Assigned Problems Solutions FIN 2_201410

Solution Ch 3 -
1) 10,000,000 (net benefit)

3) $1.78 per gallon.

4) a) Stock bonus: $6300; b) depends on the expected value of the stock price.

6) a) $208; b) $192.31 c) To have the money today as, even if you don´t need it now, with the current
interest rate you can invest it and have more in the future.

7) NPV=$16.000

8) r=6.25%

9)

a) NPV=$3.63 million

b) By taking a loan at the bank.

11)

a) The first supplier is better (cost=194,339.62 versus 198,113.21)

b) Taking a loan with the bank. With the same rate, you´ll end up paying a total of 206,000 on
year 1, less than the 210,000 you would pay the second supplier on the same date.

12)

a) Take a loan from Bank One at 5.5% and invest in Bank Enn at 6%

b) Bank One would experience a surge in the demand for loans, while Bank Enn would receive a
surge in deposits.

c) Bank One would increase the interest rate, and/or Bank Enn would decrease its rate.

14) $1.215 per euro.

16)

a) $138

b) arbitrage profit= $18;

 c) arbitrage profit= $12.

19)

a) 7,272.73; 12,727.27; 12,727.27

b) $132,727.27

c) $132,727.27

Solution Ch 4 -
8) 74,409.39

10)

a) 6,848.44

b) 148,779

c) 1,000

13) 3,152

15) 5,729.69

16) NPV = 52,63. He should go ahead with the project.

17) NPV = -38,69. He should not build the machine.

20) 2,130,833

22)

a) 1,295,282.59

b) 566,416.06

26) 21,861,255.8

27) 120.000 from the PV of all payments + 10.000 from the first payment = 130.000

33) 23,471,58

36) 24.176
41) 20,868.91

42) 13,823.91

44) 9,366.29

51) 2.29%

Solution Ch 5 -

3) 126,964

4) 9,416%

10) 73,254.81

14) 354,900

15) 543,069

19) 30 months

23)

a) 987,93

b) 1.053,85

c) 170 months

d) 50,969

39) 733

40) a.32,871

b.27,661

Solution Ch 6 - Bonds
2) a. The maturity is 10 years.
b. The coupon rate is 4%.
c. The face value is $1000.
4) a. P = $89.85
b. P = $79.36
c. 6.05%

10) a. premium.
b. $1,054.60

13) a. A=>15.3% B=>9.9% C=>11.2% D=> 7.4%

b. Bond A is more sensitive because it has longer maturity and no coupons

15) a. 3.17%
b. 5%
c. We can’t simply compare IRRs.

17) P=1032.09, Premium.

21) The par coupon rate is 4.676%.

22) a. The bond is trading at a premium

b. YTM = 4.77%

c. P=$991.39

23) The price of the coupon bond is too low, so there is an arbitrage opportunity.

24) Given the spot rates implied by Bonds A, B, and D, the price of Bond C should be $1,105.21. Its price
really is $1,118.21, so it is overpriced by $13 per bond. Yes, there is an arbitrage opportunity

30) a. P=1,008.36

b. $9,917.13 => 9,918 bonds.

c. 6.5%, or A rated.

d. 7.5% or BB bonds.

Solution Ch 7 –
1) You should take the project. The maximum IRR is 20%, it can only increase 10%

3) NPV= $275 million , 30%.

5) a. $9.895 million

b. 9.391 million

7) a. Make graph of the NPV with Y axis = NPV and X axis = Cost of capital

b. 12.72%.
 c. Yes, because the NPV is positive

d. 0.72%

9) Irr - 12.2% NPV= -986.71 Dont take it

14) If the opportunity cost of capital is between 2.93% and 8.72%, the investment should be undertaken.

16) It doesnt exist.

20) a. 5 years

b. NPV = 0.31 million

22)

a. NPVa= 119.83 NPVb= 130.37 NPVc = 124.65

b. Ranking the projects by their IRR is not valid in this situation because the projects have different
scales and different patterns of cash flows over time.

24) Since the incremental IRR of 7.522% is less than the cost of capital of 8%, you should take the
Playhouse.

28) a. a. Huawei 83.9%, Cisco 36.3%

b. Huawei $28.0 m, Cisco $44.1m

c. IRR = 111.9%

d. No,

31)

Solution Ch 8 –
1) a. $12 million

b. $16 million

2) Year 1=(878) Year2: 1,918

5) a. Unlevered Net Income (9,000) 1,020 5,100 8,862 13,692

b. Unlevered Net Income (9,000) 780 4,620 8,142 12,732

9) a. Unlevered Net Income 39.0 41.6

b. Free Cash Flow 29.0 29.6

10) a. FCF = 35,000 8,025 8,025 ..........… 8,025 18,025

b .9.56

12) $248.8K in present value terms

17) a. FCF in years 1-7: $0.63m In year 8:. $1.544m

b. 1,2458m

23) a. $57.3 million.

b. Initial Sales 90 100 110

NPV 20.5 57.3 94.0

c. Growth Rate 0% 2% 5%
NPV 57.3 72.5 98.1

d. NPV is positive for discount rates below the IRR of 20.6%.

Solution Ch 9–

1) $55.50

3) a. $48.00

b. $50.00

c. $48.00

6) $30

10) a. 6%

b. $50

c. $44 , No

11) $41.67

13) $39.4378
15) $68.45

17) a. $50

b. $50.

c. 8%

19) a. $820

b.$ 9.53

21) a. $ 8.11

b. $5.13

c. $12.07

d. $9.00

25) a. $24.77

b. $37.32

c. $34.22

d. $97.73

26) a. $30.77

b. $16.21 - $58.64

c. $27.10

d. $22.25 - 33.08

27) a. Using EV/EBITDA = $30.38, Using P/E= $30.36

b. Using EV/EBITDA = $23.67, Using P/E $28.38

30) a. $100

b. That forecast might be to high

31) a. -206

b. No, price will drop

32) a. greater than 50%

 b. Yes,

c. It might be an illiquid market.

Solution Ch 12–
1) 5.85%

3) ALCOA is 7.75% higher

18) 8.25%

19) a. 7.75%

b. 7.875%

c. In the first case, we assumed the debt had a beta of zero, so rd = rf = 4%

In the second case, we assumed rd = ytm = 4.5%

d. 8.03%

23) a. Soft drink = 1,250 Chemical = 2.125

b. Beta = 0.85, Ke = 8.25%

24) Beta in Hockey Tea, 1.64

25) a. 35.12 million

b. 25.24 million

c. 21.4% Risk is increased.

27) WACC = 8.4%