Answers to the practice/ core questions-Combined

Topic: Stock Evaluation

Questions Answers
7.1, page 137 a) -1%, b) total return=-5% + 4%
7.2 Rate of return =9%, b) find breakup on your own
7.3 $66 expected current price
7.4 $150
7.5 $20 and $25
7.6 Expected Dividend at the end of the 1 st year $2.1 and Current Price $ 30
7.7 $52 expected current price
7.8, page 138 $ 9.84
7.9 Requires rate of return on stock = 14% and expected current price 13.25
7.10 $23.72
7.11 $5.4825
7.12 $22.54
7.13 Current price $10.35
7.14 Current price $ 17.39
7.15 Current price $31.38
7.16 Current price $ 15.17
7.17 $70.30
7.18 $120
7.19 -5,000
7.20 $1.3 million

Topic Risk and Return:

Topic Risk and Return

Questions Answers
8-1 Coefficient of variation ‘CV’=0.429 first calculate the mean return and standard
deviation using calculator
8-2 CV=2.4
8-3 CV A=1.39 and CV B = 0.51
8-4 CV M =¿0.67, CV N =0.67 ,∧CV O =0.58 Stock O has the best risk/return
relationship; its risk per unit of return is the lowest at 0.583 it should be
purchased
8-5 Investment ‘F’ has better risk/return relationship
8-6 Expected Portfolio Return= r^ p =11%
8-7 Expected Portfolio Return= r^ p =13.5 %
8-8 First find the expected return of stock ‘A’, stock ‘B’, and stock ‘C’ using CAPM
formula which is 9%, 4.2% and 18%. Finally the expected portfolio return =
r^ p =11.4 %
8-9 r^ p =12.4 %, Portfolio standard deviation= σ p= 0.537%
8-10 Beta of stock ‘X’= β x = 2.5
8-11 β new− portfolio= 1.4
8-12 β sold −stock = 0.5
Answers to the practice/ core questions-Combined

8-13 β stock = 2.3

8-14 Stock’s required rate of return= r stock=12 %
8-15 r stock=24 %
8-16 Risk-free rate =r RF=¿5%
8-17 r w =¿8%. The required rate of return on stock ‘V’ is r v =¿17%. Thus, required
return on stock-v is 9% (17%-8%) higher than that of stock-w.
8-18 Based on new information Stock-Q required return is 12.4%
8-19 ^
P0= $31.38
8-20 Growth rate=g= 5%

Capital Budgeting Techniques Topic

9-1 $160,926.88
9-2 a.) 292,130.06 b.) 317,099.27
9-3 NPV=$ -66,460.79 and IRR= 10.56% as per NPV we cannot undertake this project
and NPV is in negative. Also, as per IRR we must not undertake the project
because IRR in not greater than required rate of return i.e., 11%
9-4 Investment is acceptable according to NPV and IRR techniques. Find your own
number as by this time you should be confident in finding right NPV and IRR
values. If not then do previous questions and compare your answers first with
them.
9-5 IRR=12.99%
9-6 IRR=9.01% (similar to 9-5 Question)
9-7 a.) 756.62, b.) 14.49% c.) answer yourself whether project is acceptable or
not.
9-8 Similar to 9-7 so do yourself.
9-9 Find NPV at different discount rates
yourself and plot the NPV profile in excel.
9-10 MIRR= 11%, investment is not acceptable as MIRR<r =12%
9-11 MIRR=10.19%
9-12 MIRR=11.98%
9-13 PB= 3.6 years and DPB= 4.84 years if you have used the discount rate of 11%
otherwise it is 4.69 years if you use the discount rate of 10%. I have mistakenly
used the rate of 10% while attempting this question but advise you to use the
rate (11%) as mentioned in the question.
9-14 PB= 4 years and DPB=5.78 years
9-15 NPV= 2,139.17, IRR= 13.48% and MIRR=13.33%
9-16 a.) NPV =8,595.84, b.) IRR=15.89%, c.) DBP= 2.89 years for Aplha project.
For Beta project:
a.) NPV= 13,051.79, b.) IRR= 15.53%, and c.) 2.97 years
9-17 Project AB
a.) NPV=2,084.95, b.) IRR=14.36%, c.) MIRR=13.87%, and d.) 2.92 years
Find yourself for the LM and UV projects.
9-18 NPV s=527.94 , NPV T =546.97 and IRR= 18.22%
9-19 Do it yourself.
Answers to the practice/ core questions-Combined

9-20 Critically think about it and discuss it on discussion forum if such forum is
available.
Topic Project Cash Flows and Risk

Topic: Project cash flows and risk

Question Answers
10-1 a) After tax operating income in year 1 is $3,120 and year 3 is $9,600
b) Operating cash flow in year 1 is $22,920 and year 3 is $18,600
10-2 a) Net income in year1, year 2 , year 3, and year 4 is -17,225/-, -28,925/-,
325/-, 8,125/-, respectively.
b) After tax operating cash flow in year 1, year 2, year 3 and year 4 is
32,275/- , 38,575/-, 22,825/-, 18,625/-, respectively.
10-3 It’s very easy please refer to the MACRS table (Table 10A.2) on page 205 on
uploaded chapter. However, the depreciation charges for the first year is
$138,600/- rest do on your own.
10-4 Same as 10-3, easy so kindly try attempting it on your own
10-5 a) Again, one can use the depreciation table to find the depreciation for
each year.
b) Book value at the end of four years= $40,800/- Net cash flow from
sale=$64,320
10-6 Annual supplemental operating cash flows for every year is $101,160/-
10-7 Supplemental operating cash flows are 33,360 (year-1), 38,400 (year-2), 25,800
(year-3), 22,400 (year-4)
10-8 a) Remember we need to identify the net change in “Net-Income” which
is $3,000
b) Change in supplemental operating cash flow is -2,000
10-9 a) Gain on sale of machine $12,000
b) After-tax cash flow from sale = $97,200/-
10-10 a) Tax effect of selling the machine , refund of $700
b) Net cash flow from sale of machine $4,700
10-11 NPV of the project is $7,473.28 and IRR = 14.80% thus project (setter) should be
accepted.
10-12 NPV is 1,990.94 and IRR 15.99% so one should accept the project
10-13 NPV is 1,235.09 and IRR 13.25% so project should be accepted
10-14 NPV is 13,613.80 and IRR 15.97% so the old machine should be replaced with
the new one.
10-15 NPV= $1,332.53 and IRR=10.95% so new division should be added. Hint first
find the required return using the CAPM formula from risk and return topic
(required rate= 9.6%)
10-16 Same here required rate is 10.80% (using CAPM formula from risk and return
topic). NPV = -380.36 and IRR= 10.75% thus project should not be purchased.
10-17 Coefficient of variation= 13,559.37/ 18,150 = 0.75
because CV=0.75< 0.80, so the project should be purchased
10-18 Same as previous one here CV=0.74 > 0.70 so project should not be purchased.
10-19 Project P should be accepted as IRR> r (risk-adjusted), Project Q should be
accepted as IRR> r and Project R should not be accepted IRR< r (risk-adjusted)
10-20 Project X and Y neither project is acceptable as IRR < r
Answers to the practice/ core questions-Combined