A) Income This Year 40000

Income Next Year 60000

Project Cost 30000
Project Income 36000
Interest rate 10%
Consumption This Year 50000
Invest in project 30000
Left in hand 10000
Borrowed 40000
Interest for a year 4000
Paid next year 44000
In hand next year 16000
Avialble to consume 52000
Rate of return in the project 20%
B) Period 25.00
PMT 75,000.00
Interest 9%
Present Value 802,995.88
C) Period 30.00
Interest 12%
Present Value 1,000,000.00
PMT 286.13
D) Amount 10,000.00
Period 5.00
Annuity 2,358.65
Rate 9.00%
EAR 9.38%
E) Effective Rate 10.47%
Compunding monthly 12.00
EAR 10.99%
A) D1 2
G 4%
P 20
ER 14.00%
B) D0 0.50
rs 16.00%
gs 24.00% Short-run g; for Years 1-2 only.
gL 8.00% Long-run g; for Year 3 and all following years.
Year 0 1 2 3
Dividend 0.50 0.62 0.77 0.83
PV of dividends 0.53 0.57 7.71
Termial Value 10.38
Price 8.82
C) G 0%
Shares Out (million) 2
Earn (million) 20
Cost of capital 10%
EPS = DPS = 20/2 = 10 per share
Price = 10/10% = 100
D) Peiord 3.00
Coupon 8%
Face Value 1000
Yield 10%
Payment 2.00
Price -912.89
Therefore Price 912.89
E) Peiord 4.00
Coupon 8%
Face Value 1000
Price 878.31
Payment 1.00
Yield 12%
A) Limitations of using financial ratios
1. As different companies operate in different industries with each having different set of factors to impact its business line, its not correct to compare two companies of different industries.
2. Even within companies of same industries, financial accounting assumtions and estimates can impact the financial ratio's to a great extent
3. Financial ratios shows the past analysis while investors are mostly concerned about the future analysis
B) Debt Ratio 0.5
There Debt Equity Ratio would be 1 as this means 50% is equity and 50% is debt.
Debt Equity Ratio 1.65
Assuming Debt = 100, an equity of 60 gives debt/equity ratio close to 1.65
Therefore, equity represents +60/160 = 38% of the total assets
C) Income Statement In $ Mln
Sales 22,011.90
Material Production 5,149.60
Gross Profit 16,862.30
Other Income/Expenses
Marketing Expenses 7,155.50
Other Income and Expenses -110.20
R&D 3,848.00
Restruc. Costs 322.20
Equity Income from affiliates -1,717.10
Taxes 2,732.60
Net Profit 4,631.30
Balance Sheet In $ Mln
Liab Assets
Equity 17,916.60 AR
Other Current Liab 5,381.20 Cash
Other lon term liab 8,500.10 Other assets
A/P 471.10 Other intangibles
Long term debt 5,125.60 Prepaid Exp
Loans payable 2,972.00 Short term investment
Income taxes payable 3,649.20 Investments
Dividends payable 830.00 Inventories
PPE 23713.3
Dep 9315.1
Goodwill
Total 44,845.80
1. As different companies operate in different industries with each having different set of factors to impact its business line, its not correct to compare two companies of different industries.
2. Even within companies of same industries, financial accounting assumtions and estimates can impact the financial ratio's to a great extent
3. Financial ratios shows the past analysis while investors are mostly concerned about the future analysis
Debt 100
Equity 60
D/E 1.67
Equity represents 0.38
In $ Mln
2,927.30
9,585.30
6,686.00
518.70
826.30
6,052.30
1,107.90
1,658.10
14,398.20
1,085.70
44,845.80
A) Data Prob. Return Div 1 Div 2
Good 0.25 0.22 0.28 0.18
Average 0.60 0.11 0.10 0.10
Horrible 0.15 -0.08 -0.10 0.05
B) Probability Return ER R-ER (R-ER)^2
0.25 0.22 5.50% 11.10% 1.23%
0.60 0.11 6.60% 0.10% 0.00%
0.15 -0.08 -1.20% -18.90% 3.57%
Average = 10.90% Variance =
Standard deviation = 0.09
Coefficient of variation = (standard deviation/ average) x 100 84.28
C) Probability Return ER R-ER (R-ER)^2
0.25 0.28 7.00% 17.10% 2.92%
0.60 0.10 6.00% -0.90% 0.01%
0.15 -0.10 -1.50% -20.90% 4.37%
Average = 11.50% Variance =
Standard deviation = 0.12
Coefficient of variation = (standard deviation/ average) x 100 102.56
D) Probability Return ER R-ER (R-ER)^2
0.25 0.18 4.50% 7.10% 0.50%
0.60 0.10 6.00% -0.90% 0.01%
0.15 0.05 0.75% -5.90% 0.35%
Average = 11.25% Variance =
Standard deviation = 0.04
Coefficient of variation = (standard deviation/ average) x 100 38.04
E) Return Prob. Market Div 1 Div 2
Good 0.25 5.50% 7.00% 4.50%
Average 0.60 6.60% 6.00% 6.00%
Horrible 0.15 -1.20% -1.50% 0.75%
Covariance of Division 1 with market 0.0013
Covariance of Division 2 with market 0.0008
F) Beta for Division 1 0.1506
Beta for Division 2 0.0892
G) Reuired rate of return:
Risk free rate 6%
Division 1 6.74%
Division 2 6.44%
H) As the return on the division 1 is higher than the division 2, we can keep division 1 and spun off division 2
I) Beta of the entire company
Beta of Division 1 0.1506
Beta of Division 2 0.0892
Weight of Division 1 (Assumed to be equal as mentiond in question) 0.5
Weight of Division 2 (Assumed to be equal as mentiond in question) 0.5
Beta of the company 0.12
P*((R-ER)^2
0.003
0.000
0.005
0.008
P*((R-ER)^2
0.007
0.000
0.007
0.014
P*((R-ER)^2
0.001
0.000
0.001
0.002
As the return on the division 1 is higher than the division 2, we can keep division 1 and spun off division 2