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Instructions

NAME:

Courtney Meade

To complete the homework assignments in the templates provided:

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

b) C requires a calculation, using Excel formulas or functions. You cannot perform


answer in the cell. You will enter the calculation in the cell, and only the final answe
your calculation and correct, if necessary.

c) F requires a number only. In some problems, a Step 1 is added to help you so

d) Formula requires a written formula, not the numbers. For example, the rate of re
(debt) + E (equity) = V (value).

4. Name your assignment file as "lastnamefirstinitial-FINC600-Week#", and submit b

Instructions

ay need to refer to your textbook for additional information in a few cases.

ded cells.

re references; use the textbook.

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

Step 1 is added to help you solve the problem.

bers. For example, the rate of return = [(1 + nominal)/ (1+inflation)]-1, or D

FINC600-Week#", and submit by midnight ET, Day 7.

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.

gsprice ratio EPS1/P0?

ate of return. This is when the situation is intrinsic


ces

edition (2nd ed.). Boston: McGraw-Hill.

Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.
Problem 4-12

What is meant by the "horizon value" of a business? How can it be estimated?

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.

e of all future cash flows. It can be estimated with


unted cash flow analysis.

edition (2nd ed.). Boston: McGraw-Hill.

Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.
Problem 5-9

Respond to the following comments:


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

ecific discount rate. Rates are determined by


od must be higher than the required rate of the return.
compare the IRR to opportunity cost.

rate finance, concise edition (2nd ed.). Boston:

t of a project. It can take cash inflows expected from


ost of project can be completed within short time span.
ive cash result in short time periods. Because of this
References

rate finance, concise edition (2nd ed.). Boston:

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.

Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.

if each project's cash flows can be reinvested at the


ested at the opportunity cost of capital." Think

flows when cash flows are used with discount rates.


cost of capital in this situation and both statement are
s are.

rate finance, concise edition (2nd ed.). Boston:

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 Discount Rate (rdr)


Real Cash Flow (rcf)
PV (using rcf)

Formula (in words)


(1 + C1)/(1+Inflation)-1
100,000/(1+inflation rate)
rcf/(1+r)

Principles of Corporate Finance, Concise, 2nd Edition

Calculation
1.03846
$96,154
$92,593

Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.

e discounts at an 8% nominal discount rate:

al discount rate. (You should get exactly the same

Principles of Corporate Finance, Concise, 2nd Edition

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

Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.

.
existing product, investment in net working capital is usually an

of all cash inflows and outflows is carefully specified.

en carring out activites. When a company introuduces a new product


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
References

ncise edition (2nd ed.). Boston: McGraw-Hill.