Sinh viên: Đỗ Hoàng Lan

MSV: 18051059
Lớp: Kế Toán CLC2
Bài tập giữa kỳ môn Tài chính doanh nghiệp

Slide 2

10. Cash flow from assets = Cash flow to creditors + Cash flow to
stockholders
= –$130,000 + 115,000 = –$15,000

Cash flow from assets = –$15,000 = OCF – Change in NWC – Net capital
spending
= –$15,000 = OCF – (–$85,000) – 940,000

Operating cash flow = –$15,000 – 85,000 + 940,000

Operating cash flow = $840,000

11. To find the OCF, we first calculate net income.

Income Statement
Sales $196,000
Costs 104,000
Other expenses 6,800
Depreciation 9,100
EBIT $76,100
Interest 14,800
Taxable income $61,300
Taxes 21,455
Net income $39,845

Dividends $10,400
Additions to RE $29,445
 a. OCF = EBIT + Depreciation – Taxes = $76,100 + 9,100 – 21,455 =
$63,745

b. CFC = Interest – Net new LTD = $14,800 – (–7,300) = $22,100

Note that the net new long-term debt is negative because the company
repaid part of its long- term debt.

c. CFS = Dividends – Net new equity = $10,400 – 5,700 = $4,700

d. We know that CFA = CFC + CFS, so:

CFA = $22,100 + 4,700 = $26,800

CFA is also equal to OCF – Net capital spending – Change in NWC.

We already know OCF. Net capital spending is equal to:

Net capital spending = Increase in NFA + Depreciation = $27,000 +

9,100 = $36,100

Now we can use:

CFA = OCF – Net capital spending – Change in NWC

$26,800 = $63,745 – 36,100 – Change in NWC

Solving for the change in NWC gives $845, meaning the company increased its
NWC by
$845.

15.

Net income = Dividends + Addition to ret. earnings = $1,500 + 5,100 =

$6,600
Now, looking at the income statement:

EBT – EBT × Tax rate = Net income

Recognize that EBT × Tax rate is simply the calculation for taxes.
Solving this for EBT yields:

EBT = NI / (1– tax rate) = $6,600 / (1 – 0.35) = $10,154

 Now you can calculate:

EBIT = EBT + Interest = $10,154 + 4,500 = $14,654

The last step is to use:

EBIT = Sales – Costs – Depreciation

$14,654 = $41,000 – 19,500 – Depreciation

Solving for depreciation, we find that depreciation = $6,846

Case slide 2
1. The income statement for each year will look like this:

Income statement
2008 2009
  Sales $247,259 $301,392
  Cost of goods sold 126,038 159,143
  Selling & administrative 24,787 32,352
  Depreciation 35,581 40,217
  EBIT $60,853 $69,680
  Interest 7,735 8,866
  EBT $53,118 $60,814
  Taxes 10,624 12,163
  Net income $42,494 $48,651

  Dividends $21,247 $24,326

Addition to retained
  earnings 21,247 24,326

2. The balance sheet for each year will be:

  Balance sheet as of Dec. 31, 2008

  Cash $18,187     Accounts payable $32,143
  Accounts receivable 12,887     Notes payable 14,651
  Inventory 27,119     Current liabilities $46,794
  Current assets $58,193      
        Long-term debt $79,235
  Net fixed assets $156,975     Owners' equity 89,139
  Total assets $215,168     Total liab. & equity $215,168
In the first year, equity is not given. Therefore, we must calculate equity as a plug
variable. Since total liabilities & equity is equal to total assets, equity can be calculated
as:

Equity = $215,168 – 46,794 – 79,235

Equity = $89,139

  Balance sheet as of Dec. 31, 2009

  Cash $27,478     Accounts payable $36,404
  Accounts receivable 16,717     Notes payable 15,997
  Inventory 37,216     Current liabilities $52,401
  Current assets $81,411      
        Long-term debt $91,195
  Net fixed assets $191,250     Owners' equity 129,065
  Total assets $272,661     Total liab. & equity $272,661

The owner’s equity for 2009 is the beginning of year owner’s equity, plus the
addition to retained earnings, plus the new equity, so:

Equity = $89,139 + 24,326 + 15,600

Equity = $129,065

3. Using the OCF equation:

OCF = EBIT + Depreciation – Taxes

The OCF for each year is:

OCF2008 = $60,853 + 35,581 – 10,624

OCF2008 = $85,180

OCF2009 = $69,680 + 40,217 – 12,163

OCF2009 = $97,734

4. To calculate the cash flow from assets, we need to find the capital spending and
change in net working capital. The capital spending for the year was:

Capital spending
  Ending net fixed assets $191,250
– Beginning net fixed
  assets 156,975
  + Depreciation 40,217
   Net capital spending $74,492

And the change in net working capital was:

  Change in net working capital

  Ending NWC $29,010
  – Beginning NWC 11,399
  Change in NWC $17,611

So, the cash flow from assets was:

  Cash flow from assets

  Operating cash flow $97,734
  – Net capital spending 74,492
  – Change in NWC 17,611
  Cash flow from assets $ 5,631

5. The cash flow to creditors was:

  Cash flow to creditors  

  Interest paid $8,866
  – Net new borrowing 11,960
  Cash flow to creditors –$3,094

6. The cash flow to stockholders was:

  Cash flow to stockholders  

  Dividends paid $24,326
  – Net new equity raised 15,600
Cash flow to
  stockholders $8,726

Answers to questions

1. The firm had positive earnings in an accounting sense (NI > 0) and had positive cash
flow from operations. The firm invested $17,611 in new net working capital and
$74,492 in new fixed assets. The firm gave $5,631 to its stakeholders. It raised $3,094
from bondholders, and paid $8,726 to stockholders.

2. The expansion plans may be a little risky. The company does have a positive cash
flow, but a large portion of the operating cash flow is already going to capital
spending. The company has had to raise capital from creditors and stockholders for its
 current operations. So, the expansion plans may be too aggressive at this time. On the
other hand, companies do need capital to grow. Before investing or loaning the
company money, you would want to know where the current capital spending is
going, and why t

SLIDE 3
1. Using the formula for NWC, we get:

NWC = CA – CL
CA = CL + NWC = $3,720 + 1,370 = $5,090

So, the current ratio is:

Current ratio = CA / CL = $5,090/$3,720 = 1.37 times

And the quick ratio is:

Quick ratio = (CA – Inventory) / CL = ($5,090 – 1,950) / $3,720 = 0.84 times

2. We need to find net income first. So:

Profit margin = Net income / Sales

Net income = Sales(Profit margin)
Net income = ($29,000,000)(0.08) = $2,320,000

ROA = Net income / TA = $2,320,000 / $17,500,000 = .1326 or 13.26%

To find ROE, we need to find total equity.

TL & OE = TD + TE
TE = TL & OE – TD
TE = $17,500,000 – 6,300,000 = $11,200,000

ROE = Net income / TE = 2,320,000 / $11,200,000 = .2071 or 20.71%

3. Receivables turnover = Sales / Receivables

Receivables turnover = $3,943,709 / $431,287 = 9.14 times

Days’ sales in receivables = 365 days / Receivables turnover = 365 / 9.14 = 39.92 days

The average collection period for an outstanding accounts receivable balance was 39.92
days.
4. Inventory turnover = COGS / Inventory
Inventory turnover = $4,105,612 / $407,534 = 10.07 times

Days’ sales in inventory = 365 days / Inventory turnover = 365 / 10.07 = 36.23 days

On average, a unit of inventory sat on the shelf 36.23 days before it was sold.

5. Total debt ratio = 0.63 = TD / TA

Substituting total debt plus total equity for total assets, we get:

0.63 = TD / (TD + TE)

Solving this equation yields:

0.63(TE) = 0.37(TD)

Debt/equity ratio = TD / TE = 0.63 / 0.37 = 1.70

Equity multiplier = 1 + D/E = 2.70

Case slide 3
1. The calculations for the ratios listed are:

Current ratio = $2,186,520 / $2,919,000

Current ratio = 0.75 times

Quick ratio = ($2,186,250 – 1,037,120) / $2,919,000

Quick ratio = 0.39 times

Cash ratio = $441,000 / $2,919,000

Cash ratio = 0.15 times

Total asset turnover = $30,499,420 / $18,308,920

Total asset turnover = 1.67 times

Inventory turnover = $22,224,580 / $1,037,120

Inventory turnover = 21.43 times

Receivables turnover = $30,499,420 / $708,400

Receivables turnover = 43.05 times
 Total debt ratio = ($18,308,920 – 10,069,920) / $18,308,920
Total debt ratio = 0.45 times

Debt-equity ratio = ($2,919,000 + 5,320,000) / $10,069,920

Debt-equity ratio = 0.82 times

Equity multiplier = $18,308,920 / $10,069,920

Equity multiplier = 1.82 times

Times interest earned = $3,040,660 / $478,240

Times interest earned = 6.36 times

Cash coverage = ($3,040,660 + 1,366,680) / $478,420

Cash coverage = 9.22 times

Profit margin = $1,537,452 / $30,499,420

Profit margin = 5.04%

Return on assets = $1,537,452 / $18,308,920

Return on assets = 8.40%

Return on equity = $1,537,452 / $10,069,920

Return on equity = 15.27%

2. Boeing is probably not a good aspirant company. Even though both companies
manufacture airplanes, S&S Air manufactures small airplanes, while Boeing
manufactures large, commercial aircraft. These are two different markets. Additionally,
Boeing is heavily involved in the defense industry, as well as Boeing Capital, which
finances airplanes.

Cessna is a well known manufacturer of small airplanes. The company produces

business jets, freight- and passenger-hauling utility Caravans, personal and small-
business single engine pistons. It may be a good aspirant company, however, its
products could be considered too broad and diversified since S&S Air produces only
small personal airplanes.

3. The turnover ratios are all higher than the industry median; in fact, all three turnover
ratios are above the upper quartile. This may mean that S&S Air is more efficient
than the industry.
 The financial leverage ratios are all below the industry median, but above the lower
quartile. S&S Air generally has less debt than comparable companies, but still
within the normal range.

The profit margin, ROA, and ROE are all slightly below the industry median,
however, not dramatically lower. The company may want to examine its costs
structure to determine if costs can be reduced, or price can be increased.

Overall, S&S Air’s performance seems good, although the liquidity ratios indicate
that a closer look may be needed in this area.

SLIDE 4
1. To calculate the internal growth rate, we first need to find the ROA and the retention
ratio, so:

ROA = NI / TA
ROA = $1,537,452 / $18,309,920
ROA = .0840 or 8.40%

b = Addition to RE / NI
b = $977,452 / $1,537,452
b = 0.64

Now we can use the internal growth rate equation to get:

Internal growth rate = (ROA × b) / [1 – (ROA × b)]

Internal growth rate = [0.0840(.64)] / [1 – 0.0840(.64)]
Internal growth rate = .0564 or 5.64%

To find the sustainable growth rate, we need the ROE, which is:

ROE = NI / TE
ROE = $1,537,452 / $10,069,920
ROE = .1527 or 15.27%

Using the retention ratio we previously calculated, the sustainable growth rate is:

Sustainable growth rate = (ROE × b) / [1 – (ROE × b)]

Sustainable growth rate = [0.1527(.64)] / [1 – 0.1527(.64)]
Sustainable growth rate = .1075 or 10.75%
 The internal growth rate is the growth rate the company can achieve with no outside
financing of any sort. The sustainable growth rate is the growth rate the company can
achieve by raising outside debt based on its retained earnings and current capital
structure.
2. Pro forma financial statements for next year at a 12 percent growth rate are:

  Income statement      
$
  Sales 34,159,350      
24,891,53
  COGS 0      
4,331,60
  Other expenses 0      
  Depreciation 1,366,680      
$
  EBIT 3,569,541      
  Interest 478,240      
$
  Taxable income 3,091,301      
  Taxes (40%) 1,236,520      
$
  Net income 1,854,780      
           
$
  Dividends 675,583      
1,179,19
  Add to RE 7      

  Balance sheet
  Assets   Liabilities & Equity
  Current Assets     Current Liabilities  
$ Accounts
  Cash 493,920   Payable $ 995,680
  Accounts rec. 793,408   Notes Payable 2,030,000
  Inventory 1,161,574   Total CL $ 3,025,680
  Total CA $ 2,448,902      
        Long-term debt $ 5,320,000
         
    Shareholder Equity  
        Common stock $ 350,000
  Fixed assets     Retained earnings 10,899,117
  Net PP&E $   Total Equity $ 11,249,117
 18,057,088 
           
$
  Total Assets 20,505,990   Total L&E $ 19,594,787

So, the EFN is:

EFN = Total assets – Total liabilities and equity

EFN = $20,505,990 – 19,594,797
EFN = $911,193

The company can grow at this rate by changing the way it operates. For example, if
profit margin increases, say by reducing costs, the ROE increases, it will increase the
sustainable growth rate. In general, as long as the company increases the profit
margin, total asset turnover, or equity multiplier, the higher growth rate is possible.
Note however, that changing any one of these will have the effect of changing the
pro forma financial statements.

SLIDE 5
1.
FV = PV(1 + r)t

Solving for t, we get:

t = ln(FV / PV) / ln(1 + r)

The length of time to double your money is:

FV = $2 = $1(1.07)t

t = ln 2 / ln 1.07 = 10.24
years

The length of time to quadruple your money is:

FV = $4 = $1(1.07)t
t = ln 4 / ln 1.07 = 20.49 years
2.
FV = PV(1 + r)t
r = (FV / PV)1 / t – 1
r = ($314,600 / $200,300)1/7 – 1 = .0666 or 6.66%

3. FV = PV(1 + r)t
t = ln(FV / PV) / ln(1 + r)
t = ln ($170,000 / $40,000) / ln 1.053 = 28.02 years

4.
PV = FV / (1 + r)t
PV = $650,000,000 / (1.074)20 = $155,893,400.13
5. PV = FV / (1 + r)t
PV = $1,000,000 / (1.10)80 = $488.19

Case slide 5
1. Age is obviously an important factor. The younger an individual is, the more time
there is for the (hopefully) increased salary to offset the cost of the decision to return
to school for an MBA. The cost includes both the explicit costs such as tuition, as
well as the opportunity cost of the lost salary.

2. Perhaps the most important nonquantifiable factors would be whether or not he is

married and if he has any children. With a spouse and/or children, he may be less
inclined to return for an MBA since his family may be less amenable to the time and
money constraints imposed by classes. Other factors would include his willingness
and desire to pursue an MBA, job satisfaction, and how important the prestige of a
job is to him, regardless of the salary.

3. He has three choices: remain at his current job, pursue a Wilton MBA, or pursue a
Mt. Perry MBA. In this analysis, room and board costs are irrelevant since
presumably they will be the same whether he attends college or keeps his current job.
We need to find the aftertax value of each, so:

Remain at current job:

Aftertax salary = $55,000(1 – .26) = $40,700

His salary will grow at 3 percent per year, so the present value of his aftertax salary
is:

PV = C {1 – [(1 + g)/(1 + r)]t} / (r – g)]

 PV = $40,700{[1 – [(1 +.065)/(1 + .03)]38} / (.065 – .03)
PV = $836,227.34

Wilton MBA:

Costs:

Total direct costs = $63,000 + 2,500 + 3,000 = $68,500

PV of direct costs = $68,500 + 68,500 / (1.065) = $132,819.25

PV of indirect costs (lost salary) = $40,700 / (1.065) + $40,700(1 + .03) / (1 + .065) 2

= $75,176.00

Salary:

PV of aftertax bonus paid in 2 years = $15,000(1 – .31) / 1.0652 = $9,125.17

Aftertax salary = $98,000(1 – .31) = $67,620

His salary will grow at 4 percent per year. We must also remember that he will now only
work for 36 years, so the present value of his aftertax salary is:

PV = C {1 – [(1 + g)/(1 + r)]t} / (r – g)]

PV = $67,620{[1 – [(1 +.065)/(1 + .04)]36} / (.065 – .04)
PV = $1,554,663.22

Since the first salary payment will be received three years from today, so we need to
discount this for two years to find the value today, which will be:

PV = $1,544,663.22 / 1.0652
PV = $1,370,683.26

So, the total value of a Wilton MBA is:

Value = –$75,160 – 132,819.25 + 9,125.17 + 1,370,683.26 = $1,171,813.18

Mount Perry MBA:

Costs:

Total direct costs = $78,000 + 3,500 + 3,000 = $86,500. Note, this is also the PV of
the direct costs since they are all paid today.
 PV of indirect costs (lost salary) = $40,700 / (1.065) = $38,215.96

Salary:

PV of aftertax bonus paid in 1 year = $10,000(1 – .29) / 1.065 = $6,666.67

Aftertax salary = $81,000(1 – .29) = $57,510

His salary will grow at 3.5 percent per year. We must also remember that he will now
only work for 37 years, so the present value of his aftertax salary is:

PV = C {1 – [(1 + g)/(1 + r)]t} / (r – g)]

PV = $57,510{[1 – [(1 +.065)/(1 + .035)]37} / (.065 – .035)
PV = $1,250,991.81

Since the first salary payment will be received two years from today, so we need to
discount this for one year to find the value today, which will be:

PV = $1,250,991.81 / 1.065
PV = $1,174,640.20

So, the total value of a Mount Perry MBA is:

Value = –$86,500 – 38,215.96 + 6,666.67 + 1,174,640.20 = $1,056,590.90

SLIDE 6
1. The relationship between the PVA and the interest rate is:

PVA falls as r increases, and PVA rises as r

decreases FVA rises as r increases, and FVA
falls as r decreases

The present values of $9,000 per year for 10 years at the various interest rates given are:

PVA(10%) = $9,000{[1 – (1/1.10)15] /0 .10} = $68,454.72

PVA(5%) = $9,000{[1 – (1/1.05)15] / 0.05} = $93,416.92

PV(15%) = $9,000{[1 – (1/1.15)15] / 0.15} = $52,626.33

2.
FVA = $20,000 = $340[{[1 + (.06/12)]t – 1 } / (.06/12)]

Solving for t, we get:

1.005t = 1 + [($20,000)/($340)](.06/12)
t = ln 1.294118 / ln 1.005 = 51.69 payments

3.
PVA = $73,000 = $1,450[{1 – [1 / (1 + r)]60}/ r]

r = 0.594%

The APR is the periodic interest rate times the number of periods in the year, so:

APR = 12(0.594%) = 7.13%

4.
PVA = $1,150[(1 – {1 / [1 + (.0635/12)]}360) / (.0635/12)] = $184,817.42

The amount of principal you will still owe is:

$240,000 – 184,817.42 = $55,182.58

This remaining principal amount will increase at the interest rate on the loan until the end
of the loan period. So the balloon payment in 30 years, which is the FV of the
remaining principal will be:

Balloon payment = $55,182.58[1 + (.0635/12)]360 = $368,936.54

5. the PV of the cash flows we know are:

PV of Year 1 CF: $1,700 / 1.10 =

$1,545.45
PV of Year 3 CF: $2,100 / 1.10 =
3

$1,577.76
PV of Year 4 CF: $2,800 / 1.10 =
4

$1,912.44

So, the PV of the missing CF is:

$6,550 – 1,545.45 – 1,577.76 – 1,912.44 = $1,514.35

The question asks for the value of the cash flow in Year 2, so we must find the future
value of this amount. The value of the missing CF is:

$1,514.35(1.10)2 = $1,832.36

SLIDE 7
1. payback period is:

Payback = 3 + ($105 / $765) = 3.14 years

For the $2,400 cost, the payback period is:

Payback = $2,400 / $765 = 3.14 years

For an initial cost of $3,600, the payback period is:

Payback = $3,600 / $765 = 4.71 years

The payback period for an initial cost of $6,500 is a little trickier. Notice that the
total cash inflows after eight years will be:

Total cash inflows = 8($765) = $6,120

If the initial cost is $6,500, the project never pays back. Notice that if you use the
shortcut for annuity cash flows, you get:

Payback = $6,500 / $765 = 8.50 years

1. Project A has cash flows of $19,000 in Year 1, so the cash flows are short by
$21,000 of recapturing the initial investment, so the payback for Project A is:

Payback = 1 + ($21,000 / $25,000) = 1.84 years

Project B has cash flows of:

Cash flows = $14,000 + 17,000 + 24,000 = $55,000

during this first three years. The cash flows are still short by $5,000 of recapturing the
initial investment, so the payback for Project B is:

B: Payback = 3 + ($5,000 / $270,000) = 3.019 years

Using the payback criterion and a cutoff of 3 years, accept project A and reject project B.

2. When we use discounted payback, we need to find the value of all cash flows
today. The value today of the project cash flows for the first four years is:

Value today of Year 1 cash flow = $4,200/1.14 =

$3,684.21 Value today of Year 2 cash flow =
$5,300/1.14 = $4,078.18
2

Value today of Year 3 cash flow = $6,100/1.14 3 =

$4,117.33 Value today of Year 4 cash flow =
$7,400/1.14 = $4,381.39
4

To find the discounted payback, we use these values to find the payback period. The
discounted first year cash flow is $3,684.21, so the discounted payback for a $7,000
initial cost is:

Discounted payback = 1 + ($7,000 – 3,684.21)/$4,078.18 = 1.81 years

For an initial cost of $10,000, the discounted payback is:

Discounted payback = 2 + ($10,000 – 3,684.21 – 4,078.18)/$4,117.33 = 2.54 years

If the initial cost is $13,000, the discounted payback is:

Discounted payback = 3 + ($13,000 – 3,684.21 – 4,078.18 – 4,117.33) / $4,381.39 = 3.26

years

1. R = 0%: 3 + ($2,100 / $4,300) = 3.49 years

discounted payback = regular payback = 3.49 years

R = 5%: $4,300/1.05 + $4,300/1.052 + $4,300/1.053 = $11,709.97

$4,300/1.054 = $3,537.62
discounted payback = 3 + ($15,000 – 11,709.97) / $3,537.62 = 3.93 years
 R = 19%: $4,300(PVIFA19%,6) =
$14,662.04 The project
never pays back.

SLIDE 8

2.

Sales $ 824,500
Costs 538,900
Depreciation 126,500
EBT $ 159,100
Taxes@34% 54,094
Net income $ 105,006

The OCF for the company is:

OCF = EBIT + Depreciation – Taxes

OCF = $159,100 + 126,500 – 54,094
OCF = $231,506

The depreciation tax shield is the depreciation times the tax rate, so:

Depreciation tax shield = tcDepreciation

Depreciation tax shield = .34($126,500)
Depreciation tax shield = $43,010

The depreciation tax shield shows us the increase in OCF by being able to
expense depreciation.

5. To calculate the OCF, we first need to calculate net income. The income statement
is:

Sales $ 108,000
Variable costs 51,000 Depreciation
6,800
EBT $ 50,200
Taxes@35% 17,570
 Net income $ 32,630

Using the most common financial calculation for OCF, we get:

OCF = EBIT + Depreciation – Taxes

OCF = $50,200 + 6,800 – 17,570
OCF = $39,430

The top-down approach to calculating OCF yields:

OCF = Sales – Costs – Taxes

OCF = $108,000 – 51,000 – 17,570
OCF = $39,430

The tax-shield approach is:

OCF = (Sales – Costs)(1 – tC) + tCDepreciation

OCF = ($108,000 – 51,000)(1 – .35) + .35(6,800)
OCF = $39,430

And the bottom-up approach is:

OCF = Net income + Depreciation

OCF = $32,630 + 6,800
OCF = $39,430

All four methods of calculating OCF should always give the same answer.

7. The asset has an 8 year useful life and we want to find the BV of the asset after 5
years. With straightline depreciation, the depreciation each year will be:

Annual depreciation = $548,000 / 8

Annual depreciation = $68,500

So, after five years, the accumulated depreciation will be:

Accumulated depreciation = 5($68,500)

Accumulated depreciation = $342,500

The book value at the end of year five is thus:

 BV5 = $548,000 – 342,500
BV5 = $205,500

Aftertax salvage value = $105,000 + ($205,500 – 105,000)(0.35)

Aftertax salvage value = $140,175

SLIDE 9

1.
Total value = 180($45) + 140($27) = $11,880

The portfolio weight for each stock is:

WeightA = 180($45)/$11,880 = .6818

WeightB = 140($27)/$11,880 = .3182

2. The total value of the portfolio is:

Total value = $2,950 + 3,700 = $6,650

So, the expected return of this portfolio is:

E(Rp) = ($2,950/$6,650)(0.11) + ($3,700/$6,650)(0.15) = .1323 or 13.23%

3. the expected return of the portfolio is:

E(Rp) = 0.60(0.09) + 0.25(0.17) + 0.15(0.13) = 0.1160 or 11.60%

4. E(Rp) = 0.124 = 0.14wX + 0.105(1 – wX)

We can now solve this equation for the weight of Stock X as:

.124 = 0.14wX + 0.105 – 0.105wX

.019 = 0.035wX
wX = 0.542857

So, the dollar amount invested in Stock X is the weight of Stock X times the total
portfolio value, or:
Investment in X = 0.542857($10,000) = $5,428.57

And the dollar amount invested in Stock Y is:

Investment in Y = (1 – 0.542857)($10,000) = $4,574.43

SLIDE 10

1. the cost of equity is:

RE = [$2.40(1.055)/$52] + 0.055 = 0.1037 or 10.37%

2. The cost of equity is:

RE = 0.053 + 1.05(0.12 – 0.053) = 0.1234 or 12.34%

3. RE = 0.05 + 0.85(.08) =0 .1180 or 11.80%

And using the dividend growth model, the cost of equity is
RE = [$1.60(1.06)/$37] + 0.06 = 0.1058 or 10.58%

 RE = (0.1180 +0 .1058)/2 = 0.1119 or 11.19%

4. The increase in dividends each year was:

g1 = ($1.12 – 1.05)/$1.05 = 0.0667 or

6.67% g2 = ($1.19 – 1.12)/$1.12
= 0.0625 or 6.25% g3 = ($1.30 –
1.19)/$1.19 = 0.0924 or 9.24%
g4 = ($1.43 – 1.30)/$1.30 = .1000 or 10.00%
The average arithmetic growth rate in dividends was:
g = (.0667 + .0625 + .0924 + .1000)/4 = .0804 or 8.04%
Using this growth rate in the dividend growth model, we find the cost of equity is:
RE = [$1.43(1.0804)/$45.00] + .0804 = .1147 or 11.47%
Calculating the geometric growth rate in dividends, we find:
$1.43 = $1.05(1 + g)4
g = .0803 or 8.03%
The cost of equity using the geometric dividend growth rate is:

RE = [$1.43(1.0803)/$45.00] + .0803 = .1146 or 11.46%

SLIDE 11
1. If Stephenson wishes to maximize the overall value of the firm, it should use debt to
finance the $110 million purchase. Since interest payments are tax deductible, debt in
the firm’s capital structure will decrease the firm’s taxable income, creating a tax
shield that will increase the overall value of the firm.

2. Since Stephenson is an all-equity firm with 15 million shares of common stock

outstanding, worth $35.20 per share, the market value of the firm is:

Market value of equity = $35.20(15,000,000)

Market value of equity = $528,000,000

So, the market value balance sheet before the land purchase is:

Market value balance sheet

$528,000,00
Assets $528,000,000   Equity 0
Debt & $528,000,00
  Total assets $528,000,000   Equity 0

3. a. As a result of the purchase, the firm’s pre-tax earnings will increase by $27
million per year in perpetuity. These earnings are taxed at a rate of 40 percent.
Therefore, after taxes, the purchase increases the annual expected earnings of the
firm by:

Earnings increase = $27,000,000(1 – .40)

Earnings increase = $16,200,000

Since Stephenson is an all-equity firm, the appropriate discount rate is the firm’s
unlevered cost of equity, so the NPV of the purchase is:

NPV= –$110,000,000 + ($16,200,000 / .125)

NPV = $19,600,000

SLIDE 12
2. The receivables turnover is:
Receivables turnover = 365/Average collection period
Receivables turnover = 365/36
Receivables turnover = 10.139 times
And the average receivables are:
Average receivables = Sales/Receivables period
Average receivables = $47,000,000 / 10.139
Average receivables = $4,635,616
3.
a. The average collection period is the percentage of accounts taking the discount times
the discount period, plus the percentage of accounts not taking the discount times the
days‘ until full payment is required, so:
Average collection period = .65(10 days) + .35(30 days)
Average collection period = 17 days
b. And the average daily balance is:
Average balance = 1,300($1,700)(17)(12/365)
Average balance = $1,235,178.08
4. The daily sales are:
Daily sales = $19,400 / 7
Daily sales = $2,771.43
Since the average collection period is 34 days, the average accounts receivable is:
Average accounts receivable = $2,771.43(34)
Average accounts receivable = $94,228.57

SLIDE 13
5. The operating cycle is the inventory period plus the receivables period. The
inventory turnover and inventory period are:
Inventory turnover = COGS/Average inventory
Inventory turnover = $105,817/{[$15,382 + 16,147]/2}
Inventory turnover = 6.7124 times
Inventory period = 365 days/Inventory turnover
Inventory period = 365 days/6.7124
Inventory period = 54.38 days
And the receivables turnover and receivables period are:
Receivables turnover = Credit sales/Average receivables
Receivables turnover = $143,625/{[$12,169 + 12,682]/2}
Receivables turnover = 11.56 times
Receivables period = 365 days/Receivables turnover
Receivables period = 365 days/11.5589
Receivables period = 31.5774 days
So, the operating cycle is:
Operating cycle = 54.38 days + 31.58 days
Operating cycle = 85.95 days
6. The cash cycle is the operating cycle minus the payables period. The payables
turnover and payables period are:
Payables turnover = COGS/Average payables
Payables turnover = $105,817/{[$13,408 + 14,108]/2}
Payables turnover = 7.6913 times
Payables period = 365 days/Payables turnover
Payables period = 365 days/7.6913
Payables period = 47.46 days
So, the cash cycle is:
Cash cycle = 85.95 days – 47.46 days
Cash cycle = 38.50 days
The firm is receiving cash on average 38.50 days after it pays its bills.