Financial Management

APPENDIX

B

SOLUTIONS TO

SELF-TEST PROBLEMS

Note: Except for Chapter 1, we do not show an answer for ST-1 problems because they are

verbal rather than quantitative in nature.

CHAPTER 1

ST-1

Refer to the marginal glossary definitions or relevant chapter sections to check your responses.

ST-3

a.

EBIT

$5,000,000

Interest

1,000,000

EBT

$4,000,000

Taxes (40%)

Net income

b.

1,600,000

$2,400,000

NCF

NI

DEP and AMORT

$2,400,000

c.

NOPAT

$1,000,000

EBIT(1

$3,400,000.

T)

$5,000,000(0.6)

$3,000,000.

d.

OCF

NOPAT

EBIT(1

DEP and AMORT

T)

$5,000,000(0.6)

DEP and AMORT

$1,000,000

$4,000,000.

e.

FCF

NOPAT

Net investment in operating capital

$3,000,000

($25,000,000

$24,000,000)

$2,000,000.

f.

EVA

EBIT(1

T)

(Total operating capital)(After-tax cost of capital)

$5,000,000(0.6)

$3,000,000

($25,000,000)(0.10)

$2,500,000

APPENDIX B

■

$500,000.

S O L U T IO N S TO S E L F - T E S T P R O B L E MS

A-11

CHAPTER 2

ST-2

a. The average rate of return for each stock is calculated simply by averaging the returns over

the 5-year period. The average return for each stock is 18.90 percent, calculated for Stock

A as follows:

kAvg

( 10.00%

18.50%

38.67%

14.33%

33.00%)/5

18.90%.

The realized rate of return on a portfolio made up of Stock A and Stock B would be calculated by finding the average return in each year as kA(% of Stock A) kB(% of Stock B) and

then averaging these annual returns:

YEAR

PORTFOLIO AB’S RETURN, kAB

1998

(6.50%)

1999

19.90

2000

41.46

2001

9.00

2002

30.65...

18.90%

kAvg

b. The standard deviation of returns is estimated, using Equation 5-3a, as follows (see

Footnote 5):

n

Estimated σ = S =

For Stock A, the estimated

σA =

=

∑ (k

t

− k Avg ) 2

t=1

(5-3a)

.

n −1

is 19.0 percent:

( −10.00 − 18.9)...