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(d) The change in GH’s market debt-equity ratio was 3,57. 2005: 379/365,317≈1,04. EPS if acquired is 0,867. 904/29≈31,1724...mill≈31 172 000 new shares. 8 Assume price of real estate is determined by P=PV(all cash flows generated by the real estate).After you have graduated you work for some years and can save some money. You 600 000 000+31 172 000≈ 8,631 bill. 8,6x0,87=7,482. 7,482/8,631=0,8668…≈ 0,867. 2009: 528/114,648≈4,61. 4,61-1,04= 3,57. (e) change in GH’s enterprise value was -141,7. 2005: 365,317+379-13=731,317. 2009: decide to invest in a house which you want to rent out for a rate of SEK 11000 per month. (c) Which method of acquiring the technology has a smaller impact on earnings? Is this Assume that the rental rate will increase with 1.2% per year (which is 0.1% per month). method cheaper? Purchasing would have smaller impact on earnings. The cheaper 114,648+528-53=589,648. 589,6-731,3= -141,7. (For the sake of simplicity, also assume that there are no further costs involved e.g. method of acquiring the technology is In-house. Innovation Company is thinking about marketing a new software product. Upfront costs renovating or repair). a) As the market risk of renting out the house is low, you think that a discount rate of 3.5% Considering opening a new Meli, it will cost $150 M upfront and will be built immediately. Expected to to market and develop the product are $5.3 million. The product is expected to generate produce profits of $20 M every year forever. Calculate NPV of investment opportunity if your cost of profits of $1 million per year for 10 years. The company will have to provide product (APR with monthly compounding) would be appropriate. What is the price of the house capital is 10%. Should you make the investment? Calculate IRR & use it to determine the maximum support expected to cost $93,000 per year in perpetuity. Assume all profits and expenses under the assumption that the cash flows from rent will last forever? deviation allowable in the cost of capital estimate to leave the decision unchanged. Calculate: NPV: occur at the end of the year. APR monthly: 3,5%/12=0,29. PV(growing perpetuity)= C/(r-g)  11000/(0,29-0,001)= -150+(20/0,1)=50 IRR: 20/150 Max deviation: IRR-CoC →13,3%-10%=3,3% (a) What is the NPV of this investment if the cost of capital is 5.21%? NPV is $558561. 5.74 million b) If discount rate is 1% lower than 3.5% what is the price of the house? 3,5%-1%=2,5% Consider a retailing firm with net profit margin of 3.5%, a total asset turnover of 1.8, total (Round to the nearest dollar.) Excel: PVbenefit =PV(rate 5,21%;nper 10;pmt -1 000 000)≈ 7 643 589,71. PVcost= assets of $44 million, and a book value of equity of $18 million.  10.15 million C/r= (93 000/5,21%)≈ 1 785 028,79. a. What is the firm’s current ROE? ROE= net profit margin*asset turnover*equity c) You want to make the valuation of the house more realistic by assuming that the time NPV= 7 643 589,71 - 1 785 028,79 - 5 300 000= 558 560,92≈ 558 561. horizon for the valuation should be 50 years. Again, you assume that the house will multiplier=3.5%*1.8*44/18=15.4% Should the firm undertake the project? A. Yes, because the NPV is equal to or greater than generate SEK 11000 rental income per month for the next 50 years, and the rental income b. If the firm increased its net profit margin to 4%, what would be its ROE? 0. B. No, because the NPV is not greater than the initial costs. C. No, because the NPV is is assumed to grow by 1.2% per year (or 0.1% per month). What is the value of the house ROE=4*1.8*2.44=17.57% less than zero. with a discount rate of 3.5% APR with monthly compounding? (ex. 12000inc, 4% APR) c. If, in addition, the firm increased its revenues by 20% (while maintaining this higher (b) What is the NPV of this investment if the cost of capital is 2.79%? NPV is $-10977. Growing annuity formula s.118, 12 000 / ((4%/12)-0,1%) x (1-((1+0,1%) / (1+(4%/12))) ^ profit margin and without changing its assets or liabilities), what would be its ROE? Excel: PVbenefit =PV(rate 2,79%;nper 10;pmt -1 000 000)≈ 8 622 355,63. PVcost= (50x12)) = 3 870 801 4*(1.8*1.2)*2.44=21.1% C/r= (93 000/2,79%)≈ 3 333 333,33. NPV= 8 622 355,63 - 3 333 333,33 - 5 300 000= d) at a 1% lower discount rate: 12 000 / ((3%/12)-0,1%) x (1-((1+0,1% ) / (1+(3%/12)))^ Consider the following two projects: -10 977,71≈ -10 977. (Not rounded right, but in this case the answer is -10 977). (50*12)) = 4 742 325 Should the firm undertake the project? A. Yes, because the NPV is equal to or greater than Year 0 Year 1 Year 2 Year 3 Year 4 zero. B. No, because the NPV is not greater than the initial costs. C. No, because the NPV Bill Clinton reportedly was paid $10 million to write his book My Way. The book took Discount Proj e) Which of the following statements is correct? is less than zero. A) You should invest in project B since NPV project B > NPV rate(%) ect Cash Cash Cash Cash Cash three years to write. In the time he spent writing, Clinton could have been paid to make project A and NPV project B > 0. Flow Flow Flow Flow Flow (c) What is the IRR? A. 2.79% B. 9.51% C. 13.12% D. Both (A) and (B). The answer is B) You should invest in project A since IRR project A>IRR speeches. Given his popularity, assume that he could earn $8 million per year (paid at the A -70 40 50 60 -3.5 projectB. D. Calculate???? Multiple IRR. end of the year) speaking instead of writing. Assume his cost of capital is 10% per year. B -70 C) You should invest i project A since NPV project A < 0. 30 30 30 30 3.5 D) You should invest in project A since NPV project (d) What does the IRR rule indicate about this investment? A. Since at least one of the a. What is the NPV of agreeing to write the book (ignoring any royalty payments)? A > NPV project B and NPV project A > 0. IRRs is lower than the discount rate, the IRR rule says to not take the project. B. In this =PV(10%;3;8000000)=19.89mill, NVP=10mill-19.89mill=-9.89mill (a) The internal rate of return (IRR) for project A is IRR(-70:60)=46.15% (r.2.dec) case, the IRR rule says you can either take or not the project. C. Since at least one of the b. Assume that, once the book is finished, it is expected to generate royalties of $5 million (b) The internal rate of return (IRR) for project B is IRR(-70:30)=25.68% (r.2.dec) IRRs is lower than the discount rate, the IRR rule says to take the project. D. The IRR rule in the first year (paid at the end of the year) and these royalties are expected to decrease at (c) The NPV for project A is NPV(0.035,40:60)+(-70)=69.44 (r.2.dec) says nothing in this case because there are two IRRs. a rate of 30% per year in perpetuity. What is the NPV of the book with the royalty (d) The NPV for project B is NPV(0.035,30:30)+(-70)=40.19 (r.2.dec) payments? PV(declining perpetuity at year 3)=5mill/(10%--30%)=5mill/0.4=12.5mill Itab Shop Concept AB is expected to generate the following free cash flows over the next at year 3. Discount back 3 periods: 12.5mill/1.1^3=9.391mill. To get total PV: General Electric has just issued a callable (at par) ten-year 8% coupon bond with annual five years: 9.931+--9.89=-503.381 coupon payments. The bond can be called at par in one year or anytime thereafter on a coupon payment date. It has a price of $104 and a face value of $100. After year 5, the free cash flows are expected to grow at the industry average of 4.5% per Bonds pay regular semiannual coupons, but don’t mature until 100 y after they are issued . a.) What is the bond's yield to maturity and yield to call? The yield to maturity year. Using the discounted free cash flow model and assuming a cost of capital of 10.0%, assume such bonds were issued with a 1000$ par value & 6% semiannual coupon rate. a) is 7.42%. =RATE(10;8;-104;100) Year 1 2 3 4 5 if current market rates are 6%, what is PV of the principal repayment at maturity? b.) What is the bond's yield to call? The yield to call is 3.85%. =RATE(1;8;-104;100) Answer: Excel: =-PV(0,06/2;2*100;0;1000) = $2,71 b) What is the tot value today of FCF(million $) 53 68 78 75 82 the final 40 y (y 61-100) of payments, incl coupons & principal? Answer: Coupon: H&M has just issued a callable (at par) ten-year, 8% coupon bond with annual coupon 1000*0,06/2=$30 Excel PV60 of C: =-PV(0,06/2;40*2;30)= $906,02 PV0 of C:=payments. The bond can be called at par in one year or anytime thereafter on a coupon PV(0,06/2;2*(100-40);0;906,02)=26,10 Tot value today = 26,10+2,71= $28,81 payment date. It has a price of $98 and a face value of $100. What is the bond’s yield to a) Estimate the enterprise value of Itab Shop Concept. maturity and yield to call? (nper=1; pmt=8% of FV, pv=-98 fv=100) V(5):82/(0.1-0.045)=1491. V(0):53/(1+0.1)+68/(1+0.1)^2+78/(1+0.1)^3+(75+1491)/ Bubba Ho-Tep Company reported net income of $300 million for the most recent fiscal (a) = RATE (1; 8; -98; 100) = 10.204%. Answer: The bond’s yield to call is 10.204 %. (1+0.1)^4=1233$. Answer: Itab's enterprise value is $1233 million. year. The firm had depreciation expenses of $125 million and capital expenditures of $150 (b) = RATE (10; 8; -98; 100) = 8.302%. Answer: The bond’s yield to maturity is b) If Itab Shop Concept has no excess cash, debt of $300 million, and 40 million shares million. Although they had no interest expense, the firm did have an increase in net 8.302%. working capital of $20 million. What is Bubba Ho-Tep's free cash flow? Bubba Ho-Tep's (c) Now suppose that the coupon payments are made quarterly, where the coupon rate is outstanding, estimate Itab's share price. Equity Value: 1233+0-300=933. Answer: Itab's equity value is $933 million. free cash flow is 300+125-150-20 = 255 million. (round to the nearest dollar) 8% APR with quarterly compounding. APR/year:8%/4=2%, NPER:10*4=40, = RATE Stock Price: 933/40=23.31. Answer: Itab's stock price is $23.31. (40; 0.02*100; -98; 100) = 2.074%, YTM:(2.074%+1)^4-1=8.558%. Answer: The Cisco has 8.6 billion shares outstanding and a share price of $29. Cisco is considering bond's yield to maturity, stated as EAR, is 8.558 %. Jönköping International Business School AB is a limited company and part of Jönköping developing a new networking product in house at a cost of $629 million. Alternatively, Cisco can acquire a firm that already has the technology for $904 million worth (at current In March 2005, General Holdings (GH) had a book value of equity of $111 billion, 10.1 University Foundation. According to its 2015 annual financial report, it had Assets with a value of 76,246 tSEK(=thousand SEK), a turnover of 180,613 tSEK, net income of 4,777 price) of Cisco stock. Suppose that absent the expense of the new technology, Cisco will billion shares outstanding, and a market price of $36.17 per share. GH also had cash of tSEK and a book value of equity of 8,260 tSEK. have EPS of $0.87. $13 billion, and total debt of $379 billion. Four years later, in early 2009, GH had a book (a) Calculate JIBS' net profit margin. (4777/180613)*100= 2.64% Answer: net profit (a) Suppose Cisco develops the product in-house. What impact would the development value of equity of $110 billion, 10.2 billion shares outstanding with a market price of cost have on Cisco's EPS? Assume all costs are incurred this year and are treated as R&D $11.24 per share, cash of $53 billion, and total debt of $528 billion. Over this period, what margin is 2.64%. (b) Calculate JIBS' book equity multiplier. 76246/8260=9.23 Answer: Book equity expenses, Cisco's tax rate is 35%, and the number of shares outstanding is unchanged. was the change in GH's (a) market capitalization/ market value of equity? (b) market-to- multiplier is 9.23. EPS if in house is 0,82. Net income=Pre-tax income-taxes. 629x(1-0,35)=408,85. book ratio? (c) book debt-equity ratio? (d) market debt-equity ratio? (e) enterprise value? (c) According to DuPont equation, what is JIBS' return on equity (ROE)? Asset 408,85/8600≈0,048. 0,87-0,048= 0,822≈ 0,82. (a) The change in GH's market capitalization was -250,7 billion. 2005: turnover:180613/76246=2.37, ROE=2.64*2.37*9.23=57.8% Answer: ROE is 57.8%. (b) Suppose Cisco doesn’t develop the product in-house, but instead acquires the 10,1x36,17=365,317. 2009: 10,2x11,24=114,648. 114,648-365,317=-250,669≈ -250,7. technology. What effect would the acquisition have on Cisco's EPS this year? (Note that (b) change in GH’s market-to-book ratio was -2,25. 2005: 365,317/111≈3,291. 2009: (d) What is JIBS' return on assets (ROA)? (4777/76246)*100=6.27% Answer: ROA is 6.27%. acquisition expenses do not appear directly on the income statement. Assume the firm was 114,648/110≈1,042. 1,042-3,291=-2,249≈ -2,25 acquired at the start of the year and has no revenues or expenses of its own, so that the (c) change in GH’s book debt-equity ratio was 1,39. 2005: 379/111≈3,41. 2009: only effect on EPS is due to the change in the number of shares outstanding.) 528/110=4,8. 4,8-3,41= 1,39.

The price you would be willing to pay, if you planned to hold the stock for two years, is 46,27. Calculate: 2,85/1,119+((2,96+51,79)/1,119^2)= 46,2713…≈ 46,27. (b) Suppose instead you plan to hold the stock for one year. What price would you expect to be able to sell a share of Acap stock for in one year? You would expect in one year to Listed below is information about two stocks Exp. return Variance Std. deviation be able to sell an Acap share at 48,93. (Round to the nearest cent.) Calculate: (2,96+51,79)/1,119= 48,9276…≈ 48,93. Stock A 5,4% 0,043 20,74% (c) Given your answer in part b.), what price would you be willing to pay for a share of Stock B 28,1% 0,101 31,78% Acap stock today, if you planned to hold the stock for one year? The price you would (a) Which statement below characterizes the difference between the two stocks and best answers the question: which stock would you prefer to hold? A. Stock A has less risk and pay for an Acap share today is 46,27. (Round to the nearest cent.) Calculate: has a higher expected return; therefore, I prefer it. B. Stock B has a higher expected return (48,93+2,85)/1,119= 46,273…≈ 46,27. (d) How does this compare to your answer in part (a)? Comparing the answers from parts but is riskier. It is impossible to say which stock I would prefer. It depends on risk preferences and what other stocks I am holding. C. Stock B is less risky and has a higher (a) and (c), you can conclude the following: A. Price in part (a) is higher than the price in part (c). B. Price in part (a) is lower than the price in part (c). C. They are not comparable return; therefore, I prefer to hold it. D. There is no way to compare the two stocks. values. D. Price in part (a) is the same (or virtually the same) as the price in part (c). The (b) Another question. What is an efficient portfolio? A. An efficient portfolio is any portfolio that only contains systematic risk - it contains no diversifiable risk. B. An answer is D. efficient portfolio is a portfolio that has the highest return in the economy. C. An efficient Suppose that EastCapital (also Galt Ventures), a venture capital firm, raises $250 million portfolio is a portfolio that minimizes the cost to the investor of purchasing it. D. An efficient portfolio is a portfolio that simultaneously has the highest return and the lowest of committed capital. Over the 14-year life of the fund, $50 million of this committed capital is used to pay EC's management fee. As is typical in the venture capital industry, volatility. Answer: A. EC only invests $200 million (committed capital less lifetime management fees). At the end of 14 years, the investments made by the fund are worth $850 million. EC also Procter & Gamble will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to grow at 12% per year thereafter until the 5th year. After then, charges 20% carried interest on the profits of the fund (final fund value minus intial investment net of management fees). The proceeds from the investments are collected at growth will level off at 2% per year. According to the dividend-discount model, what is the value of a share of Procter & Gamble stock if the firm’s equity cost of capital is 8%? the end of the 14-year fund life. (a) Calculate the IRR on the investments made by EastCapital. The IRR on the (ÄVEN PÅ SIDA 304) investments is 10.89%. Timeline Y0-14, 0=-200, 1-13=0, 14=850. PV(growing annuity)= 0.65/(8-12%)*(1-(1.12/1.08)^5)=3.24. =IRR(vaule0-14)=10.89% PV(perpetuity at year 5)=(0.65*(1.12^4)*1.02)/(8%-2%)=17.39. note 4y. Discount back 5 years: 17.39/1.08^5=11.83 So, PV is 11.83+3.24=15.07 (b) Calculate the IRR on the investment of a limited partner into EastCapital net of all management fees and expenses. The IRR for the limited partner is 7.85%. timeline: Y0-14, 0=-250, 1-13=0, calc14: profit=850-250+50=650, carried int=20%*profit=130, Sailboats Etc. is a retail company specializing in sailboats and other sailing-related payoff=850-carried int=720=Y14. =IRR(values0-14)=7.85. equipment. The following table contains financial forecasts as well as current (month 0) (c) Suppose that the limited partner has a cost of capital of 15%. Which value (net of working capital levels. During which months are the firm's seasonal working capital needs carried interest) must the fund at the end of 14 years have that the IRR for the limited the greatest? When does it have surplus cash? partner is 15%? (Hint: define the profit to the limited partner in the same way as is done (a) Calculate the changes in net working capital for Sailboats: in (b)) (Round to two decimal places.) (NWC = acc. Receivables + inventory – acc. Payable) The fund must have a value of $1769million. solve for payoff w (3,01+1,96-2,08) = 2,89. Change y1: 2,89-(1,98+3,02-2,04) = -0,07. IRR=15%;15%=(payoff/250)^(1/14)-1 or use 250*((1+0.15)^14)=1769. (3,92+4,09-2,06) = 5,95. Change y2: 5,95 – 2,89 = 3,06. (4,98+4,97-2,09) = 7,86. Change y3: 7,86 – 5,95 = 1,91. Suppose you invest $4,000 today and receive $10,500 in five years. (6,95+5,06-1,94) = 10,07. Change y4: 10,07 – 7,86 = 2,21. (a) What is the internal rate of return of this opportunity? The IRR of this (9,98+4,09-2,07) = 12. Change y5: 12,00 – 10,07 = 1,93. opportunity is 21,29. (Round to two decimal places.) (5,96+1,97-2,03) = 5,9. Change y6: 5,90 – 12,00 = -6,10. Timeline: 0 1 2 3 4 5 -4 000 0 0 0 0 10 500 IRR using Excel: =IRR(Values from year 0 to year 5)≈ 21,29%. Calculating IRR: NPV=(10 500/(1+r)^5)-4 000=0. 1+r=((10 500/4 000)^(1/5))-1≈ 21,29% (b) Suppose another investment opportunity also requires $4,000 upfront, but pays an From the table it can be seen that Sailboat's working capital needs are highest in Month equal amount at the end of each year for the next five years. If this investment has the 2(3,06) same IRR as the first one, what is the amount you will receive each year? because its investments in accounts receivable, inventory and accounts payable increased The periodic payment that gives the same IRR is 1375,68. (Round to the nearest the cent.) Using Excel: =PMT(rate 21,29%;nper 5;PV 4000)≈ 1375,68. most in that month. (Fill in the number of the month.) Calculating: 4 000/((1/0,2129)*(1-(1/1,2129)^5))≈ 1375,68 (the actual rounding is (b) (P. 244) To determine when Sailboats does have surplus cash, calculate the changes in 1375,67. Andreas did a mistake.) cash: (Round two decimal places.) Suppose you purchase a 30-year, $100 par value, zero-coupon bond with a yield to Changes In Cash = Net Income-Capital exp. - ∆ NWC + Depreciation. maturity of 4%. CiC1= 10,70. CiC2= 11,59. CiC3= 16,02. CiC4= 25,44. CiC5= 33,28 CiC6= 27,80. When does Sailboat have surplus cash? It has a cash surplus in periods all. (Fill in the You hold the bond for five years before selling it. (a) If the bond's yield to maturity is 4% when you sell it, what is the internal rate of return period numbers, separated by commas, or fill in "all".) of your investment? Suppose Acap Corporation will pay a dividend of $2.85 per share at the end of this year, The IRR is 4,00. (100/(1+4%^30))= 30,8318… (100/(1+4%^25))= 37,5116… and $2.96 per share next year. You expect Acap's stock price to be $51.79 in two years. If (37,5116…/30,8318…)^(1/5)-1=0,04. 0,04*100=4.00. Acap's equity cost of capital is 11.9%. (b) If the bond's yield to maturity is 5% when you sell it, what is the internal rate of return (a) What price would you be willing to pay for a share of Acap stock today, if you planned of your investment? to hold the stock f...