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Corp Finance Gedchtnisprotokoll Deniz:

Tabelle hnlich P.149 durchrechnen:


Definition IRR: (P.121 ff.):
Whereas pavback and return on book are ad hoc measures, internal rate of return has a much more respectable
ancestry and is recommended in many finance texts. If, therefore, we dwell more on its deficiencies, it is not
because they are more numerous but because they are less obvious.
In Chapter 2 we noted that the net present value rule could also be expressed in terms of rate of return, which
would lead to the following rule: "Accept investment opportunities offering rates of return in excess of their
opportunity costs of capital." That Statement, properly interpreted, is absolutely correct. However, interpretation
is not always easy for long-lived investment projects.
There is no ambiguity in defining the true rate of return of an investment that generates a Single payoff after one
period:

Rate of return=

payoff
investment

Alternatively, we could write down the NPV of the investment and find the discount rate that makes NPV = 0.

NPV =C0 +

C1
=0
1+ discount

Implies

Discount Rate=

C1
1
C 0

Of course C, is the payoff and -C0 is the required investment, and so our two equations say exactly the same
thing. The discount rate that makes NPV = 0 is also the rate of return.
Unfortunately, there is no wholly satisfactory way of defining the true rate of return of a long-lived asset. The
best available concept is the so-called discounted-cash-flow (DCF) rate of return or internal rate of return (IRR).
The internal rate of return is used frequently in finance. It can be a handy measure, but, as we shall see, it can
also be a misleading measure. You should, therefore, know how to calculate it and how to use it properly.
Wikipedia:
The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare
the profitability of investments. It is also called the discounted cash flow rate of return (DCFROR) or the rate of
return (ROR). In the context of savings and loans the IRR is also called the effective interest rate. The
term internal refers to the fact that its calculation does not incorporate environmental factors (e.g., the interest
rate or inflation).
The internal rate of return on an investment or project is the "annualized effective compounded return rate" or
"rate of return" that makes the net present value (NPV as NET*1/(1+IRR)^year) of all cash flows (both positive
and negative) from a particular investment equal to zero.
In more specific terms, the IRR of an investment is the discount rate at which the net present value of costs
(negative cash flows) of the investment equals the net present value of the benefits (positive cash flows) of the
investment.

Internal rates of return are commonly used to evaluate the desirability of investments or projects. The higher a
project's internal rate of return, the more desirable it is to undertake the project. Assuming all projects require the
same amount of up-front investment, the project with the highest IRR would be considered the best and
undertaken first.
A firm (or individual) should, in theory, undertake all projects or investments available with IRRs that exceed
the cost of capital. Investment may be limited by availability of funds to the firm and/or by the firm's capacity or
ability to manage numerous projects

NPV/ROI (ME1 Aufgabe 1):


Sie haben folgende Investitionsmglichkeit: In to Kauf eines Objektes fr 2000, Verkauf ein Jahr spter ( t1 )
fr 2500. Rechnen Sie mit i = 10% .
a. Kapitalwert (Net Present Value) ?
b. Rendite (return) ?
c. Ist das Investment lohnend ??
a.
b.
c.

2500 / (1 + 0.1) = 2500 / 1,1 = 2273


- 2000 + 2273 = 273 = NPV
Rendite = 2500 2000 / 2000 = 500 / 2000 = 0,25 bzw. 25
bei 10% auf jeden Fall.

Annuity/Redemptation Plan (ME1 Aufgabe 3):


Sie wollen sich in Kiel mit einem auf Skandinavien spezialisiertes Reisebro
selbstndig machen. Ihre Berechnungen ergeben fr die Existenzgrndung einen
einmaligen Kapitalbedarf (fr Mbel, Computer, etc.) von 0,1 Mio. Die
gnstigsten Bankkonditionen sind: i = 8,5 % bei n = 5 Jahre.
a. Wie hoch ist der jhrliche Kapitaldienst (Annuitt)?
b. Erstellen Sie den Tilgungsplan mit Zinsen und Rckzahlungsbetrag fr den
Kredit fr die 5 Jahre.
c. Auf wieviel Jahre mte n (ungefhr) steigen, wenn Ihr jhrlicher
Kapitaldienst 100.000,- nicht bersteigen soll? Begrndung?
Rechnung?
a.

Annuity=loan

interest rate ( 1+interest rate )n


0,085 ( 1+0,085 )5
=
100000
x
= 25376.58
( 1+interest rate )n1
( 1+0,085 )51

KWF (vgl. meine Kopien mit den Tabellen) fr 5 Jahre und 8,5 % lautet 0,253766.
Jhrlicher Kapitaldienst fr Zinsen und Tilgung ist dann 25.376,60 .
b.

year

1
2
3
4

loan (sum at the


beginning of the
year
100000
83123.42
64812.33
44944.80

annuity

interests

payoff

Sum at the end


oft he year

25376.58
25376.58
25376.58
25376.58

8500
7065.49
5509.05
3820.31

16876.58
18311.09
19867.53
21556.27

83123.42
64812.33
44944.80
23388.53

5
c.

23388.53

KWF bei 23 Jahren: 0,100372


KWF bei 24 Jahren: 0,098970
Etwas lnger als 23 Jahre.

25376.58

1988.02

23388.56

NPV/Payback Period (ME1 Aufgabe 7):


Fr drei Projekte A , B und C mgen folgende Zahlungen gelten:

Project
A

0
-$1.000,00

-$2.000,00

-$3.000,00

1
$1.000,0
0
$1.000,0
0
$1.000,0
0

2
$0,00

3
$0,00

4
$0,00

5
$0,00

$1.000,0
0
$1.000,0
0

$4.000,0
0
$0,00

$1.000,0
0
$1.000,0
0

$1.000,0
0
$1.000,0
0

1. NPV fr die drei bei I = 10% ?


2. Payback-Periode fr die drei ?
3. Welche(s) Projekt(e) wrde eine Firma durchfhren, wenn Sie die payback-Methode anwendet und fordert,
dass das Geld nach drei Jahren zurckgeflossen sein mu (payback period = 3 years)
NPV A $1000

$1000
$90.91
(1.10)

1.
NPVB $2000

$1000 $1000 $4000 $1000 $1000

$4,044.73
(1.10) (1.10) 2 (1.10) 3 (1.10) 4 (1.10)5

NPVC $3000

2.

3. A und B

$1000 $1000 $1000 $1000

$39.47
(1.10) (1.10) 2 (1.10) 4 (1.10)5

Payback A = 1 year
Payback B = 2 years
Payback C = 4 years

Varianz u. Standard Deviation (Aufgabe 11 p.232 und ME1 Aufgabe 11):


Ebenezer Scrooge has invested 60% of his money in share A and the remainder in share B. He assesses their
prospects as follows:

Expected return (%)

15

20

Standard deviation (%)

20

22

Correlation besween returns

.5

a. What are the expected return and Standard deviation of retums on his portfolio?
b. How would your answer change if the correlation coefficient was 0 or -.5?
c. Is Mr. Scrooge's portfolio better or worse than one invested entirely in share A, or is it not possible to say?
a.

Expected return = (0.6 15) + (0.4 20) = 17%


Variance = (0.62 202) + (0.42 222) + 2(0.6)(0.4)(0.5)(20)(22) = 327.04
Standard deviation = 327.04(1/2) = 18.08%

b.

Correlation coefficient = 0 Standard deviation = 14.88%


Correlation coefficient = 0.5 Standard deviation = 10.76%

c.

His portfolio is better. The portfolio has a higher expected return and a lower standard
deviation.

Breakeven (ME2 Aufgabe 5) (see Chapter 11):


Following data is given:
Price (p)
Variable unit cost (kv)
Fixed costs (Kf)
1. Calculate the breakeven point.

contrib ution margin= pkv=106=4


breakeven=

Kf
100
=
=25 pcs .
contribution margin
4

2. What does that mean?


The breakeven point describes the point when the outcome and income is equal.
At this point the profit is 0. The contribution margin is covered at this point.
3. To which point the break even will be changed, if Kf rises to 140?

contribution margin= pkv=106=4

breakeven=

Kf
140
=
=35 pcs .
contribution margin
4

To reach the break even it is necessary to sell 10 pcs more.

10.00
6.00
100.000

(Aufgabe 6 P.405 oder ME3 Aufgabe 2) Nicht Sicher ob sie Inhalt der Klausur war:
In 2005 Pfizer had 12,000 mio. shares of common stock authorized, 8,784 mio. in issue, and 7,361 mio.
outstanding (figures round to the nearest million). Its equity account was as follows:
Common Stock
$ 439
Additional Paid-in Capital
67,622
Retained Earnings
37,608
Treasury Shares
39,323
Contributions to an employee benefit trust have been deducted from retained earnings.
a) What is the par value of each share?
The par value of each share is calculated by the following formula:

par valoe eac h s h are=

common stock
$ 439 mio .
=
=$ 0 , 05
amount of issued s h ares 8,784 mio .

The par value each share is $0.05.


b) What was the average price at which shares were sold?
The average price at which the shares were sold is calculated with the following formula:

avg . sales price of s h ares=

common stock+ additional paidcapital ($ 439 mio .+ $ 67,622 mio .)


=
=$ 7 , 75
amount of issued s h ares
8,784 mio .

The average sales price for one share (when they were sold) was $7.75.
c)

How many shares have been repurchased?


The amount of shares which have been repurchased is calculated with the following formula:

amnt . of repurc h ased s h ares=issued s h aresoutstanding s h ares=8,784 mio .7,361mio .=1 , 423 mio .
The amount of repurchased shares is 1,423 million.
d) What was the average price at which the shares were repurchased?
The average price at which the shares were repurchased is calculated with the following formula:

avg . repurc h ase price o f s h ares=

value of treasury s h ares


$ 39,323 mio .
=
=$ 27 . 63
amnt . of repurc h ased s h ares
1,423 mio .

The average repurchase price for one share (when they were repurchased) was $27.63.
e)

What is the value of the net common equity?


The net common equity is calculated with the following formula:

net common equity=common stock+ additional paidcapital +retained earningstreasury s h ares=$ 439 m
The net common equity is $66,346 million.

Aufgabe 11 P.406 oder ME3 Aufgabe 3) Nicht Sicher ob sie Inhalt der Klausur war:
In 2007 Beta corp. earned gross profits of $ 760,000.
a) Suppose that it is financed by combination of common stock and dollar one million of debt. The interest
rate on a debt is 10%, and the corporate tax rate is 35%. How much profit is available for common
stockholders after payment of interest and corporate taxes?
Earned gross profit (in $)
Interest (based on rate of 10%) (in $)
Earnings before tax (in $)
Tax (based on a rate of 35%) (in $)
Profit available for common stockholder after
payment of interest and corporate taxes (in $)

760,000
100,000?
660,000
231,000
429,000

b) Now suppose that instead of issuing debt Beta is financed by a combination of common stock and dollar
one million of preferred stock. The dividend yield on the preferred is 8% and the corporate tax rate is
still 35%. How much profit is now available for common stockholders after payment of preferred
dividends and corporate taxes?
Earned gross profit before taxes (in $)
Tax (based on a rate of 35%) (in$)
Net profit (in $)
Dividend (based on rate 8% and $ one million
of preffered stock) (in $)
Profit available for common stockholder after
payment of preferred dividends and corporate
taxes (in $)

760,000
266,000
494,000
80,000
414,000

WACC Definition (ME4 Aufgabe 7) See chapter 20:


a) Was besagt die WACC?
WACC is the abbreviation for Weighted Average Cost of Capital and describes a method of the DiscountedCash-Flow-Principles. The WACC is the formula to calculate the costs of capital after taxes. It is the rate that a
company is expected to pay on average to all its security holders to finance its assets.
In general, the WACC is calculated by the following formula:
N

r i MV i

WACC= i=1N

MV i
i=1

Where

is the number of sources of capital (securities, types of liabilities);

return for security i ;

r i is the required rate of

MV i is the market value of all outstanding securities i .

b) Wofr bentige ich es?


Companies can use the WACC to see if the investment projects available to them are worthwhile to undertake.
To calculate the profitability of an investment with the net present value method it is necessary to use an interest
rate for the comparison. Often the interest rate derives from alternative investment methods like the interest a
bank would pay for the investment. The WACC is a more detailed calculated interest rate which comprises also
the capital structure of the companys liabilities. Due to this decisions regarding financial investments are
included in the calculation.

Aufgabe 24 P.815 (ME 5 Aufgabe 3):


As you can see, someone has spilled ink over some of the entries in the balance sheet and income Statement of
Transylvania Railroad (Table 29.14). Can you use the following information to work out the missing entries?
Debt ratio: .4.
Times-interest-earned: 11.2.
Current ratio: 1.4.
Quick ratio: 1.0.
Cash ratio: .2.
Return on total assets: .18.
Return on equity: .41.
Inventory turnover: 5.0.
Receivables' collection period: 71.2 days.
Total Assets = Total Liabilities + Equity = 115
Total current liabilities = Notes payable + Accounts payable= 30 + 25 = 55
Current ratio = current assets / current liabilities = 1.4
Total current assets = 1.4 x 55 = 77
Cash ratio = cash / current liabilities = 0.2
Cash = cash ratio x current liabilities = 0.2 x 55 = 11
Quick ratio = (cash + accounts receivable) / current liabilities = 1.0
1.0 x current liabilities - Cash = Accounts receivable
1.0 x 55 - 11 = 44
Accounts receivable = 44
Total current assets = Cash + Accounts receivable + Inventory
Inventory = total current assets - cash - accounts receivable
Inventory = 77 - 11 - 44 = 22
Total assets = Total current assets + Fixed assets= 115
Fixed assets = Total assets Total current assets = 38
Fixed assets = 115 - 77 = 38
Debt ratio = Long-term debt/ (Long-term debt + Equity) = 0.4
Long-term debt + Equity = 115 55 = 60
Debt ration x (long-term debt +equity) = long-term debt
0.4 x 60 = 24
Long-term debt = 24
Equity = 60 24 = 36
Inventory turnover = (Cost of goods sold/Average inventory) = 5.0
Average inventory = (Inventory 2007 + Inventory 2006) / 2 = (22 + 26)/2 = 24
Cost of goods sold = Average inventory x inventory turnover
Cost of goods sold = 24 x 5.0
Cost of goods sold = 120
Receivables collection period = Average receivables/ (Sales/365) = 71.2
Average receivables = (receivables 2007 + receivables 2006) / 2 (34 + 44)/2 = 39
Sales = (Average Receivables / Receivables' collection period) +365
Sales = (39 / 71.2) +365
Sales = 200
EBIT = Total revenues - costs - depreciations
EBIT = Sales- Costs of goods sold - general expenses -depreciations

EBIT = 200 120 10 20 = 50


Times-interest-earned = (EBIT + Depreciation)/Interest = 11.2
Interest = (EBIT + Depreciation) / Times-interest-earned
Interest = (50 + 20) / 11.2
Interest = 6.25
Earnings before tax = EBIT - Interests = 50 6.25 = 43.75
Average total assets = (Assets 2006 + Assets 2007) /2 (105 + 115)/2 = 110
Return on total assets = (EBIT Tax)/Average total assets = 0.18
Tax = -1 x (Return on total assets x Average total assets) - EBIT
Tax = -1 x (0.18 x 110) - 50
Tax = 30.2
Average equity = (Equity 2006 + Equity 2007) / 2 = (30 + 36)/2 = 33
Return on equity = Earnings available for common stock/average equity= 0.41
Earnings available for common stockholders = 13.53
The result in the balance sheet and income statement is:

December
2007

December
2006

11.00
44.00
22.00
77.00
38.00
115.00
30.00
25.00
55.00
24.00
36.00
115.00

20.00
34.00
26.00
80.00
25.00
105.00
35.00
20.00
55.00
20.00
30.00
105.00

Balance Sheet
Cash
Accounts receivable
Inventory
Total current assets
Fixed assets, net
Total
Notes payable
Accounts payable
Total current liabilities
Long-term debt
Equity
Total
Income Statement
Sales
Cost of goods sold
Selling, general, and administrative
expenses

200.00
120.00
10.00

Depreciation
EBIT
Interest
Earnings before tax
Tax
Earnings available for common stock

20.00
50.00
6.27
43.75
30.20
13.55

Aufgabe 19 P.847 (ME 5 Aufgabe 5):

Jim Khana, the credit manager of Velcro Saddles, is reappraising the company's credit policy. Velcro sells on
terms of net 30. Cost of goods sold is 85% of sales, and fixed costs are a further 5% of sales. Velcro classifies
customers on a scale of 1 to 4. During the past five years, the collection experience was as follows:

Classification

Defaults as Percent of Sales

1
2
3
4

.0
2.0
10.0
20.0

Average Collection Period in


Days for Non Defaulting
Accounts
45
42
40
80

The average interest rate was 15%.


What conclusions (if any) can you draw about Velcro's credit policy? What other factors should be taken into
account before changing this policy?
In this case we will calculate the credit an amount of 100.00 $ and will be calculated with the formula for the net
present value.
For classification number 1:

NPV =$ 85.00+

100(10)
=$ 13.29
1.15 45/365

For classification number 2:

NPV =$ 85.00+

100(10.02)
=$ 11.44
1.15 42/365

For classification number 3:

NPV =$ 85.00+

100(10.10)
=$ 3.63
1.15 40/365

For classification number 4:

NPV =$ 85.00+

100(10.20)
=$7.41
1.1580 /365

If the company follows the calculated data, it would only make sense to sell products to the customers that are
ranked in the categories 1, 2 and 3. With customers in the 4th category, the company loses money and makes no
sense to do business with them. Now, the target for the company should be that the non-defaulting customers
from the category 4 can developed to reliable and regular customers. The category 4 should be split in two
groups with the non-defaulting and defaulting customers. With the splitting in this 2 categories, the nondefaulting customers could be profitable and a chance for doing further business. For the defaulting customers is
exist only one opportunity for the future: Change the paying terms in cash in Advance or dont sell goods to
this customers.

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