corporate finance - Ch 6, 7 8

8/10/2019 corporate finance - Ch 6, 7 8

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6


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C O6.1 B C F, P,

6.2 D B B P

6.3 C B A6.4 C B

6.5 B


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6.1 B C F, P,

B

B C

M D F

C P


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6.1 B C F, P, (')

B

F

N

C R

D , APR

C P

Coupon Rate Face ValueNumber of Coupon Payments per Year

=CPN


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C B

C B

D A (

),

..

.


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C B (')

, , $100,000

$96,618.36. :

A ,

.


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C B (')

M

(1 )

=+

n

n

FVP

YTM


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C B (')

M

F :

, M 3.5%.

1

100,00096,618.36

(1 )=

+ YTM

1

100,0001 1.035

96,618.36+ = =YTM


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C B (')

M

M C B1

1

=

n

n

FVYTM

P


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A E 6.1

$100

. D

.M 1 2 3 4

P $98.04 $95.18 $91.51 $87.14


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A E 6.1 (')

:

1/2

1/3

1/4

YTM (100 / 98.04) 1 0.02 2%

YTM (100 / 95.18) 1 0.025 2.5%

YTM (100 / 91.51) 1 0.03 3%YTM (100 / 87.14) 1 0.035 3.5%

= = =

= = =

= = =

= = =


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C B (')

RF I R

A

. , L O P

.

RF I R M

=

n nr YTM


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C B (')

RF I R

I R

A ,

C C A


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C B

C BP

P

N

.. 110

B

.. 10


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A E 6.2

The U.S. Treasury has just issued a ten-year, $1000

bond with a 4% coupon and semi-annual couponpayments. What cash flows will you receive if youhold the bond until maturity?


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A E 6.2 (')

The face value of this bond is $1000. Because thisbond pays coupons semiannually, from Eq. 8.1 you will

receive a coupon payment every six months of CPN =$1000 X 4%/2 = $20. Here is the timeline, based on asix-month period:

Note that the last payment occurs ten years (twenty six-month periods) from now and is composed of both a couponpayment of $20 and the face value payment of $1000.


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C B (')

M

M .

M C B

1 1

1 (1 ) (1 )

= +

+ + N N

FV

P CPN y y y


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E 6.3


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E 6.3 (')


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E 6.4


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E 6.4 (')


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6.4 C B

C B

I

C R

R


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C B

I

.

.


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C B (')

N D

C 1, B M 4%.

?

1

1000 1000 $961.541 1.04= = =+P YTM


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C B (')

C D

90%

.

?

1

900 900 $865.381 1.04

= = =+

PYTM


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C B (')

C D

,

.

1000 1 1 15.56%865.38

= = =FVYTMP

900

1.04865.38 =


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C B (')

C D

.

.


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C B (')

R D

C , $1000, . A

.

50% 50%

$900. ,

$950.

B , 5.1%.


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C B (')

R D

950 $903.90

1.051= =P

1000 1 1 .1063

903.90

= = =FV

YTM

P


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C B (')

R D

A .

A .


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C B (')

Table 6.3 Price, Expected Return, and Yield to Maturity ofa One-Year, Zero-Coupon Avant Bond with Different

Likelihoods of Default


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B R

I G B

B

A J B H B


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6.4 B R ()


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C C

D

A C


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F 6.3 C C R, J 2012

Source: Bloomberg


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F 6.4 F C

Source:Bloomberg.com


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6.5 B

B

..

A

.. G 2012

I

P

E , EM, ECB


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F 6.5 P C D R D, 18002006

Source: Data from This Time Is Different, Carmen Reinhart and Kenneth Rogoff, Princeton University Press, 2009.


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F 6.6 E G B , 19632011

Source: Nowakwoski, David, Government Bonds/Rates: High, Low and Normal, Roubini Global Economics, June 8, 2012.


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Chapter 7

InvestmentDecision Rules


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C O7.1 NP A P

7.2 I R R R

7.3 P R

7.4 C B P

7.5 P R C


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7.1 NP A P

C ,

F F F (FFF).

$250

$35 ,

.


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NP R

NP :

NP .

35NPV 250= +r


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F 7.1 NP F F P

I FFF 10%, NP $100 .


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A R NP R

NP , .

, NP .


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7.2 I R R R

()


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I R R R (')

IRR I R NP , , .

I , IRR .

I F 7.1, IRR 14%, NP .

A IRR R


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A IRR R

I , IRR NP .

IRR NP :

D I N IRR

M IRR

A IRR R ( ')


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A IRR R (')

D I

A CEO

. A . $1 . .

$500,000 . 10%.

A IRR R (')


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A IRR R (')

D I

?

C IRR.

IRR . ,

IRR .

A IRR R (')


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A IRR R (')

D I

?

NP , NP .

2 3

500,000 500,000 500,000 1,000,000 $243,426

1.1 1.1 1.1= = NPV

F 7 2 NP $1 M B D


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F 7.2 NP $1 M B D

, NP .

A IRR R (')


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A IRR R (')

M IRR

.

$550,000

$1,000,000

.

?

A IRR R (')


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A IRR R ( )

M IRR

:

NP :

2 3 4

500, 000 500, 000 500, 000 1, 000, 000

550,000 - - -1 (1 ) (1 ) (1 )NPV r r r r =

+ + + +

!

A IRR R (')


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A IRR R ( )

M IRR

B NP , IRR. I , IRR:

7.164% 33.673%. B

IRR, IRR .

F 7 3 NP B D R


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F 7.3 NP B D R

A IRR R (')


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A IRR R ( )

M IRR

B 7.164% 33.673%, NP.

10%, .

A IRR R (')


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A IRR R ( )

N IRR

F,

$750,000, $1 .

, IRR ;

NP .

F 7 4 NP F O


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F 7.4 NP F O

N IRR NP . IRR .

A IRR R (')


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A IRR R ( )

IRR IRR R

IRR , IRR . IRR

NP

.

E 7 1


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E 7.1

E 7 1 ()


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E 7.1 ( )

F 7.5 NP P E 7.1


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IRR R A,

.

7.3 P R


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7.3 P R

. I

, .O, .

.

A E 7.2


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A E 7.2

P A, B, C

5 .

, ?

A B C

Cost $80 $120 $150

Cash Flow $25 $30 $35

A E 7.2


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P A

$80 $25 = 3.2

P B

$120 $30 = 4.0

P C

$150 $35 = 4.29

P R ()


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( )

P:

I .

I .

R .

7.4 C B P


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M E P

, .

NP R

NP.

IRR R IRR

.

E 7.3


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E 7 3 ()


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E 7.3 ( )

A E 7.3


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A . G

, .

(

). ?

ProjectInitial

InvestmentFirst-YearCash Flow

GrowthRate

Cost ofCapital

Used Book Store $250,000 $55,000 4% 7%

Sandwich Shop $350,000 $75,000 4% 8%

Hair Salon $400,000 $120,000 5% 8%

Clothing Store $500,000 $125,000 8% 12%

A E 7.3 ()


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A ,

. NP

, NP. B , .

$55,000NPV (Used Book Store) = -$250,000 + $1,583,333

7% 4%

$75,000NPV (Sandwich Shop) = -$350,000 + $1,525,000

8% 4%

$120,000NPV (Hair Salon) = -$400,000 + $2,600,000

8% 5%

NPV (Clothing Store) = -$500,

=

=

=

$125,000000 + $2,625,000

12% 8%=

IRR R M E I: D


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I , NP

. IRR. , IRR

.

IRR R M E I: D ()


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BookstoreCoffee Shop

Initial Investment $300,000 $400,000

Cash FlowYear 1 $63,000 $80,000

Annual Growth Rate 3% 3%Cost of Capital 8% 8%

IRR 24% 23%

NPV $960,000 $1,200,000

C E 7.3

IRR R M E I: C F


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A IRR ,

.

IRR , .

C

E 7.3. B . IRR,

NP .

IRR R M E I: D R


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A IRR .

C E

7.3. IRR , NP .

IRR

.

I IRR R


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I IRR I R

A IRR (

).

A E 7.4


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Suppose your firm is considering two different projects, one that lasts oneyear and another that lasts five years. The cash flows for the two projects

look like this:

What is the IRR of each proposal? What is the incremental IRR? If yourfirms cost of capital is 10%, what should you do?

Problem

A E 7.4 ()


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Solution

We can compute the IRR of Project L using theannuity calculator:

NPER RATE PV PMT FV Excel formula

Given 4 -100 0 200

Solve

for rate

14.87% =RATE(4,0,-100,200)

A E 7.4 ()


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Solution

We can compute the IRR of Project S using theannuity calculator:


Given 1 -100 0 125

Solve

for rate

25% =RATE(1,0,-100,125)

A E 7.4 ()


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Solution

We can calculate the incremental IRR this way:


Given 4 -125 0 200

Solvefor rate

12.47% =RATE(4,0,-125,200)

Project 0 1 2 3 4 5

L -100 200

S -100 125

Difference 0 -125 200

A E 7.4 ()


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SolutionBecause the 12.47% incremental IRR is biggerthan the cost of capital of 10%, the long-termproject is better than the short-term project, eventhough the short-term project has a higher IRR.

I IRR R (')


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I IRR R

IRR .

M IRR .

IRR NP.

, IRR .

7.5 P R C


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E P D RC

C $100

7.1 P P $100 M B

P I


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.

F 7.1,

II & III I.

Value Created NPVProfitability Index

Resource Consumed Resource Consumed= =

A E 7.5


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NP

. H,

. , 100,000 .

Project NPV Square feet needed

Project 1 100,000 40,000

Project 2 88,000 30,000

Project 3 80,000 38,000

Project 4 50,000 24,000

Project 5 12,000 1,000

Total 330,000 133,000

A E 7.5 ()


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C PI .Project NPV Square feetneeded

Profitability Index(NPV/Sq. Ft)

Project 1 100,000 40,000 2.5

Project 2 88,000 30,000 2.93Project 3 80,000 38,000 2.10

Project 4 50,000 24,000 2.08

Project 5 12,000 1,000

12.0Total 330,000 133,000

A E 7.5 ()


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R PI .

Project NPV Squarefeet

needed

ProfitabilityIndex

(NPV/Sq. Ft)

Cumulative totalspace used

Project 5 12,000 1,000 12 1,000

Project 2 88,000 30,000 2.93 31,000

Project 1 100,000 40,000 2.5 71,000

Project 3 80,000 38,000 2.11

Project 4 50,000 24,000 2.08

P I


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I I .

E 7.4 NI NP $120,000 3. 0.1 2/ 3 = 0.04,

. H, 3 190 . A , .

P I (')


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, .


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8

C O


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8.1 F E

8.2 D F C F NP

8.3 C A A

8.4 F A F C F

8.5 A P

8.1 F E

C B


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C B

L

C B

P

I E

R C E

E


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E

L $300,000

,HN.

.

R E

= 100,000 /

P P = $260

R C E (')


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E

C E F R&D = $15,000,000

F N E = $7,500,000 E 5

H

A O = $2,800,000

P C = $110

I E F


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8.1 HN I E

F

C E D

$7 5


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$7.5 ,

. I,

.

L D .

A D = $7.5 5 = $1.5 /

I E


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I , .

, .


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M C R

. N: A

.

Income Tax EBIT= c

(')


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N I C

Unlevered Net Income EBIT (1 )(Revenues Costs Depreciation) (1 )

=

=

c

c

A E 8.1


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NRG, I. .

$500

.

NRG

$7 .

NRG 39% .

A E 8.1


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()

NRG ?

?

A E 8.1


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, NRG :

$7 39% = $2.730

, NRG :

$6.5 39% = $2.535

P I = $7 $500 = $6.5

L NRG :

$2.730 $2.535 = $195 .

I E I E


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I HN , . E

,

(.., )

.

A E 8.2


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NRG

$900 .

H NRG ?

A E 8.2


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.

NRG

:

$900 (1 .39) = $549 .

I E I E (')


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.

.

I E I E (')

P E


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I HN , 25% L

HN . B

HN,

HN .

I E I E (')

8.2 HN I E


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F I C L R

C I E


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.

.

C I E (')

F O E


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.

C I E (')

P R D E


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M R&D

.

.

C I E (')

C E


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, .

H, ,

.

R C


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,

.

.

.

E 8.3


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E 8.3 (')


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8.2 D F C F NP


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.


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C F C F E (')

C E DTable 8.3 Spreadsheet Calculation of HomeNets Free Cash Flow


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(Including Cannibalization and Lost Rent)

C F C F E (')

N C (NC)


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M .

.

:

Net Working Capital Current Assets Current Liabilities

Cash Inventory Receivables Payables

=

= + +

1 = t t tNWC NWC NWC


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A E 8.4

R I


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R I $250,000 , $275,000

, $300,000 . 5% , 7% ,

10% , 8% . F R .

A E 8.4 ()


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:

0 1 2 3

() $250,000 $275,000 $300,000

(5% ) $12,500 $13,750 $15,000 (7% ) $17,500 $19,250 $21,000

(10% ) $25,000 $27,500 $30,000

(8% ) $20,000 $22,000 $24,000

$35,000 $38,500 $42,000

C F C F D

F C FUnlevered Net Income

7


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.

Free Cash Flow (Revenues Costs Depreciation) (1 )

Depreciation CapEx

=

+

644444444474444444448

c

NWC

Free Cash Flow (Revenues Costs) (1 ) CapEx

Depreciation

=

+

c

c

NWC

C NP

1( )

(1 ) (1 )= =

+ +

t

t tt t

FCFPV FCF FCF

r r


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HN NP (ACC = 12%)

year discount factor

(1 ) (1 )

=

+ +14243

t

r r

NPV 16,500 4554 5740 5125 4576 1532

5027

= + + + + +

=

Table 8.5 Spreadsheet Computing HomeNets NPV

8.3 C A A

L HN


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NP,

0 NP.

E M A

8.3 C A A (')

E M A


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I HN , $95 $5

( $110 ).

.

8.3 C A A (')

E M A


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O C = $110

I A/P = 15% COG

COG = 100,000 $110 = $11

I A/P = 15% $11 = $1.65

NC = $1.65 1 $1.65 5

NC A/P

8.3 C A A (')

E M A

I H


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IH

C = $95

$5,000,000

I A/P = 15% COG COG = 100,000 $95 = $9.5

I A/P = 15% $9.5 = $1.425 I I = $9.5 / 12 = $0.792

NC 1 = $0.792 $1.425 =$0.633

NC $0.633 1 $0.633 5

8.3 C A A (')

E M A

Table 8 6 Spreadsheet NPV Cost of Outsourced Versus


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Table 8.6 Spreadsheet NPV Cost of Outsourced VersusIn-House Assembly of HomeNet

8.3 C A A (')

C F C F C


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A

O .

8.4 F A F C F

O N I

A


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A

C F

C .

A D

M A C R

(MACR)

A E 8.5

C M


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C M

. $50,000

MACR 3 .

MACR ,

0?

A E 8.5 ()

B 8A.1,


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B 8A.1,

:

0 1 2 3

$50,000

33.33% 44.45% 14.81% 7.41%

$16,665 $22,225 $7,405 $3,705

F A F C F (')

L


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Capital Gain Sale Price Book Value=

Book Value Purchase Price Accumulated Depreciation=

After-Tax Cash Flow from Asset Sale Sale Price ( Capital Gain)= c

E 8.6


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E 8.6 (')


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F A F C F (')

C


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.

E 8.7


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E 8.7 (')


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F A F C F (')

C


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.

E 8.8


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E 8.8 (')


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8.5 A P

BE A

NP .


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HN IRR C

Table 8.7 Spreadsheet HomeNet IRR Calculation

8.5 A P (')

BE A BE L HN

T bl 8 8 B k E L l f H N t


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EBI BE L EBI

Table 8.8 Break-Even Levels for HomeNet


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A (')

Table 8.9 Best- and Worst-Case Parameter Assumptionsfor HomeNet


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F 8.1 HN NP B C P

A


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A E 8.9

A NRG

$500,000 1 3.


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$ ,

$200,000 $900,000 . H

NP

? R, NRG 39%

. A 9%.

A E 8.9 ()

.


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NP , .

A E 8.9 ()

.A $300,000

NRG EBI $300,000 ,


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NRG :$300,000 ( 1 0.39) = $183,000

:

, NP $463,227.

2 3

$183,000 $183,000 $183,000PV= $463,227

1.09 1.09 1.09+ + =

A E 8.9 ()

.A $400,000

NRG EBI $400,000 ,


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NRG :$400,000 ( 1 0.39) = $244,000

:

, NP $617,636.

2 3

-$244,000 -$244,000 -$244,000PV= $617,6361.09 1.09 1.09

+ + =


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F 8.2 P C HN

E NP


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8A.1 MACR

D

P


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P

A C MB D E

B I

R P

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