Professional Documents
Culture Documents
Suggested Answers To Even-Numbered Problems: Analysis For Financial Management, 10e
Suggested Answers To Even-Numbered Problems: Analysis For Financial Management, 10e
Suggested Answers To Even-Numbered Problems: Analysis For Financial Management, 10e
2. The numerator of Stock A’s beta = 22.9% (0.62 x 37%). The same quantity for Stock
B = 32.0% (0.94 x 34%).Because all betas share the same denominator, the stock with
the lower numerator has the lower beta. Thus, Stock B is the riskier asset. Stock A
has higher total risk but because its returns are relatively independent of those of a
diversified portfolio, it has lower systematic risk.
4. If the investment is above the company's average risk, its cost of capital is not an
appropriate benchmark. Equivalently, the high risk of the investment places it below
the market line. Such investments destroy value because they promise returns below
those available on available similar-risk investments. Other more prosaic arguments
include: the investment is not consistent with the strategic plan, the cash flow
estimates are too optimistic, and there are other mutually exclusive projects with
higher NPVs.
c. IRR exceeds the WACC and the investment is average risk for the company, so it
should create value for owners.
8. Divide the cash flows into two periods: A 15-year annuity of $1,000, and a growing
perpetuity beginning in the 15th year. The value of the 15-year annuity is $6,462.38.
Input: 15 13 ? 1,000 --
n i PV PMT FV
Output: -6,462.38
10. A standard way to estimate an asset’s beta is to regress its returns against those of a
well-diversified portfolio. The slope of this regression line is the beta estimate. An
estimate of Berkshire Hathaway’s beta is thus 0.72.
© 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
14. a. Following the approach described in Table 8A.1, an average asset beta, weighted
by relative market values of equity, appears below. Other weighting schemes, or a
simple unweighted average, are also defensible.
b. The asset betas of the companies above vary within a reasonably narrow range,
providing some comfort that our calculated asset beta reflects the business risk of
the home appliance industry. However, we should also evaluate the extent to
which these comparable companies are engaged in other, different-risk industries.
To the extent they are active in other businesses unrelated to home appliances,
they are less comparable to Dome Appliance.
b. KA = 3% + 0.48 x 5% = 5.4%.
Year 1 2 3 4 5
Principal $320 $240 $160 $80 $0
Interest at 8% beginning balance 32 26 19 13 6
Tax shields (Tax rate x interest 13 10 8 5 3
expense)
f. The answer in “e” above ignores expected financial distress costs and is thus
surely an over-estimate of the top price the investors can justify paying.
© 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.