CHAPTER 6 - RISK AND RETURN

SELF TEST

ST 1
Standard Deviation
Year rA Rb rAB A B AB
2015 -18% -24% -21% 9% 13% 11%
2016 44% 24% 34% 10% 1% 5%
2017 -22% -4% -13% 12% 3% 6%
2018 22% 8% 15% 1% 0% 0%
2019 34% 56% 45% 5% 19% 11%
30.27% 30.20% 28.71%
a)
Average rate of return
rA 12.0%
Rb 12.0%

Realized rate of return 5 years

rAB 12%

b)
Standard Deviation
A 30.27%
B 30.20%
AB 28.71%

ST 2

Subsidiary % Beta
Electric Utility 60% 0.7 0.42
Cable Company 25% 0.9 0.225
Real Estate 10% 1.3 0.13
Special Projecs 5% 1.5 0.075

a)
Beta Company 0.85

b)
RP = (rm-rf)b
6% = rmb - 0,85*5%
10.25%

c)
Subsidiary % Beta
Electric Utility 50% 0.7 0.35
Cable Company 25% 0.9 0.225
Real Estate 10% 1.3 0.13
Special Projecs 15% 1.5 0.225
0.93

RP = (rm-rf)b
6% = rmb - 0,93*5%
10.65%

PROBLEMS

6-1

36% 0.7 0.25

64% 1.3 0.83
1.08

6-2

ri = rrf + (rm - rrf)bi.

10.4%

6-3

rf = 5%
RP =7%

1)
rm = 12%

2)
12.00%

3)
16.90%

6-4

16.96%

6-5

Probability Return std

Weak 0.1 -50% -0.05 0.038
Below Average 0.2 -5% -0.01 0.005
Average 0.4 16% 0.064 0.001
Above Average 0.2 25% 0.05 0.004
Strong 0.1 60% 0.06 0.024
 11.40% 26.7%

6-6
Probability Rm Rj
0.3 15% 5% 6.75E-05 20% 6%
0.4 9% 4% 0.00081 5% 2%
0.3 18% 5% 0.000608 12% 4%
13.5% 3.85% 11.6%
a)
Rm 14%
Rj 12%

b)
Rm 3.85%
Rj

6-7

ri = rrf + (rm - rrf)bi.

a)
12%=5%+(10%-5%)*b
12%=5%+10%b-5%b
7%=5%b
b= 1.4

b)
i=5%+(10%-5%)*2
15.00%

6-8

ri = rrf + (rm - rrf)bi.

a)
14.8%

b)
RP = 7%
RM = 13%
15.8%

RM = 11%
13.8%

c)
17.6%
13.4%
6-9

0.9 1.2 1.146667

0.1 0.8 0.053333
1.20

0.9 1.2 1.146667

0.1 1.6 0.106667
1.253333

6-10

A 400,000 1.5 0.1 0.15

B 600,000 -0.5 0.15 -0.075
C 1,000,000 1.25 0.25 0.3125
D 2,000,000 0.75 0.5 0.375
4,000,000 0.76

ri = rrf + (rm - rrf)bi.

12.1%

6-11

0.95 1.1 1.055

0.05 0.9 0.045
1.1

0.95 1.110526316 1.055

0.05 1.4 0.07
1.125

6-12

ri = rrf + (rm - rrf)bi.

16.0%
4.5%
11.5%

6-13
Ra Rb std Ra std Rb
2014 -20% -5% 0.10 0.03 -0.125 5.9%
2016 42% 15% 0.09 0.00 0.285 2.8%
2017 20% -13% 0.01 0.06 0.035 0.7%
2018 -8% 50% 0.04 0.15 0.21 0.8%
2019 25% 12% 0.02 0.00 0.185 0.4%
11.8% 11.8% 0.26 0.24 11.8% 10.7%
 6% 6% 3%
25.3% 24.3% 16.3%
a)
Ra 11.8%
Rb 11.8%

b)
rab (5 years) 11.8%
rab 2014 -12.5%

c)
Ra 25.3%
Rb 24.3%

d)
portfolio, lower deviation

6-14

X Y Market
2015 14% 13% 12%
2016 19% 7% 10%
2017 -16% -5% -12%
2018 3% 1% 1%
2019 20% 11% 15%
8.0% 5.4% 5.2%
15.0% 7.4% 10.9%
a)
Correlation X 0.981475301
Correlation Y 0.961833952

BX 1.35
BY 0.65

b)
ri = rrf + (rm - rrf)bi.
12.7%
9.3%

c)
12.0%

0.0846
0.006875
9%
0.21%
0.17%
0.00%
6.22%
CHAPTER 2 - Financial Statements, Cash
Flow, and Taxes

SELF TEST

ST 1

EBIT 5
Depreciation 1
Interest 1
Tax 40%
Current Assets 14
Current Liabilities 4
net plant and equipment 15
WACC 10%

a)
EBIT 5
Interest 1
EBT 4
Tax 1.6
Net Income 2.4

b)
Net cash flow = Net income + Depreciation and amortization
3.4

c)
NOPAT = EBIT (1 - Tax rate)
3

d)
Operating current
liabilities
10

Total net operating capital = NOWC + Operating long-term assets

25

e)
Investment
in NOWC
2

f)
ROIC = NOPAT/Operating capital
12%

g) = NOPAT -
EVA
(Operating capital *WACC)
0.5
PROBLEMS

2-1

bond’s after-tax yield 5.8%

2-2

8% = 6%/X
0.75
0.25

2-3

net income 6
EBIT 13
Tax 40%

EBIT 13
Interest 3
EBT 10
Tax 4
Net Income 6 10

2-4

EBITDA 8
net income 2.4
interest expense 2
Tax 40%

EBITDA 8
Depreciation 2
EBIT 6
Interest 2
EBIT 4
Tax 1.6
Net Income 2.4

2-5

net income 3.1

Depreciation 0.5

Net cash flow = Net income + Depreciation and amortization

3.6
2-6

net income 70
R/E ENDING 900
R/E Beginning 855

925 25

2-7

Income 365,000 Income 365,000

Interest 50,000 Interest 50,000
Dividends received 15,000 Dividends received 15,000
Dividends paid 25,000 Dividends paid 25,000

Taxable Income Taxable Income

EBIT 365,000 EBIT 365,000
Interest 50,000 Interest 50,000
EBT 315,000 EBT 315,000
Dividends received 7,500 Dividends received 4,500
Taxable Income 322,500 50% dividend is taxable Taxable Income 319,500

Net Income Net Income

EBT 322,500 EBT 319,500
Tax 67,725 Tax 107,855
Dividends received 7,500 Dividends received 10,500
Net Income 262,275 Net Income 222,145

Average Tax rate 33.8%

2-8

Taxable Income 10.5

2-9

Investment 10,000 Investment 10,000

Bonds 1 6.60% Bonds 1 7.50%
Bonds 2 5% Bonds 2 5%
Stock 6% Stock 6%
Tax 21% Tax 35%

Bonds 1 5.214% Bonds 1 5.925%

Bonds 2 5.000% Bonds 2 5.000%
Stock 5.370% Stock 5.370%

2-10
EBIT 750,000
Depreciation 200,000
Tax 40%

Net Income
EBIT 750,000
Tax 300,000
Net Income 450,000

Net Cashflow 650,000

2-11

Sales 12
Cost 75%
Depreciation 1.5
Tax 40%

a)
Sales 12
Cost 9
Depreciation 1.5
EBT 1.5
Tax 0.6
Net Income 0.9

Net Cash Flow 2.4

b)
Sales 12
Cost 9
Depreciation 3
EBT 0
Tax 0
Net Income 0

Net Cash Flow 3

c)
Sales 12
Cost 9
Depreciation 0.75
EBT 2.25
Tax 0.9
Net Income 1.35

Net Cash Flow 2.1

d) doubled don’t pay tax
30% dividend is taxable

Tiering tax
CHAPTER 3 - Analysis of Financial
Statements

SELF TEST

ST 1

current liabilities 60
total liabilities 150
total common equity 210
debt 120

debt-to-assets ratio 33%

debt-to-equity ratio 57%

ST 2

Cash 400
Fixed assets 4,300
Sales 14,600
Net income 730
Quick ratio 2
Current ratio 3
DSO 40 days
ROE 12.50%

accounts receivable 1,600

current liabilities 1,567
current assets 4,700
Inventory 1,567 2 3,133
total assets 6,267
ROA 11.6%
common equity
long-term debt
equity multiplier
profit margin

PROBLEMS

3-1

DSO 20
Daily Sales 20,000
 20 = x
20,000
x = 40,000

3-2

Assets 200
N/P 5
Debt 25

Debt to assets ratio = 30

200
15%

3-3

Stock Price 75
Total Assets 10 bio
Current Liabilities 1
Debt 3
Common equity 6000000000
#stock 800000000 mio

Book value per share 7.5

M/B 10

3-4

EPS 1.5
Cashflow per share 3
Price/cash flow 8
 8 = Price/share
3
24= Price/share

P/E = 16

3-5

Profit Margin 3%
Equity Multiplier 2
Sales 100
Total Assets 50

ROE?

12%

3-6

ROA 12%
Profit Margin 5%
ROE 20%

12%5%
= x Assets Turnover
2.4Assets Turnover

20%
12%*
= equity multiplier
1.7equity multiplier

3-7

Current Assetts 3
Current Ratio 1.5
Quick Rtaio 1

1,5= 3
 CL
1,5CL = 3
Current Liabilities = 2

1= 3-I
2
2= 3-I
1= Inventory

3-8

Sales/Total Assets 1.2

ROA 4%
ROE 7%

4%
1,2*Profit margin
3.33% Profit Margin

7%4%*equity
= multiplier
1.75equity multiplier

ROA/ROE -> Equity Multiplier 57%

Debt 43%
Debt (50%) 21.4%

3-9

Current Assets 1,312,500

Curent Liabilities 525,000
Inventory 375,000
CA + Inventory 1,687,500
Current ratio above 2
Current ratio 2.5

Quick Ratio 1.19

3-10

Debt 600,000
Interest 8%
Sales 3,000,000
Tax 40%
Net profit Margin 3%

Sales 3,000,000
Interest 48,000
EBT 2,952,000
Tax 1,180,800
Net Income 1,771,200
Dividend 53,136
Net Income 1,718,064 35.793

150,000