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Drill exercises:

Chapter 3
E3.6

Required return = 12%

Value of the building=

5.34.2
1.1
1.1
1.1 1.1+12
+
+
+
+
=10.77 million
1
2
3
(1+0.12) 1.12 1.12 1.124 1.125

E3.7
a
Sales

Earning
s

Book value

Market
value

Price-tosales ratio

Price-toearnings
ratio

Price-to-book
ratio

HewlettPackard Co.

84,229

7,264

38,526

115,700

1.37

15.93

3.00

Lenovo
Group Ltd.

14,590

161

1,134

6,381

0.44

39.63

5.63

b
Average
Multiple for
Comparables

Dell's
number
Sales
Earnings
Book value

61,133
2,947
3,735

x
x
x

0.91
27.78
4.32

Dell's
valuation
=
=
=

55,355.64
81,869.73
16,116.81

51,114.06

E3.11
a
no effect on the price per share
158 million * 55 per share = 8690 million

30 million * 55 per share = 1650 million


(8690+1650)/188 = still 55 per share

b
By issuing the stock firm lost equity value, stock price tend to decrease, so the directors
exercised some of the stocks and increased price.
Market Risk
Cost of Capital
E3.13
Premium
4.5%
Risk-free rate
CAPM6%
equity beta
7.5%
9%

9.4%
11.2%

a
4%
1.2

13%
14.8%

B
Risk-free rate

4%

beta = 0.9
beta = 1.4
Market
Market
Risk
Cost of
Risk
Cost of
Premium
Capital
Premium
Capital
4.5%
8.05%
4.5%
10.3%
6.0%
9.40%
6.0%
12.4%
7.5%
10.75%
7.5%
14.5%
9.0%
12.10%
9.0%
16.6%

c
When P/E ratio is 20$ and EPS is 2.17$, then price of the stock 43.4$ on May 31,2012.
Also we can find price on May 31, 2011 by adding stock price of May 31,2012 and dividend,
then bring it to the May 31, 2012s value.
beta = 0.9

beta = 1.4

Cost of
Capital
8.05%
9.4%
10.75%
12.1%

Price
40.39
39.89
39.40
38.93

Cost of
Capital
10.3%
12.4%
14.5%
16.6%

Price
39.56
38.83
38.11
37.43

Chapter 4
E4.4
Reported cash flow from operations
Interest payments
Interest income
Net interest payments
Taxes (35%)
Net interest payments after tax (65%)
Cash flow from operations
Cash investment in operations

5270
1342
876
466
163.1
302.9
5572.9
6417

Free cash flow

-844.1

E4.7
Net cash provided by operating activities
Interest payment
Interest income
Net interest
Taxes (36%)
Net interest payments after tax (64%)
Cash flow from operations
Reported cash used in investing activities
Purchases of investments in interest-bearing
securities
Proceeds from disposal of investments
Cash investment in operations
Free cash flow

7150
405
236
169
60.84
108.16
7258.16
6719
99
-448

-349
6370
13628.16

E4.8
According to discounted cash flow analysis, we need a discount rate. Also if we value the
firm at the beginning of 2004 just analyzing next 4 years data, we might mislead, so long
forecast horizons are required.

E4.10

a
E

V0=

2014300 2057380 2095442 2107470


2107470
+
+
+
+
6192=12113 . 55
2
3
4
1+0.09
( 1.091 )1.09 4
1.09
1.09
1.09

Value per share = $12113.55 million / 369 million = 32.83


Value to price = 32.83 / 47 = 0.698

b
E

V0=

2014300 2057380 2095442 2107470


16371.03
+
+
+
+
6192=19136 . 13
2
3
4
1+0.09
( 1.091.03 )1.094
1.09
1.09
1.09

Value per share = $19136.13 million / 369 million = 51.86


Value to price = 51.86 / 47 = 1.103

E4.12
a
Walmart stores have negative free cash flows because the firm spent too much cash in
investments. They spent in investments more than they earned from operations.

b
Net income of Walmart is higher than free cash flows because it includes accrual incomes and
expenditures /non-cash transactions/.

c
No, since the difference between free cash flow and net income is very big, the firm should
apply another analysis, which is suitable for non-cash transactions.

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