
-0.1136
0.0482
-0.0754
-0.0761
0.1390
0.1366
0.0623
-0.0138
0.0875
0.0215
0.0530
-0.0543
0.0546
0.0434
-0.0437
0.0301
0.0662
0.0151
-0.0812
-0.0647
0.0505
-0.0593
0.1083

0.0120
0.0284
0.0350
-0.0132
-0.0486
-0.0114
0.0232
0.0266
-0.0661
0.0021
-0.0519
-0.0113
-0.0198
0.0491
0.0334
-0.0891
-0.0155
0.0093
-0.1196
-0.2010
-0.0878
0.0852
-0.0639
-0.0922
0.0839
0.1449
0.0631
-0.0008
0.0886
0.0437
0.0385
-0.0285
0.0389
0.0423
-0.0164
0.0352
0.0640
0.0256
-0.0774
-0.0477
0.0612
-0.0408
0.0955

0.0025
0.0164
0.0344
-0.0031
-0.0461
0.0042
0.0448
0.0519
-0.0297
-0.0273
-0.0953
-0.0369
-0.0142
0.0488
0.0302
-0.0972
0.0030
0.0269
-0.1042
-0.1949
-0.1070
0.0570
-0.0709
-0.0802
0.0804
0.1406
0.0347
0.0193
0.0517
0.0269
0.0509
-0.0317
0.0334
0.0718
-0.0317
0.0252
0.0617
0.0552
-0.0641
-0.0604
0.0593
-0.0542
0.1069

201009 0.0389 0.0091 -0.0214


201010 0.0058 0.0372 -0.0061
201011 0.0677 0.0080 0.0353
201012 0.0202 -0.0242 0.0094
201101 0.0385 0.0178 0.0137
201102 0.0029 0.0271 -0.0131
201103 0.0282 -0.0019 -0.0235
201104 -0.0147 -0.0039 -0.0227

0.0361
0.0135
0.0665
0.0162
0.0414
-0.0040
0.0252
-0.0222

0.0383
0.0018
0.0660
0.0133
0.0356
0.0119
0.0444
-0.0115

0.0300
0.0431
0.0587
0.0227
0.0542
0.0207
0.0290
-0.0074

Fund Returns

BSCFX
Adj Close
$ 19.91
$ 19.64
$ 18.38
$ 18.79
$ 19.41
$ 20.53
$ 21.12
$ 21.32
$ 22.15
$ 21.99
$ 22.14
$ 22.60
$ 23.47
$ 23.49
$ 22.50
$ 22.69
$ 23.78
$ 25.09
$ 24.43
$ 23.83
$ 21.61
$ 20.84
$ 20.58
$ 21.62
$ 22.31
$ 20.18
$ 20.27
$ 20.84
$ 18.70
$ 15.07
$ 13.46
$ 14.24
$ 13.23
$ 12.17

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

13.15
15.00
15.52
15.82
16.64
17.09
17.96
17.39
17.97
19.26
18.65
19.12
20.30
21.42
20.05
18.84
19.96
18.88
20.90
21.53
22.46
23.78
24.32
25.64
26.17
26.93
26.73

SUMMARY OUTPUT
Regression Statistics
Multiple R
0.97508
R Square
0.95078
Adjusted R Square 0.94815
Standard Error
0.01485
Observations
60
ANOVA
df
Regression
Residual
Total

Intercept
Mkt-RF
SMB
HML

3
56
59

SS
###
###
###

MS
###
###

F Significance F
### 1E-036

Coefficients
Standard Errort Stat
P-value Lower 95%
Upper 95%
Lower 95.0%
-0.0037 0.0019 -1.9003
0.0625 -0.0076 0.0002 -0.0076
1.2100 0.0413 29.2713
0.0000 1.1272 1.2928 1.1272
0.1588 0.0902 1.7615
0.0836 -0.0218 0.3395 -0.0218
-0.3039 0.0746 -4.0745
0.0001 -0.4534 -0.1545 -0.4534

Upper 95.0%
0.0002
1.2928
0.3395
-0.1545

SUMMARY OUTPUT
Regression Statistics
Multiple R
0.97840
R Square
0.95727
Adjusted R Square
0.95498
Standard Error
0.01222
Observations
60
ANOVA
df
Regression
Residual
Total

Intercept
Mkt-RF
SMB
HML

3
56
59

SS
0.187284
0.008359
0.195643

MS
F
Significance F
0.062428 418.219483 2.71E-038
0.000149

Coefficients
Standard Error t Stat
0.00062
0.00160
0.38863
1.00241
0.03401 29.47540
0.26928
0.07418
3.62993
-0.05479
0.06137 -0.89285

P-value Lower 95%Upper 95%


Lower 95.0%
Upper 95.0%
0.69902 -0.00258 0.00383 -0.00258 0.00383
0.00000 0.93428 1.07054 0.93428 1.07054
0.00062 0.12067 0.41789 0.12067 0.41789
0.37576 -0.17772 0.06814 -0.17772 0.06814

Upper 95.0%

SUMMARY OUTPUT
Regression Statistics
Multiple R
0.97260
R Square
0.94595
Adjusted R Square
0.94306
Standard Error
0.01405
Observations
60
ANOVA
df
Regression
Residual
Total

Intercept
Mkt-RF
SMB
HML

3
56
59

SS
0.19356
0.01106
0.20462

MS
F
Significance F
0.06452 326.71151 1.94E-035
0.00020

Coefficients
Standard Error t Stat
-0.00053
0.00184 -0.28720
0.97967
0.03912 25.04468
0.62095
0.08533
7.27739
-0.22366
0.07058 -3.16876

P-value Lower 95%Upper 95%


Lower 95.0%
Upper 95.0%
0.77502 -0.00422 0.00316 -0.00422 0.00316
0.00000 0.90131 1.05803 0.90131 1.05803
0.00000 0.45002 0.79188 0.45002 0.79188
0.00248 -0.36506 -0.08227 -0.36506 -0.08227

Upper 95.0%

Chapter 13
The Cost of Capital for Goff Computer, Inc.
Input area:

Bond 2013 maturity book value


2013 bond price
2013 bond YTM
Bond 2018 maturity book value
2018 bond price
2018 bond YTM
Bond 2028 maturity book value
2028 bond price
2028 bond YTM
Bond 2038 maturity book value
2038 bond price
2038 bond YTM
BV of debt (balance sheet)
BV of equity per share
Stock price
Shares outstanding (billions)
Beta
3-month Treasury bill rate
Market risk premium
Bond 1 price
Bond 1 YTM
Tax rate

600
94.367
6.221%
500
92.106
6.811%
300
91.672
7.949%
400
80.725
8.254%
1,851
2.139
11.20
1.94
1.410
0.10%
7.00%
100.433
5.124%
35%

$
$
$

Output area:

2) RE from CAPM
3)

Company
Apple Inc.
Dell
Hewlett Packard
Sun Microsystems
Ingram Mico Inc.
Tech Data Corp.

9.97%
Beta
1.87
1.41
1.19
1.92
1.18
1.28

Electronics for Imaging


Palm, Inc.
Digi International
Agilysis, Inc.
Rackable Systems, Inc.
SeaChange International
MIPS Technologies
Silicon Graphics
Cray Inc.
Industry Average

1.40
2.16
0.62
1.84
1.62
0.62
1.89
1.28
1.87
1.48

RE with industry beta

10.44%
Book value
(millions)

4)
Bond 1
Bond 2
Bond 3
Bond 4
Total
5) Book value of equity
Market value of equity
Book value of company
Market value of company

600
500
300
400
1,800

$
$
$
$

4.1497
21.7280
5.9497
23.3526

WACC using book value

8.07%

WACC using market value

9.60%

Percent
of total
0.33
0.28
0.17
0.22
$
1.00
billion
billion
million
million

Quoted
Market value Percent Yield to
Book
Market
price
(millions)
of total Maturity values values
94.367 $
566.202
0.35
6.221% 2.07% 2.17%
92.106
460.530
0.28
6.811% 1.89% 1.93%
91.672
275.016
0.17
7.949% 1.32% 1.35%
80.725
322.900
0.20
8.254% 1.83% 1.64%
$
1,624.65
1.00
7.12% 7.08%

Chapter 16
Stephenson Real Estate Recapitalization
Input area:

Shares outstanding
Share price
Purchase price
Increase in cash flow
Current cost of capital
YTM on new debt
Equity weight in new capital structure
Tax rate

$
$
$

12,000,000
48.50
45,000,000
11,000,000
11.50%
7.00%
70%
40%

Output area:

2.

Assets
Total assets

3. a) Aftertax earnings increase


NPV
b) Assets
NPV of project
Total assets
New share price
New shares issued
Price
c) Cash
Old assets
NPV of project
Total assets
Total
New shares outstanding

$
$

582,000,000
582,000,000

$
$

6,600,000
12,391,304

582,000,000
12,391,304
594,391,304

$
$

49.53
908,492

45,000,000
582,000,000
12,391,304
639,391,304

12,908,492

New share price

49.53

d) PV of the project

57,391,304

Old assets
PV of project
Total assets

$
$

582,000,000
57,391,304
639,391,304

657,391,304

b) Value unlevered
Tax shield
Total assets

$
$

639,391,304
18,000,000
657,391,304

New stock price

51.03

4. a) Market value of company

Equity
Total Debt & Equity

$
$

582,000,000
582,000,000

Equity
Total Debt & Equity

$
$

594,391,304
594,391,304

Equity
Total Debt & Equity

$
$

639,391,304
639,391,304

Equity
Total Debt & Equity

$
$

639,391,304
639,391,304

Debt
Equity
Total Debt & Equity

45,000,000
612,391,304
657,391,304

Chapter 17
McKenzie Corporation's Capital Budgeting
Input Area:

Recession
Normal
Expansion
Face value of debt
Cost of expansion

Probability
0.30 $
0.50 $
0.20 $

Without
expansion
25,000,000 $
30,000,000 $
48,000,000 $

$
$

29,000,000
5,700,000

$
$

32,100,000
38,000,000

200,000

With
expansion
27,000,000
37,000,000
57,000,000

Output Area:

1) Expected value of firm


Without expansion
With expansion
Expected NPV

2) Value of debt
Recession
Normal
Expansion
Expected value of debt

3) Value of equity
Recession
Normal
Expansion
Expected value of equity

$
$
$

Without
expansion
25,000,000 $
29,000,000 $
29,000,000 $

With
expansion
27,000,000
29,000,000
29,000,000

27,800,000 $

28,400,000

Without
expansion

With
expansion

$
$
$

$
1,000,000 $
19,000,000 $

8,000,000
28,000,000

4,300,000 $

9,600,000

Bondholder gain with expansion

600,000

Stockholder gain with expansion

5,300,000

Stockholder NPV

(400,000)

Chapter 18
The Leveraged Buyout of Cheek Products, Inc.
Input area:

2012
2013
2,749.00 $ 3,083.00 $
731.00
959.00
485.00
516.00
1,533.00 $ 1,608.00 $
613.20
643.20
919.80 $
964.80 $

2014
3,322.00
1,009.00
537.00
1,776.00
710.40
1,065.60

Sales
Costs
Depreciation
EBT
Tax
Net income

Capital expenditures
Change in NWC
Asset sales

$
$
$

279 $
(122) $
1,419 $

242 $
(186) $
1,028

304
101

Interest payments

1,927 $

1,859 $

2,592

$
$

Terminal growth rate


Terminal D/E
Return on assets
Pretax cost of debt
Pretax debt after Year 5
Tax rate
Shares outstanding (million)

3.50%
25.00%
14.00%
12.50%
8.00%
40.00%
425

Output area:

Unlevered cash flows

2,666.80 $ 2,452.80 $ 1,197.60

PV unlevered CF

6,406.71

Terminal value of future


unlevered CF in Year 5

$ 12,459.43

Value today of terminal


value

6,471.04

Interest tax shield


PV of interest tax shield

$
$

Levered equity return


WACC

770.80 $
3,211.89
15.20%
13.36%

Terminal value of company

$ 13,268.15

Terminal value of tax shields

808.73

Value of terminal tax shields


today

448.79

PV unlevered CF
PV tax shields
Value of company

$ 12,877.75
$ 3,660.68
$ 16,538.42

Share price to offer

38.91

743.60 $ 1,036.80

2015
2016
$ 3,400.00 $ 3,559.00
1,091.00
1,149.00
564.00
575.00
$ 1,745.00 $ 1,835.00
698.00
734.00
$ 1,047.00 $ 1,101.00
$
$

308 $
95 $

304
108

2,526 $

2,614

$ 1,208.00 $ 1,264.00

$ 1,010.40 $ 1,045.60

Chapter 20
East Coast Yachts Goes Public
Input area:

Underwriter fee
Legal fees and expenses
SEC registration fees
Filing fees
NASDAQ listing fee
Transfer agent fee
Engraving expenses
Other expenses
Audit cost/year
IPO size

$
$
$
$
$
$
$
$
$

7.00%
1,800,000
15,000
20,000
100,000
8,500
525,000
75,000
325,000
85,000,000

Underwriter fees

5,950,000

Total fees excluding underwriter fees

2,543,500

Total fees

8,493,500

Net amount raised

79,050,000

Output area:

Fee as a percentage of funds raised

10.74%

Chapter 21
The Decision to Lease or Buy at Warf Computers
Input area:

Purchase price
Year 1 depreciation
Year 2 depreciation
Year 3 depreciation
Year 4 depreciation
Salvage value
Lease payment
Security deposit
Cost of debt
Tax rate
Alternative lease:
Lease payments
Year 2 salvage value

$
$
$

$
$

4,000,000
0.3333
0.4445
0.1481
0.0741
480,000
1,040,000
240,000
11%
35%

1,840,000
1,600,000

Output area:

1) Aftertax cost of debt

7.15%
Year 0
4,000,000

Saved purchase
Lost salvage value
Lost depreciation tax shield
Security deposit
Lease payment
Tax on lease payment
Cash flow from leasing

NAL

35,446.43

2) Book value in Year 2

888,800

Saved purchase

Year 0
4,000,000

Year 1

Year 2

(466,620) $

(622,300)

(240,000)
(1,040,000)
(1,040,000)
364,000
364,000
3,084,000 $ (1,142,620) $

(1,040,000)
364,000
(1,298,300)

Year 1

Year 2

Lost salvage value


Lost depreciation tax shield
Lease payment
Tax on lease payment
Cash flow from leasing

NAL

(466,479.28)

PV of lease payments

3,497,657.66

(466,620)
(1,840,000)
(1,840,000)
644,000
644,000
2,804,000 $ (1,662,620) $

(1,351,080)
(622,300)

(1,973,380)

Year 3

Year 4
$

(207,340)

(1,040,000)
364,000
(883,340) $

(312,000)
(103,740)
240,000

(175,740)

Chapter 22
Clissold Industries Options
Input Area:

Current stock price $


Exercise price
$
Expiration (months)
Risk-free rate
Standard deviation

68
80
6
4%
57.86%

Output Area:

d1

(0.1438)

d2

(0.5529)

N(d1)

0.4428

N(d2)

0.2902

Call

7.36

Microsoft Excel 12.0 Answer Report


Worksheet: [Jaffe 10th edition Case Solutions.xlsx]Chapter 22
Report Created: 7/2/2011 2:13:15 PM

Target Cell (Value Of)


Cell
Name
$D$22 Call

Original Value Final Value


$
14.23 $
18.73

Adjustable Cells
Cell
Name
$D$11 Standard deviation

Original Value Final Value


65.00%
90.35%

Constraints
NONE

Microsoft Excel 12.0 Answer Report


Worksheet: [Jaffe 10th edition Case Solutions.xlsx]Chapter 22
Report Created: 7/2/2011 2:14:04 PM

Target Cell (Value Of)


Cell
Name
$D$22 Call

Original Value Final Value


$
16.81 $
15.69

Adjustable Cells
Cell
Name
$D$11 Standard deviation

Original Value Final Value


90.35%
84.24%

Constraints
NONE

Microsoft Excel 12.0 Answer Report


Worksheet: [Jaffe 10th edition Case Solutions.xlsx]Chapter 22
Report Created: 7/2/2011 2:14:31 PM

Target Cell (Value Of)


Cell
Name
$D$22 Call

Original Value Final Value


$
13.95 $
11.06

Adjustable Cells
Cell
Name
$D$11 Standard deviation

Original Value Final Value


84.24%
69.05%

Constraints
NONE

Microsoft Excel 12.0 Answer Report


Worksheet: [Jaffe 10th edition Case Solutions.xlsx]Chapter 22
Report Created: 7/2/2011 2:15:38 PM

Target Cell (Value Of)


Cell
Name
$D$22 Call

Original Value Final Value


$
9.50 $
7.36

Adjustable Cells
Cell
Name
$D$11 Standard deviation

Original Value Final Value


69.05%
57.86%

Constraints
NONE

Chapter 23
Exotic Cuisine Employee Stock Options
Input Area:

Current stock price


Exercise price
Expiration (years)
Risk-free rate
Standard deviation

$
$

38.15
50
10
4.40%
60.00%

Output Area:

d1

1.0380

d2

(0.8593)

N(d1)

0.8504

N(d2)

0.1951

Call

26.16

Chapter 24
S&S Air's Convertible Bond
Input area:

Industry PE
Company EPS
Conversion price (stock)
Maturity (years)
Convertible bond coupon
Conversion value of bond
Plain vanilla coupon

$
$

17.50
1.75
45.00
20
5%
680.56
8%

Output area:

Stock price

30.63

Intrinsic bond value

703.11

Floor value

703.11

Conversion ratio

22.22

Conversion premium
Option value

46.94%
$

296.89

Chapter 25
Williamson Mortgage, Inc.
Input area:

Mortgage value
Years
Interest rate

4) Interest rate
5) Interest rate

500,000
25
5.50%
6.20%
4.60%

Output area:

1) Mortgage payment

3,070.44

4) Mortgage value

$ 467,639.54

5) Mortgage value

$ 546,804.59

Chapter 26
Keafer Manufacturing Working Capital Management

3
4

Input Area:

5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24

A/R
Percent uncollectible
Collection period
% of purchases for next Q sales
Suppliers paid
% of sales for expenses
Interest and dividends
Outlay in third Q
Beginning cash balance
Target cash balance
Borrowing rate
Invested securities
Beginning short-term borrowing

Last years' sales

675,000
10%
57
50%
53
25%
185,000
390,000
210,000
135,000
1.2%
0.5%
-

Q1
1,102,000

$
$
$
$

Growth rate in sales

21.00%

25
26
27

Output Area:

28
29
30
31

Sales next year


Sales following year

$
$

1,333,420.00
1,613,438.20

32
33
34
35
36
37
38
39
40
41

Collections from previous quarter


Collections from current quarter sales
Payments to suppliers for previous quarter
Payments to suppliers for current quarter
Expenses
Dividends and interest
Outlay

Quarterly cash flow


Q1
607,500.00
488,920.67
(392,618.11)
(283,792.06)
(333,355.00)
(185,000.00)

A
42
43

Net cash flow

(98,344.50)

A
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81

Beginning cash balance


Net cash inflow
Ending cash balance
Minimum cash balance
Cumulative surplus (deficit)

Q1:
Q2:
Q3:
Q4:

$
$
$

Target cash balance


Net cash inflow
New short-term investments
Income on short-term investments
Short-term investments sold
New short-term borrowing
Interest on short-term borrowing
Short-term borrowing repaid
Ending cash balance
Minimum cash balance
Cumulative surplus (deficit)

Beginning short-term investments


Ending short-term investments
Beginning short-term debt
Ending short-term debt

$
$

Excess funds at start of quarter of


Excess funds at start of quarter of
Excess funds at start of quarter of
Excess funds at start of quarter of
Net cash cost
Q1
Q2
Q3
Q4
Cash generated by short-term financing

Cash Balance
Q1
210,000.00
(98,344.50)
111,655.50
135,000.00
(23,344.50)
Short-term Financial Plan
135,000.00
(98,344.50)
375.00
97,969.50
135,000.00
(135,000.00)
75,000.00
75,000.00
$75,000.00
$75,000.00
$209,620.06
$3,662.77

375.00
375.00
1,048.10
18.31
1,816.41

nagement 2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24

Q2
1,141,000 $

Q3
1,125,000 $

Q4
1,063,000

1,380,610.00 $

1,361,250.00 $

1,286,230.00

Q3
874,386.33 $
499,125.00
(400,812.50)
(264,391.72)
(340,312.50)
(185,000.00)
(390,000.00)

Q4
862,125.00
471,617.67
(378,723.28)
(331,651.19)
(321,557.50)
(185,000.00)

25
26
27
28
29
30
31
32
33cash flow
Quarterly
34
35
36
37
38
39
40
41

Q2
844,499.33 $
506,223.67
(406,512.94)
(279,812.50)
(345,152.50)
(185,000.00)

E
42
43

134,245.06 $

(207,005.39) $

116,810.70

E
44
Cash Balance
45
Q2
46 $
111,655.50
47
134,245.06
48
$
245,900.56
49
135,000.00
50 $
110,900.56
51
52
ort-term Financial
Plan
53
$
135,000.00
54
134,245.06
55
(134,620.06)
56
375.00
57
58
59
60
61
$
135,000.00
62
(135,000.00)
63 $
64
65
$
75,000.00
66
209,620.06
67
68 $
69
70
earns
71
earns
72
earns
73
earns
74
75
76
77
78
79
80
81

$
$
$

$
$
$

Q3
245,900.56 $
(207,005.39)
38,895.17 $
135,000.00
(96,104.83) $

Q4
38,895.17
116,810.70
155,705.87
135,000.00
20,705.87

135,000.00 $
(207,005.39)
1,048.10
205,957.29
135,000.00 $
(135,000.00)
- $

135,000.00
116,810.70
(116,829.02)
18.31
135,000.00
(135,000.00)
-

209,620.06 $
3,662.77
- $

3,662.77
120,491.78
-

$375.00
$375.00
$1,048.10
$18.31

in income.
in income.
in income.
in income.

Microsoft Excel 14.0 Answer Report


Worksheet: [Jaffe 10th edition Case Solutions.xlsx]Chapter 26
Report Created: 8/4/2011 12:54:21 PM
Result: Solver found a solution. All Constraints and optimality conditions are satisfied.
Solver Engine
Engine: GRG Nonlinear
Solution Time: 0.031 Seconds.
Iterations: 2 Subproblems: 0
Solver Options
Max Time 100 sec, Iterations 100, Precision 0.000001
Convergence 0.0001, Population Size 100, Random Seed 0, Derivatives Forward, Require Bounds
Max Subproblems Unlimited, Max Integer Sols Unlimited, Integer Tolerance 5%, Solve Without Integer Constraints
Objective Cell (Value Of)
Cell
Name
$F$68 Ending short-term debt Q3

Original Value Final Value


$
53,265.82 $
-

Variable Cells
Cell
Name
$D$24 Growth rate in sales Q1

Original Value Final Value Integer


11.00%
21.00% Contin

Constraints
Cell
Name
$F$68 Ending short-term debt Q3

Cell Value
$

Formula
$F$68=0

Status Slack
Binding
0

nteger Constraints

Chapter 27
Cash Management at Richmond Corp.
Input Area:

Number of lockboxes
Daily payments
Investment account rate
Wire transfer cost
Sweep time
Money market yield
ACH transfer cost

4
185,000
0.068%
0.20%
14
0.075%
200

Output:

1. FVA

$10,385,104.15

2. FVA
$ 10,391,608.36
The company should go ahead with the plan.
3. ACH transfer cost

315.67

Chapter 28
Credit Policy at Braam Industries
Input Area:

Current policy
Option 1
Option 2
Option 3

$
$
$
$

Variable costs
Interest rate

Sales
116,000,000
130,000,000
129,000,000
132,000,000
45%
6.00%

Output Area:

Daily interest rate

0.01597%

Current policy:
Daily sales
Variable costs (daily)
Defaults on sales (daily)
Administrative costs (daily)
Interest rate

$
$
$
$

317,808.22
143,013.70
6,673.97
5,084.93
0.6085%

NPV

$ 26,650,947.25

Option 1:
Daily sales
Variable costs (daily)
Defaults on sales (daily)
Administrative costs (daily)
Interest rate

$
$
$
$

356,164.38
160,273.97
9,260.27
8,547.95
0.6567%

NPV

$ 26,958,531.53

Default rate
2.10%
2.60%
2.20%
2.50%

Option 2:
Daily sales
Variable costs (daily)
Defaults on sales (daily)
Administrative costs (daily)
Interest rate

$
$
$
$

353,424.66
159,041.10
7,775.34
6,715.07
0.8175%

NPV

$ 21,846,461.54

Option 3:
Daily sales
Variable costs (daily)
Defaults on sales (daily)
Administrative costs (daily)
Interest rate

$
$
$
$

361,643.84
162,739.73
9,041.10
7,594.52
0.7853%

NPV

$ 23,047,081.08

Administrative costs
1.60%
2.40%
1.90%
2.10%

Receivables period
38
41
51
49

Chapter 29
The Birdie Golf-Hybrid Golf Merger
Input Area:

Cash paid

Sales
Production costs
Depreciation
Other expenses
EBIT
Interest
Taxable income
Taxes (40%)
Net income
Investments
Net working capital
Fixed assets
Total
Sources of financing
New debt
Profit retention
Total
Tax rate
Loan to buy company
Dividends from Hybrid today
Current target debt-equity ratio
New target debt-equity ratio
Year 2 tax-loss carryforward
Year 3 tax-loss carryforward
Terminal value of Hybrid in five years
Debt level in five years
Stock price of acquirer
Shares outstanding in acquirer
Shares outstanding in target
Risk-free rate

$
$
$

$
$

$
$

$
$

$
$
$
$
$

352,000,000
2012
512,000,000
359,200,000
48,000,000
51,200,000
53,600,000
12,160,000
41,440,000
16,576,000
24,864,000

2013
576,000,000
403,200,000
51,200,000
57,600,000
64,000,000
14,080,000
49,920,000
19,968,000
29,952,000

12,800,000 $
9,600,000
22,400,000 $

16,000,000
16,000,000
32,000,000

22,400,000 $
22,400,000 $

10,240,000
21,760,000
32,000,000

40%
71,000,000
96,000,000
0.5000
1.0000
16,000,000
16,000,000
576,000,000
192,000,000
94.00
11,600,000
5,200,000
6%

$
$

Expected return on market


Company acquirer WACC
Cost of debt for each company
Current beta for Hydrid equity
Price agreed by Hybrid shareholders

13%
11%
8%
1.30
68.75

Output Area:

Current debt weight


Current equity weight
Beta of debt
Hybrid beta
Discount rate for normal operations

0.33
0.67
0.29
0.96
12.73%

New debt weight


New equity weight
New stock beta
Discount rate for dividends

0.50
0.50
1.59
17.13%

Acquisition of Hybrid
Dividends from Hybrid
Tax-loss carryforwards
Terminal value of equity
Terminal value of debt
Total
Present values
Acquisition of Hybrid
Dividends from Hybrid
Tax-loss carryforwards
Terminal value of equity
Terminal value of debt
Total

$
$

Year 0
(352,000,000)
96,000,000 $

24,864,000

(256,000,000) $

24,864,000

$
$

(352,000,000)
96,000,000 $

21,227,092

(256,000,000) $

21,227,092

1) NPV

25,512,330.96

2) Highest price to offer

377,512,330.96

67.69

Price per share offered

Year 1

Highest share price to offer


3) New share price
Exchange ratio
4) Highest exchange ratio

72.60

96.20
0.7147
0.7314

$
$
$

$
$

$
$

2014
640,000,000
448,000,000
52,800,000
64,000,000
75,200,000
15,360,000
59,840,000
23,936,000
35,904,000

2016
800,000,000
564,000,000
53,600,000
77,600,000
104,800,000
17,280,000
87,520,000
35,008,000
52,512,000

16,000,000 $
11,520,000
27,520,000 $

19,200,000 $
76,800,000
96,000,000 $

19,200,000
4,480,000
23,680,000

10,240,000 $
17,280,000
27,520,000 $

9,600,000 $
17,280,000
26,880,000 $

7,680,000
16,000,000
23,680,000

$
$
$

2015
720,000,000
505,600,000
53,120,000
72,320,000
88,960,000
16,000,000
72,960,000
29,184,000
43,776,000

$
$

Year 2
$

8,192,000 $
16,000,000

Year 3
18,624,000 $
16,000,000

Year 4

Year 5

26,496,000 $

36,512,000

24,192,000 $

34,624,000 $

26,496,000 $

576,000,000
(192,000,000)
804,512,000

5,970,751 $
13,717,421

11,588,613 $
12,701,316

14,075,321 $

16,558,962

14,075,321 $

316,344,830
(130,671,974)
202,231,818

19,688,172 $

24,289,929 $

Chapter 31
East Coast Yachts Goes International
Input Area:

Sales per month


Commission
Current exhange rate ($/)
Production costs
3) Exhange rate ($/)

8,000,000
5%
1.34
80%

1.25

Sales less commission


Dollar value of sales

7,600,000
10,184,000

Total sales
Production costs

$
$

10,720,000
8,576,000

Profit at current exchange rate

1,608,000

$
$

9,500,000
8,576,000

Profit at new exchange rate

924,000

Breakeven exchange rate ($/)

1.1284

Output Area:

3) At revised exchange rate:


Dollar value of sales
Production costs