Principles of Corporate Finance_ 12th Edition

A-8 Appendix Answers to Select Basic Problems

bre44380_app_A1-A10 8 10/09/15 08:14 PM

5. The illogical ratios are a, b, d, e, and h. The correct
   definitions are
   Debt-equity ratio =
   long-term debt + value of leases

   ---

   
   

   equity
   Return on equity = __net income
   equity at start of year
   Days in inventory = _____COGS
   (inventory/365)
   Current ratio = __current assets
   current liabilities
   Times earned
   interest ratio
   =

   
   


6. a. Sales = 3 × 500,000 = 1,500,000;
   after-tax interest + net income = .08 × 1,500,000 = 
   120,000; ROA = 120,000/500,000 = 24%;
   b. Net income = .08 × 3 × 500,000 − (1 − .35)
   × 30,000 = 100,500. ROE = net income/
   equity = 100,500/300,000 = .34.


7. .73.; 3.65%


8. Assume that new debt is a current liability.
   a. Current ratio goes from 100/60 = 1.67 to 120/80 = 1.50;
   cash ratio goes from 30/60 = .5 to 50/80 = .63;
   b. Long-term debt ratio is unchanged; total liabili-
   ties/total assets goes from 410/600 = .6833 to
   430/620 = .6935.


9. $82 million.

CHAPTER 29

1. Cash cycle (days) = 96 + 104 – 110 = 90.


2. 
   

COMMON-SIZE INCOME STATEMENT

Sales 100%

Cost of goods sold 41.7%

Selling, general, and administrative expenses 34.4%

Depreciation 4.3%

Earnings before interest & taxes 19.6%

Interest expense 0.4%

Taxable income 19.2%

Ta x 6.6%

Net income 4.8%

Addition to retained earnings 7.8%

_____________EBIT

interest expense

Cash Working Capital

1. $2 million decline $2 million decline


2. $2,500 increase Unchanged


3. $50,000 decline Unchanged


4. Unchanged $10 million increase


5. Unchanged Unchanged


6. $5 million increase Unchanged

d. (117.565/116.903) – 1 = .0057 or .57%.
e. 1 + r¥ = (116.903/117.565)1.015 = 1.009285. r¥ =
.9285%.
f. 117.429
g. (1 + 3-month Japanese inflation) = (117.429/117.565)
× (1 + U.S. 3-month inflation) = .9988 × U.S.
3-month inflation.

3. a. 2,419 × 1.3/1.02 = R3,083 = $1.
   b. Real value of rupiah fell by 3,083/8,325 − 1 = .63, or
   63%.


4. b


5. It can borrow the present value of €1 million, sell the
   euros in the spot market, and invest the proceeds in an
   8-year dollar loan.


6. a. NPV = 6.61 × 1.2 = $7.94 million.
   b.
   Year 0 1 2 3 4 5
   Forward rate 1.2 1.223 1.246 1.269 1.293 1.318
   $ millions − 96 12.23 24.91 29.19 34.92 32.94

c. It doesn’t. The company can always hedge against a
fall in the euro.

CHAPTER 28

1. $ Thousands $ Thousands

Cash $ 25 $ 24 Accounts payable
Accounts receivable 35 24 Total current liabilities
Inventories 30 130 Long-term debt
Total current assets 90 76 Equity
Net plant & equipment 140
Total assets 230 230 Total liabilities & equity

Common-Size Balance Sheet

Percent Percent

Cash & marketable

securities

17.2% Accounts payable 20.9%

Accounts receivable 8.8 Other current

liabilities

7.4

Inventories 10.1 Total current

liabilities

28.3

Other current assets 2.7 Long-term debt 19.0

Total current assets 38.8 Other long-term

liabilities

3.7

Net fixed assets 32.7 Total liabilities 51.0

Other long-term assets 28.5 Total shareholders’

equity

49.0

Total assets 100 Total liabilities &

shareholders’ equity

100