Financial Analysis Spreadsheet Templates

MAIN MENU -- CHAPTER 3

Problem 3-1 Problem 3-8

Corporate Finance by Ross, Westerfield, and Jordan -- Fifth Edition

Copyright © 1999 Irwin/McGraw-Hill and KMT Software, Inc. (www.kmt.com)

File: 569592444.xls Copyright © 1999 Irwin/McGraw-Hill Printed: 01/10/2022

 Corporate Finance
Ross, Westerfield, and Jordan -- Fifth Edition

Problem 3-1 Objective

Determine consumption potential

Student Name:
Course Name:
Student ID:
Course Number:

Currently, Jim Morris makes $100,000. Next year his income will be $120,000. Jim is a big spender and he
wants to consume $150,000 this year. The equilibrium interest rate is 10 percent. What will be Jim's
consumption potential next year if he consumes $150,000 this year?

Key assumptions
Current year income $100,000
Next year's income $120,000
This year's consumption $150,000
Equilibrium interest rate 10%

Solution
Problem 3-1
Instructions
Using the key assumptions given above, enter a formula (using cells references) that calculates Jim's
consumption potential next year.

Next year's consumption potential FORMULA

File: 569592444.xls Copyright © 1999 Irwin/McGraw-Hill Printed: 01/10/2022

 Corporate Finance
Ross, Westerfield, and Jordan -- Fifth Edition

Problem 3-8 Objective

Review corporate investment decision making.

Student Name:
Course Name:
Student ID:
Course Number:

Consider a one-year world with perfect capital markets in which the interest rate is 10 percent. Suppose a firm
has $12 million in cash. The firm invests $7 million today and $5 million is paid to shareholders. The NPV
of the firm's investment is $3 million. All shareholders are identical.

a. How much cash will the firm receive next year from its investment?

b. Suppose shareholders plan to spend $10 million today.

(I) How can they do this?
(ii) How much money will they have available to spend net year if they follow your plan?

Solution
Problem 3-8
Instructions
Enter a formula to calculate the cash to be received next year. In part b, enter your answers to the two
questions.

a. How much cash will the firm receive next year from its investment?

Investment amount $7,000,000

Net Present Value $3,000,000
Cash to be received next year FORMULA

b. Suppose shareholders plan to spend $10 million today.

(I) How can they do this?

(ii) How much money will they have available to spend net year if they follow your plan?

File: 569592444.xls Copyright © 1999 Irwin/McGraw-Hill Printed: 01/10/2022