Financial Accounting 1 problem

Mr. Art Deco will be paid $100,000 one year hence. This is a nominal flow, which he discounts at an 8% nominal discount rate:           PV = 100,000/1.08 = $92,593           The inflation rate is 4%. Calculate the PV of Mr. Deco’s payment using the equivalent real cash flow and real discount rate. (You should get exactly the same answer as he did.)

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Use excel

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Instructions

o complete the homework assignments in the templates provided:

requires a text answer. Essay questions require references; use the textbook.

requires a calculation, using Excel formulas or functions. You cannot perform the operation on a calculator and then type the answer in the cell. You will enter the calculation in the cell, and only the final answer will show in the cell. I will be able to review your calculation and correct, if necessary.

requires a number only. In some problems, a “Step 1” is added to help you solve the problem.

)]-1, or D (debt) + E (equity) = V (value).

NAME:
T
1. The question is provided for each problem. You may need to refer to your textbook for additional information in a few cases.
2. You will enter the required information into the shaded cells.
3. The cells are coded:
a)

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T
b)

C
c)

F
d) Formula requires a written formula, not the numbers. For example, the rate of return = [(1 + nominal)/ (1+

inflation
4. Name your assignment file as “lastnamefirstinitial-FINC600-Week#”, and submit by midnight ET, Day 7.

P4-10

T
Problem 4-10
Under what conditions does r, a stock’s market capitalization rate, equal its earnings­price ratio EPS1/P0?
Answer:

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

P4-12

Answer:
T

Problem 4-12
What is meant by the “horizon value” of a business? How can it be estimated?

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

P5-9

“I like the IRR rule. I can use it to rank projects without having to specify a discount rate.”

“I like the payback rule. As long as the minimum payback period is short, the rule makes sure that the company takes no borderline projects. That reduces risk.”

a. T
b. T
Problem 5-9
Respond to the following comments:

a. b.
Answers:

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

P5-16

Answer:

T
Problem 5-16
Some people believe firmly, even passionately, that ranking projects on IRR is OK if each project’s cash flows can be reinvested at the project’s IRR. They also say that the NPV rule “assumes that cash flows are reinvested at the opportunity cost of capital.” Think carefully about these statements. Are they true? Are they helpful?

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

P6-2

Answer:

F

r F
inflation F

T C

T C

T C

Problem 6-2
Mr. Art Deco will be paid $100,000 one year hence. This is a nominal flow, which he discounts at an 8% nominal discount rate:
PV = 100,000/1.08 = $92,593
The inflation rate is 4%.
Calculate the PV of Mr. Deco’s payment using the equivalent real cash flow and real discount rate. (You should get exactly the same answer as he did.)
C1
Formula (in words) Calculation
Real Discount Rate (rdr)
Real Cash Flow (rcf)
PV (using rcf)

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

Principles of Corporate Finance, Concise, 2nd Edition

P6-13

Answer:
T

Problem 6-13
Each of the following statements is true. Explain why they are consistent.
a. When a company introduces a new product, or expands production of an existing product, investment in net working capital is usually an important cash outflow.
b. Forecasting changes in net working capital is not necessary if the timing of all cash inflows and outflows is carefully specified.

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

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