EBITDA Earnings before interest, taxes, depreciation, and amortization

EBITDA = sale - costs

EBIT Earnings before interest and taxes

EBIT = EBITDA - depreciation and amortization

EBT Earnings before taxes

EBT = EBIT - interest

tc Company income tax

Tax=EBT × t c

NI Net income = EBT - taxes

DGM Dividend growth model

SML Security Market Line

CAPM The Capital asset pricing model

g constrant growth rate (tốc độ tăng trưởng đều)

EPS Earning per shares

EPS = net income/ share outstanding

OCF Operating Cash Flow

OCF = EBIT + D - t c
OCF = NI + D (when there is no interest expense)
= Sales - Costs - Taxes
= (1 - t c) x (sales - costs) + D x t c
D: Depreciation

CFFA Cash Flow from Assets

CFFA = OCF - NCS - Changes in NWC
NCS: Net capital spending
NWC: Net working capital

PBP Payback Period

| |
n

∑ NCF t
t=0
PBP=n+
CF n+1
n: number of years when cummulative NCFs ≤ 0

NPV Net Present Value

N
|NCF t| N
NPV =∑ t
−I 0=∑ PV −¿ I 0 ¿
t=1 (1+r ) t =1

IRR Internal Rate of Return

N
NCF t
NPV =∑ t
−I 0=0
t=1 ( 1+ IRR )
IRR là nghiệm của phương trình NPV = 0
Chapter 2: Capital Structure
Chapter 14 – Fundamentals of Corporate Finance
1. [Cost of Equity] The Drogon Co. just issued a dividend of $2.40 per share on its common stock. The
company is expected to maintain a constant 5.5 percent growth rate in its dividends indefinitely. If the stock
sells for $52 a
share, what is the company’s cost of equity?
g=5.5 % D D (1+ g) 2.4 ×(1+5.5 % )
R E= 1 + g= 0 + g= +5.5 %=10.3 %
D0=$ 2.4 P0=$ 52 P0 P0 52

2. [Cost of Equity] The Rhaegel Corporation’s common stock has a beta of 1.05. If the risk-free rate is 5.3
percent and the expected return on the market is 12 percent, what is the company’s cost of equity capital?
β E =1.05 R E=R f + β E ¿
R f =5.3 %
E(R ¿¿ M )=12 % ¿

3. [Cost of Equity] Stock in Daenerys Industries has a beta of 0.85. The market risk premium is 8 percent,
and T-bills (Tín phiếu không rủi ro) are currently yielding 5 percent. The company’s most recent dividend
was $1.60 per share, and dividends are expected to grow at an annual rate of 6 percent indefinitely. If the stock
sells for $37 per share, what is your best estimate of the company’s cost of equity?
β E =0.85 R E=R f + β E ¿
R f =5 % D D ( 1+ g ) 1.6 × ( 1+6 % )
R E= 1 + g= 0 + g= +6 %=10.583 %
E(R ¿¿ M )−R f =8 % ¿ P0 P0 37
P0=$ 37 g=6 % 11.8 % +10.583 %
¿> best estimate of cost of equity= =11.19 %
D =$ 1.6 2
0

5. [Cost of Preferred Stock] Holdup Bank has an issue of preferred stock with a stated dividend of $6 that just
sold for $96 per share. What is the bank’s cost of preferred stock?
D=$ 6 P0=$ 96 D 6
R P= = =6.25 %
P0 96

6. [Cost of Debt] Viserion, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding
with 15 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments
and has an embedded cost of 7 percent annually. What is the company’s pretax cost of debt? If the tax rate is 35
percent, what is the after-tax cost of debt?
FV =m 1−( 1+ y )−n FV
PV = A × + ⟹ semiannual y =3.1 %
PV =107 % ×m=1.07 m y ( 1+ y )
n

7%
c= =3.5 %¿> ( A )=0.035 m ⟹ annual y=3.1 % × 2=6.2 %⟹ P retax cost of debt R D =6.2 %
2
n=15 ×2=30 AftertaxCost of Debt=R D × ( 1−T c ) =6.2 % × ( 1−35 % ) =4.03 %

7. [Cost of Debt] Jiminy’s Cricket Farm issued a 30-year, 8 percent (per year) semiannual bond seven years
ago. The bond currently sells for 95 percent of its face value. The company’s tax rate is 35 percent.
a. What is the pre-tax cost of debt?
b. What is the after-tax cost of debt?
c. Which is more relevant, the pretax or the after-tax cost of debt? Why?
FV =m 1−( 1+ y )−n FV
PV = A × + ⟹ semiannual y =4.25 %
PV =95 % ×m=0.95 m y ( 1+ y )
n

8%
c= =4 % ⟹ annual y=4.25 % ×2=8.5 %⟹ P retax cost of debt R D =8.5 %
2
¿> ( A )=0.04 m AftertaxCost of Debt=R D × ( 1−T c ) =8.5 % × ( 1−35 % )=5.525 %
n=(30−7)× 2=46 → After tax ismore relevant as interest is tax deductable expense.

8. [Cost of Debt] For the firm in Problem 7, suppose the book value of the debt issue is $80 million. In
addition, the company has a second debt issue on the market, a zero coupon bond with seven years left to
maturity; the book value of this issue is $35 million, and the bonds sell for 61 percent of par. What is the
company’s total book value of debt? The total market value? What is your best estimate of the after-tax cost of
debt now?
Book value of debt issue ( 1 )=80000000 Total book value of debt=80000000+35000000=$ 115000000
Book value of debt issue ( 2 ) =35000000 Market value of debt ( 2 )=61 % × 35000000=21350000
Total market value=¿
Book value of debt issue (1) 85000000

Second issue 01-01-2000

Maturity Date 01-01-2012
Annual coupon rate 0%
Coupon per year 2
Bond Price (%par) 59
Tax rate 35%
Book value debt issue (2) 35000000
Book value of debt $ 1200,00,000.00
Market value of first bond $ 790,50,000.00
Market value of second bond =59%*35000000 $ 206,50,000.00
Market value of total debt =79050000+20650000 $ 997,00,000.00
Pre tax cost of second issue =35000000-20650000 $ 143,50,000.00
After tax cost of second issue =14350000*(1-35%) $ 93,27,500.00
After tax cost of total debt =(120000000-99700000)*(1-35%) $ 131,95,000.00
9. [WACC] Targaryen Corporation has a target capital structure of 60 percent common stock, 5 percent
preferred stock, and 35 percent debt. Its cost of equity is 14 percent, the cost of preferred stock is 6 percent, and
the pretax cost of debt is 8 percent. The relevant tax rate is 35 percent. What is the company’s WACC?
pretax R D =8 %R E=14 % WAAC =w E R E +w D pretax R D ¿
R P=6 %w P =5 %
w D =35 %w E =60 %

10. [WACC] Lannister Manufacturing has a target debt-equity ratio of 0.65. Its cost of equity is 15 percent, and
its cost of debt is 9 percent. If the tax rate is 35 percent, what is the company’s WACC?
 pretax R D =9 %R E=15 % E D E+ D
WAAC =w E R E +w D R D ׿w E + w D=1 ⇔ + =1⇔ =1
V V V
D
Target =0.65T c =35 % D
E
1 E
WAAC = × RE+ × R D ×(1−T c )=11.395 %
D D
+1 +1
E E

11. [Capital Structure] Fama’s Llamas has a weighted average cost of capital of 8.9 percent. The company’s
cost of equity is 12 percent, and its pretax cost of debt is 7.9 percent. The tax rate is 35 percent. What is the
company’s target debt-equity ratio?
pretax R D =7.9 % D
R E=12 % WAAC =8.9 % 1 E
WAAC =w E R E +w D R D ׿WAAC = × RE+ × R D ×(1−T c )=11.395%
D D
T c =35 % +1 +1
E E
D
⟹ =0.8233
E

14. [WACC] Starset, Inc., has a target debt-equity ratio of 1.05. Its WACC is 9.4 percent, and the tax rate is 35
percent.
a. If the company’s cost of equity is 14 percent, what is its pretax cost of debt?
b. If instead you know that the after-tax cost of debt is 6.8 percent, what is the cost of equity?
D D
R E=14 %Target =1.05
E 1 E
WAAC =w E R E +w D R D ׿WAAC = × RE+ × R D × ( 1−T c ) =9.4 %
WAAC =9.4 % T c =35 % D D
+1 +1
E E
b . R D × ( 1−T c )=6.8 %
1 1.05
⇒ Pretax R D =7.721 %b . WAAC = × RE+ ×6.8 %=9.4 %
1.05+1 1.05+ 1
⇒ R E =12.13 %

15. [WACC] Given the following information for Watson Power Co., find the WACC. Assume the company’s
tax rate is 35 percent.
 Debt: 8,000 bonds with a 6.5 percent coupon outstanding, $1,000 par value, 20 years to maturity, selling for
92 percent of par; the bonds make semiannual payments.
 Common stock: 250,000 shares outstanding, selling for $57 per share; the beta is 1.05.
 Preferred stock: 15,000 shares that have an annual dividend of $5, currently selling for $93 per share.
 Market: 8 percent market risk premium and 4.5 percent risk-free rate.

−n
1−( 1+ y ) FV
Debt :D=92 % ×1000 ×8000=7360000 PV = A × + n
y ( 1+ y )
−20 ×2
6.5 % 1−( 1+ y ) 1000
⇔ 92 % ×1000= × 1000× +
20 ×2
⇒ R D = y=3.63 % × 2=7.26 %
2 y ( 1+ y )
Common stock :E=$ 57 × 250000=14250000 R E=R f + β E ¿
 D 5
R P= = =5.37 %
P0 93

V =D+ E=7360000+14250000=21610000WAAC =w E R E +w D R D ׿⇒ WAAC =10.46 %

23. [Cost of Equity] Minder Industries stock has a beta of 1.5.The company just paid a dividend of $.8, and the
dividends are expected to grow at 5 percent. The expected return on the market is 12 percent, and Treasury bills
are yielding 5.5 percent. The most recent stock price for the company is $61.
a. Calculate the cost of equity using the DCF method.
b. Calculate the cost of equity using the SML method.
β E =1.5D0=$ 8 b . R E=R f + β E ¿ a .
g=5 % R f =5.5 %
P0=$ 61
E(R ¿¿ M )=12 % ¿
Chapter 16 – Fundamentals of Corporate Finance
1. [EBIT and Leverage] Ghost, Inc., has no debt outstanding and a total market value of $250,000. Earnings
before interest and taxes, EBIT, are projected to be $28,000 if economic conditions are normal. If there is strong
expansion in the economy, then EBIT will be 30 percent higher. If there is a recession, then EBIT will be 50
percent lower. The company is considering a $90,000 debt issue with an interest rate of 7 percent. The proceeds
will be used to repurchase shares of stock. There are currently 5,000 shares outstanding (cổ phiếu đang lưu
hành). Ignore taxes for this problem.
a. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued.
Also calculate the percentage changes in EPS when the economy expands or enters a recession.
Recession Expected Expansion
EBIT ( 1−50 % ) ×28000 28000 ( 30 % +1 ) × 28000
Net Income 14000 28000 36400
14000 28000 36400
EPS =2.8 =5.6 =7.28
5000 5000 5000
7.28−5.6
% ΔEPS going ¿ Normal → Expansion= =30 %
5.6
2.8−5.6
% ΔEPS going ¿ Normal → Recession= =−50 %
5.6

b. Repeat part (a) assuming that the company goes through with recapitalization. What do you observe?

If the market value of the

firm is $150,000 with 2,500
shares outstanding, then
the value of one share of
stock is: $150,000/2,500 =
$60/share.
If $60,000 worth of debt is
raised to retire stock, then
you will be buying back
$60,000/$60 or 1,000 shares.
So, after recapitalization
there will be 2,500 -1,000
or 1,500 shares outstanding.
EBIT will be reduced by the
amount of the interest on
$60,000 in debt or
$60,000 x .05 = $3,000.
If the market value of the firm is $250,000 with 5,000 shares outstanding, then the value of one share of stock
is: $250,000/5,000 = $50/share.
If $90,000 worth of debt is raised to retire stock, then you will be buying back $90,000/$50 or 1,800 shares.
So, after recapitalization there will be 5,000 - 1,800 or 3,200 shares outstanding.
EBIT will be reduced by the amount of the interest on $90,000 in debt or $90,000 x 0.07 = $6,300.
 Recession Expected Expansion
EBIT ( 1−50 % ) ×28000 28000 ( 30 % +1 ) × 28000
Interest 7 % × 90000 7 % × 90000 7 % × 90000
Net Income 7700 21700 30100
7700 21700 30100
EPS =2.4 =6.78 =9.4
3200 3200 3200
9.4−6.78
% ΔEPS going ¿ Normal → Expansion= =38.64 %
6.78
2.4−6.78
% ΔEPS going ¿ Normal → Recession= =−64.6 %
6.78

2. [EBIT and Taxes and Leverage] Repeat parts (a) and (b) in Problem 1 assuming the company has a tax rate
of 35 percent.
Part (a) Recession Expected Expansion
EBIT = EBT ( 1−50 % ) ×28000 28000 ( 30 % +1 ) × 28000
Tax = 35 % × EBT 4900 9800 12740
Net Income 9100 18200 23660
9100 18200 23660
EPS =1.82 =3.64 =4.732
5000 5000 5000
4.732−3.64
% ΔEPS going ¿ Normal → Expansion= =30 %
3.64
1.82−3.64
% ΔEPS going ¿ Normal → Recession= =−50 %
3.64
If the market value of the firm is $250,000 with 5,000 shares outstanding, then the value of one share of stock
is: $250,000/5,000 = $50/share.
If $90,000 worth of debt is raised to retire stock, then you will be buying back $90,000/$50 or 1,800 shares.
So, after recapitalization there will be 5,000 - 1,800 or 3,200 shares outstanding.
EBIT will be reduced by the amount of the interest on $90,000 in debt or $90,000 x 0.07 = $6,300.
Recession Expected Expansion
EBIT ( 1−50 % ) ×28000 28000 ( 30 % +1 ) × 28000
Interest 6300 6300 6300
EBT 7700 21700 30100
Tax 2695 7595 10535
Net Income 5005 14105 19565
5005 14105 19565
EPS =1.564 =4.4 =6.114
3200 3200 3200
6.114−4.4
% ΔEPS going ¿ Normal → Expansion= =38.95 %
4.4
1.564−4.4
% ΔEPS going ¿ Normal → Recession= =−64.45 %
4.4

4. [Break-even EBIT] Round Hammer is comparing two different capital structures: An all-equity plan (Plan I)
and a levered plan (Plan II). Under Plan I, the company would have 160,000 shares of stock outstanding. Under
Plan II, there would be 80,000 shares of stock outstanding and $2.8 million in debt outstanding. The interest rate
on the debt is 8 percent, and there are no taxes.
a. If EBIT is $350,000, which plan will result in the higher EPS?
Plan I Plan II
Shares outstanding 160000 80000
EBIT 350000 350000
Interest 0 8 % × 2.8 m=224000
EBT = Net Income 350000 126000
350000 126000
EPS =2.1875 =1.575
160000 80000

b. If EBIT is $500,000, which plan will result in the higher EPS?

Plan I Plan II
Shares outstanding 160000 80000
EBIT 500000 500000
Interest 0 8 % × 2.8 m=224000
EBT = Net Income 500000 276000
500000 276000
EPS =3.125 =3.45
160000 80000

c. What is the break-even EBIT?

EBIT EBIT −224000
EPS no debt =EPS debt = ⇒ EBIT =448000
160000 80000

CHAPTER 3: CAPITAL BUDGETING

Chapter 9 - Net Present Value and Other Investment Criteria
1. [Payback]. What is the payback period for the following set of cash flows?
Year CF NCF

| |
0 -6400 -6400 n

1 1600 -4800 ∑ NCF t

t=0 |−600|
2 1900 -2900 PBP=n+ =3+ =3.43
CF n+1 1400
3 2300 -600
4 1400 800

2. [Payback] An investment project provides cash inflows of $765 per year for eight years. What is the project
payback period if the initial cost is $2,400? What if the initial cost is $3,600? What if it is $6,500?
Year CF NCF CF NCF CF NCF
0 -2400 -2400 -3600 -3600 -6500 -6500
1 765 -1635 765 -2835 765 -5735
2 765 -870 765 -2070 765 -4970
 3 765 -105 765 -1305 765 -4205
4 765 660 765 -540 765 -3440
5 765 1425 765 225 765 -2675
6 765 2190 765 990 765 -1910
7 765 2955 765 1755 765 -1145
8 765 3720 765 2520 765 -380
|−105| |−540|
PBP=3+ =3.14 PBP=4 + =4.7
765 765

4. [Discounted Payback] An investment project has annual cash inflows of $4,200, $5,300, $6,100, and
$7,400, for the next four years, respectively. The discount rate is 14 percent. What is the discounted payback
period for these cash flows if the initial cost is $7,000? What if the initial cost is $10,000? What if it is $13,000?
Year CF PV Factor PV NCF

| |
0 -7000 1 -7000 -7000 n

1 4200 0,877 3684,21 -3315,79 ∑ NCF t

2
t=0 |−3315 ,79|
5300 0,769 4078,18 762,39 PBP=n+ =1+ =1, 81
CF n+1 4078 ,18
3 6100 0,675 4117,33 4879,71
4 7400 0,592 4381,39 9261,11

Year CF PV Factor PV NCF

|∑ |
0 -10000 1 -10000 -10000 n

1 4200 0,877 3684,21 -6315,79 NCF t

2
t=0 |−2237 , 61|
5300 0,769 4078,18 -2237,61 PBP=n+ =2+ =2 ,54
CF n+1 4117 ,33
3 6100 0,675 4117,33 1879,71
4 7400 0,592 4381,39 6261,11

Year
|∑ |
n
CF PV Factor PV NCF
NCF t
0 -13000 1 -13000 -13000 t=0 |−1120, 29|
1 PBP=n+ =2+ =3,255
4200 0,877 3684,21 -9315,79 CF n+1 4381 ,39
2 5300 0,769 4078,18 -5237,61
3 6100 0,675 4117,33 -1120,29
4 7400 0,592 4381,39 3261,11

7. [IRR] A firm evaluates all of its projects by applying the IRR rule. If the required return is 16 percent, should
the firm accept the following project?
N
NCF t Year CF
NPV =∑ t
−I 0=0
t=1 ( 1+ IRR ) 0 -34000
15000 17000 13000 1 15000
⇔ + + −34000=0 2 17000
( 1+ IRR )1 (1+ IRR )2 ( 1+ IRR )3
3 13000
⇔ IRR=15 , 8 % <r=16 %⇒ The firm should reject the project

8. [NPV] For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a
required return of 11 percent, should the firm accept this project? What if the required return is 30 percent?
 11% 30%
Year CF PV PV
0 -34000 -34000 -34000
1 15000 13513,51 11538
2 17000 13797,58 10059
3 13000 9505,49 5917
NPV = 2816,58 -6485,21
Accept Reject

9. [NVP and IRR] A project that provides annual cash flows of $28,500 for nine years costs $138,000 today. Is
this a good project if the required return is 8 percent? What if it’s 20 percent? At what discount rate would you
be indifferent between accepting the project and rejecting it?
8% 20%
year CF PV PV
0 -138000 -138000 -138000 N
|NCF t|
NPV =∑ t
−I 0
1 28500 26388,89 23750,00 t=1 ( 1+r )
2 28500 24434,16 19791,67 N
NCF t
3 28500 22624,22 16493,06 NPV =∑ t
−I 0=0
t=1 ( 1+ IRR )
4 28500 20948,35 13744,21
5 28500 19396,62 11453,51 28500 28500 28500
⇔ 1
+ 2
+…+ −138000=0
6 28500 17959,83 9544,59 ( 1+ IRR ) (1+ IRR ) ( 1+ IRR )9
7 28500 16629,48 7953,83 ⇔ IRR=14 ,59 %
8 28500 15397,66 6628,19
At discount rate =14,59%, it would be indifferent
9 28500 14257,10 5523,49
NPV = 40036,31 -23117,45
accept reject

12. [NPV versus IRR] Bruin, Inc., has identified the following two mutually exclusive projects:
Yea
Cash flow A Cash flow B
r
0 -43000 -43000
1 23000 7000
2 17900 13800
3 12400 24000
4 9400 26000

a. What is the IRR for each of these projects? Using the IRR decision rule, which project should the company
accept?
Project A:
N
NCF t 23000 17900 12400 9400
NPV =∑ −I 0=0 ⇔ + + + −43000=0⇔ IRR=20 , 44 %
t=1 ( 1+ IRR ) t
( 1+ IRR ) (1+ IRR ) ( 1+ IRR ) ( 1+ IRR ) 4
1 2 3

Project B:
 N
NCF t 7000 13800 24000 26000
NPV =∑ −I 0=0 ⇔ + + + −43000=0⇔ IRR=18 , 83 %
t=1 ( 1+ IRR ) t
( 1+ IRR ) (1+ IRR ) ( 1+ IRR ) ( 1+ IRR ) 4
1 2 3

⇒ The firm should accept the project A

b. If the required return is 11 percent, what is the NPV for each of these projects? Which project will the
company choose if it applies the NPV decision rule?
Yea
CF A PV A CF B PV B
r
0 -43000 -43000 -43000 -43000 N
|NCF t|
1 23000 20720,72 7000 6306,30 NPV =∑ t
−I 0
t=1 ( 1+r )
2 17900 14528,04 13800 11200,39
3 12400 9066,77 24000 17548,59  Choose project B
4 9400 6192,07 26000 17127
NPV = 7507,61 9182,29

Chapter 10 – Making Capital Investment Decisions

3. [Projected Net Income] A proposed new investment has projected sales of $830,000. Variable costs are 60
percent of sales, and fixed costs are $181,000; depreciation is $77,000. Prepare a pro forma income statement
assuming a tax rate of 35 percent. What is the projected net income?

VC =60 % × sales=60 % × 830000=498000

¿=OCF−Depreciation=( 1−t c ) × ( Sales−Costs )+ D × t c −D
¿=( 1−0 , 35 ) × ( 830000−498000−181000 ) +77000 ×0 ,35−77000⇒∋¿ 48100

4. [OCF] Consider the following income statement:

Sales $747300
Costs 582600
Depreciation 89300
EBIT ¿ 747300−582600−89300=75400
Taxes (34%) ¿ 0 , 34 ×75400=25636
Net income ¿ 75400−25636=49764
OCF ¿∋+depreciation=. 39064
Depreciation tax shield ¿ 0 , 34 × 89300=30362
Fill in the missing numbers and then calculate the OCF. What is the depreciation tax shield?

5. [OCF] A proposed new project has projected sales of $108,000, costs of $51,000, and depreciation of $6,800.
The tax rate is 34 percent. Calculate operating cash flow.
OCF=( 1−t c ) × ( Sales−Costs )+ D × t c ¿ ( 1−0 ,34 ) × ( 108000−51000 )+ 6800× 0 , 35⇒ OCF=39932
9. [Project OCF] Quad Enterprises is considering a new three-year expansion project that requires an initial
fixed asset investment of $3.9 million. The fixed asset will be depreciated straight-line to zero over its three-
year tax life, after which time it will be worthless. The project is estimated to generate $2,650,000 in annual
sales, with costs of $840,000. If the tax rate is 35 percent, what is the OCF for this project?
10. [Project NPV] Suppose the required return on the project is 12 percent. What is the project’s NPV?