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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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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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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Value of Equity in Infinitelife asset = E(FCFE_{t}^{)}/ (k_{e}g_{n}) 
Value of Equity in Infinitelife asset = E(FCFE_{1}^{)}/ (k_{e}g_{n}) 
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Value of high growth business = Terminal value = …… = $43,058 
Denominator should be k_{c} Terminal value = …… = $43,049_{} 
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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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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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only 9.54% (1.2^{0.5}1=1.0954) 
only 9.54% (1.2^{0.5}1=.0954) 
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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 + (1t) (D/E) 
bL = bu (1 + (1t) (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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Last line.. Geometric Average…. = 26.40% 
Last line.. Geometric Average…. = 25.30% 
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Aftertax Return on capital = $ 270 $1000 
Aftertax Return on capital = $ 270/$1000 
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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 Rate_{d/f} = 
D Exchange Rate_{d/f} = 1 
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) ^{a}Future 
Table 11.10 Year 10 – Change in working capital +1955.02 ^{a}Free 
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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 5year project yields $37.98 more per year 
…the 5year 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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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

Table 12.7: Lost Sales are in units 
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In Practice 12.12 Table 12.8 summarizes aftertax operating income 
In Practice 12.12 Table 9.6 summarizes beforetax 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= $171,618 
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… at the project’s cost of capital of 9.38% 
… at the project’s cost of capital of 9.32% 
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… since the working capital investment would be only 7%… 
… since the working capital investment would be only 7.2%… 
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… with 99% probability 
….. with 95% probability 
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In Practice 13.10 …offers 30day credit 
In Practice 13.10 …offers 1year credit 
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Figure 14.5 Y Axis: Cash Balance ($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. …10year semi annual convertible boinds 9b. …. has 10,000 convertible bonds outstanding,
trading at par.. 
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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*.(09171,176)/(40,789+1,176) = .0611 or 6.11% 
Growth rate = (Firm Value * Cost of Capital FCFF)/(Firm Value + FCFF) = (40,789*.09171,176)/(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 Income_{t}1 
Table 20.3 Footnote: Net Income_{t1} 
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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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Problem 12 
Problem 12 Add: Growth rate is 12% next year. 
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Cost of Capital = k_{equity }(Equity/(Debt + Equity) + 
Cost of Capital = k_{equity }(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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Predicted PBV_{Boeing} = …….. = 2.27 … is overvalued by roughly 35%. 
Predicted PBV_{Boeing} = …….. = 2.30 … is overvalued by roughly 54%. 
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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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Gary Condit 
Philip Condit 
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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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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Figure 25.9 Terminal Value = 6666 (.0792.05) 
Figure 25.9 Terminal Value = 6666 / (.0792.05) 
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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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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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Table 26.5 Year EBIT 1983 113.15 
Table 26.5 Year EBIT 1983 133.15 
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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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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 
921 
Problem 1 … growing at 5% a year until the patent expires 
Problem 1 … growing at 5% a year forever 

Solutions to problems 
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