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NAME:

Courtney Meade

1. The question is provided for each problem. You may need to refer to your textbook

2. You will enter the required information into the shaded cells.

3. The cells are coded:

a) T requires a text answer. Essay questions require references

answer in the cell. You will enter the calculation in the cell, and only the final answe

your calculation and correct, if necessary.

d) Formula requires a written formula, not the numbers. For example, the rate of re

(debt) + E (equity) = V (value).

Instructions

ded cells.

r functions. You cannot perform the operation on a calculator and then type the

the cell, and only the final answer will show in the cell. I will be able to review

Instructions: Please refer to your book for assistance with your homework. Post your work

in the worksheet. Highlight your final answer.

Problem 4-10

Under what conditions does r, a stock's market capitalization rate, equal its earningsprice ratio EPS1/P0?

Answer:

As PVGO = 0, r = EPS1 / P0. The market capitalization rate is equal to expected rate of return. This is when the s

value of the stock is equal to its price.

References

Brealey, R., Myers, S., & Allen, F. (2011). Principles of corporate finance, concise edition (2nd ed.). Boston: McGr

Instructions: Please refer to your book for assistance with your homework. Post your work

in the worksheet. Highlight your final answer.

ces

Instructions: Please refer to your book for assistance with your homework. Post your work

in the worksheet. Highlight your final answer.

Problem 4-12

Answer:

The horizon value also known as terminal value of a business is the present value of all future cash flows. It can

perpetual growth valuation, the multiple growth model, liquidation value and discounted cash flow analysis.

References

Brealey, R., Myers, S., & Allen, F. (2011). Principles of corporate finance, concise edition (2nd ed.). Boston: McGr

Instructions: Please refer to your book for assistance with your homework. Post your work

in the worksheet. Highlight your final answer.

unted cash flow analysis.

Instructions: Please refer to your book for assistance with your homework. Post your work

in the worksheet. Highlight your final answer.

Problem 5-9

a. "I like the IRR rule. I can use it to rank projects without having to specify a discount rate."

b. "I like the payback rule. As long as the minimum payback period is short, the rule makes sure that the compan

projects. That reduces risk."

Answers:

a.

This comment is correct. The IRR rule does not require a specific discount rate. Rates are d

adjustment as well as skill. The rate determined in this method must be higher than the requ

It is important to know if this is used that the company must compare the IRR to opportunity

References

Brealey, R., Myers, S., & Allen, F. (2011). Principles of corporate finance, concise edition (2n

McGraw-Hill.

b.

Payback period can help estimate time period within the cost of a project. It can take cash in

the results of the project. So, if payback period is short the cost of project can be completed

Short period also means that the project can produce a positive cash result in short time pe

risk can be reduced.

Brealey, R., Myers, S., & Allen, F. (2011). Principles of corporate finance, concise edition (2n

McGraw-Hill.

Instructions: Please refer to your book for assistance with your homework. Post your work

in the worksheet. Highlight your final answer.

ount rate."

le makes sure that the company takes no borderline

od must be higher than the required rate of the return.

compare the IRR to opportunity cost.

ost of project can be completed within short time span.

ive cash result in short time periods. Because of this

References

Instructions: Please refer to your book for assistance with your homework. Post your work

in the worksheet. Highlight your final answer.

Problem 5-16

Some people believe firmly, even passionately, that ranking projects on IRR is OK if each project's cash flows can

project's IRR. They also say that the NPV rule "assumes that cash flows are reinvested at the opportunity cost of

carefully about these statements. Are they true? Are they helpful?

Answer:

IRR is used to determine th discount rate on a projects cash flows when cash flows are use

Discount rates need to tield NPV = 0. IRR is an opportunity cost of capital in this situation an

true. It is helpful in determining what the projected cash flows are.

References

Brealey, R., Myers, S., & Allen, F. (2011). Principles of corporate finance, concise edition (2n

McGraw-Hill.

in the worksheet. Highlight your final answer.

ested at the opportunity cost of capital." Think

cost of capital in this situation and both statement are

s are.

Instructions: Please refer to your book for assistance with your homework. Post your work

in the worksheet. Highlight your final answer.

Problem 6-2

Mr. Art Deco will be paid $100,000 one year hence. This is a nominal flow, which he discounts at an 8% nominal

PV = 100,000/1.08 = $92,593

The inflation rate is 4%.

Calculate the PV of Mr. Decos payment using the equivalent real cash flow and real discount rate. (You should g

answer as he did.)

Answer:

C1

r

inflation

8%

0.0384615385

4%

Real Cash Flow (rcf)

PV (using rcf)

(1 + C1)/(1+Inflation)-1

100,000/(1+inflation rate)

rcf/(1+r)

Calculation

1.03846

$96,154

$92,593

in the worksheet. Highlight your final answer.

in the worksheet. Highlight your final answer.

Problem 6-13

Each of the following statements is true. Explain why they are consistent.

a. When a company introduces a new product, or expands production of an existing product, investment in net w

important cash outflow.

b. Forecasting changes in net working capital is not necessary if the timing of all cash inflows and outflows is care

Answer:

A. Operating capital is used to ensure the business is running smoothly when carring out activites. When a comp

or service they will need more money for materials and may have creditors. The more creditors they have the mo

to a large extent which may create debtors and cash flow would be blcoked. Companies need to hold a sufficient

need to hire extra employees to work creating more working capital.

B. W

run a business effectively and efficiently. If cash inflow and outflow are estimated then companies can determine

when things are paid. Due to this, working capital is not necessary because companies have a clear understandi

conducted by the business can be handled effectively.

Referen

Brealey, R., Myers, S., & Allen, F. (2011). Principles of corporate finance, concise edition (2nd ed.). Boston: McGr

in the worksheet. Highlight your final answer.

.

existing product, investment in net working capital is usually an

The more creditors they have the more likely they are to sell goods

. Companies need to hold a sufficient amount of goods and they may

B. Working capital is necessary to

mated then companies can determine cash that will be made and

companies have a clear understanding of cash flows. All activites

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