Zappe Airlines is considering two alternative planes.

Plane A has an expected

and will produce net cash flows of $30 million per year. Plane B has a life of
produce net cash flows of $25 million per year. Zappe plans to serve the route
12 percent. If Zappe needs to purchase a new Plane A, the cost will be $105 m
same. Should Zappe acquire Plane A or Plane B? Explain your answer.

0 1 2
Machine A -10 4 4

-10 4 4
NPV B 3.576555
Machine B -15 3.5 3.5

NPV B 3.672242 npv $ amount he oti hae…

anes. Plane A has an expected life of 5 years, will cost $100 million,
per year. Plane B has a life of 10 years, will cost $132 million, and will
Zappe plans to serve the route for 10 years. The company’s WACC is
ane A, the cost will be $105 million, but cash inflows will remain the
? Explain your answer.

3 4 5 6 7 8
4 4 4.2 4.2 4.2 4.2
-12
4 -8 4.2 4.2 4.2 4.2

3.5 3.5 3.5 3.5 3.5 3.5

ount he oti hae…

The Fernandez Company has the opportunity to invest in one of two mutual
machines that will produce a product it will need for the next 8 years. Mach
$10 million but would provide after-tax inflows of $4 million per year for
Machine A were replaced, its cost would be $12 million due to inflation, a
inflows would increase to $4.2 million due to production efficiencies. Mach
$15 million and would provide after-tax inflows of $3.5 million per year fo
the WACC is 10 percent, which machine should be acquired?
 invest in one of two mutually exclusive
d for the next 8 years. Machine A costs
s of $4 million per year for 4 years. If
2 million due to inflation, and its cash
roduction efficiencies. Machine B costs
s of $3.5 million per year for 8 years. If
achine should be acquired?
 Last year, Joan purchased a $1,000 face value
corporate bond with an 11 percent annual coupon
rate and a 10-year maturity. At the time of the
purchase, it had an expected yield to maturity of 9.79
percent. If Joan sold the bond today for $1,060.49,
what rate of return would she have earned for the
past year?

Ending price  Beginning price  Coupon received

One-period return =
Beginning price
 You would be willing to pay up to $987.87 for this bond today.
STOCK 1 Assume that today is December 31, 2005, and the following information applies to Ve
• After-tax operating income [EBIT(1 _ T), also called NOPAT] for 2006 is expected to
be $500 million.
• The depreciation expense for 2006 is expected to be $100 million.
• The capital expenditures for 2006 are expected to be $200 million.
• No change is expected in net operating working capital.
• The free cash flow is expected to grow at a constant rate of 6 percent per year.
• The required return on equity is 14 percent.
• The WACC is 10 percent.
• The market value of the company’s debt is $3 billion.
• 200 million shares of stock are outstanding.
Using the free cash flow approach, what should the company’s stock price be today?
ormation applies to Vermeil Airlines:
is expected to

e be today?
STOCK
fcf/(wac-g) value of firm

FCF nopat $+dep+capex+delta networking capitla

400
FIRM VALUE 10000
10000 million

total firm value

MV TOTAL MV equity plus MV debt
10000 MV EQUITY plus 3000
MV equity 7000

MV equity/ No. of sahres Rs35.00 million

Ks 14% cost of debt wacc

ws 0.7 0.1
wd 0.3
 The following table gives Foust Company’s earnings per share for the last
10 years. The common stock, 7.8 million shares outstanding, is now
(1/1/06) selling for $65 per share, and the expected dividend at the end of
the current year (12/31/06) is 55 percent of the 2005 EPS. Because investors
expect past trends to continue, g may be based on the historical earnings
growth rate. (Note that 9 years of growth are reflected in the 10 years of
data.)

Year EPS Year EPS

1996 3.9 2001 5.73
1997 4.21 2002 6.19
1998 4.55 2003 6.68
1999 4.99 2004 7.22
200 5.31 2005 7.8

The current interest rate on new debt is 9 percent, Foust’s

marginal tax rate is 40 percent, and its capital structure,
considered to be optimal, is as follows:

Debt $104,000,000
Common $156,000,000
equity
Total Liab & $260,000,000
a. Calculate Foust’s after-tax cost of debt and common equity.
b. Find Foust’s WACC.
share for the last
nding, is now
end at the end of
Because investors
torical earnings
the 10 years of

Pv 3.9
Fv 7.8
g(i) ?
N 9
pmt 0
Growth rate 8.01%
Kd 0.09 Dividen 4.29
Ttax 0.4 Pprice 65

Wd 0.4 ks 0.146
Ws 0.6 14.6

after tax kd 5.4

Wacc 10.92
FAV question

0 1 2 3 4 5
-500 202 - X 196 350 451

This project requires two outflows at 0 and 2, but the remaining cash flows are positive. Its W
10%, and its MIRR is 14.14 percent. What is year 2 cash outflow?
WRONG
FV -Rs222.20 -Rs260.88 -Rs512.44 -Rs726.34
0.1
NFV -Rs1,721.85
i 0.1414
FV Rs1,721.85
PV -Rs888.80
N 5

Pv of X 388.8
Future value of X 470.45
 ash flows are positive. Its WACC is
r 2 cash outflow?

FV Rs295.75 Rs237.16 Rs385.00 451

totsl FV Rs1,368.91
Toal PV 500+x
N 5
pmt 0
i(MIRR) 0.1414
Pv -Rs706.62
X value in present -Rs206.62
Valuse of X in future
Rs250.01 -250.01
 BOND 2 Bond X is noncallable, has 20 years to maturity, a 9 percent
coupon, and a $1,000 par value. Your required return on Bond X is 10
and if you buy it you plan to hold it for 5 years. You, and the market,
expectations that in 5 years the yield to maturity on a 15-year bond with
risk will be 8.5 percent. How much should you be willing to pay for B
today? (Hint: You will need to know how much the bond will be worth a
of 5 years.)
has 20 years to maturity, a 9 percent annual
our required return on Bond X is 10 percent,
d it for 5 years. You, and the market, have
d to maturity on a 15-year bond with similar
h should you be willing to pay for Bond X
w how much the bond will be worth at the end
f 5 years.)
 Assume that it is now January 1, 2006. Wayne-Martin Electric Inc. (WME) has just dev
solar panel capable of generating 200 percent more electricity than any solar panel curre
the market. As a result, WME is expected to experience a 15 percent annual growth rate
next 5 years. By the end of 5 years, other firms will have developed comparable technol
WME’s growth rate will slow to 5 percent per year indefinitely. Stockholders require a r
12 percent on WME’s stock. The most recent annual dividend (D0), which was paid yes
was $1.75 per share.
a. Calculate WME’s expected dividends for 2006, 2007, 2008, 2009, and 2010.
b. Calculate the value of the stock today, Pˆ0.
c. Calculate the expected dividend yield, D1/P0, capital gains yield, and total return (div
yield plus capital gains yield) expected for 2006. (Assume that Pˆ0 = P0, and recognize t
capital gains yield is equal to the total return minus the dividend yield.) Then calculate th
same three yields for 2011.
g 0.12

ke d1/(p-f) +g

dividen yied1/p
di1 2.3375
0.172632
 -800 350 350 350
13.50%

1 2 3
-900 500 500 500
Rs454.55 Rs413.22 Rs375.66
-Rs445.45 -Rs32.23 Rs343.43
-0.0858
 A company has a 12 percent WACC and is considering two mutually exclusive investments with the follo
net cash flows:
0 1 2 3 4 5 6 7
Project A -300 -387 -193 -100 600 600 850 -180
Project B -405 134 134 134 134 134 134 0

a. What is each project’s NPV?

b. What is each project’s IRR?
c. What is each project’s MIRR? (Hint:
Consider Period 7 as the end of Project B’s
life.)

d. From your answers to parts a, b, and c,

which project would be selected? If the
WACC were 18 percent, which project
would be selected?
e. Construct NPV profiles for Projects A and
f. What is each project’s MIRR at a WACC
of 18 percent?

NPV A NPV B
0% $890.00 $399.00
5% $540.09 $275.14
10% $283.34 $178.60
15% $92.96 $102.12
20% ($49.49) $40.62
25% ($156.88) ($9.51)
vestments with the following