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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
Annuity=loan
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
annuity
interests
payoff
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
25376.58
1988.02
23388.56
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
$1000
$90.91
(1.10)
1.
NPVB $2000
$4,044.73
(1.10) (1.10) 2 (1.10) 3 (1.10) 4 (1.10)5
NPVC $3000
2.
3. A und B
$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
15
20
20
22
.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.
b.
c.
His portfolio is better. The portfolio has a higher expected return and a lower standard
deviation.
Kf
100
=
=25 pcs .
contribution margin
4
breakeven=
Kf
140
=
=35 pcs .
contribution margin
4
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:
common stock
$ 439 mio .
=
=$ 0 , 05
amount of issued s h ares 8,784 mio .
The average sales price for one share (when they were sold) was $7.75.
c)
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:
The average repurchase price for one share (when they were repurchased) was $27.63.
e)
net common equity=common stock+ additional paidcapital +retained earningstreasury s h ares=$ 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 $)
760,000
266,000
494,000
80,000
414,000
r i MV i
WACC= i=1N
MV i
i=1
Where
December
2007
December
2006
11.00
44.00
22.00
77.00
38.00
115.00
30.00
25.00
55.00
24.00
36.00
115.00
20.00
34.00
26.00
80.00
25.00
105.00
35.00
20.00
55.00
20.00
30.00
105.00
Balance Sheet
Cash
Accounts receivable
Inventory
Total current assets
Fixed assets, net
Total
Notes payable
Accounts payable
Total current liabilities
Long-term debt
Equity
Total
Income Statement
Sales
Cost of goods sold
Selling, general, and administrative
expenses
200.00
120.00
10.00
Depreciation
EBIT
Interest
Earnings before tax
Tax
Earnings available for common stock
20.00
50.00
6.27
43.75
30.20
13.55
Jim Khana, the credit manager of Velcro Saddles, is reappraising the company's credit policy. Velcro sells on
terms of net 30. Cost of goods sold is 85% of sales, and fixed costs are a further 5% of sales. Velcro classifies
customers on a scale of 1 to 4. During the past five years, the collection experience was as follows:
Classification
1
2
3
4
.0
2.0
10.0
20.0
NPV =$ 85.00+
100(10)
=$ 13.29
1.15 45/365
NPV =$ 85.00+
100(10.02)
=$ 11.44
1.15 42/365
NPV =$ 85.00+
100(10.10)
=$ 3.63
1.15 40/365
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.