Corporate Finance 2.01: Update to the first printing
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53 |
Cumulated Future Value = $5,000(1.06)9+……. + $5,000(1.06) = |
Cumulated Future Value = $5,000(1.06)9+……. + $5,000(1.06) + $5,000 = |
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As long as g is less than n… |
As long as g is less than r…. |
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120 |
Duration of a bond = |
No t in denominator |
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Price of Boeing bond = = $1400.45 |
Price of Boeing bond = = $1404.25 |
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125 |
For instance, assume that Boeing has a cost of equity of 10.54% Thus, for Boeing, the cost of equity is 10.54% |
For instance, assume that Boeing has a cost of equity of 10.58% Thus, for Boeing, the cost of equity is 10.58% |
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131 |
Value of Equity in Infinite-life asset = E(FCFEt)/ (ke-gn) |
Value of Equity in Infinite-life asset = E(FCFE1)/ (ke-gn) |
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134 |
Value of high growth business = Terminal value = …… = $43,058 |
Denominator should be kc Terminal value = …… = $43,049 |
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135 |
When you buy the right to sell an asset…. With a put option…., you buy the right to buy the asset at the current price and sell it back at the exercise price, |
When you buy the right to buy an asset… With a put option…., you buy the right to buy the asset at the exercise price and sell it back at the current price, |
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162 |
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169 |
E(R) = Rf + bj [E(Rj)-Rf] + b2 [E(R2)-Rf] ...+ bn [E(Rn)-Rf] |
E(R) = Rf + b1 [E(R1)-Rf] + b2 [E(R2)-Rf] ...+ bn [E(Rn)-Rf] |
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191 |
only 9.54% (1.20.5-1=1.0954) |
only 9.54% (1.20.5-1=.0954) |
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199 |
Figure 7.3 RAW BETA = 0.98 |
Figure 7.3 RAW BETA = 0.96 |
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Jensen’s alpha=1.11%-0.4%(1-.62)= 1.01% Annualized Jensen’s alpha = (1.01)12-1= 12.68% |
Jensen’s alpha=1.11%-0.4%(1-.62)= .96% Annualized Jensen’s alpha = (1.01)12-1= 12.12% |
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bL = bu (1 + (1-t) (D/E) |
bL = bu (1 + (1-t) (D/E)) |
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Unlevered Beta= 0.96 / ( 1 + (1 - 0.35)) (0.1788) = 0.86 |
Unlevered Beta= 0.96 / [( 1 + (1 - 0.35)) (0.1788)] = 0.86 |
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In Table 8.9 Home Depot Expo Debt ratio = 6.32% |
In Table 8.9 Home Depot Expo Debt ratio = 6.62% |
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· The firm will have to incur an advertising expense…. |
Remove bullet point (there is no advertising expense) |
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· Subtract out the changes in working capital. Since… the initial investment in working capital is $ 2 million …. and 10% of revenues in year 1. The changes…10% |
Subtract out the changes in working capital. Since… the initial investment in working capital is $ 3.2 million …. and 8% of revenues in year 1. The changes…8% |
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287 |
Last line.. Geometric Average…. = 26.40% |
Last line.. Geometric Average…. = 25.30% |
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After-tax Return on capital = $ 270 $1000 |
After-tax Return on capital = $ 270/$1000 |
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298 |
In Practice 10.7 … the cost of capital of 9.38% |
In Practice 10.7 … the cost of capital of 9.32% |
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D Exchange Rated/f
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D Exchange Rated/f
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329, 330 |
In last two paragraphs and table 11.8 $0.6525 |
In last two paragraphs $0.65625 |
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Table 11.10 Year 10 – Change in working capital (1955.02) aFuture |
Table 11.10 Year 10 – Change in working capital +1955.02 aFree |
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= - $3000 - $30,000 [PV(A,10%,5 years)] |
= - $30,000 - $3,000 [PV(A,10%,5 years)] |
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…the 5-year project yields $37.98 more per year |
…the 5-year project yields $38.02 more per year |
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In Practice 12.7 Net Initial Investment in New Machine = …= $135,000 Annual Tax Savings from Additional Depreciation on New Machine = Depreciation on old machine – Depreciation on new machine |
In Practice 12.7 Net Initial Investment in New Machine = …= -
$135,000 Annual Tax Savings from Additional Depreciation on New Machine = Depreciation on new machine – Depreciation on new machine |
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368 |
CC 12.3:… required for project B was $ 40 million. |
CC 12.3:… required for project B was $ 30 million. |
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Table 12.7: Lost Sales are in dollars
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Table 12.7: Lost Sales are in units |
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376 |
In Practice 12.12 Table 12.8 summarizes after-tax operating income |
In Practice 12.12 Table 9.6 summarizes before-tax operating income |
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Footnote 7: ….at 9.38% |
Footnote 7: ….at 9.32% |
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Table 12.11 Year …. PV of Incremental OI 3 38,805 4 37,915 PV of Synergy 349,657 In text NPV of Restauarant = -$300,000 + $128,623 +$349,657 = $178,280 |
Table 12.11 Year …. PV of Incremental OI 3 35,435 4
34,623 PV of Synergy 342,995 In text NPV of Restauarant = -$300,000 + $128,623 + $342,995= $171,618 |
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… at the project’s cost of capital of 9.38% |
… at the project’s cost of capital of 9.32% |
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… since the working capital investment would be only 7%… |
… since the working capital investment would be only 7.2%… |
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… with 99% probability |
….. with 95% probability |
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In Practice 13.10 …offers 30-day credit |
In Practice 13.10 …offers 1-year credit |
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Figure 14.5 Y Axis: Cash Balance ($millions) X Axis: Market Value of Equity (%) |
Figure 14.5 Y Axis: Number of firms X Axis: Cash/Market Value of Equity (%) |
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Footnote 8: … Boeing’s return on capital of 510% to its cost of capital of 9.23% |
Footnote 8: … Boeing’s return on capital of 5.82% to its cost of capital of 9.17% |
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Table 16.2 Year Cashflow from Borrow/Buy 3 3639131 4 3690108 5 3744042 15 (10,510,869) |
Table 16.2 Year Cashflow from Borrow/Buy 3 (3639131) 4 (3690108) 5 (3744042) 15 +10,510,869 |
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5. … convertible bonds 9b. …. has 10,000 convertible bonds outstanding |
5. …10-year semi annual convertible boinds 9b. …. has 10,000 convertible bonds outstanding,
trading at par.. |
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584 |
Effective tax rate = 613/1,751 = 30.05% |
Effective tax rate = 613/2039 = 30.05% |
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Growth rate = (Firm Value * (Cost of Capital- FCFF/Firm Value + FCFF = (40,789*.(0917-1,176)/(40,789+1,176) = .0611 or 6.11% |
Growth rate = (Firm Value * Cost of Capital- FCFF)/(Firm Value + FCFF) = (40,789*.0917-1,176)/(40,789+1,176) = .0611 or 6.11% |
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Value of Boeing as an Unlevered Firm = $40,789 million + $2,868 million - $32 million |
Value of Boeing as an Unlevered Firm = $40,789 million - $2,868 million + $32 million |
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Problem 13 |
Problem 13 Riskfree rate is 7%. |
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Table 20.3 Footnote: Net Incomet-1 |
Table 20.3 Footnote: Net Incomet-1 |
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Time Warner repays $189 million |
Time Warner repays $190 million |
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Footnote 3: This is because 70% of intercorporate dividends are not raked. |
Footnote 3: This is because 70% of intercorporate dividends are not taxed. |
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In Practice 22.8 Boeing = 0.3213 – 0.39023 (1.01) …. = 42.76% The Home Depot = 0.3213 – 0.39023 (0.87) …. = 45.56% |
In Practice 22.8 Boeing = 0.3213 – 0.39023 (0.87) …. = 48.22% The Home Depot = 0.3213 – 0.39023 (1.01) …. = 40.09% |
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Boeing = 0.0190 – 0.01908 (1.01) …. = 1.97% The Home Depot = 0.0190 – 0.01908 (0.87) …. = 2.09% |
Boeing = 0.0190 – 0.01908 (0.87) …. = 2.23% The Home Depot = 0.0190 – 0.01908 (1.01) …. = 1.82% |
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Problem 1 The firm’s current beta is 1.0 and the current T.Bond rate is 5.5%. Problem 3 The firm has a cost of equity of 22% |
Problem 1 The firm’s current beta is 1.0 and the current T.Bond rate is 8.5%. Problem 3 The firm has a cost of equity of 16% |
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714 |
Problem 12 |
Problem 12 Add: Growth rate is 12% next year. |
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Cost of Capital = kequity (Equity/(Debt + Equity) + |
Cost of Capital = kequity (Equity/(Debt + Equity)) + |
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… as a function of its profit margin, payout ratio, profit margin and expected growth |
… as a function of its profit margin, payout ratio |
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Value of Equity = $977,300 million X 1.40 |
Value of Equity = $977.3 million X 1.40 |
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781 |
Predicted PBVBoeing = …….. = 2.27 … is overvalued by roughly 35%. |
Predicted PBVBoeing = …….. = 2.30 … is overvalued by roughly 54%. |
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783 |
We will use the results of the market regression summarized in Table 24.20 |
We will use the results of the market regression summarized in Table 24.22 |
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791 |
Gary Condit |
Philip Condit |
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794 |
Gary Condit |
Mr. Condit |
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Figure 25.3 Y axis: Value (thoustands) |
Figure 25.3 Y axis: Value (millions) |
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809 |
Figure 25.8 Terminal Value = 2298(.0842-.05) Cost of equity = 13.05% |
Figure 25.8 Terminal Value = 2298 / (.0842-.05) Cost of Equity = 10.58% |
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810 |
Figure 25.9 Terminal Value = 6666 (.0792-.05) |
Figure 25.9 Terminal Value = 6666 / (.0792-.05) |
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811 |
Firm’s D/E Ratio = 7.09% |
Firm’s D/E Ratio = 25% |
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826 |
… the relationship between EVA changes |
… the relationship between CFROI changes |
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849 |
In Practice26.4 |
In Practice26.4 Add: Depreciation in the current year is $545 million |
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Figure 26.5: Synergy 2422 million |
Figure 26.5: Synergy 2432 million |
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870 |
Table 26.5 Year EBIT 1983 113.15 |
Table 26.5 Year EBIT 1983 133.15 |
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898 |
In Practice 27.4 … the present value of the expected cashflows from the store is 120 million FF |
In Practice 27.4 … the present value of the expected cashflows from the store is 80 million FF |
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904 |
Value of Put = ……. = $474,831 Value of Abandonment Option = $ 474,831 NPV with abandonment option = - $462,456 |
Value of Put = ……. = $783,464 Value of Abandonment Option = $783,464 NPV with abandonment option = - $153,823 |
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921 |
Problem 1 … growing at 5% a year until the patent expires |
Problem 1 … growing at 5% a year forever |
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Solutions to problems |
Check solutions on web site for any corrections |
