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Transcript of Case Solutions
Corporate Finance Ross, Westerfield, and Jaffe
9th editionCase Solutions
Input boxes in tanOutput boxes in yellowGiven data in blueCalculations in redAnswers in green
NOTE: Some functions used in these spreadsheets may require that the "Analysis ToolPak" or "Solver Add-in" be installed in Excel.To install these, click on "Tools|Add-Ins" and select "Analysis ToolPak" and "Solver Add-In."
Corporate Finance Ross, Westerfield, and Jaffe
9th editionCase Solutions
To install these, click on "Tools|Add-Ins" and select "Analysis ToolPak"
Chapter 2 Cash Flows at Warf Computer, Inc.
Input area:
Balance Sheet (in $ thousands)2010 2009 2010 2009
Current assets Current liabilities Cash and equivalents $ 290 $ 251 Accounts payable $ 262 $ 245 Accounts receivable 459 428 Notes payable 71 66 Inventories 411 425 Accrued expenses 158 257 Other 59 50 Total current liabilities $ 491 $ 568 Total current assets $ 1,219 $ 1,154
Long-term liabilitiesFixed assets Deferred taxes $ 212 $ 103 Property, plant, and equipment $ 2,631 $ 2,038 Long-term debt 756 736 Less accumulated depreciation 859 700 Total long-term liabilities $ 968 $ 839 Net property, plant, and equipment $ 1,772 $ 1,338 Intangible assets and others 508 454 Stockholders equity Total fixed assets $ 2,280 $ 1,792 Preferred stock $ 13 $ 13
Common stock 81 80 Capital surplus 509 499 Accumulated retained earnings 1,558 1,028 Less treasury stock 121 81 Total equity $ 2,040 $ 1,539
Total liabilities and Total assets $ 3,499 $ 2,946 shareholders equity $ 3,499 $ 2,946
Acquisition of fixed assets $ 786 Sale of fixed assets $ 139 New debt issued $ 118 Debt retired $ 98 New stock issued $ 11 Stock repurchased $ 40
Income Statement (in $ thousands)Sales $ 4,844 Cost of goods sold 2,858 Selling, general, and administrative 543 Depreciation 159 Operating income $ 1,284 Other income 48 EBIT $ 1,332 Interest expense 95 Pretax income $ 1,237 Taxes 495 Current $ 386 Deferred $ 109 Net income $ 742
Retained earnings $ 530 Dividends $ 212
Output area:
Operating cash flowEarnings before interest and taxes $ 1,332 Depreciation 159 -Current taxes 386 Operating cash flow $ 1,105
Net capital spendingAcquisition of fixed assets $ 786 Sale of fixed assets $ (139) Capital spending $ 647
Alternatively, Ending fixed assets $ 2,280
-Beginning fixed assets 1,792 Depreciation 159 Capital spending $ 647
Net working capital cash flowEnding NWC $ 728 Beginning NWC 586 NWC cash flow $ 142
Cash flow from assetsOCF $ 1,105 -Net capital spending 647 -Change in NWC 142 Cash flow from assets $ 316
Cash flow to creditorsInterest $ 95 Retirement of debt 98 Debt service $ 193 Proceeds from sale of long-term debt (118) Total $ 75
AlternativelyBeginning long-term debt $ 736 Ending long-term debt (756)Interest 95 Total $ 75
Cash flow to stockholdersDividends $ 212 Repurchase of stock 40 Cash to stockholders $ 252 Proceeds from new stock issue (11) Total $ 241
AlternativelyBeginning total equity $ 1,539 Ending total equity (2,040)Dividends 212 Retained earnings 530
$ 241
Statement of cash flowsOperationsNet income $ 742 Depreciation 159 Deferred taxes 109 Changes in assets and liabilities Accounts receivable (31) Inventories 14 Accounts payable 17 Accrued expenses (99) Other (9)Total cash flow from operations $ 902
Investing activties Acquisition of fixed assets $ (786) Sale of fixed assets 139 Total cash flow from investing activities $ (647)
Financing activties Retirement of debt $ (98) Proceeds of long-term debt 118 Notes payable 5 Dividends (212) Repurchase of stock (40) Proceeds from new stock issues 11 Total cash flow from financing activities $ (216)
Change in cash (on balance sheet) $ 39
Balance Sheet (in $ thousands)
Chapter 3Ratios and Financial Planning at East Coast Yachts
Input area:
Tax rate 40%
Sales $ 167,310,000 COGS 117,910,000 Other expenses 19,994,000 Depreciation 5,460,000 EBIT $ 23,946,000 Interest 3,009,000 Taxable income $ 20,937,000 Taxes (40%) 8,374,800 Net income $ 12,562,200
Dividends $ 7,537,320 Add to RE $ 5,024,880
Assets Liabilities & EquityCurrent Assets Current liabilities Cash $ 3,042,000 Accounts payable $ 6,461,000 Accounts rec. 5,473,000 Notes payable 13,078,000 Inventory 6,136,000 Total CL $ 19,539,000 Total CA $ 14,651,000
Long-term debt $ 33,735,000 Fixed assets Net PP&E $ 93,964,000 Shareholder equity
Common stock $ 5,200,000 Retained earnings 50,141,000 Total equity $ 55,341,000
Total assets $ 108,615,000 Total L&E $ 108,615,000
Growth rate 20%Minimum FA purchase $ 30,000,000
Output area:
1) Current ratio 0.75 Quick ratio 0.44 Total asset turnover 1.54 Inventory turnover 19.22 Receivables turnover 30.57 Debt ratio 0.49 Debt-equity ratio 0.96 Equity multiplier 1.96 Interest coverage 7.96 Profit margin 7.51%Return on assets 11.57%Return on equity 22.70%
3) Retention ratio 0.40 Sustainable growth rate 9.99%
Sales $ 184,018,615
COGS 129,685,224 Other expenses 21,990,725 Depreciation 5,460,000 EBIT $ 26,882,666 Interest 3,009,000 Taxable income $ 23,873,666 Taxes (40%) 9,549,466 Net income $ 14,324,199
Dividends $ 8,594,520 Add to RE 5,729,680
Assets Liabilities & EquityCurrent Assets Current liabilities Cash $ 3,345,793 Accounts payable $ 7,106,236 Accounts rec. 6,019,568 Notes payable 14,384,050 Inventory 6,748,779 Total CL $ 21,490,286 Total CA $ 16,114,140
Long-term debt $ 33,735,000 Fixed assets Net PP&E $ 103,347,828 Shareholder equity
Common stock $ 5,200,000 Retained earnings 55,870,680 Total equity $ 61,070,680
Total Assets $ 119,461,968 Total L&E $ 116,295,966
EFN $ 3,166,002
Current ratio 0.75 Quick ratio 0.44 Total asset turnover 1.54 Inventory turnover 19.22 Receivables turnover 30.57 Debt ratio 0.49 Debt-equity ratio 0.90 Equity multiplier 1.96 Interest coverage 8.93 Profit margin 7.78%Return on assets 11.99%Return on equity 23.46%
4) Sales $ 200,772,000 COGS 141,492,000 Other expenses 23,992,800 Depreciation 5,460,000 EBIT $ 29,827,200 Interest 3,009,000 Taxable income $ 26,818,200 Taxes (40%) 10,727,280 Net income $ 16,090,920
Dividends $ 9,654,552 Add to RE 6,436,368
Assets Liabilities & EquityCurrent Assets Current liabilities Cash $ 3,650,400 Accounts payable $ 7,753,200 Accounts rec. 6,567,600 Notes payable 15,693,600 Inventory 7,363,200 Total CL $ 23,446,800
Total CA $ 17,581,200 Long-term debt $ 33,735,000
Fixed assets Net PP&E $ 112,756,800 Shareholder equity
Common stock $ 5,200,000 Retained earnings 56,577,368 Total equity $ 61,777,368
Total Assets $ 130,338,000 Total L&E $ 118,959,168
EFN $ 11,378,832
5) EFN if minimum FA purchase is $ 30,000,000
Depreciation as a percentage of fixed assets 5.81%New fixed assets $ 123,964,000 New depreciation $ 7,203,221
Sales $ 200,772,000 COGS 141,492,000 Other expenses 23,992,800 Depreciation 7,203,221 EBIT $ 28,083,979 Interest 3,009,000 Taxable income $ 25,074,979 Taxes (40%) 10,029,992 Net income $ 15,044,988
Dividends $ 9,026,993 Add to RE 6,017,995
Assets Liabilities & EquityCurrent Assets Current liabilities Cash $ 3,650,400 Accounts payable $ 7,753,200 Accounts rec. 6,567,600 Notes payable 15,693,600 Inventory 7,363,200 Total CL $ 23,446,800 Total CA $ 17,581,200
Long-term debt $ 33,735,000 Fixed assets Net PP&E $ 123,964,000 Shareholder equity
Common stock $ 5,200,000 Retained earnings 56,158,995 Total equity $ 61,358,995
Total Assets $ 141,545,200 Total L&E $ 118,540,795
EFN $ 23,004,405
Chapter 4The MBA Decision
Input area:
Current salary $ 60,000 Years until retirement 40 Salary increase 3%Tax rate 26%
WiltonTuition per year $ 65,000 Books & Supplies $ 3,000 Starting salary $ 110,000 Signing bonus $ 20,000 Salary increase 4%Tax rate 31%
Mount PerryTuition per year $ 80,000 Books & Supplies $ 4,500 Signing bonus $ 18,000 Starting salary $ 92,000 Salary increase 3.5%Tax rate 29%
Both schoolsHealth insurance $ 3,000 Room & board increase $ 2,000
Discount rate 6.50%
Output area:
3. Current jobAftertax income $ 44,400.00
Present value of salary $ 935,283.49
Wilton MBAPV of tuition & expenses $ (141,544.60)
PV of lost salary $ (82,010.18)
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 $ 1,379,943.36
Mount Perry MBAPV of tuition & expenses $ (89,500.00)
PV of lost salary $ (41,690.14)
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 $ 1,254,421.56
5. Current job PV minus bonus after Wilton costs $ 1,146,671.37
Value in 2 years $ 1,300,583.34
Aftertax beginning salary $ 54,691.54
Pretax beginning salary $ 79,263.10
Chapter 5Bullock Gold Mining
Input area:
Year Cash flow 0 $ (400,000,000)1 $ 85,000,000 2 $ 90,000,000 3 $ 140,000,000 4 $ 180,000,000 5 $ 195,000,000 6 $ 130,000,000 7 $ 95,000,000 8 $ 60,000,000 9 $ (95,000,000)
Required return 12%
Output area:
Payback period 3.47
IRR 23.73% =IRR(D8:D17)IRR Err:523 =IRR(D8:D17,-0.99)
MIRR 16.21% =MIRR(D8:D17,D19,D19)
Profitability index 1.43 =NPV(D19,D9:D17)/-D8
NPV $ 171,141,294.31 =NPV(D19,D9:D17)+D8
Chapter 6Bethesda Mining
Input area:
Equipment $ 85,000,000 Land cost $ 6,000,000 Aftertax land value $ 7,000,000 Contract sales/tons 500,000 Year 1 production 620,000 Year 2 production 680,000 Year 3 production 730,000 Year 4 production 590,000 Contract $/ton $95 Spot market $/ton $90 Variable cost/ton $31 Year 1 depreciation 14.30%Year 2 depreciation 24.50%Year 3 depreciation 17.50%Year 4 depreciation 12.50%Fixed costs $4,300,000 Reclamation costs $2,800,000 Charitable expense $7,500,000 NWC percent 5%Tax rate 38%Required return 12%
Output area:
Time 0 cash flowEquipment $ (85,000,000)Land (7,000,000)NWC (2,915,000)Total ($94,915,000)
Sales Year 1 Year 2 Year 3Contract $ 47,500,000 $ 47,500,000 $ 47,500,000 Spot 10,800,000 16,200,000 20,700,000 Total $ 58,300,000 $ 63,700,000 $ 68,200,000
Sales $ 58,300,000 $ 63,700,000 $ 68,200,000 VC 19,220,000 21,080,000 22,630,000 FC 4,300,000 4,300,000 4,300,000 Dep 12,155,000 20,825,000 14,875,000 EBT $ 22,625,000 $ 17,495,000 $ 26,395,000 Tax 8,597,500 6,648,100 10,030,100 NI $ 14,027,500 $ 10,846,900 $ 16,364,900 + Dep 12,155,000 20,825,000 14,875,000 OCF $ 26,182,500 $ 31,671,900 $ 31,239,900
Beginning NWC $ 2,915,000 $ 3,185,000 $ 3,410,000 Ending NWC 3,185,000 3,410,000 2,780,000 NWC cash flow $ (270,000) $ (225,000) $ 630,000
Total cash flow $ 25,912,500 $ 31,446,900 $ 31,869,900
Book value $ 72,845,000 $ 52,020,000 $ 37,145,000
Salvage MV $ 51,000,000 BV 26,520,000 Taxes (9,302,400)
Salvage CF $ 41,697,600
Time Cash flow0 $ (94,915,000)1 25,912,500 2 31,446,900 3 31,869,900 4 68,981,300 5 (1,736,000)6 (4,650,000)
Profitability index 1.1736 Average accounting return 20.79%IRR 19.01%IRR Err:523MIRR 14.93%NPV $ 16,472,777.67
Year 4 Year 5 Year 6 $ 47,500,000 8,100,000 $ 55,600,000
$ 55,600,000 18,290,000 4,300,000 $ 2,800,000 $ 7,500,000 10,625,000 $ 22,385,000 $ (2,800,000) $ (7,500,000) 8,506,300 (1,064,000) (2,850,000) $ 13,878,700 $ (1,736,000) $ (4,650,000) 10,625,000 - - $ 24,503,700 $ (1,736,000) $ (4,650,000)
$ 2,780,000
$ 2,780,000
$ 27,283,700
$ 26,520,000 $ - $ -
Chapter 6Goodweek Tires, Inc.
Input area:
Research and development $ 10,000,000 Test marketing cost $ 5,000,000 Initial equipment cost $ 140,000,000 Equipment salvage value $ 54,000,000 Year 1 depreciation 14.30%Year 2 depreciation 24.50%Year 3 depreciation 17.50%Year 4 depreciation 12.50%
OEM market:Price $ 38 Variable cost $ 22 Automobile production 5,600,000 Growth rate 2.50%Market share 11.00%
Replacement market:Price $ 59 Variable cost $ 22 Market sales 14,000,000 Growth rate 2.00%Market share 8.00%
Price increase above inflation 1%VC increase above inflation 1%Marketing and general costs $ 26,000,000 Tax rate 40.00%Inflation rate 3.25%Required return 15.90%Initial NWC $ 9,000,000 NWC percentage of sales 15%
Output area:
Nominal price increase 4.28%Nominal VC increase 4.28%
Year 0 Year 1 Year 2 Year 3 Year 4OEM:Automobiles sold 5,600,000 5,740,000 5,883,500 6,030,587 Tires for automobiles sold 22,400,000 22,960,000 23,534,000 24,122,350 SuperTread tires sold 2,464,000 2,525,600 2,588,740 2,653,458 Price $ 38.00 $ 39.24 $ 40.51 $ 41.83
Replacement market:Total tires sold in market 14,000,000 14,280,000 14,565,600 14,856,912 SuperTread tires sold 1,120,000 1,142,400 1,165,248 1,188,553 Price $ 59.00 $ 60.92 $ 62.90 $ 64.94
Revenue:OEM market $ 93,632,000 $ 99,091,916 $ 104,870,213 $ 110,985,458 Replacement market 66,080,000 69,592,152 73,290,975 77,186,390 Total $ 159,712,000 $ 168,684,068 $ 178,161,188 $ 188,171,848
Variable costs:
OEM market $ 54,208,000 $ 57,942,694 $ 59,391,261 $ 60,876,043 Replacement market 24,640,000 26,209,112 25,635,456 26,148,165 Total $ 78,848,000 $ 84,151,806 $ 85,026,717 $ 87,024,208
Revenue $ 159,712,000 $ 168,684,068 $ 178,161,188 $ 188,171,848 Variable costs 78,848,000 84,151,806 85,026,717 87,024,208 Marketing and general costs 26,000,000 26,845,000 27,717,463 28,618,280 Depreciation 20,020,000 34,300,000 24,500,000 17,500,000 EBT $ 34,844,000 $ 23,387,262 $ 40,917,008 $ 55,029,360 Tax 13,937,600 9,354,905 16,366,803 22,011,744 Net income $ 20,906,400 $ 14,032,357 $ 24,550,205 $ 33,017,616 OCF $ 40,926,400 $ 48,332,357 $ 49,050,205 $ 50,517,616
New working capital:Beginning 0 $ 9,000,000 $ 23,956,800 $ 25,302,610 $ 26,724,178 Ending 9,000,000 23,956,800 25,302,610 26,724,178 - NWC cash flow $ (9,000,000) $ (14,956,800) $ (1,345,810) $ (1,421,568) $ 26,724,178
Book value of equipment $ 140,000,000 $ 119,980,000 $ 85,680,000 $ 61,180,000 $ 43,680,000
Aftertax salvage value:Market value $ 54,000,000 Taxes (4,128,000)Total $ 49,872,000
Year 0 Year 1 Year 2 Year 3 Year 4Operating cash flow $ 40,926,400 $ 48,332,357 $ 49,050,205 $ 50,517,616 Capital spending $ (140,000,000) 49,872,000 Net working capital (9,000,000) (14,956,800) (1,345,810) (1,421,568) 26,724,178 Total cash flows $ (149,000,000) $ 25,969,600 $ 46,986,547 $ 47,628,637 $ 127,113,794
Discounted cash flow $ (149,000,000) $ 22,406,903 $ 34,978,941 $ 30,592,703 $ 70,446,422
NPV $ 9,424,967.81 IRR 18.35%Profitability index 1.0633
Chapter 7Bunyan Lumber, LLC
Input area:
Total acreage 5,000 Years since original planting 20 1P pond value $ 660 2P pond value $ 630 3P pond value $ 620 Cash flow/acre from thinning $ 1,000
Years from today for harvest Harvest (MBF)to begin per acre 1P 2P 3P
20 14.1 16% 36% 48%25 16.4 20% 40% 40%30 17.3 22% 43% 35%35 18.1 24% 45% 31%
Defect rate 5%Tractor cost (MBF) $ 140 Road (MBF) $ 50 Sale preparation and and administrative (MBF) $ 18
Excavator piling/acre $ 150 Broadcast burning/acre $ 300 Site preparation/acre $ 145 Planting costs/acre $ 225
Nominal required return 10.00%Inflation rate 3.70%Tax rate 35%
Conservation fund $ 250,000 Conservation fund growth 3.20%
Output area:
Real required return 6.08%
Cash flow from thinning $ 5,000,000
Harvest in 20 years
Revenue $ 42,194,250 Tractor cost 9,870,000 Road 3,525,000 Sale preparation & admin 1,269,000 Excavator piling 750,000 Broadcast burning 1,500,000 Site preparation 725,000 Planting costs 1,125,000 EBIT $ 23,430,250 Taxes 8,200,587 Net income (OCF) $ 15,229,663
PV of first harvest $ 4,681,788
Next thinning will occur in 40 years, and will reoccur at this same interval. The effective real interest rate for this period is 958.17%
The real rate in the conservation fund is 6.59%The effective real interest rate for the conservation fund for this period is 1183.87%
Aftertax cost of convservation $ (162,500.00)Value of conservation at harvest $ (176,226.22)
PV of future thinnings $ 521,825.80 PV of future harvests $ 488,615.51 PV of conservation fund $ (49,182.52)
Total NPV $ 5,643,046.36
Harvest in 25 years
Revenue $ 49,232,800 Tractor cost 11,480,000 Road 4,100,000 Sale preparation & admin 1,476,000 Excavator piling 750,000 Broadcast burning 1,500,000 Site preparation 725,000 Planting costs 1,125,000 EBIT $ 28,076,800 Taxes 9,826,880 Net income (OCF) $ 18,249,920
PV of first harvest $ 4,177,464
Next thinning will occur in 45 years, and will reoccur at this same interval. 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 $ 378,470.46 PV of future harvests $ 316,209.37 PV of conservation fund $ (34,941.27)
Total NPV $ 4,837,202.85
Harvest in 30 years
Revenue $ 52,024,993 Tractor cost 12,110,000 Road 4,325,000 Sale preparation & admin 1,557,000 Excavator piling 750,000 Broadcast burning 1,500,000 Site preparation 725,000 Planting costs 1,125,000 EBIT $ 29,932,993 Taxes 10,476,547 Net income (OCF) $ 19,456,445
PV of first harvest $ 3,316,238
Next thinning will occur in 50 years, and will reoccur at this same interval. The effective real interest rate for this period is 1808.52%The effective real interest rate for the conservation fund for this period is 2330.24%Value of conservation at harvest $ (169,473.53)
PV of future thinnings $ 276,469.34
PV of future harvests $ 183,367.60 PV of conservation fund $ (24,986.89)
Total NPV $ 3,751,087.59
Harvest in 35 years
Revenue $ 54,516,748 Tractor cost 12,670,000 Road 4,525,000 Sale preparation & admin 1,629,000 Excavator piling 750,000 Broadcast burning 1,500,000 Site preparation 725,000 Planting costs 1,125,000 EBIT $ 31,592,748 Taxes 11,057,462 Net income (OCF) $ 20,535,286
PV of first harvest $ 2,606,233
Next thinning will occur in 55 years, and will reoccur at this same interval. 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 $ 202,995.97 PV of future harvests $ 105,810.96 PV of conservation fund $ (17,950.88)
Total NPV $ 2,897,089.08
Chapter 8Financing East Coast Yachts Expansion Plans with a Bond Issue
Input area:
Years to maturity 20 Required return 7.50%Amount needed $ 40,000,000 Face value $ 1,000
Coupon rate 7.50%Tax rate 35%
Year bond is called 7 Spread above Treasury 0.40%Treasury rate at call 5.60%Treasury rate at call 9.10%
Output area:
2) Price of coupon bond $ 1,000 # of coupon bonds needed 40,000
Price of zero coupon bond $ 229.34 # of zeroes needed 174,413
3) Repayment of coupon bonds $ 40,000,000
Repayment of zeroes $ 174,413,000
4) Year 1 interest payments:Pretax coupon payment $ 3,000,000 Aftertax coupon payment $ 1,950,000 Cash outflow
Value of zero in one year $ 246.86 Zero coupon growth $ 17.52 Zero coupon bond $ (1,069,544.61) 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 $ 1,134.08
Make whole price $ 852.47
Chapter 8Financing East Coast Yachts Expansion Plans with a Bond Issue
Chapter 9Stock Valuation at Ragan Engines
Input area:
Shares owned by each sibling 150,000 Ragan EPS $ 5.08 Dividend to each sibling $ 320,000 Ragan ROE 25%Ragan required return 20%
EPS DPS Stock price ROE RBlue Ribband Motors Corp. $ 1.09 $ 0.16 $ 15.19 11.00% 14.00%Bon Voyage Marine, Inc. 1.16 0.53 12.49 14.00% 19.00%Nautilus Marine Engines (0.32) 0.54 23.05 14.00% 18.00%Industry average $ 0.64 $ 0.41 $ 16.91 13.00% 17.00%
Nautilus EPS w/o write-off $ 1.97
Output area:
1) Total earnings $ 1,524,000.00 Payout ratio 41.99%Retention ratio 58.01%Growth rate 14.50%Total dividends next year $ 732,808.40 Total equity value $ 13,326,968.97
Value per share $ 44.42
2) Industry EPS $ 1.41 Industry payout ratio 29.15%Industry retention ratio 70.85%Industry growth rate 9.21%
Year Total dividends 1 $ 732,808.40 2 $ 839,075.23 3 $ 960,752.15 4 $ 1,100,073.82 5 $ 1,259,598.97 6 $ 1,375,619.37
Stock value in Year 5 $ 17,660,826.76 Total stock value today $ 11,056,024.78
Value per share $ 36.85
3) Industry PE 12.02
Ragan PE (original assumption) 8.74
Ragan PE (revised assumption) 7.25
Stock price implied by
industry PE $ 61.07
4) Total earnings $ 1,524,000.00
Cash cow value $ 8,964,705.88
Percentage not attributable to growth opportunities 81.08%
Percentage attributable to growth opportunities 18.92%
5) ROE 15.88%
Chapter 10A Job at East Coast Yachts
Input area:
10-year annual return Standard deviationBledsoe S&P 500 Index Fund 8.45% 21.85%Bledsoe Small-Cap Fund 13.45% 24.83%Bledsoe Large Company Stock Fund 8.62% 22.93%Bledsoe Bond Fund 6.25% 9.20%
Risk-free rate (historic) 3.80%Company stock expected return 16.00%Company stock standard deviation 70.00%
Output area:
Bledsoe S&P 500 Index Fund 0.2128
Bledsoe Small-Cap Fund 0.3886
Bledsoe Large Company Stock Fund 0.2102
Bledsoe Bond Fund 0.2663 Company stock 0.1743
Chapter 11A Job at East Coast Yachts, Part 2
Input area:
10-year annual return Standard deviationBledsoe Large Company Stock Fund 8.62% 22.93%Bledsoe Bond Fund 6.25% 9.20%Risk-free rate (historic) 3.80%
Correlation 0.15
Output area:
Weight of stock fund Portfolio E(R)0% 6.25% 9.2000%
10% 6.49% 8.9170%20% 6.72% 9.2373%30% 6.96% 10.1037%40% 7.20% 11.3923%50% 7.44% 12.9780%60% 7.67% 14.7653%70% 7.91% 16.6896%80% 8.15% 18.7087%90% 8.38% 20.7949%
100% 8.62% 22.9300%
Dominant portfolio:Weight of stock fund 19.37%Weight of bond fund 80.63%Standard deviation 9.20%Expected return 6.71%
Minumum variance portfolio:
Weight of large cap stock fund 9.69%
Weight of bond fund 90.31%
Expected return 6.48%
Variance 0.007951
Standard deviation 8.9167%
Sharpe optimal portfolio: (Using Solver)Weight of large cap stock fund 22.54%Sharpe ratio 0.317133
Weight of large cap stock fund 22.54%
Weight of bond fund 77.46%
Expected return 6.78%
Standard deviation 9.4098%Sharpe ratio 0.317133
Portfolio standarddeviation
8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 20.00% 22.00% 24.00%0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%9.00%
10.00%Investment Opportunity Set
Portfolio Standard Deviation
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8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 20.00% 22.00% 24.00%0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%9.00%
10.00%Investment Opportunity Set
Portfolio Standard Deviation
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Microsoft Excel 12.0 Answer ReportWorksheet: [Jaffe 9th edition Case Solutions.xlsx]Chapter 11Report Created: 1/5/2009 12:23:05 PM
Target Cell (Max)Cell Name Original Value Final Value
$D$46 Sharpe ratio Portfolio E(R) 0.266304 0.317133
Adjustable CellsCell Name Original Value Final Value
$D$45 Weight of large cap stock fund Portfolio E(R) 0.00% 22.54%
ConstraintsNONE
Chapter 12The Fama-French Multi-Factor Model and Mutual Fund Returns
Input area:
FMAGX FLPSX Mkt-RF SMB HML RF Adj Close Adj Close
200312 $ 62.03 $ 22.50 200401 2.24 2.6 1.66 0.07 $ 62.83 $ 23.11 200402 1.49 -1.2 0.37 0.06 $ 63.72 $ 23.79 200403 -1.16 1.85 -0.01 0.09 $ 62.92 $ 23.82 200404 -2.5 -2.53 -1.69 0.08 $ 61.84 $ 23.24 200405 1.35 -0.12 -0.31 0.06 $ 62.49 $ 23.30 200406 2.08 2.25 1.72 0.08 $ 63.40 $ 24.11 200407 -3.87 -3.82 4.42 0.1 $ 60.92 $ 23.27 200408 0.16 -1.56 1.13 0.11 $ 61.07 $ 23.20 200409 1.95 2.82 0.4 0.11 $ 61.64 $ 24.12 200410 1.67 0.49 -0.95 0.11 $ 62.59 $ 24.45 200411 4.67 4.11 1.96 0.15 $ 64.67 $ 26.40 200412 3.36 0.18 -0.35 0.16 $ 66.68 $ 27.45 200501 -2.82 -1.67 2.52 0.16 $ 65.43 $ 26.91 200502 2.11 -0.76 2.85 0.16 $ 66.20 $ 27.76 200503 -1.9 -1.37 1.71 0.21 $ 64.89 $ 27.19 200504 -2.73 -3.95 -0.49 0.21 $ 63.55 $ 25.90 200505 3.55 3.01 -1.16 0.24 $ 65.84 $ 27.17 200506 0.92 2.58 2.84 0.23 $ 65.87 $ 28.03 200507 4.09 2.77 -0.47 0.24 $ 68.52 $ 29.11 200508 -0.89 -0.88 1.44 0.3 $ 67.73 $ 29.08 200509 0.77 -0.65 1.23 0.29 $ 68.21 $ 29.30 200510 -2.35 -1.05 -0.74 0.27 $ 67.33 $ 28.06 200511 3.73 0.99 -1.75 0.31 $ 69.59 $ 29.31 200512 0.03 -0.47 0.51 0.32 $ 70.96 $ 29.84 200601 3.66 5.33 1.18 0.35 $ 74.35 $ 31.80 200602 -0.5 -0.31 -0.76 0.34 $ 73.24 $ 31.60 200603 1.54 3.51 0.04 0.37 $ 75.20 $ 32.41 200604 0.94 -1.22 3.07 0.36 $ 76.64 $ 33.05 200605 -3.53 -3 2.75 0.43 $ 72.90 $ 31.73 200606 -0.44 -0.47 1.51 0.4 $ 72.36 $ 31.35 200607 -0.59 -3.9 3.25 0.4 $ 70.10 $ 30.98 200608 2.09 0.8 -1.66 0.42 $ 71.79 $ 31.55 200609 1.54 -1.22 -0.49 0.41 $ 72.59 $ 32.01
200610 3.3 1.68 0.49 0.41 $ 74.71 $ 33.13 200611 1.95 0.7 0.39 0.42 $ 76.65 $ 34.51 200612 0.68 -0.93 2.56 0.4 $ 76.24 $ 35.14 200701 1.5 0.02 0 0.44 $ 78.43 $ 35.57 200702 -1.78 1.39 0.32 0.38 $ 77.14 $ 35.47 200703 0.86 -0.2 0.31 0.43 $ 77.78 $ 36.06 200704 3.55 -2.06 -1.08 0.44 $ 81.52 $ 37.23 200705 3.48 -0.05 -0.23 0.41 $ 84.84 $ 38.69 200706 -1.88 0.69 -1.07 0.4 $ 84.48 $ 38.34 200707 -3.58 -2.74 -3.01 0.4 $ 82.94 $ 36.63 200708 0.74 -0.09 -2.42 0.42 $ 83.90 $ 36.37 200709 3.77 -2.47 -2.1 0.32 $ 89.11 $ 37.33 200710 2.26 0.07 -1.97 0.32 $ 93.86 $ 38.44 200711 -5.27 -2.72 -0.88 0.34 $ 90.30 $ 36.04 200712 -0.7 0.06 -0.02 0.27 $ 90.61 $ 36.21 200801 -6.44 -0.76 3.13 0.21 $ 82.50 $ 34.40 200802 -2.33 -0.67 0.04 0.13 $ 81.18 $ 34.06 200803 -1.22 0.87 0.26 0.17 $ 79.40 $ 33.44 200804 4.94 -1.6 0.08 0.17 $ 84.58 $ 35.14 200805 2.21 2.8 -0.3 0.17 $ 87.17 $ 36.37 200806 -8.03 0.91 -0.93 0.17 $ 79.87 $ 33.20 200807 -1.46 3.89 3.57 0.15 $ 76.73 $ 32.74 200808 0.98 3.66 1.65 0.12 $ 76.67 $ 33.07 200809 -9.96 -0.2 4.37 0.15 $ 62.89 $ 29.17 200810 -18.55 -2.05 -3.14 0.08 $ 49.30 $ 23.33 200811 -8.54 -3.46 -5.09 0.02 $ 43.72 $ 21.29 200812 2.06 4.09 -1.21 0.09 $ 45.86 $ 23.12
Output area:
Risk premium for mutual fundsMkt-RF SMB HML FMAGX FLPSX BSCFX
200401 0.0224 0.0260 0.0166 0.0122 0.0264 0.0368200402 0.0149 -0.0120 0.0037 0.0136 0.0288 0.0054200403 -0.0116 0.0185 -0.0001 -0.0135 0.0004 0.0264200404 -0.0250 -0.0253 -0.0169 -0.0180 -0.0251 0.0277200405 0.0135 -0.0012 -0.0031 0.0099 0.0020 0.0007200406 0.0208 0.0225 0.0172 0.0138 0.0340 -0.0140200407 -0.0387 -0.0382 0.0442 -0.0401 -0.0358 -0.0628200408 0.0016 -0.0156 0.0113 0.0014 -0.0041 -0.0174200409 0.0195 0.0282 0.0040 0.0082 0.0386 0.0265
200410 0.0167 0.0049 -0.0095 0.0143 0.0126 0.0399200411 0.0467 0.0411 0.0196 0.0317 0.0783 0.0682200412 0.0336 0.0018 -0.0035 0.0295 0.0382 0.0600200501 -0.0282 -0.0167 0.0252 -0.0203 -0.0213 -0.0079200502 0.0211 -0.0076 0.0285 0.0102 0.0300 0.0133200503 -0.0190 -0.0137 0.0171 -0.0219 -0.0226 -0.0060200504 -0.0273 -0.0395 -0.0049 -0.0228 -0.0495 -0.0468200505 0.0355 0.0301 -0.0116 0.0336 0.0466 0.0284200506 0.0092 0.0258 0.0284 -0.0018 0.0294 0.0477200507 0.0409 0.0277 -0.0047 0.0378 0.0361 0.0430200508 -0.0089 -0.0088 0.0144 -0.0145 -0.0040 -0.0302200509 0.0077 -0.0065 0.0123 0.0042 0.0047 -0.0131200510 -0.0235 -0.0105 -0.0074 -0.0156 -0.0450 -0.0511200511 0.0373 0.0099 -0.0175 0.0305 0.0414 0.0638200512 0.0003 -0.0047 0.0051 0.0165 0.0149 0.0177200601 0.0366 0.0533 0.0118 0.0443 0.0622 0.0637200602 -0.0050 -0.0031 -0.0076 -0.0183 -0.0097 -0.0054200603 0.0154 0.0351 0.0004 0.0231 0.0219 0.0416200604 0.0094 -0.0122 0.0307 0.0155 0.0161 -0.0088200605 -0.0353 -0.0300 0.0275 -0.0531 -0.0442 -0.0611200606 -0.0044 -0.0047 0.0151 -0.0114 -0.0160 -0.0171200607 -0.0059 -0.0390 0.0325 -0.0352 -0.0158 -0.0686200608 0.0209 0.0080 -0.0166 0.0199 0.0142 0.0181200609 0.0154 -0.0122 -0.0049 0.0070 0.0105 0.0289200610 0.0330 0.0168 0.0049 0.0251 0.0309 0.0536200611 0.0195 0.0070 0.0039 0.0218 0.0375 0.0245200612 0.0068 -0.0093 0.0256 -0.0093 0.0143 0.0055200701 0.0150 0.0002 0.0000 0.0243 0.0078 0.0345200702 -0.0178 0.0139 0.0032 -0.0202 -0.0066 -0.0110200703 0.0086 -0.0020 0.0031 0.0040 0.0123 0.0025200704 0.0355 -0.0206 -0.0108 0.0437 0.0280 0.0164200705 0.0348 -0.0005 -0.0023 0.0366 0.0351 0.0344200706 -0.0188 0.0069 -0.0107 -0.0082 -0.0130 -0.0031200707 -0.0358 -0.0274 -0.0301 -0.0222 -0.0486 -0.0461200708 0.0074 -0.0009 -0.0242 0.0074 -0.0113 0.0042200709 0.0377 -0.0247 -0.0210 0.0589 0.0232 0.0448200710 0.0226 0.0007 -0.0197 0.0501 0.0265 0.0519200711 -0.0527 -0.0272 -0.0088 -0.0413 -0.0658 -0.0297200712 -0.0070 0.0006 -0.0002 0.0007 0.0020 -0.0273200801 -0.0644 -0.0076 0.0313 -0.0916 -0.0521 -0.0953200802 -0.0233 -0.0067 0.0004 -0.0173 -0.0112 -0.0369200803 -0.0122 0.0087 0.0026 -0.0236 -0.0199 -0.0142200804 0.0494 -0.0160 0.0008 0.0635 0.0491 0.0488
200805 0.0221 0.0280 -0.0030 0.0289 0.0333 0.0302200806 -0.0803 0.0091 -0.0093 -0.0854 -0.0889 -0.0972200807 -0.0146 0.0389 0.0357 -0.0408 -0.0154 0.0030200808 0.0098 0.0366 0.0165 -0.0020 0.0089 0.0269200809 -0.0996 -0.0020 0.0437 -0.1812 -0.1194 -0.1042200810 -0.1855 -0.0205 -0.0314 -0.2169 -0.2010 -0.1949200811 -0.0854 -0.0346 -0.0509 -0.1134 -0.0876 -0.1070200812 0.0206 0.0409 -0.0121 0.0480 0.0851 0.0570
Chapter 12The Fama-French Multi-Factor Model and Mutual Fund Returns
BSCFX Adj Close $ 14.40 $ 14.94 $ 15.03 $ 15.44 $ 15.88 $ 15.90 $ 15.69 $ 14.72 $ 14.48 $ 14.88 $ 15.49 $ 16.57 $ 17.59 $ 17.48 $ 17.74 $ 17.67 $ 16.88 $ 17.40 $ 18.27 $ 19.10 $ 18.58 $ 18.39 $ 17.50 $ 18.67 $ 19.06 $ 20.34 $ 20.30 $ 21.22 $ 21.11 $ 19.91 $ 19.65 $ 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
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.96923R Square 0.93941Adjusted R 0.93617Standard E 0.01265Observatio 60
ANOVAdf SS MS F Significance F
Regression 3 0.139004 0.046335 289.4198 4.739E-34Residual 56 0.008965 0.00016Total 59 0.14797
CoefficientsStandard Error t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept -0.001479 0.001665 -0.888673 0.37798 -0.004814 0.001856 -0.004814 0.001856Mkt-RF 1.230512 0.04505 27.31433 4.703E-34 1.140266 1.320758 1.140266 1.320758SMB -0.130062 0.082425 -1.577952 0.120209 -0.295179 0.035054 -0.295179 0.035054HML -0.356284 0.086944 -4.097836 0.000136 -0.530454 -0.182113 -0.530454 -0.182113
Upper 95.0%
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.97008R Square 0.94106Adjusted R 0.93790Standard E 0.01177Observatio 60
ANOVAdf SS MS F Significance F
Regression 3 0.123813 0.041271 298.0359 2.191E-34Residual 56 0.007755 0.000138Total 59 0.131568
CoefficientsStandard Error t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.00157 0.001548 1.01372 0.315076 -0.001532 0.004671 -0.001532 0.004671Mkt-RF 1.047432 0.041898 24.99949 4.629E-32 0.9635 1.131364 0.9635 1.131364SMB 0.322687 0.076658 4.209435 9.361E-05 0.169123 0.476252 0.169123 0.476252HML 0.082383 0.080861 1.018823 0.312668 -0.079601 0.244368 -0.079601 0.244368
Upper 95.0%
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.93283R Square 0.87017Adjusted R 0.86321Standard E 0.01874Observatio 60
ANOVAdf SS MS F Significance F
Regression 3 0.131768 0.043923 125.108 8.462E-25Residual 56 0.01966 0.000351Total 59 0.151429
CoefficientsStandard Error t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.002124 0.002465 0.861594 0.392585 -0.002814 0.007063 -0.002814 0.007063Mkt-RF 1.045257 0.066713 15.66805 3.968E-22 0.911616 1.178899 0.911616 1.178899SMB 0.465691 0.122059 3.815284 0.000342 0.221177 0.710205 0.221177 0.710205HML -0.265235 0.128752 -2.060042 0.044053 -0.523156 -0.007313 -0.523156 -0.007313
Upper 95.0%
Chapter 13The Cost of Capital for Goff Computer, Inc.
Input area:
Bond 2013 maturity book value $ 600 2013 bond price 94.367 2013 bond YTM 6.221%Bond 2018 maturity book value $ 500 2018 bond price 92.106 2018 bond YTM 6.811%Bond 2028 maturity book value $ 300 2028 bond price 91.672 2028 bond YTM 7.949%Bond 2038 maturity book value $ 400 2038 bond price 80.725 2038 bond YTM 8.254%BV of debt (balance sheet) $ 1,851 BV of equity per share $ 2.139 Stock price $ 11.20 Shares outstanding (billions) 1.94 Beta 1.410 3-month Treasury bill rate 0.10%Market risk premium 7.00%Bond 1 price 100.433 Bond 1 YTM 5.124%Tax rate 35%
Output area:
2) 9.97%
3) Company BetaApple Inc. 1.87 Dell 1.41 Hewlett Packard 1.19 Sun Microsystems 1.92 Ingram Mico Inc. 1.18 Tech Data Corp. 1.28
RE from CAPM
Electronics for Imaging 1.40 Palm, Inc. 2.16 Digi International 0.62 Agilysis, Inc. 1.84 Rackable Systems, Inc. 1.62 SeaChange International 0.62 MIPS Technologies 1.89 Silicon Graphics 1.28 Cray Inc. 1.87
Industry Average 1.48
10.44%
4)Bond 1 $ 600 0.33 Bond 2 500 0.28 Bond 3 300 0.17 Bond 4 400 0.22 Total $ 1,800 $ 1.00
5) Book value of equity $ 4.1497 billionMarket value of equity $ 21.7280 billionBook value of company $ 5.9497 millionMarket value of company $ 23.3526 million
WACC using book value 8.07%
WACC using market value 9.60%
RE with industry beta
Book value(millions)
Percentof total
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%
Quoted price
Market value(millions)
Percentof total
Yield toMaturity
Bookvalues
Marketvalues
Chapter 16Stephenson Real Estate Recapitalization
Input area:
Shares outstanding 15,000,000 acciones en circulación
Share price $ 35.50 Precio de la acción
Purchase price $ 60,000,000 Precio del terreno
Increase in cash flow $ 14,000,000 Incremento del flujo de caja anual
Current cost of capital 12.50% Costo de capital
YTM on new debt 8.00% Tasa cupón del Bono Yield to maturity
Equity weight in new capital structure 70% Porcentaje de capital
Tax rate 40% Tasa impositiva
Output area: Recomendamos emitir deuda,. Porque ele costo de esa fuente es menor
2. Assets $ 532,500,000 Equity $ 532,500,000 Total assets $ 532,500,000 Total Debt & Equity $ 532,500,000
3. a) Aftertax earnings increase $ 8,400,000 NPV $ 7,200,000
b) Assets $ 532,500,000 NPV of project 7,200,000 Equity $ 539,700,000 Total assets $ 539,700,000 Total Debt & Equity $ 539,700,000
New share price $ 35.98 New shares issued 1,667,593 Price
c) Cash $ 60,000,000 Old assets 532,500,000 NPV of project 7,200,000 Equity $ 599,700,000 Total assets $ 599,700,000 Total Debt & Equity $ 599,700,000 Total
New shares outstanding 16,667,593 New share price $ 35.98
d) PV of the project $ 67,200,000
Old assets $ 532,500,000 PV of project 67,200,000 Equity $ 599,700,000 Total assets $ 599,700,000 Total Debt & Equity $ 599,700,000
4. a) Market value of company $ 601,620,000
b) Value unlevered $ 599,700,000 Debt $ 60,000,000 Tax shield 24,000,000 Equity 563,700,000 Total assets $ 623,700,000 Total Debt & Equity $ 623,700,000
New stock price $ 37.58
5
Chapter 17McKenzie Corporation's Capital Budgeting
Input Area:
ProbabilityRecession 0.30 $ 30,000,000 $ 33,000,000 Normal 0.50 $ 35,000,000 $ 46,000,000 Expansion 0.20 $ 51,000,000 $ 64,000,000
Face value of debt $ 34,000,000 Cost of expansion $ 8,400,000
Output Area:
1) Expected value of firmWithout expansion $ 36,700,000 With expansion $ 45,700,000
Expected NPV $ 600,000
2) Value of debtRecession $ 30,000,000 $ 33,000,000 Normal $ 34,000,000 $ 34,000,000 Expansion $ 34,000,000 $ 34,000,000
Expected value of debt $ 32,800,000 $ 33,700,000
3) Value of equityRecession $ - $ - Normal $ 1,000,000 $ 12,000,000 Expansion $ 17,000,000 $ 30,000,000
Expected value of equity $ 3,900,000 $ 12,000,000
Without expansion
With expansion
Without expansion
With expansion
Without expansion
With expansion
Bondholder gain with expansion $ 900,000
Stockholder gain with expansion $ 8,100,000
Stockholder NPV $ (300,000)
Chapter 18The Leveraged Buyout of Cheek Products, Inc.
Input area:
2010 2011 2012Sales $ 2,115.00 $ 2,371.00 $ 2,555.00 Costs 562.00 738.00 776.00 Depreciation 373.00 397.00 413.00 EBT $ 1,180.00 $ 1,236.00 $ 1,366.00 Tax 472.00 494.40 546.40 Net income $ 708.00 $ 741.60 $ 819.60
Capital expenditures $ 215 $ 186 $ 234 Change in NWC $ (94) $ (143) $ 78 Asset sales $ 1,092 $ 791
Interest payments $ 1,482 $ 1,430 $ 1,534
Terminal growth rate 3.50%Terminal D/E 25.00%Return on assets 14.00%Pretax cost of debt 12.50%Pretax debt after Year 5 8.00%Tax rate 40.00%Shares outstanding (million) 167
Output area:
Unlevered cash flows $ 2,052.00 $ 1,886.60 $ 920.60
1) PV unlevered CF $ 4,928.50
Terminal value of futureunlevered CF in Year 5 $ 9,583.11
Value today of terminal 2) value $ 4,977.17
Interest tax shield $ 592.80 $ 572.00 $ 613.60 3) PV of interest tax shield $ 2,126.55
Levered equity return 15.20%WACC 13.36%
Terminal value of company $ 10,205.14
Terminal value of tax shields $ 622.03
Value of terminal tax shields4) today $ 345.18
PV unlevered CF $ 9,905.67 PV tax shields $ 2,471.73 Value of company $ 12,377.41
Share price to offer $ 74.12
2013 2014 $ 2,616.00 $ 2,738.00 839.00 884.00 434.00 442.00 $ 1,343.00 $ 1,412.00 537.20 564.80 $ 805.80 $ 847.20
$ 237 $ 234 $ 73 $ 83
$ 1,495 $ 1,547
$ 929.80 $ 972.20
$ 598.00 $ 618.80
Chapter 20East Coast Yachts Goes Public
Input area:
Underwriter fee 7.00%Legal fees and expenses $ 1,500,000 SEC registration fees $ 15,000 Filing fees $ 20,000 NASDAQ listing fee $ 100,000 Transfer agent fee $ 8,500 Engraving expenses $ 525,000 Other expenses $ 75,000 Audit cost/year $ 300,000 IPO size $ 70,000,000
Output area:
Underwriter fees $ 4,900,000
Total fees excluding underwriter fees $ 2,243,500
Total fees $ 7,143,500
Net amount raised $ 65,100,000
Fee as a percentage of funds raised 10.97%
Chapter 21 The Decision to Lease or Buy at Warf Computers
Input area:
Purchase price $ 2,500,000 Year 1 depreciation 0.333 Year 2 depreciation 0.444 Year 3 depreciation 0.148 Year 4 depreciation 0.074 Salvage value $ 300,000 Lease payment $ 650,000 Security deposit $ 150,000 Cost of debt 11%Tax rate 35%
Alternative lease:Lease payments $ 1,150,000 Year 2 salvage value $ 1,000,000
Output area:
1) Aftertax cost of debt 7.15%
Year 0 Year 1 Year 2Saved purchase $ 2,500,000 Lost salvage valueLost depreciation tax shield (291,375) (388,500)Security deposit (150,000)Lease payment (650,000) (650,000) (650,000)Tax on lease payment 227,500 227,500 227,500 Cash flow from leasing $ 1,927,500 $ (713,875) $ (811,000)
NAL $ 22,917.57
2) Book value in Year 2 $ 557,500
Year 0 Year 1 Year 2Saved purchase $ 2,500,000
Lost salvage value (845,125)Lost depreciation tax shield (291,375) (388,500)Lease payment (1,150,000) (1,150,000)Tax on lease payment 402,500 402,500 Cash flow from leasing $ 1,752,500 $ (1,038,875) $ (1,233,625)
NAL $ (291,533.21)
PV of lease payments $2,186,036.04
Year 3 Year 4
(195,000) (129,500) (64,750)
150,000 (650,000) 227,500 $ (552,000) $ (109,750)
Chapter 22Clissold Industries Options
Input Area:
Current stock price $ 50 Exercise price $ 55 Expiration (months) 6 Risk-free rate 4%Standard deviation 78.82%
Output Area:
0.1435
(0.4138)
0.5571
0.3395
Call $ 9.55
d1
d2
N(d1)
N(d2)
Microsoft Excel 12.0 Answer ReportWorksheet: [Jaffe 9th edition Case Solutions.xlsx]Chapter 22Report Created: 1/12/2009 1:16:40 PM
Target Cell (Value Of)Cell Name Original Value Final Value
$D$22 Call $ 22.48 $ 27.65
Adjustable CellsCell Name Original Value Final Value
$D$11 Standard deviation 78.59% 144.80%
ConstraintsNONE
Microsoft Excel 12.0 Answer ReportWorksheet: [Jaffe 9th edition Case Solutions.xlsx]Chapter 22Report Created: 1/12/2009 1:17:37 PM
Target Cell (Value Of)Cell Name Original Value Final Value
$D$22 Call $ 23.30 $ 19.45
Adjustable CellsCell Name Original Value Final Value
$D$11 Standard deviation 144.80% 109.42%
ConstraintsNONE
Microsoft Excel 12.0 Answer ReportWorksheet: [Jaffe 9th edition Case Solutions.xlsx]Chapter 22Report Created: 1/12/2009 1:18:12 PM
Target Cell (Value Of)Cell Name Original Value Final Value
$D$22 Call $ 15.41 $ 11.95
Adjustable CellsCell Name Original Value Final Value
$D$11 Standard deviation 109.42% 83.16%
ConstraintsNONE
Microsoft Excel 12.0 Answer ReportWorksheet: [Jaffe 9th edition Case Solutions.xlsx]Chapter 22Report Created: 1/12/2009 1:18:43 PM
Target Cell (Value Of)Cell Name Original Value Final Value
$D$22 Call $ 10.16 $ 9.55
Adjustable CellsCell Name Original Value Final Value
$D$11 Standard deviation 83.16% 78.82%
ConstraintsNONE
Chapter 23Exotic Cuisine Employee Stock Options
Input Area:
Current stock price $ 36.28 Exercise price $ 40 Expiration (years) 10 Risk-free rate 4.40%Standard deviation 60.00%
Output Area:
1.1291
(0.7682)
0.8706
0.2212
Call $ 25.89
d1
d2
N(d1)
N(d2)
Chapter 24 S&S Air's Convertible Bond
Input area:
Industry PE 12.50 Company EPS $ 1.60 Conversion price (stock) $ 25.00 Maturity (years) $ 20.00 Convertible bond coupon 6%Conversion value of bond $ 800 Plain vanilla coupon 7%
Output area:
Stock price $ 20.00
Intrinsic bond value $ 893.22
Floor value $ 893.22
Conversion ratio 32.00
Conversion premium 25.00%
Option value $ 106.78
Chapter 25Williamson Mortgage, Inc.
Input area:
Mortgage value $ 500,000 Years 25 Interest rate 6.50%
4) Interest rate 7.40%5) Interest rate 5.80%
Output area:
1) Mortgage payment $ 3,376.04
4) Mortgage value $ 460,892.97
5) Mortgage value $ 534,071.83
Chapter 26Keafer Manufacturing Working Capital Management
Input Area:
A/R $ 553,000 Percent uncollectible 10%Collection period 57 % of purchases for next Q sales 50%Suppliers paid 53 % of sales for expenses 25%Interest and dividends $ 148,000 Outlay in third Q $ 260,000 Beginning cash balance $ 149,500 Target cash balance $ 90,000 Borrowing rate 1.2%Invested securities 0.5%Beginning short-term borrowing $ -
Q1 Q2 Q3 Q4Last years' sales $ 735,000 $ 761,000 $ 817,000 $ 709,000
Growth rate in sales 8.00%
Output Area:
Sales next year $ 793,800.00 $ 821,880.00 $ 882,360.00 $ 765,720.00 Sales following year $ 857,304.00
Quarterly cash flow Q1 Q2 Q3 Q4
Collections from previous quarter $ 497,700.00 $ 502,740.00 $ 520,524.00 $ 558,828.00 Collections from current quarter sales 291,060.00 301,356.00 323,532.00 280,764.00 Payments to suppliers for previous quarter (233,730.00) (241,998.00) (259,806.00) (225,462.00)Payments to suppliers for current quarter (168,942.00) (181,374.00) (157,398.00) (176,223.60)Expenses (198,450.00) (205,470.00) (220,590.00) (191,430.00)Dividends and interest (148,000.00) (148,000.00) (148,000.00) (148,000.00)Outlay (260,000.00)Net cash flow $ 39,638.00 $ 27,254.00 $ (201,738.00) $ 98,476.40
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Cash Balance Q1 Q2 Q3 Q4
Beginning cash balance $ 149,500.00 $ 189,138.00 $ 216,392.00 $ 14,654.00 Net cash inflow 39,638.00 27,254.00 (201,738.00) 98,476.40 Ending cash balance $ 189,138.00 $ 216,392.00 $ 14,654.00 $ 113,130.40 Minimum cash balance 90,000.00 90,000.00 90,000.00 90,000.00 Cumulative surplus (deficit) $ 99,138.00 $ 126,392.00 $ (75,346.00) $ 23,130.40
Short-term Financial Plan Target cash balance $ 90,000.00 $ 90,000.00 $ 90,000.00 $ 90,000.00 Net cash inflow 39,638.00 27,254.00 (201,738.00) 98,476.40 New short-term investments (39,935.50) (27,751.18) - (23,674.03)Income on short-term investments 297.50 497.18 635.93 - Short-term investments sold - - 127,186.68 - New short-term borrowing - - 73,915.39 - Interest on short-term borrowing - - - (886.98)Short-term borrowing repaid - - - (73,915.39)Ending cash balance $ 90,000.00 $ 90,000.00 $ 90,000.00 $ 90,000.00 Minimum cash balance (90,000.00) (90,000.00) (90,000.00) (90,000.00)Cumulative surplus (deficit) $ - $ - $ - $ -
Beginning short-term investments $ 59,500.00 $ 99,435.50 $ 127,186.68 $ - Ending short-term investments 99,435.50 127,186.68 - 23,674.03 Beginning short-term debt - - - 73,915.39 Ending short-term debt $ - $ - $ 73,915.39 $ -
Q1: Excess funds at start of quarter of $59,500.00 earns $297.50 in income.Q2: Excess funds at start of quarter of $99,435.50 earns $497.18 in income.Q3: Excess funds at start of quarter of $127,186.68 earns $635.93 in income.Q4: Shortage of funds at start of quarter of $73,915.39 costs $886.98 in interest.
Net cash costQ1 $ 297.50 Q2 497.18 Q3 635.93 Q4 (886.98)Cash generated by short-term financing $ 543.63
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Microsoft Excel 12.0 Answer ReportWorksheet: [Jaffe 9th edition Case Solutions.xlsx]Chapter 26Report Created: 7/15/2009 4:05:13 PM
Target Cell (Value Of)Cell Name Original Value Final Value
$F$68 Ending short-term debt Q3 $ 73,915.39 $ -
Adjustable CellsCell Name Original Value Final Value
$D$24 Growth rate in sales Q1 8.00% 48.00%
ConstraintsNONE
Chapter 27Cash Management at Richmond Corp.
Input Area:
Number of lockboxes 4 Daily payments $ 235,000 Investment account rate 0.068%Wire transfer cost 0.20%Sweep time 14 Money market yield 0.075%ACH transfer cost $ 200
Output:
1. FVA $13,191,889.06
2. FVA $ 13,203,190.71 The company should go ahead with the plan.
3. ACH transfer cost $ 400.98
Chapter 28Credit Policy at Braam Industries
Input Area:
Sales Default rateCurrent policy $ 140,000,000 1.90%Option 1 $ 158,000,000 2.90%Option 2 $ 149,000,000 2.20%Option 3 $ 167,000,000 2.50%
Variable costs 45%Interest rate 6.00%
Output Area:
Daily interest rate 0.01597%
Current policy:
Daily sales $ 383,561.64 Variable costs (daily) $ 172,602.74 Defaults on sales (daily) $ 7,287.67 Administrative costs (daily) $ 6,136.99 Interest rate 0.6085%
NPV $ 32,291,008.61
Option 1:
Daily sales $ 432,876.71 Variable costs (daily) $ 194,794.52 Defaults on sales (daily) $ 12,553.42 Administrative costs (daily) $ 11,687.67 Interest rate 0.6567%
NPV $ 32,369,467.12
Option 2:
Daily sales $ 408,219.18 Variable costs (daily) $ 183,698.63
Defaults on sales (daily) $ 8,980.82 Administrative costs (daily) $ 7,756.16 Interest rate 0.8175%
NPV $ 25,233,509.84
Option 3:
Daily sales $ 457,534.25 Variable costs (daily) $ 205,890.41 Defaults on sales (daily) $ 11,438.36 Administrative costs (daily) $ 9,608.22 Interest rate 0.7853%
NPV $ 29,158,049.54
Credit Policy at Braam Industries
Administrative costs Receivables period1.60% 382.70% 411.90% 512.10% 49
Chapter 29 The Birdie Golf-Hybrid Golf Merger
Input Area:
Year 1 Year 2Sales $ 640,000,000 $ 720,000,000 Production costs 449,000,000 504,000,000 Depreciation 60,000,000 64,000,000 Other expenses 64,000,000 72,000,000 EBIT $ 67,000,000 $ 80,000,000 Interest 15,200,000 17,600,000 Taxable income $ 51,800,000 $ 62,400,000 Taxes (40%) 20,720,000 24,960,000 Net income $ 31,080,000 $ 37,440,000
InvestmentsNet working capital $ 16,000,000 $ 20,000,000 Fixed assets 12,000,000 20,000,000 Total $ 28,000,000 $ 40,000,000
Sources of financingNew debt $ 28,000,000 $ 12,800,000 Profit retention - 27,200,000 Total $ 28,000,000 $ 40,000,000
Tax rate 40%Dividends from Hybrid today $ 120,000,000 Year 2 tax-loss carryforward $ 20,000,000 Year 3 tax-loss carryforward $ 20,000,000 Terminal value of Hybrid in five years $ 720,000,000 Debt level in five years $ 240,000,000 Current target debt-equity ratio 0.5000 New target debt-equity ratio 1.0000 Risk-free rate 6%Expected return on market 13%Company acquirer WACC 11%Cost of debt for each company 8%Current beta for Hydrid equity 1.30 Loan to buy company $ 88,000,000 Cash paid $ 440,000,000
Shares outstanding in target 6,400,000 Stock price of acquirer $ 94.00 Shares outstanding in acquirer 14,400,000
Output Area:
Current debt weight 0.33 Current equity weight 0.67 Beta of debt 0.29 Hybrid beta 0.96 Discount rate for normal operations 12.73%
New debt weight 0.50 New equity weight 0.50 New stock beta 1.59 Discount rate for dividends 17.13%
Year 0 Year 1Acquisition of Hybrid $ (440,000,000)Dividends from Hybrid $ 120,000,000 $ 31,080,000 Tax-loss carryforwardsTerminal value of equityTerminal value of debtTotal $ (320,000,000) $ 31,080,000
Present valuesAcquisition of Hybrid $ (440,000,000)Dividends from Hybrid $ 120,000,000 $ 26,533,865 Tax-loss carryforwardsTerminal value of equityTerminal value of debtTotal $ (320,000,000) $ 26,533,865
1) NPV $ 31,890,413.71
2) Highest price to offer $ 471,890,413.71
Price per share offered $ 68.75 Highest share price to offer $ 73.73
3) New share price $ 96.21
Exchange ratio 0.7145
4) Highest exchange ratio 0.7314
The Birdie Golf-Hybrid Golf Merger
Year 3 Year 4 Year 5 $ 800,000,000 $ 900,000,000 $ 1,000,000,000 560,000,000 632,000,000 705,000,000 66,000,000 66,400,000 67,000,000 80,000,000 90,400,000 97,000,000 $ 94,000,000 $ 111,200,000 $ 131,000,000 19,200,000 20,000,000 21,600,000 $ 74,800,000 $ 91,200,000 $ 109,400,000 29,920,000 36,480,000 43,760,000 $ 44,880,000 $ 54,720,000 $ 65,640,000
$ 20,000,000 $ 24,000,000 $ 24,000,000 14,400,000 96,000,000 5,600,000 $ 34,400,000 $ 120,000,000 $ 29,600,000
$ 12,800,000 $ 12,000,000 $ 9,600,000 21,600,000 21,600,000 20,000,000 $ 34,400,000 $ 33,600,000 $ 29,600,000
Year 2 Year 3 Year 4 Year 5
$ 10,240,000 $ 23,280,000 $ 33,120,000 $ 45,640,000 20,000,000 20,000,000
720,000,000 (240,000,000)
$ 30,240,000 $ 43,280,000 $ 33,120,000 $ 1,005,640,000
$ 7,463,438 $ 14,485,766 $ 17,594,151 $ 20,698,703 $ 17,146,776 $ 15,876,645
$ 395,431,037 $ (163,339,967)
$ 24,610,215 $ 30,362,411 $ 17,594,151 $ 252,789,772
Chapter 31East Coast Yachts Goes International
Input Area:
Sales per month € 8,000,000 Commission 5%
$ 1.45 Production costs 80%
3) $ 1.30
Output Area:
Sales less commission € 7,600,000 Dollar value of sales $ 11,020,000
Total sales $ 11,600,000 Production costs $ 9,280,000
Profit at current exchange rate $ 1,740,000
3) At revised exchange rate:Dollar value of sales $ 9,880,000 Production costs $ 9,280,000
Profit at new exchange rate $ 600,000
$ 1.2211
Current exhange rate ($/€)
Exhange rate ($/€)
Breakeven exchange rate ($/€)