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Exam 22sept Solutions
Exam 22sept Solutions
Exam 22sept Solutions
1 (15 points)
At the end of year 2008 the balance sheet of Cadyllop Inc. is the following:
ASSETS
Cash
Accounts Receivable
Short-term investments
Pre-paid expenses
Other current assets
Total current assets
Equipment
Notes receivable
Intangible assets
Total long-term assets
Total assets
LIABILITIES
Accounts Payable
Accrued Expenses Payable
Other current liabilities
Total current liabilities
850,000
150,000
120,000
30,400
10,200
1,160,600 Long term note payable
Other long-term liability
75,000
Total long-term liabilities
8,000
11,000
Total liabilities
94,000
STOCKHOLDERS EQUITY
Contributed capital
1,254,600 Retained earnings
Total stockholders equity
Total liabilities +stockholders
equity
60,000
120,000
70,000
250,000
220,000
143,500
363,500
613,500
300,000
341,100
641,100
1,254,600
SOLUTION
T-accounts: balance sheet
Cash
Beg. 850,000
3,600 (1a)
90,000 (3a)
(3b)
3,060
50,000 (4c)
(5)
1,000
50,300 (6a)
100,000 (6b)***
(7)
900,000
1,460,160
Pre-paid expense
Beg. 30,400
(1a) 3,600
1,200 (1b)*
Investment in SAS
(3a) 90,000**
32,800
90,000
Retained earnings
341,100 Beg
490,907 (4a)
(4c) 10,728
480,179
Equipment
Beg. 75,000
6,500 (2)
(4a) 490,907
559,407
Net unrealized loss
(3c) 10,800
10,800
(6a) 50,300
(6b) 100,000
190,800
Intangible assets
Beg. 11,000
1,500 (2)
2,000 (5)
7,500
Accumulated depreciation
22,313 (4b)
22,313
Allowance to value at
market
10,800
(3c)
10,800
Sales Revenues
900,000 (7)
1,200
900,000
Investment Income
3,060 (3b)
3,060
Interest Expense
(4c) 39,272
39,272
Unexpected losses
(5) 1,000
1,000
Lease calculation
Debit
Fixture (+A)
Credit
490,907
490,907
22,313
22,313
39,272
10,728
50,000
Cash (-A)
PV of the fixture:
1
1
20
0.08 0.08(1 0.08)
PV 50,000
=490,907$
The adjustments at year end (t1):
Depreciation expense=cost-residual value*1/useful life
Depreciation expense=490,907/22=22,313$
Interest expense=490,907*0.08=39,272$
Lease liability=50,000-39,272=10,728$ (the portion of the equipment that is now owned)
Income statement
Revenues:
Total revenues
900,000
(1,200)
(30,313)
Operating income
868,487
(39,272)
(1,000)
3,060
Net Income
831,275
Balance sheet
ASSETS
Cash
Accounts Receivable
Short-term investments
Pre-paid expenses
Other current assets
Total current assets
Equipment (net of
Accumulated Depreciation)
Notes receivable
Intangible assets
Investment in SAS (net of
Allowance to value at
market)
Total long-term assets
Total assets
LIABILITIES
Accounts Payable
Accrued Expenses Payable
Other current liabilities
Total current liabilities
60,000
120,000
70,000
250,000
537,094
Lease liability
Long term note payable
Other long-term liability
480,179
220,000
143,500
8,000
7,500
79,200
843,679
1,093,679
631,794
Contributed capital
2,404,954 Retained earnings
Net unrealized loss
Total stockholders equity
Total liabilities +stockholders
equity
300,000
1,022,075
(10,800)
1,311,275
2,404,954
1,460,160
150,000
120,000
32,800
10,200
1,773,160
190,800+831,275= 1,022,075$
LIABILITIES
Accounts Payable
Income taxes payable
Note Payable, long-term
Total liabilities
48,000
15,000
30,000
93,000
STOCKHOLDERS EQUITY
Contributed capital
Retained earnings
Total stockholders equity
84,000
22,500
106,500
199,500
115,000
35,000
80,000
40,000
40,000
12,000
28,000
1,500
26,500
Beta Corp has financial debts amounting to 30 million Euros that generate annual interest expense
for 2.4 million Euros. Beta Corp is not quoted on the stock market but the returns of a benchmark
company that is quoted on the stock market have demonstrated a covariance with the returns of the
market portfolio equal to 0.0111. This benchmark company has a financial leverage equal to 2 and a
cost of debt equal to 7%. The market portfolio has a return of 13% with a standard deviation equal
to 0.094. The market risk premium is 9%.
From the analysis of the last financial statement of Beta Corp the director of the investment fund
has calculated the presence of Levered Cash Flows (LCF) equal to 18 million Euros. The corporate
tax rate for all firms is 30%.
Assume an infinite temporal horizon and the absence of variations in cash flows during the period.
The director of the fund, on the basis of the assumption of the CAPM, should accept the offer?
SOLUTION
D=30 million Euros
Interest expenses=2.4 million Euros
LCF=18 million Euros
D/E=2 tax rate=30%
rd=7% rm=13%
rm r f 9%
i M 0.0111
M 0.094
2. Calculate Beta
iM
0.011
1.256
2
M (0.094) 2
4. Calculate ru
D
re ru (1 Tc )(ru rd )( )
E
15.3% ru (1 30%)(ru 7%)(2)
ru 10.45%