Answers to Selected End-of-Chapter Problems

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1 Appendix C Answers to Selected End-of-Chapter Problems The following list of answers to selected problems and portions of problems is included to provide check figures for use in preparing detailed solutions to end-of-chapter problems requiring calculations. For problems that are relatively straightforward, the key answer is given; for more complex problems, answers to a number of parts of the problem are included. Detailed calculations are not shown only the final and, in some cases, intermediate answers, which should help to confirm whether the correct solution is being developed. Answers to problems involving present and future value were solved by using a financial calculator. For problems containing a variety of cases for which similar calculations are required, the answers for only one or two cases have been included. The only verbal answers included are simple yes-or-no or choice of best alternative responses; answers to problems requiring detailed explanations or discussions are not given. The problems and portions of problems for which answers have been included were selected randomly; therefore, there is no discernible pattern to the choice of problem answers given. The answers given are based on what are believed to be the most obvious and reasonable assumptions related to the given problem; as based on the coverage of the material in the chapter.

2 862 APPENDIX C CHAPTER a. Ms. Harper has unlimited liability: $60,000 c. Ms. Harper has limited liability 1-2 b. $150,000 f. No (EVA = 1,045) 1-3 a. $460,000 CHAPTER EAC = $29, b. $27, a. $ Preferred: $20/share Common: $9.50/share 2-9 a. EPS = $ b. Total Assets: $926, c. $1,150, a. $19,700 b. $75, a. X: $250; Y: $5, b. NIAT = $198, a. Taxes payable = $397, $80, b. $2,256, a. $81,063 CHAPTER a. Average Age of Inventory: days 3-7 a. (2) Times Interest Earned (Pelican) = 62.5 b. (2) Profit Margin (Timberland) =13.8% 3-12 a. Current Ratio: 1.04 Average Collection Period: 56 days Profit Margin: 4.1% ROE: 11.3% 3-14 a. Net Working Capital = +5.45% Average Collection Period = 26.19% ROA = % CHAPTER August: $92, Accounts Payable, 1-month lag, April = $168,000 Wages and salaries, May = $48,700 Accounts Payable, 2-month lag, June = $146, a. Ending Cash March: $67,000 b. Required total financing April: $37,000 c. Line of credit should be at least $37,000 to cover borrowing needs for the month of April. 4-8 a. NIAT: $216,600 b. NIAT: $227, a. Accounts receivable: $1,440,000 Net fixed assets: $4,820,000 Total current liabilities: $2,260,000 External Funds Required (EFR): $775,000 Total assets: $9,100, a. NIAT: $67,500 c. EFR: $11,250 CHAPTER 5 Solved Using Financial Calculator 5-3 C: 3 years < n< 4 years 5-4 A: $ a. (1) $15, a. (1) Annual: $8, Semi-annual: $8, Quarterly: $9, b. B: 12.6% D: 16.99% 5-12 A: $1, a. B: (1) $4, (2) $4, A: $3, B: $138, C: $6, A: $4, D: $80, $ a. A: $20, c. B 5-32 C: $52, A: $109, E: $85, A: $43, A: $1, C: $2, Future value of retirement home in 20 years = $272, b. $3, CHAPTER P = $ a. P = $1,289,220, d. $36,446, g. After-tax interest rate = 4.9% 6-12 c. iii) 3.81% or 63.5% CHAPTER A: 25% 7-4 a. A: 8% B: 20% 7-5 a. R: 10% S: 20% b. R: 25% S: 25.5% 7-9 a. (4) Project 257 CV:.368 Project 432 CV: a. F: 4% b. F:13.38% c. F: b. Portfolio return: 15.5% c. Standard deviation: 1.638%

3 Answers to Selected End-of-Chapter Problems b. Purchase price = $2, a. 18% increase b. 9.6% increase c. No change 7-22 A: 8.9% D: 15% 7-23 c. b = b. 10% CHAPTER Real rate of return = 3.5% 8-3 c. $ a. 20 years: 11.5% 8-8 B: R f = 12% D: R f = 8% 8-11 C: $16,663,96 E: $14, a. $1, b. (1) $1, (3) $ a. k s = 9.5% 8-32 a. P 0 = $34.12 c. P 0 = $ a. k s = 14.8% CHAPTER b. 12% 9-3 a. Net proceeds = $980 d. k d = 12.26% 9-8 b. 6% d. 12% 9-13 a % 9-20 a. 0 $600,000: 10.52% c. $1,000,000 and above: 11.71% CHAPTER a. 21,000 CDs d. $10, b. 8,000: $12,000 12,000: $28, a. $0.375 c. $ a. DOL: 1.25 DFL: 1.71 DTL: b. Expected EPS = $ b. Debt: 60% = P 0 = $ a. 600,000: $60, ,000: $240,000 1,200,000: $420,000 CHAPTER a. $ a. Retained earnings: $85, a. EPS = $2 d. $20 per share b. $2.10 c. $21 per share CHAPTER a. $3,246 $5,131 $3, a. Project A: NPV = $4,336 Project B: NPV = $1,118 Project C: NPV = $7,008 Project D: NPV = $5,899 c. Project A: 9.70% Project B: 15.63% Project C: 19.44% Project D: 17.51% 12-5 a. $9,544 i years ii $82,456 iii $17,636 iv $22,047 v $42,398 vi 11.28% 12-6 b. $385, a. Initial Investment: $28,000 Year 1: $4,000 Year 2: $6,000 Year 3: $8,000 Year 4: $10,000 Year 5: $4, a. NWC = $25, a. Project A: 3.08 years Project B: 3.63 years Project C: 2.38 years b. Project A: $2,562 Project B: $327 Project C: $5, a. Project A: 3.0 years Project B: 3.2 years Project C: 3.4 years b. Project A: $10,340 Project B: $10, Project C: $4, c. Project A: 20% Project B: 17% Project C: 15% Project A: $48,750 Project B: $75, a. Year 1: $7,000 Year 2: $13,440 Year 3: $12,365 Year 4: $11,376 b. Year 1: $1,820 Year 2: $3,494 Year 3: $3,215 Year 4: $2, a. $153,000 b. $135,500 c. Year 1: $5,420; $1,409 Year 2: $10,406; $2,706

4 864 APPENDIX C Year 3: $9,574; $2,489 Year 4: $8,808; $2, Incremental after-tax cash flow = $287, a. NPV = $52, NPV = $8, a. NPV of Machine X = $111,073 NPV of Machine Y = $162,544 b. Adjusted NPV of Machine X = $78,256 Adjusted NPV of Machine Y = $106, NPV = $63, IRR = 15.6% a. Machine 1: 4 years, 8 months Machine 2: 5 years, 3 months a. 10% years $12,244 CHAPTER a. $6, b. Project X: $8, Project Y: $11, a. Project A: $1,600 Project A: Pessimistic $6, Most likely $ Optimistic $7, Range $13, b. $5, a. Project C: $9, Project D: $7, a. Project E: $2, Project G: $1, b. Project F: 0.15 c. Project E: $ a. Project A: $5, b. Project A: $7, a. Project Z: $8, b. Project A: Optimistic $500 Most likely $1,000 Pessimistic $1,500 c. Project A: 13% d. Project A: NPV = $1, a. New Brunswick Project:NPV = $110, a. Machine A: $42, Machine B: $6, Machine C: $7, a. Project X: $2, a. Sell: $177, b. Sell: $105, b. Project C: NPV = $300,000 Project F: NPV = $500, a. Project B: $210,000 Project G: $960,000 b. New OC = 115 days c. New CCC = 69 days $240, a. $908,333 b. Aggressive: $1,083,583 Conservative: $1,260, a. Aggressive: $646,500 Conservative: $780,000 b. Aggressive: $571,667 Conservative: $676,000 Aggressive: $496,833 Conservative: $572, a units: $2,000.00; $125.00; $2, units: $1,000.00; $250.00; $1, units: $667.67; $375.00; $1, units: $500.00; $500.00; $ units: $400.00; $625.00; $1, units: $333.33; $750.00; $1, units: $285.71; $875.00; $1, EOQ = 4000 units a. A: 66.0 B: 81.5 C: a. $123,288 b. $73,973 c. $8, a. $490,000 b. Annual savings = $98,000 c. Net savings = $52,000 CHAPTER b. December 30 c. January a % c % 15-3 a. i) 1/15 net 45 day of invoice ii) 2/10 net 30 EOM b. iii) 28 days iv) 80 days c. i) 12.29% iii) 35.47% 15-4 Cost of giving up cash discount = 32.25% 15-5 a. Supplier K: 12.41% Supplier M: 25.09% 15-8 b. 3.70% c % a % a. The Eastern Bank: 10.0% a. 9.12% a. Total collateral = $200, b. 12 months: 13.5% a. The Bank of P.E.I.: $1,083 CHAPTER a days b days c. $97, a. Current OC = 97 days Current CCC = 51 days CHAPTER Annual loan payment = $30, a. NPV L = $3, NPV L = $47, Lease A: $272, Lease D: $40,500.72

5 Answers to Selected End-of-Chapter Problems b. 40 shares Bond B: $ Bond C: $ a. $ At $12.00: $960 At $20.00: $1, c. $ a. 160 shares, 400 warrants a. $420 or 6.67% $900 or 14.29% Option B: -$50 Option D: $300 Option E: $ b. At $46: $380 At $35: $620

Tutorial Letter: May 2014 examination session. Financial Management 3 (FM303) Semester One 2014

Tutorial Letter: May 2014 examination session Financial Management 3 () Semester One 2014 Dear Student Please make note of the following key areas and notes pertaining to the Financial Management 3 Examination