Corporate Finance Answers

Appendix

B

S o l u t i o n s t o S e l f - Te s t Problems

CHAPTER 1

ST 1–1 a. Recommend project 1 since the total impact of project 1 on EPS (in today’s dollars) is greater than project 2: $1.32 versus $1.19. b. Recommend project 1 since if it were implemented, Doyle’s common share price will increase to $28.00 which is greater than the $26.50 for project 2. While both projects are acceptable since both result in the share price increasing, the increase with project 1 is greater. If only one project can be implemented, it should be project 1 if share price maximization were Doyle’s goal. c. The current value of common shareholders’ interest in Doyle is $195,000,000 (10,000,000 common shares $19.50). If project 1 were implemented, shareholder value will increase to $308,000,000 (11,000,000 common shares $28). For project 2, shareholder value will increase to $312,700,000 (11,800,000 common shares $26.50). Project 2 should be recommended. d. Liam should recommend project 2 as it results in the firm achieving its goal: maximization of shareholder wealth. The goal is to maximize the value of the common shareholders’ total interest in the company. This is measured by multiplying the total number of common shares outstanding by the common share price. e. Project 2 might be the better project because it maximizes cash flows, leading to higher share prices.

CHAPTER 2

ST 2–1 a. Assets Liabilities long-term debt.

$1,129,800

Equity. Using this general formula, solve for the amount of

$229,160 $92,000 $378,000 $165,640 $265,000

b. Preferred shares sold in 2008 Shares outstanding in 2008 Shares outstanding in 2007 The company had 10,000 preferred shares outstanding in 2007 (9,000/$0.90). It is stated that there are 11,000 preferred shares outstanding in 2008. Therefore, they sold 1,000 preferred shares (11,000 10,000).

Common shares sold in 2008 Shares outstanding in 2008 Shares outstanding in 2007

B-2

APPENDIX B

The company had 35,000 common...