Principles of Corporate Finance_ 12th Edition

A-2 Appendix Answers to Select Basic Problems

bre44380_app_A1-A10 2 10/09/15 08:14 PM

can have positive NPV if all future cash flows are

considered but still do not meet the stated cutoff period.

3. (a) $15,750; $4,250; $0; (b) 100%.


4. (a) Two; (b) − 50% and +50%; (c) yes, NPV = $14.58.


5. 1, 2, 4, and 6.

CHAPTER 5

1. (a) A = 3 years, B = 2 years, C = 3 years; (b) B; (c) A,
   B, and C; (d) B and C
   (NPVA = –$1,011; NPVB = $3,378; NPVC = $2,405);
   (e) true; (f) It will accept no negative-NPV projects but
   will turn down some with positive NPVs. A project

Standard deviation, %

Expected return (r), %

20

14

22

20

18

16

22 24 26 28 30

R

Q

◗ FIGURE 1 Chapter 8, Problem 1(c).

2012 2013 2014 2015 2016

Working capital 50,000 230,000 305,000 250,000 0

Cash flows –50,000 –180,000 –75,000 +55,000 +250,000

CHAPTER 6

1. 
   

   a, b, d, g, h.

   
   


2. 
   

   (a) False; (b) False; (c) False; (d) False.

   
   


3. 
   


4. 
   

   PV cost = 1.5 + .2 × 14.09 = $4.319 million. Equivalent
   annual cost = $4.319/14.09 = $.3065 million.

   
   


5. 
   

   Replace at end of 5 years ($80,000 > $72,350).

   
   

CHAPTER 7

1. Expected payoff is $100 and expected return is zero.
   Variance is 20,000 (% squared) and standard deviation
   i s 141%.


2. Ms. Sauros: Av. return = 19.98%; Variance = 194.85;
   SD = 13.96%.
   S&P 500: Av. return = 16.02%; Variance = 105.95;
   SD = 10.29%.


3. d


4. (a) 26%; (b) zero; (c) .75; (d) less than 1.0 (the portfolio’s
   risk is the same as the market, but some of this risk is
   specific risk).


5. A, 1.0; B, 2.0; C, 1.5; D, 0; E, − 1.0.

CHAPTER 8

1. (a) 7%; (b) 27% with perfect positive correlation;
   1% with perfect negative correlation; 19.1% with no
   correlation; (c) See Figure 1; (d) No, measure risk by
   beta, not by standard deviation.


2. Sharpe ratio = 7.7/19.9 = .387.


3. (a) See Figure 2; (b) A, D, G; (c) F; (d) 15% in C.
   (e) Put 25/32 of your money in F and lend 7/32 at
   12%: Expected return = 7/32 × 12 + 25/32 × 18 
   = 16.7%; standard deviation = 7/32 × 0 + (25/32) 
   × 32 = 25%.


4. (a) True; (b) False (it offers twice the market risk
   premium); (c) False.

r

20

15

12

10

10 20 30

A

40 50

5

B

C

D

E

H

G

F

s

◗ FIGURE 2 Chapter 8, Problem 5(a).