Q1. Chapter 12 Q7 (P.

432)
0.08 + 0.21 + 0.17 − 0.16 + 0.09
𝑥̅ = = 7.8%
5
0.16 + 0.38 + 0.14 − 0.21 + 0.26
𝑦1 = = 14.6%
5

#
𝜎! " = $%# {(8% − 7.8%)" + (21% − 7.8%)" + (17% − 7.8%)" + (−16% − 7.8%)" +
(9% − 7.8%)" } = 0.020670
#
𝜎& " = $%# {(16% − 14.6%)" + (38% − 14.6%)" + (14% − 14.6%)" + (−21% − 14.6%)" +

(26% − 14.6%)" } = 0.048680

𝜎! = (.020670)1/2 = 14.38%
𝜎& = (.048680)1/2 = 22.06%

Q2. Chapter 13 Q10 (P.469)

a)
Boom = 36.90%
Good = 12.10%
Poor = –7.20%
Bust = –16.50%

E(Rp) = 7.64%

b)
σp2 = 0.02436
σp = (0.02436)1/2 = 15.61%
Q3. Chapter 9 Question 1 (p.325)
After three years, the project has created:

$1,600 + 1,900 + 2,300 = $5,800

Therefore, the payback period is:

Payback = 3 + ($600 / $1,400) = 3.43 years

Q4. Chapter 9 Question 7 (p.326)

The equation that defines the IRR for this project is:

0 = – $34,000 + $16,000/(1+IRR) + $18,000/(1+IRR)2 + $15,000/(1+IRR)3

IRR = 20.97%

Since the IRR is greater than the required return we would accept the project.

Q5. Chapter 9 Question 8 (p.326)

NPV = – $34,000 + $16,000/1.11 + $18,000/1.112 + $15,000/1.113 = $5,991.49

At an 11 percent required return, the NPV is positive, so we would accept the project.

NPV = – $34,000 + $16,000/1.30 + $18,000/1.302 + $15,000/1.303 = –$4,213.93

At a 30 percent required return, the NPV is negative, so we would reject the project
Q6.
(a)

D/V = $111,600,000/$459,100,000 = 0.2431

P/V = $41,500,000/$459,100,000 = 0.0904

E/V = $306,000,000/$459,100,000 = 0.6665

(b)

RE = 0.05 + 1.20(0.1) = 17%

RD = (1 – 0.35)(0.0938) = 6.10%

RP = $7/$83 = 8.43%

WACC = 0.061(0.2431) + 0.17(0.6665) + 0.0843(0.0904) = 13.58%

Q7.
The accounting breakeven for the project is: Q = [$9,000 + ($18,000/4)]/($57 – 32)

Q = 540

And the cash breakeven is:

Q = $9,000/($57 – 32)

Q = 360

At the financial breakeven, the project will have a zero NPV. Since this is true, the initial cost of the
project must be equal to the PV of the cash flows of the project. Using this relationship, we can find
the OCF of the project must be:

NPV = 0 implies $18,000 = OCF(PVIFA12%,4)

OCF = $5,926.22

Using this OCF, we can find the financial breakeven is:

Q = ($9,000 + $5,926.22)/($57 – 32) = 597

Q8.
(a)
WACC = RU = RE = 11%

(b)
RE = RU + (RU – RD)(D/E)(1 – tC)

RE = 11.61%

(c)
RE = 12.82%

(d)
The WACC with 25 percent debt = 10.04%

And the WACC with 50 percent debt is = 9.08%