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Chapter 18How Much Should a Corporation Borrow?McGraw-Hill/Irwin211111Topics CoveredCorporate TaxesCorporate and Personal TaxesCost of Financial DistressPecking Order of Financial Choices322222Capital Structure & Corporate TaxesFinancial Risk - Risk to shareholders resulting from the use of debt.Financial Leverage - Increase in the variability of shareholder returns that comes from the use of debt.Interest Tax Shield- Tax savings resulting from deductibility of interest payments.

3Capital Structure & Corporate Taxes

The tax deductibility of interest increases the total distributed income to both bondholders and shareholders.Capital Structure & Corporate Taxes

Capital Structure & Corporate TaxesExample - You own all the equity of Space Babies Diaper Co. The company has no debt. The companys annual cash flow is $900,000 before interest and taxes. The corporate tax rate is 35% You have the option to exchange 1/2 of your equity position for 5% bonds with a face value of $2,000,000.

Should you do this and why?

6

Capital Structure & Corporate TaxesExample - You own all the equity of Space Babies Diaper Co. The company has no debt. The companys annual cash flow is $900,000 before interest and taxes. The corporate tax rate is 35% You have the option to exchange 1/2 of your equity position for 5% bonds with a face value of $2,000,000. Should you do this and why?

Total Cash Flow All Equity = 585

*1/2 Debt = 620 (520 + 100)7Capital Structure & Corporate TaxesPV of Tax Shield = (assume perpetuity) D x rD x Tc rD= D x TcExample:Tax benefit = 2,000,000 x (.05) x (.35) = $35,000PV of $35,000 in perpetuity = 35,000 / .05 = $700,000

PV Tax Shield = $2,000,000 x .35 = $700,0008Capital Structure & Corporate TaxesFirm Value = Value of All Equity Firm + PV Tax ShieldExampleAll Equity Value = 585 / .05 = 11,700,000 PV Tax Shield = 700,000

Firm Value with 1/2 Debt = $12,400,0009Capital Structure & Corporate Taxes

Merck Balance Sheet, December 2008 (figures in $millions)Capital Structure & Corporate Taxes

Merck Balance Sheet, December 2008 (figures in $millions)(w/ $1 billion Debt for Equity Swap)C.S. & Taxes (Personal & Corp)Corporate TaxIncome after Corp Taxes$1.00Tp$1.00 TpPersonal Taxes .Income after All Taxes$1.00Tc-TpE (1.00-Tc) =(1.00-TpE)(1.00-Tc)TpE (1.00-Tc) $1.00 Tc TcNoneTo bondholdersTo stockholdersOperating Income ($1.00)Paid out as interestOr paid out as equity incomeC.S. & Taxes (Personal & Corp)Relative Advantage Formula ( Debt vs Equity )1-Tp(1-TpE) (1-Tc)RAF > 1 DebtRAF < 1EquityAdvantage13Example C.S. & Taxes (Personal & Corp)

14Another Example C.S. & Taxes (Personal & Corp)

15C.S. & Taxes (Personal & Corp)Todays RAF & Debt vs Equity preference.

1-.33(1-.16) (1-.35)= 1.23RAF = Why are companies not all debt?16Capital StructureStructure of Bond Yield RatesDEBondYieldr17rDVrDrEIncludes Bankruptcy RiskWACCWACC w/o taxes (traditional view)18Financial DistressCosts of Financial Distress - Costs arising from bankruptcy or distorted business decisions before bankruptcy.19Financial DistressCosts of Financial Distress - Costs arising from bankruptcy or distorted business decisions before bankruptcy.

Market Value =Value if all Equity Financed + PV Tax Shield - PV Costs of Financial Distress20Financial DistressDebtMarket Value of The FirmValue ofunleveredfirmPV of interesttax shieldsCosts offinancial distressValue of levered firmOptimal amount of debtMaximum value of firm21Default Payoff Scenarios

Ace Limited ExampleTotal payoff to Ace Limited security holders. There is a $200 bankruptcy cost in the event of default (shaded area).

Conflicts of InterestCircular File Company has $50 of 1-year debt.

Conflicts of InterestCircular File Company has $50 of 1-year debt.

Why does the equity have any value ?Shareholders have an option -- they can obtain the rights to the assets by paying off the $50 debt.

Conflicts of InterestCircular File Company has may invest $10 as follows.

Assume the NPV of the project is (-$2). What is the effect on the market values?Conflicts of InterestCircular File Company value (post project)

Firm value falls by $2, but equity holder gains $3

Conflicts of InterestCircular File Company value (assumes a safe project with NPV = $5)

While firm value rises, the lack of a high potential payoff for shareholders causes a decrease in equity value.

Financial Distress GamesCash In and Run

Playing for Time

Bait and Switch

29Financial ChoicesTrade-off Theory - Theory that capital structure is based on a trade-off between tax savings and distress costs of debt.

Pecking Order Theory - Theory stating that firms prefer to issue debt rather than equity if internal finance is insufficient.30Trade Off Theory & Prices1.Stock-for-debtStock price exchange offersfalls

Debt-for-stockStock price exchange offersrises

2. Issuing common stock drives down stock prices; repurchase increases stock prices.3. Issuing straight debt has a small negative impact.

Issues and Stock PricesWhy do security issues affect stock price? The demand for a firms securities ought to be flat.

Any firm is a drop in the bucket. Plenty of close substitutes. Large debt issues dont significantly depress the stock price.Pecking Order TheoryConsider the following story:

The announcement of a stock issue drives down the stock price because investors believe managers are more likely to issue when shares are overpriced.

Therefore firms prefer internal finance since funds can be raised without sending adverse signals.

If external finance is required, firms issue debt first andequity as a last resort.

The most profitable firms borrow less not because they have lower target debt ratios but because they don't need external finance.

Pecking Order TheorySome Implications:Internal equity may be better than external equity.Financial slack is valuable.If external capital is required, debt is better. (There is less room for difference in opinions about what debt is worth).

Web ResourcesClick to access web sitesInternet connection required

http://astro.temple.edu/~tub06197/Wk1Myers1984.pdf

3.6Inflation1900190119021903190419051906190719081909191019111912191319141915191619171918191919201921192219231924192519261927192819291930193119321933193419351936193719381939194019411942194319441945194619471948194919501951195219531954195519561957195819591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984198519861987198819891990199119921993199419951996199719981999200020012002200319000.61Inflation0.611.221.21.791.7500.573.291.11-1.641.672.191.071.991.041.9311.618.5320.514.792.27-10.65-2.562.63-0.233.85-1.49-2.08-0.970.2-6.03-9.52-10.30.512.032.991.213.1-2.78-0.480.969.729.293.162.112.2518.169.012.71-1.85.795.870.880.62-0.50.372.863.021.761.51.480.671.221.651.191.923.353.044.726.115.493.363.418.812.27.014.816.779.0313.3112.48.943.873.83.953.771.134.414.424.656.113.062.92.752.672.543.321.71.612.683.391.552.381.919011.2219021.219031.7919041.751905019060.5719073.2919081.111909-1.6419101.6719112.1919121.0719131.9919141.0419151.93191611.6191718.53191820.5191914.7919202.271921-10.651922-2.5619232.631924-0.2319253.851926-1.491927-2.081928-0.9719290.21930-6.031931-9.521932-10.319330.5119342.0319352.9919361.2119373.11938-2.781939-0.4819400.9619419.7219429.2919433.1619442.1119452.25194618.1619479.0119482.711949-1.819505.7919515.8719520.8819530.621954-0.519550.3719562.8619573.0219581.7619591.519601.4819610.6719621.2219631.6519641.1919651.9219663.3519673.0419684.7219696.1119705.4919713.3619723.4119738.8197412.219757.0119764.8119776.7719789.03197913.31198012.419818.9419823.8719833.819843.9519853.7719861.1319874.4119884.4219894.6519906.1119913.0619922.919932.7519942.6719952.5419963.3219971.719981.6119992.6820003.3920011.5520022.3820031.9

Table 6.1Period012345671Capital Investment10,000(1,949)2Accumulated depreciation1,5833,1674,7506,3337,9179,5000.03Year-end book value10,0008,4176,8335,2503,6672,0835000.04Working capital5501,2893,2614,8903,5832,0020.05Total book value (3+4)10,0008,9678,1228,5118,5575,6662,5020.06Sales52312,88732,61048,90135,83419,7177Cost of goods sold8377,72919,55229,34521,49211,8308Other Costs4,0002,2001,2101,3311,4641,6111,7729Depreciation1,5831,5831,5831,5831,5831,58310Pretax profit (6-7-8-9)(4,000)(4,097)2,36510,14416,50911,1484,5321,44911Tax at 35%(1,400)(1,434)8283,5505,7783,9021,58650712Profit after tax (10-11)2,600(2,663)1,5376,59510,7317,2462,946942

Table 6.2Period012345671Sales52312,88732,61048,90135,83419,7172Cost of goods sold8377,72919,55229,34521,49211,8303Other costs4,0002,2001,2101,3311,4641,6111,7724Tax on operations(1,400)(1,434)8283,5505,7783,9021,5865Cash flow from operations (1-2-3-4)(2,600)(1,080)3,1208,17712,3148,8294,5296Change in working capital(550)(739)(1,972)(1,629)1,3071,5812,0027Capital investment and disposal(10,000)1,4428Net cash flow (5+6+7)(12,600)(1,630)2,3816,20510,68510,1366,1103,4449Present value at 20%(12,600)(1,358)1,6543,5915,1534,0742,046961Net Present value= +3520 (sum of 9)

Table 6.4Tax Depreciation Schedules by Recovery-Period ClassYear(s)3-Year5-Year7-Year10-Year15-Year20-Year133.332014.291053.75244.453224.49189.57.22314.8119.217.4914.48.556.6847.4111.5212.4911.527.76.18511.528.939.226.935.7165.768.927.376.235.2878.936.555.94.8984.456.555.94.5296.565.94.46106.555.94.46113.295.94.46125.94.46135.914.46145.94.46155.914.46162.994.4617-204.46212.23

Table 6.5Period012345671Sales52312,88732,61048,90135,83419,7172Cost of goods sold8377,72919,55229,34521,49211,8303Other Costs4,0002,2001,2101,3311,4641,6111,7724Tax depreciation2,0003,2001,9201,1525765Pretax profit (1-2-3-4)(4,000)(4,514)7489,80716,94011,5795,5391,9496Taxes at 35%(1,400)(1,580)2623,4325,9294,0531,939682

Table 6.6Period012345671Sales52312,88732,61048,90135,83419,7172Cost of goods sold8377,72919,55229,34521,49211,8303Other costs4,0002,2001,2101,3311,4641,6111,7724Tax(1,400)(1,580)2623,4325,9294,0531,9396825Cash flow from operations (1-2-3-4)(2,600)(934)3,6868,29512,1638,6784,176(682)6Change in working capital(550)(739)(1,972)(1,629)1,3071,5812,0027Capital investment and disposal(10,000)1,9498Net cash flow (5+6+7)(12,600)(1,484)2,9476,32310,5349,9855,7573,2699Present Value= +3802 (sum of 9)(12,600)(1,237)2,0473,6595,0804,0131,928912Net present value= +3802 (sum of 9)

7.1Plotting data Fig 7.1EquitiesBondsBills19001901190219031904190519061907190819091910191119121913191419151916191719181919192019211922192319241925192619271928192919301931193219331934193519361937193819391940194119421943194419451946194719481949195019511952195319541955195619571958195919601961196219631964196519661967196819691970197119721973197419751976197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200419001.001.001.00Equities1.001.241.471.551.331.702.082.161.532.242.692.462.602.792.572.433.373.592.913.484.203.453.855.035.186.588.449.2412.3017.0614.5810.465.875.298.348.7012.5316.5810.8413.8914.2913.2611.9513.8617.7821.5829.7828.0229.0129.6435.6746.1755.7563.2463.6195.48119.55129.40116.09168.32190.44192.01244.70219.72265.71308.62353.13322.38414.85473.70421.87422.01496.62585.91477.42341.89473.43599.30583.50637.61800.601,070.161,030.031,222.751,509.691,555.692,062.292,394.212,448.672,888.003,730.543,499.964,697.095,118.315,695.735,692.057,766.729,414.1312,359.9215,255.9718,850.1716,796.6014,953.3411,834.1115,578.5119011.241.041.04Bonds1.001.041.071.091.131.151.191.221.231.281.311.351.401.451.491.551.601.651.701.651.661.761.982.052.172.312.442.632.862.862.963.102.943.433.433.773.964.264.274.504.775.065.115.275.385.536.136.125.966.166.566.576.316.386.617.097.006.617.106.676.527.417.498.008.108.388.448.757.957.937.528.439.5510.099.9810.4211.3713.2813.1913.0312.8712.3612.5917.6817.7920.5526.9133.5132.6035.7542.2344.8453.4957.8068.3463.0382.9982.2295.26107.7098.05119.11123.51145.54147.6519021.471.071.09Bills1.001.041.091.141.201.251.311.381.471.531.591.671.731.811.912.012.082.142.242.372.502.702.883.023.183.313.443.553.663.793.984.074.114.154.174.174.184.194.204.204.204.204.204.214.234.244.264.274.294.334.384.434.504.574.654.694.774.885.045.125.275.415.525.675.856.066.296.596.877.237.708.218.578.909.5110.2710.8711.4212.0112.8714.2015.8018.1220.0421.8023.9525.7927.3828.8830.7133.2935.8937.8939.2240.3641.9344.2846.5949.0451.4253.8257.0059.1860.1560.7719031.551.091.1419041.331.131.2019051.701.151.2519062.081.191.3119072.161.221.3819081.531.231.4719092.241.281.5319102.691.311.5919112.461.351.6719122.601.401.7319132.791.451.8119142.571.491.9119152.431.552.0119163.371.602.0819173.591.652.1419182.911.702.2419193.481.652.3719204.201.662.5019213.451.762.7019223.851.982.8819235.032.053.0219245.182.173.1819256.582.313.3119268.442.443.4419279.242.633.55192812.302.863.66192917.062.863.79193014.582.963.98193110.463.104.0719325.872.944.1119335.293.434.1519348.343.434.1719358.703.774.17193612.533.964.18193716.584.264.19193810.844.274.20193913.894.504.20194014.294.774.20194113.265.064.20194211.955.114.20194313.865.274.21194417.785.384.23194521.585.534.24194629.786.134.26194728.026.124.27194829.015.964.29194929.646.164.33195035.676.564.38195146.176.574.43195255.756.314.50195363.246.384.57195463.616.614.65195595.487.094.691956119.557.004.771957129.406.614.881958116.097.105.041959168.326.675.121960190.446.525.271961192.017.415.411962244.707.495.521963219.728.005.671964265.718.105.851965308.628.386.061966353.138.446.291967322.388.756.591968414.857.956.871969473.707.937.231970421.877.527.701971422.018.438.211972496.629.558.571973585.9110.098.901974477.429.989.511975341.8910.4210.271976473.4311.3710.871977599.3013.2811.421978583.5013.1912.011979637.6113.0312.871980800.6012.8714.2019811,070.1612.3615.8019821,030.0312.5918.1219831,222.7517.6820.0419841,509.6917.7921.8019851,555.6920.5523.9519862,062.2926.9125.7919872,394.2133.5127.3819882,448.6732.6028.8819892,888.0035.7530.7119903,730.5442.2333.2919913,499.9644.8435.8919924,697.0953.4937.8919935,118.3157.8039.2219945,695.7368.3440.3619955,692.0563.0341.9319967,766.7282.9944.2819979,414.1382.2246.59199812,359.9295.2649.04199915,255.97107.7051.42200018,850.1798.0553.82200116,796.60119.1157.00200214,953.34123.5159.18200311,834.11145.5460.15200415,578.51147.6560.77

7.2Plotting data Fig 7.2EquitiesBondsBills19001901190219031904190519061907190819091910191119121913191419150.916191719181919192019211922192319241925192619271928192919301931193219331934193519361937193819391940194119421943194419451946194719481949195019511952195319541955195619571958195919601961196219631964196519661967196819691970197119721973197419751976197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200419001.001.001.00Equities1.001.231.441.511.271.591.952.011.382.002.442.202.272.412.182.042.772.641.811.801.891.521.892.542.553.244.014.456.058.477.235.523.423.445.395.527.7210.086.398.438.718.016.586.988.6810.3213.9211.0910.5310.4812.8415.7117.9220.1420.1430.3737.8939.8734.7249.4755.1554.7969.3661.5373.2084.0294.3283.31104.05113.4595.2290.29102.80117.2887.8456.0672.5487.6179.9080.0888.74105.5393.24106.56126.75125.65160.51184.26180.50203.87251.65222.51289.74306.82332.30323.44430.40504.92651.82791.78952.74821.14719.86556.47719.0319011.231.031.04Bonds1.001.031.051.061.071.081.111.141.111.151.191.211.221.251.261.301.321.211.060.850.750.770.971.041.071.141.161.271.411.421.471.641.712.232.222.392.442.592.522.732.913.062.812.662.632.652.872.422.162.182.362.232.032.032.092.252.222.042.121.961.892.122.122.242.232.282.252.261.991.901.701.801.982.021.841.711.741.941.811.641.431.221.141.541.491.662.092.582.402.522.852.853.303.463.993.584.604.415.025.594.965.825.956.846.8119021.441.051.07Bills1.001.041.071.111.151.181.221.291.321.371.441.491.511.571.621.681.711.581.391.221.131.181.421.521.561.631.631.711.801.891.972.152.402.702.692.652.572.552.482.552.562.542.312.122.062.031.991.691.561.531.581.511.441.461.471.491.511.501.511.501.521.541.571.591.611.651.681.701.721.731.741.761.771.781.751.681.671.671.641.621.571.561.641.751.831.932.012.112.132.172.252.282.342.352.352.382.452.502.592.672.722.792.852.832.8019031.511.061.1119041.271.071.1519051.591.081.1819061.951.111.2219072.011.141.2919081.381.111.3219092.001.151.3719102.441.191.4419112.201.211.4919122.271.221.5119132.411.251.5719142.181.261.6219152.041.301.680.9162.771.321.7119172.641.211.5819181.811.061.3919191.800.851.2219201.890.751.1319211.520.771.1819221.890.971.4219232.541.041.5219242.551.071.5619253.241.141.6319264.011.161.6319274.451.271.7119286.051.411.8019298.471.421.8919307.231.471.9719315.521.642.1519323.421.712.4019333.442.232.7019345.392.222.6919355.522.392.6519367.722.442.57193710.082.592.5519386.392.522.4819398.432.732.5519408.712.912.5619418.013.062.5419426.582.812.3119436.982.662.1219448.682.632.06194510.322.652.03194613.922.871.99194711.092.421.69194810.532.161.56194910.482.181.53195012.842.361.58195115.712.231.51195217.922.031.44195320.142.031.46195420.142.091.47195530.372.251.49195637.892.221.51195739.872.041.50195834.722.121.51195949.471.961.50196055.151.891.52196154.792.121.54196269.362.121.57196361.532.241.59196473.202.231.61196584.022.281.65196694.322.251.68196783.312.261.701968104.051.991.721969113.451.901.73197095.221.701.74197190.291.801.761972102.801.981.771973117.282.021.78197487.841.841.75197556.061.711.68197672.541.741.67197787.611.941.67197879.901.811.64197980.081.641.62198088.741.431.571981105.531.221.56198293.241.141.641983106.561.541.751984126.751.491.831985125.651.661.931986160.512.092.011987184.262.582.111988180.502.402.131989203.872.522.171990251.652.852.251991222.512.852.281992289.743.302.341993306.823.462.351994332.303.992.351995323.443.582.381996430.404.602.451997504.924.412.501998651.825.022.591999791.785.592.672000952.744.962.722001821.145.822.792002719.865.952.852003556.476.842.832004719.036.812.80

7.3Denmark4.3Belgium4.7DenmarkBelgiumSwitzerlandSpainCanadaIrelandGermanyUKAverageNetherlandsUSASwedenSouth AfricaAustraliaFranceJapanItalySwitzerland5.14.34.75.15.35.85.95.96.36.46.67.68.18.28.69.31010.7Spain5.3Canada5.8Ireland5.9Germany5.9UK6.3Average6.4Netherlands6.6USA7.6Sweden8.1South Africa8.2Australia8.6France9.3Japan10Italy10.7

7.4190024.2%190118.0%19026.1%19001901190219031904190519061907190819091910191119121913191419151916191719181919192019211922192319241925192619271928192919301931193219331934193519361937193819391940194119421943194419451946194719481949195019511952195319541955195619571958195919601961196219631964196519661967196819691970197119721973197419751976197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120021903-14.6%24.2%18.0%6.1%-14.6%28.1%22.1%4.1%-29.3%46.8%20.0%-8.5%5.7%7.2%-7.8%-5.5%38.8%6.4%-18.9%19.6%20.6%-17.9%11.6%30.6%3.0%27.0%28.3%9.5%33.1%38.7%-14.6%-28.3%-43.9%-9.8%57.6%4.4%44.0%32.3%-34.6%28.2%2.9%-7.2%-9.9%16.0%28.3%21.4%38.0%-5.9%3.6%2.2%20.3%29.4%20.8%13.4%0.6%50.1%25.2%8.2%-10.3%45.0%13.1%0.8%27.4%-10.2%20.9%16.2%14.4%-8.7%28.7%14.2%-10.9%0.0%17.7%18.0%-18.5%-28.4%38.5%26.6%-2.6%9.3%25.6%33.7%-3.8%18.7%23.5%3.1%32.6%16.1%2.3%17.9%29.2%-6.2%34.2%9.0%11.3%-0.1%36.5%21.2%31.3%23.4%23.6%-10.9%-11.0%-20.9%190428.1%190522.1%19064.1%1907-29.3%190846.8%190920.0%1910-8.5%19115.7%19127.2%1913-7.8%1914-5.5%191538.8%19166.4%1917-18.9%191819.6%191920.6%1920-17.9%192111.6%192230.6%19233.0%192427.0%192528.3%19269.5%192733.1%192838.7%1929-14.6%1930-28.3%1931-43.9%1932-9.8%193357.6%19344.4%193544.0%193632.3%1937-34.6%193828.2%19392.9%1940-7.2%1941-9.9%194216.0%194328.3%194421.4%194538.0%1946-5.9%19473.6%19482.2%194920.3%195029.4%195120.8%195213.4%19530.6%195450.1%195525.2%19568.2%1957-10.3%195845.0%195913.1%19600.8%196127.4%1962-10.2%196320.9%196416.2%196514.4%1966-8.7%196728.7%196814.2%1969-10.9%19700.0%197117.7%197218.0%1973-18.5%1974-28.4%197538.5%197626.6%1977-2.6%19789.3%197925.6%198033.7%1981-3.8%198218.7%198323.5%19843.1%198532.6%198616.1%19872.3%198817.9%198929.2%1990-6.2%199134.2%19929.0%199311.3%1994-0.1%199536.5%199621.2%199731.3%199823.4%199923.6%2000-10.9%2001-11.0%2002-20.9%

Fig 8.1Price Change %Coca ColaNormal-8.56150.00070-8.117700-7.67390.00020-7.2300-6.78620.00020-6.34240.00050.0001-5.89860.00090.0002-5.45480.00180.0005-5.0110.00070.0011-4.56720.00230.0023-4.12330.00160.0044-3.67950.00480.008-323570.00710.0136-2.79190.01270.0217-2.34810.02190.0325-1.90430.0320.0457-1.46040.05190.0605-1.01660.08070.0752-0.57280.10670.0878-0.1290.12120.09640.31480.13090.09950.75860.10880.09641.20250.09260.08781.64630.07350.07522.09010.04890.06052.53390.030.04572.97770.02280.03253.42150.01340.02173.86540.00970.01364.30920.00550.0084.7530.00410.00445.19680.00370.00235.64060.00210.00116.08440.00140.00056.52830.00070.00026.97210.00090.00017.41590.000207.85970.000508.30350.000708.74730.00020

Fig 8.4Std Devr18.21017.8810.2517.6510.517.5110.7517.481117.5311.2517.6911.517.9411.7518.271218.6912.2519.212.519.7712.7520.411321.1213.2521.8713.522.6813.7523.531424.4314.2525.3514.526.3114.7527.315

Fig 8.9InvestorBetaRisk Premium, %10.49920.631030.751040.851250.931261.051371.151481.221491.3515101.5315Mkt portfolio112.2

Fig 8.10 AInvestorBetaRisk premium, %10.491120.631330.751540.851650.931761.061871.172081.242191.3722101.5325Mkt portfolio117.9

Fig 8.10 BInvestorBetaRisk premium, %10.5620.63630.75640.85750.95861.03871.11981.18891.38101.526Mkt portfolio16.8

Fig 8.1119261119261927192819291930193119321933193419351936193719381939194019411942194319441945194619471948194919501951195219531954195519561957195819591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984198519861987198819891990199119921993199419951996199719981999200020012002200319270.970.9410.971.010.720.690.720.751.121.411.591.831.581.761.851.881.791.892.462.883.643.493.232.943.033.092.942.752.712.662.492.472.412.762.912.842.862.592.432.392.943.024.545.654.864.34.574.013.053.033.493.974.895.586.727.17.618.289.448.638.557.696.897.366.475.546.456.967.487.516.986.856.65.065.655.336.857.149.1519281.010.8610.940.860.970.840.710.750.0870.610.650.840.80.690.570.560.630.761.021.191.351.391.511.561.511.911.821.871.732.162.272.222.082.342.362.242.362.613.013.33.493.463.143.713.314.033.573.654.34.75.116.346.836.866.715.066.317.148.4810.0610.1811.210.9112.4211.7210.478.8910.9412.812.7912.3512.3813.7511.697.088.5910.9411.3413.0619290.720.9719300.690.8419310.720.7119320.750.7519331.120.08719341.410.6119351.590.6519361.830.8419371.580.819381.760.6919391.850.5719401.880.5619411.790.6319421.890.7619432.461.0219442.881.1919453.641.3519463.491.3919473.231.5119482.941.5619493.031.5119503.091.9119512.941.8219522.751.8719532.711.7319542.662.1619552.492.2719562.472.2219572.412.0819582.762.3419592.912.3619602.842.2419612.862.3619622.592.6119632.433.0119642.393.319652.943.4919663.023.4619674.543.1419685.653.7119694.863.3119704.34.0319714.573.5719724.013.6519733.054.319743.034.719753.495.1119763.976.3419774.896.8319785.586.8619796.726.7119807.15.0619817.616.3119828.287.1419839.448.4819848.6310.0619858.5510.1819867.6911.219876.8910.9119887.3612.4219896.4711.7219905.5410.4719916.458.8919926.9610.9419937.4812.819947.5112.7919956.9812.3519966.8512.3819976.613.7519985.0611.6919995.657.0820005.338.5920016.8510.9420027.1411.3420039.1513.06

Table 9.1Standard ErrorBurlington Northern & Santa Fe0.530.2CSX Transportation0.580.23Norfolk Southern0.470.28Union Pacific Corp0.470.19Industry portfolio0.490.18

Table 9.2Ratio of Standard DeviationsCorrelation CoefficientBetaBrazil6.290.1340.84Egypt5.670.1040.59India6.10.1731.05Indonesia7.290.1761.28Mexioco3.920.1310.51Poland3.210.2640.85Thailand6.320.2761.74South Africa4.040.2110.85

TABLE 10.1TABLE 10.1 Preliminary cash-flow forecastsfor Otabai's electric motor project(figures in billions of yen)Year 0Years 1-10Investment15.00Revenue37.50Variable cost30.00Fixed cost3.00Depreciation1.50Pretax Profit3.00Tax1.05Net profit1.95Operating cash flow3.45Net cash flow(15.00)3.45NPV6.20Notes:Market size (million)1.00Market share %0.10Price per unit (yen)375,000Variable costs (yen)300,000Tax rate %35Cost of capital %10

TABLE 10.2TABLE 10.2 To undertake a sensitivity analysis of the electric scooter project, we set each variable in turnto its most pessimistic or optimistic value and recalculate the NPV of the projectOperating cash flow (yen bn) =Rangenet income + depreciation tax shieldNPV (billions of yen)VariablePessimisticExpectedOptimisticPessimisticExpectedOptimisticPessimisticExpectedOptimisticMarket size (million)0.911.13.03.53.93.26.29.2Market share0.040.100.160.53.56.4-11.86.224.2Unit price (yen)350,000375,000380,0001.83.53.8-3.86.28.2Unit variable cost (yen)360,000300,000275,000-0.53.55.1-17.86.216.2Fixed cost (bns of yen)4322.83.54.12.26.210.2

TABLE 10.3TABLE 10.3 How the NPV of the electric scooter project would be affectedby higher oil prices and a world recessionCash Flows, Years 1- 10, billions of yenBase CaseHigh Oil Prices and Recession CaseRevenue37.544.9Variable cost3035.9Fixed cost33.5Depreciation1.51.5Pretax Profit34.0Tax1.051.4Net profit1.952.6Net cash flow3.454.1PV of cash flows21.225.1NPV6.210.1AssumptionsBase CaseHigh Oil Prices and Recession CaseMarket size (million)10.8Market share0.100.13Unit price (yen)375,000431,300Unit variable cost (yen)300,000345,000Fixed cost (bns of yen)33.5

TABLE 10.4TABLE 10.4 NPV of electric scooter project under different assumptions about unit sales(figures in billions of yen excepted as noted)OutflowsYear 0Years 1-10Unit Sales,RevenuesVariableFixedPVPVThousandsYears 1-10InvestmentCostsCostsTaxesInflowsOutflowsNPV001503-2.250.019.6-19.610037.5153031.5230.4227.03.420075.0156035.25460.8434.426.5Notes:Price per unit (yen)375,000Variable costs (yen)300,000Fixed costs (bns of yen)3Depreciation (bns of yen)1.5Tax rate %50Cost of capital %10TABLE 10.5 The electric scooter project's accounting profit under different assumptions about unit sales(figures in billions of yen excepted as noted)Unit Sales,RevenuesVariableFixedTotalProfitThousandsYears 1-10CostsCostsDepreciationTaxesCostsafter Tax00031.5-2.252.25-2.2510037.53031.51.536.001.5020075.06031.55.2569.755.25

Table 10.1 (2)Year 0Year 1-10Investment151. Revenue37.52. Variabke cost303. Fixed cost34. Depreciation1.55. Pretax profit (1-2-3-4)36. Tax1.57. Net Profit (5-6)1.58. Operating cash flow (4+7)3Net Cash Flow-153

Table 10.2 (2)RangeNPV, BillionsVariablePessimisticExpectedOptimisticPessimisticExpectedOptimisticMarket Size.9 million1 million1.1 million1.13.45.7Market share0.040.10.16-10.43.417.3Unit price350000375000380000-4.23.45Unit variable cost360000300000275000-153.411.1Fixed cost4 billion3 billion2 billion0.43.46.5

Table 10.3 (2)Cash Flows, Years 1-10, BillionsBase CaseHigh Oil Prices and Recession Case1Revenue37.544.92Variable cost30.035.93Fixed cost3.03.54Depreciation1.51.55Pretax profit (1-2-3-4)3.04.06Tax1.52.07Net profit (5-6)1.52.08Net cash flow (4+7)3.03.5PV of cash flows18.421.5NPV3.46.5AssumptionsBase CaseHigh Oil Prices and Recession CaseMarket size1 million.8 millionMarket share0.10.13Unit Price375000431300Unit variable cost300000345000Fixed cost3 billion3.5 billion

Table 10.4 (2)InflowsOutflowsYear 0Years 1-10Unit Sales, ThousandsRevenue, Years 1-10InvestmentVariable CostsFixed CostsTaxesPV InflowsPV OutflowsNPV001503-2.25019.6-19.610037.5153031.5230.42273.420075156035.25460.8434.426.4

Table 10.5Unit Sales, ThousandsRevenueVariable CostsFixed CostsDepreciationTaxesTotal CostsProfit after Tax00031.5-2.252.25-2.2510037.53031.51.5361.5200756031.55.2569.755.25

Table 10.6Year 0Year 1-10Investment15.001. Revenue37.502. Variable cost12.003. Fixed cost19.004. Depreciation1.505. Pretax profit (1-2-3-4)5.006.Tax2.507. Net profit (5-6)2.508. Operating cash flow (4+7)4.00Net cash flow(15.00)4.00

Table 10.7Year0123417-MayInvestment:Land30Construction203010Operations:Rental121212Share of retail sales242424Operating and maintenance costs244101010Real estate taxes223444

Table 11.1Year 0Year 1Year 2Year 3-10Investment1005 - 10Production, Millions of pounds per year004080Spread, dollars per pound1.21.21.21.2Net revenues004896Production costs003030Transport0048Other costs0202020Cash flow-100-20-638NPV (at r=8%) = $63.6 million

Table 11.2Year 0Year 1Year 2Year 3-10Investment1005 - 10Production, Millions of pounds per year004080Spread, dollars per pound0.950.950.950.95Net revenues003876Production costs003030Transport0000Other costs0202020Cash flow-100-20-1226NPV (at r=8%) = 0

Table 11.3Year012345 - 10Investment100Production, Millions of pounds per year0040808080Spread, dollars per pound1.21.21.21.21.10.95Net revenues0048968876Production costs0030303030Transport004888Other costs02020202020Cash flow-100-20-6383018NPV (at r= 8%)= -9.8

Table 11.4Capacity, Millions of UnitsTechnologyIndustryMarvinCapital Cost per Unit ($)Manufacturing Cost per Unit ($)Salvage Value per Unit ($)First generation (2014)120_17.55.52.5Second generation (2022)1202417.53.52.5

Table 12.1IncomeAssetsSales$550Net working capital$805 - 10Cost of goods sold275Property, plant, and equipment investment1770Selling, general, and administrative expenses75360200Net investment810Taxes at 35%70Other assets110Net income$130Total assets$1,000

Table 12.2Econimic Value Added (EVA)Capital InvestedReturn on CapitalCost of CapitalWal-Mart Stores4,52579,17712.30%6.60%Johnson & Johnson4,45951,50817.68.9Microsoft4,02724,67729.813.5Merck3,34740,94116.98.7Coca Cola2,72920,50320.16.7Intel Corp.(57)31,21615.615.8Dow Chemical(1,503)44,1583.67Boeing(1,974)50,0462.26.1Delta Airlines(2,288)27,238-0.97.5Viacom(5,508)96,5153.59.2IBM(7,505)108,9264.611.5

Table 12.3Year123456Cash flow100200250298298298Book value at start of year, straight-line depreciation1000833667500333167Book depreciation167167167167167Book income-673383131131Book ROI-0.670.040.1240.2620.3930.784Forecasted EVA-167-50178198115

Table 12.4Year123456Cash flow10001000901741517271Economic depreciation0100160224246271Economic income10010090745227Rate of return0.10.10.10.10.10.1Forecasted EVA (5-.1*2)000000

Table 12.5Year123456Book Income for store1-6733831311311312-6733831311313-6733831314-6733835-67336-67Total book income-67-3449180311442Book value for store110008336675003331672100083366750033331000833667500410008336675100083361000Total book value100018332500300033333500Book ROI for all stores-0.067-0.0190.020.060.0930.126EVA for all stores-167-217-201-120-2292

Table 12.6Income statement for 2004Assets, December 31, 2004Revenue$56.66Net working capital$7.08Raw materials cost$18.72Operating cost$21.09Investment in plant and equipment69.33Depreciation4.5Less accumulated depreciation21.01Pretax income12.35Net plant and equipment48.32Tax at 35%4.32Net income$8.03Total assets$55.40

Table 12.7Start of YearMarket ValueCash Flow119.69217.99$3.67316.793415.782.69514.892.47614.092.29713.362.14812.682.02912.051.91011.461.81110.911.71210.391.61139.911.52149.441.46159.011.37168.591.32

Fig 12.1Basic CompensationVariable BonusOptions & OthersPerksBenefitsAustraliaCanadaChinaFanceGermanyIndiaItalyJapanMexicoNetherlandsSingaporeSpainSwedenSwitzerlandUnited KingdomUnited StatesAustralia293193.3117.234.35.8Basic Compensation293333.5347.6323.6344.175.7365.4261.5465.5302.6329.3295276.9500348.3587.8Canada333.5166.8300.22069.5Variable Bonus193.3166.8128.893.8309.237.8127.934.1173.1173.7124.3132.768.1249.8104.5335.7China347.6128.8160.262.946.9Options & Others117.2300.2160.2115.8172.10127.951182.9105.9442.111876.2230.6174.11087Fance323.693.8115.846.9155.2Perks34.32062.946.921.984.42437.367.619.933.712.312.824.949.6108.5Germany344.1309.2172.121.9107.5Benefits5.869.546.9155.2107.524.9215.273.171.672.93062266.3185.8153.8130India75.737.8084.424.9Italy365.4127.9127.924215.2Japan261.534.15137.373.1Mexico465.5173.1182.967.671.6Netherlands302.6173.7105.919.972.9Singapore329.3124.3442.133.730Spain295132.711812.362Sweden276.968.176.212.8266.3Switzerland500249.8230.624.9185.8United Kingdom348.3104.5174.149.6153.8United States587.8335.71087108.5130

Fig 13.8-21Jan-73-21-21-22.2-16.4-19.6-21.7-20.8-4.54.3-1.64.4-1.38.4-5.2-11.83.8-5.30.8710.410.712.910.925.829.38.6-4.3-3.7-2.1-6.5-10.7-5.8-8.5-9.6-8.6-13.9-14.6-14-7.4-24.2-36.6-40.5-33.7-34.1-26.5-18.9-24.1-15.7-20.1-15.7-20.4-11.8-11.7-8.9-8.8-18-18.7-16-17.5-17.2-13.3-13.7-11.3-11.2-11.3-11.1-8.7-10.9-9.6-7-5.8-2.7-0.50.55.11.2-22.2Feb-73-22.2Jan-73Feb-73Mar-73Apr-73May-73Jun-73Jul-73Aug-73Sep-73Oct-73Nov-73Dec-73Jan-74Feb-74Mar-74Apr-74May-74Jun-74Jul-74Aug-74Sep-74Oct-74Nov-74Dec-74Jan-75Jan-78Feb-78Mar-78Apr-78May-78Jun-78Jul-78Aug-78Sep-78Oct-78Nov-78Dec-78Jan-79Feb-79Mar-79Apr-79May-79Jun-79Jul-79Aug-79Sep-79Oct-79Nov-79Dec-79Jan-80Jan-83Feb-83Mar-83Apr-83May-83Jun-83Jul-83Aug-83Sep-83Oct-83Nov-83Dec-83Jan-84Feb-84Mar-84Apr-84May-84Jun-84Jul-84Aug-84Sep-84Oct-84Nov-84Dec-84Jan-85-16.4Mar-73-16.4-19.6Apr-73-19.6-21.7May-73-21.7-20.8Jun-73-20.8-4.5Jul-73-4.54.3Aug-734.3-1.6Sep-73-1.64.4Oct-734.4-1.3Nov-73-1.38.4Dec-738.4-5.2Jan-74-5.2-11.8Feb-74-11.83.8Mar-743.8-5.3Apr-74-5.30.8May-740.87Jun-74710.4Jul-7410.410.7Aug-7410.712.9Sep-7412.910.9Oct-7410.925.8Nov-7425.829.3Dec-7429.38.6Jan-758.6-4.3Jan-78-4.3-3.7Feb-78-3.7-2.1Mar-78-2.1-6.5Apr-78-6.5-10.7May-78-10.7-5.8Jun-78-5.8-8.5Jul-78-8.5-9.6Aug-78-9.6-8.6Sep-78-8.6-13.9Oct-78-13.9-14.6Nov-78-14.6-14Dec-78-14-7.4Jan-79-7.4-24.2Feb-79-24.2-36.6Mar-79-36.6-40.5Apr-79-40.5-33.7May-79-33.7-34.1Jun-79-34.1-26.5Jul-79-26.5-18.9Aug-79-18.9-24.1Sep-79-24.1-15.7Oct-79-15.7-20.1Nov-79-20.1-15.7Dec-79-15.7-20.4Jan-80-20.4-11.8Jan-83-11.8-11.7Feb-83-11.7-8.9Mar-83-8.9-8.8Apr-83-8.8-18May-83-18-18.7Jun-83-18.7-16Jul-83-16-17.5Aug-83-17.5-17.2Sep-83-17.2-13.3Oct-83-13.3-13.7Nov-83-13.7-11.3Dec-83-11.3-11.2Jan-84-11.2-11.3Feb-84-11.3-11.1Mar-84-11.1-8.7Apr-84-8.7-10.9May-84-10.9-9.6Jun-84-9.6-7Jul-84-7-5.8Aug-84-5.8-2.7Sep-84-2.7-0.5Oct-84-0.50.5Nov-840.55.1Dec-845.11.2Jan-851.2

Table 13.1Month(A) Market Return(B) Executive Cheese Return(C) Paddington Beer Return2002-0.4-1.9Aug-0.4-1.9-0.5Sep-12-10.1-17.2Oct8.58.19.8Nov3.27.516.5Dec-5.54.36.72003Jan-9.5-5.3-11.1Feb2.55.7-7.3Mar-1.2-9.74.5Apr8.7-4.723May3.1-10-1.1June-0.4-2.7-1.2July3.10.16.2Aug0.13.412.4Sep-1.75.6-7.9Oct4.8-2.211.5Nov1.3-6.54.3Dec3.1-0.23.42004Jan-1.9-3.74.1Feb2.3-9-14.1Mar-2.47.3-6.5Apr2.44.712.6May-1.3-7.1-14.1

Fig 13.1 B100105.84112.04116.91126.04118.8125.12125.1296.55100.86102.44103.48110.77116.31117.36115.15119.69118.3101.06107.36115.98122.84129.76135.09130.72135.8140.95137.43144.91140.27139.39135.41143.88146.62155.1147.21144.25158.2153.33149.97153.56151.05160.21151.65150.9138.81139.81144.2130.89122.49131.9132.57129.26127.86119.67109.89111.79120.29121.2

Fig 14.3Book Debt ratioItaly71ItalyItalySwedenGermanyAustriaFranceUSABelgiumJapanDenmarkPortugalSpainFinlandNetherlandsSweden68Sweden71686765646362615957575348Germany67GermanyAustria65AustriaFrance64FranceUSA63USABelgium62BelgiumJapan61JapanDenmark59DenmarkPortugal57PortugalSpain57SpainFinland53FinlandNetherlands48Netherlands

Table 14.4Common shares ($.25 par value per share)$108Additional paid-in capital317Retained earnings4433Treasury shares2880Other adjustments838Net common equity1199Note:Authorized shares600Issued sgares of which:431Outstanding shares351Treasury shares80

Fig 14.4Households36.8HouseholdsPension FundsInsurance CompaniesMutual Funds, etc.Rest of WorldOtherPension Funds21.136.821.17.42110.43.2Insurance Companies7.4Mutual Funds, etc.21Rest of World10.4Other3.299.9

Fig 14.1198919901991199219931994199519961997199819992000200120022003Internal92.386.1108.989.59087.478.78376.779.173.975.481.2100.391.2Equity-26.8-12.44.65.63.8-6.9-7.4-5.9-8.4-25.5-11-11.9-5.1-4.8-4.7Debt34.526.2-13.456.219.528.722.931.746.437.136.523.94.613.5

Table 15.1January 2003 to December 2003UnderwriterValue of Issues ($billion)Number of issuesCitigroup5431872Morgan Stanley3951365Merrill Lynch3801914Lehman Brothers3541264J.P. Morgan3541417

Table 15.3TypeCompanyIssue Amount ($ millions)Underwriter's spreadCommon Stock:IPOBuffalo Wild Wings457.0%7.000.07IPOCarter's Inc.1197.0%70.07IPOGenitope Corp.417.0%70.07IPOInternational Steel Group4626.5%6.50.07IPOIpass987.0%70.070.0SeasonedGeneral Cable Corp.415.5%5.500.06SeasonedBig 5 sporting Goods Corp.945.0%50.05SeasonedRed Robin Goods Corp.925.3%5.250.05SeasonedGibraltar Steel1025.0%50.05SeasonedInterstate hotels475.3%5.250.050.0Debt (cupon rate, type, maturity) :0.04.85% Fixed Rate Notes, 2011Raytheon5000.6%0.6250.014.85% Notes, 2015Procter & Gamble1500.5%0.4750.006.3% Notes, 2018Eastman Chemical2480.8%0.750.015.9% Senior Notes, 2008Bausch & Lomb501.0%10.016.25% Convertible Senior Debentures, 2033General Motors4,0001.8%1.750.02

Fig 15.119933.71993199419951996199719981999200020012002200319944.23.74.27.611.514.821.254.4106.240.721.218.419957.6199611.5199714.8199821.2199954.42000106.2200140.7200221.2200318.4

Fig 15.2China256.9Brazil78.5Korea74.3Greece49India35.3Switzerland34.9Mexico33Taiwan31.1Sweden30.5Singapore29.6Japan28.4Germany27.7Italy21.7USA19.1UK17.4Hing Kong17.3Australia12.1France11.6Spain10.7Netherlands10.2Canada6.3

Table 16.3Rate of Income Tax15%30%47%Operating income100100100Corporate tax (Tc = .3)303030After tax income707070Grossed-up dividend100100100Income Tax153047Tax credit for corporate payment-30-30-30Tax due from shareholder-15017Available to shareholder857053

Fig 16.1DividendsRepurchasesEarnings less purchases & Dividends198071.18.2104198182.2898198292.812.664.2198398.511.978.71984106.234.289.8198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120021985108.451.542Repurchases8.2812.611.934.251.553.666.361.661.84130.139.146.850.579.297.2136173.8160.6182140.299.11986121.153.617.4Earnings less purchases & Dividends1049864.278.789.84217.438.180.155.835.915.131.446.7143.7132.2158.1132.237.2122.8193.84.573.11987131.566.338.1Dividends71.182.292.898.5106.2108.4121.1131.5150.4140.7113.7148.9148161.1169.5189.8203.8192226.5200.5211.3202.1108.21988150.461.680.1Dividends71.182.292.898.5106.2108.4121.1131.5150.4140.7113.7148.9148161.1169.5189.8203.8192226.5200.5211.3202.1108.21989140.761.855.81990113.74135.91991148.930.115.1199214839.131.41993161.146.846.71994169.550.5143.71995189.879.2132.21996203.897.2158.11997192136132.21998226.5173.837.21999200.5160.6122.82000211.3182193.82001202.1140.24.52002108.299.173.1

Table 17.1DataNumber of shares1000Price per share$10Market value of shares$10,000OutcomesOperating income ($)500100015002000Earning per share ($)0.511.52Return on shares(%)5101520Expected Outcome

Table 17.2DataNumber of shares500Price per share$10Market value of shares$5,000Market value of debt$5,000Interest at 10 percent$500OutcomesOperating income ($)$500100015002000Interest ($)$500500500500$050010001500Earning per share ($)$0123Return on shares(%)$0102030Expected Outcome

Table 17.3Operating Income ($)500100015002000Earnings on two shares ($)1234Less interest at 10% ($)1111Net earnings on investment ($)0123Return on $10 investment (%)0102030Expected Outcome

Table 17.4 If operating income falls from$500ChangeNo debt:Earnings per share$1.50$0.50($1)Return15%5%-10%50% debt:Earnings per share$20($2)Return20%0-20%

table 18.1Income Statement of Firm UIncome Statement of Firm LEarnings before interest and taxes$1,000$1,000Interest paid to bondholders0.080Pretax income1,000920Tax at 35%350322Net income to stockholders650598Total income to both bondholders and stockholders$0+650=$650$80+598=$678Interest tax shield (.35 x interest)$0$28

Table 18.3 aBook valuesNet working capital$10,752$7,144Long-term debt21460Other long-term liabilitiesLong-term assets8690069048EquityTotal assets$97,652$97,652Total valueMarket valuesNet working capital$10,752$7,144Long-term debtPV interest tax shield250021460Other long-term liabilitiesLong-term assests283373268021EquityTotal assets$296,625$296,625Total value

Table 18.3 bBook valuesNet working capital$10,752$8,144Long-term debt21460Other long-term liabilitiesLong-term assets8690068048EquityTotal assets$97,652$97,652Total valueMarket valuesNet working capital$10,752$8,144Long-term debtPV interest tax shield285021460Other long-term liabilitiesLong-term assests283373267371EquityTotal assets$296,975$296,975Total value

Fig 18.1InterestEquity IncomeIncome before tax$1$1Less corporate tax at Tc =.3500.35Income after corpotare tax10.65Personal tax at Tp = .35 and Tpe = .1$0.350.068Income after all taxes$675$582Advantage to debt= $ .068

Table 19.1Latest yearForecast012345671Sales83.689.595.8102.5106.6110.8115.2118.72Cost of goods sold63.166.271.376.379.983.18790.23EBITDA (1-2)20.523.324.426.126.627.728.228.54Depreciation3.39.910.611.311.812.312.713.15Profit before tax (EBIT) (3-4)17.213.413.814.814.915.415.515.46Tax64.74.85.25.25.45.45.47Profit after tax (5-6)11.28.799.69.71010.1108Investment in fixed assets1114.615.516.61515.616.215.99Investment in working capital10.50.80.90.50.60.60.410Free cash flow (7+4-8-9)2.53.53.23.45.96.166.8PV Free cash flow, years 1-620.3PV Horizon value67.6PV of company87.9AssumptionsSales growth (percent)6.7777444375.57474.574.5757575.57613.31313131313131379.279797979797979514141414141414Tax rate, percent35%WACC9%Long term growth forecast3%Fixed assets and working capitalGross fixed assets95109.6125.1141.8156.8172.4188.6204.52938.949.560.872.684.997.6110.7Net fixed assets6670.775.680.984.287.59193.8Depreciation3.39.910.611.311.812.312.713.1Working capital11.111.612.413.313.914.41515.4

Table 19.2Latest yearForecast0123456710Free cash flow (7+4-8-9)2.53.53.23.45.96.166.8PV Free cash flow, years 1-619.7Pv Horizon value64.6Base-case PV of company84.3Debt515049484746453.0632.942.882.822.761.071.051.031.010.990.97PV Interest tax shields5APV89.3Tax rate, percent35%Opportunity cost of capital9.84%WACC (To discount horizon value to year 6)9%Lomg term growth forecast3%Interest rate (years 1-6)6%After tax debt service2.992.952.912.872.832.79

Table 19.5Number of outstanding shares (N)324.5 millionPrice per share (P)$40.59Beta0.46Treasury bill rate1%20-year Treasury bond rate5.20%Cost of debt (rD)7%Marginal tax rate35%

Table 19.-Current assets899.1Current liabilities820.4Net property, plant, and equipment11260.1Long-term debt2327Investments and other assets256.9Deferred taxes1697.2Other liabilities1038.7Shareholders' equity6532.8Total12416.1Total12416.1

Fig 19.1rdrrewacc069.849.849.840.169.8410.229.650.269.8410.619.490.2569.8410.89.420.369.8410.999.360.469.8411.389.240.569.8411.769.140.669.8412.149.050.6769.8412.4190.76.049.8412.58.970.86.189.8412.778.880.96.319.8413.028.7916.439.8413.258.711.16.549.8413.478.641.26.659.8413.678.571.36.749.8413.878.511.46.839.8414.058.451.56.919.8414.248.39

Table 20.1Option MaturityExercise PricePrice of Call OptionPrice of Put OptionApr-04$50$10.50$1.25556.72.5603.854.6651.957.7700.911.65Jul-04$50$11.30$2.05557.83.6605.155.75653.158.75701.8912.4Jan-05$50$13.10$3.4555105.2607.37.5655.210.4703.6513.75Lomg term options are called 'LEAPS"

Fig 21.1-69-65-60-47-39-29-19-7723426387115148185227Bottom right histogramPercent price changes:-60-54-47-39-29-19-77Probability %:0.150.692.295.6510.7215.9718.9317.95Percent price changes:23426387115Probability %:13.628.223.91.420.39

Table 21.1Changes per interval (%)Intervals in a Year (1/h)UpsideDownsideEstimated Option Value1.533.3-258.83322.6-18.46.351212.4-11.16.99525.8-5.57.1Black-Scholes value=7.13

Table 21.2Establishment IndustriesDigital OrganicsINPUTSStock price(P)2222Exercise price (EX)2525Interest rate, percent 44Maturity in years (t)55Annual standard deviation, percent ()2436Are these rates compounded annually (A) or continuously ?aaequivalent continously compounded rate, percent3.923.92INTERMEDIATE CALCULATIONS:PV(EX)20.548220.5482d1=log[P/PV(EX)]/.0.39550.4873d2=d1-..-0.1411-0.3177N(d1)= delta0.65380.687N(d2)0.44390.3754OPTION VALUES:Call value = N(d1) * P - N(d2)* PV(EX)5.267.4Put value = Call value + PV(EX) - S3.815.95

Table 21.3YearInterest RateMarket ReturnEnd-Year Dividend Yield198411-2.35.119851544.14.6198617.152.23.9198714.1-7.94.8198811.711.95.4198917.317.45.5199015.9-17.56199111.134.23.819926.8-2.33.819935.345.43.219945.4-8.74.11995820.23.919967.414.63.619975.512.23.61998511.63.819994.919.33.520004.953.220014.810.13.320024.8-8.1420034.915.93.5

Fig 21.1 -2-69-65-60-54-47-39-29-19-7723426387115148185227

Table 22.1Year198219831984198519861987After-tax operating cash flow (1)1001592951850Capital investment (2)45000000Increase in working capital (3)050100100-125-125Net cash flow (1)-(2)-(3)-4506059195310125NPV at 20% = - $46.45, or about -$46 million

Table 23.2YearCtPV_Ct) at 2.75%Proportion of Total Value [PV(Ct)/V]Proportion of Total Value Time5553.530.0490.04495552.10.0470.0945550.70.0460.1381055946.510.8583.433V = 1102.831Duration= 3.714 years

Fig 24.2100604020111.05240027.850.760.04036.471.10.14045.651.310.26055.11.440.370.0164.691.530.470.0374.381.590.560.0584.131.630.630.0793.921.650.70.1103.741.670.750.13113.591.680.80.16123.461.690.840.19133.341.70.880.22143.241.70.910.24153.151.70.940.27163.061.690.970.3172.991.690.990.32182.921.691.010.35192.851.681.030.37202.81.671.040.39212.741.671.060.41222.691.661.070.43232.641.661.080.45242.61.651.090.47252.561.641.10.49

Table 24.2RatioAAAAAABBBBBBCCCEBIT interest cover21.410.16.13.72.10.80.1return on capital %34.921.719.413.611.66.61Gross profit margin %2722.118.615.415.911.911.9Total debt/capital %22.937.742.548.262.674.887.7

Table 24.3Percentage Defaulting WithinRating at Time of Issue1 Year after issue5 Years after Issue10 Years after IssueAAA00.10.5AAA00.30.9AAA0.10.72BBB0.43.46.9BBB1.412.421BBB6.126.835.4CCC30.95358.4

Fig 23.14/1/863.678.74May-863.419.13Jun-863.549.32Jul-863.679.51Aug-863.629.41Sep-863.9510.77Oct-864.110.73Nov-864.1411Dec-864.0610.34Jan-87Jan-0010.09Feb-87Jan-009.6Mar-873.379.18Apr-873.678.93May-873.638.84Jun-873.919.22Jul-873.849.83Aug-873.9410.23Sep-874.1310.14Oct-874.349.42Nov-873.679.37Dec-873.769.66Jan-883.889.39Feb-883.749.24Mar-883.489.13Apr-883.449.39May-883.539.48Jun-883.499.7Jul-883.579.64Aug-883.739.94Sep-883.799.67Oct-883.459.37Nov-883.689.79Dec-883.81Jan-893.69Feb-893.5Mar-893.53Apr-893.65May-893.76Jun-893.76Jul-893.41Aug-893.35Sep-893.55Oct-893.54Nov-893.6Dec-893.53Jan-903.69Feb-903.97Mar-904.13Apr-904.26May-904.21Jun-904.24Jul-904.36Aug-904.28Sep-904.35Oct-904.22Nov-904.01Dec-904.09Jan-914.1Feb-914.1Mar-914.08Apr-914.06May-914.09Jun-914.24Jul-914.34Aug-914.24Sep-914.14Oct-914.15Nov-914.23Dec-914.42Jan-924.24Feb-924.2Mar-924.47Apr-924.5May-924.38Jun-924.42Jul-924.71Aug-924.95Sep-924Oct-923.36Nov-923.58Dec-923.62Jan-933.35Feb-933.04Mar-933.01Apr-933.21May-933.25Jun-933.25Jul-933.13Aug-933.09Sep-933.07Oct-932.97Nov-932.92Dec-932.66Jan-942.7Feb-943.06Mar-943.21Apr-943.33May-943.72Jun-943.86Jul-943.94Aug-943.71Sep-943.79Oct-943.86Nov-943.81Dec-943.83Jan-953.87Feb-953.87Mar-953.86Apr-953.78May-953.51Jun-953.71Jul-953.55Aug-953.46Sep-953.58Oct-953.61Nov-953.45Dec-953.44Jan-963.46Feb-963.67Mar-96Apr-96May-96Jun-96Jul-96Aug-96Sep-96Oct-96Nov-96Dec-96Jan-97Feb-97Mar-97Apr-97May-97Jun-97Jul-97Aug-97Sep-97Oct-97Nov-97Dec-97Jan-98Feb-98Mar-98Apr-98May-98Jun-98Jul-98Aug-98Sep-98Oct-98Nov-98Dec-98Jan-99Feb-99Mar-99Apr-99May-99Jun-99Jul-99Aug-99Sep-99Oct-99Nov-99Dec-99Jan-00Feb-00Mar-00Apr-00May-00Jun-00Jul-00Aug-00Sep-00Oct-00Nov-00Dec-00Jan-01Feb-01Mar-01Apr-01May-01Jun-01Jul-01Aug-01Sep-04Oct-01Nov-01

Fig 24.3

3.6Inflation1900190119021903190419051906190719081909191019111912191319141915191619171918191919201921192219231924192519261927192819291930193119321933193419351936193719381939194019411942194319441945194619471948194919501951195219531954195519561957195819591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984198519861987198819891990199119921993199419951996199719981999200020012002200319000.61Inflation0.611.221.21.791.7500.573.291.11-1.641.672.191.071.991.041.9311.618.5320.514.792.27-10.65-2.562.63-0.233.85-1.49-2.08-0.970.2-6.03-9.52-10.30.512.032.991.213.1-2.78-0.480.969.729.293.162.112.2518.169.012.71-1.85.795.870.880.62-0.50.372.863.021.761.51.480.671.221.651.191.923.353.044.726.115.493.363.418.812.27.014.816.779.0313.3112.48.943.873.83.953.771.134.414.424.656.113.062.92.752.672.543.321.71.612.683.391.552.381.919011.2219021.219031.7919041.751905019060.5719073.2919081.111909-1.6419101.6719112.1919121.0719131.9919141.0419151.93191611.6191718.53191820.5191914.7919202.271921-10.651922-2.5619232.631924-0.2319253.851926-1.491927-2.081928-0.9719290.21930-6.031931-9.521932-10.319330.5119342.0319352.9919361.2119373.11938-2.781939-0.4819400.9619419.7219429.2919433.1619442.1119452.25194618.1619479.0119482.711949-1.819505.7919515.8719520.8819530.621954-0.519550.3719562.8619573.0219581.7619591.519601.4819610.6719621.2219631.6519641.1919651.9219663.3519673.0419684.7219696.1119705.4919713.3619723.4119738.8197412.219757.0119764.8119776.7719789.03197913.31198012.419818.9419823.8719833.819843.9519853.7719861.1319874.4119884.4219894.6519906.1119913.0619922.919932.7519942.6719952.5419963.3219971.719981.6119992.6820003.3920011.5520022.3820031.9

Table 6.1Period012345671Capital Investment10,000(1,949)2Accumulated depreciation1,5833,1674,7506,3337,9179,5000.03Year-end book value10,0008,4176,8335,2503,6672,0835000.04Working capital5501,2893,2614,8903,5832,0020.05Total book value (3+4)10,0008,9678,1228,5118,5575,6662,5020.06Sales52312,88732,61048,90135,83419,7177Cost of goods sold8377,72919,55229,34521,49211,8308Other Costs4,0002,2001,2101,3311,4641,6111,7729Depreciation1,5831,5831,5831,5831,5831,58310Pretax profit (6-7-8-9)(4,000)(4,097)2,36510,14416,50911,1484,5321,44911Tax at 35%(1,400)(1,434)8283,5505,7783,9021,58650712Profit after tax (10-11)2,600(2,663)1,5376,59510,7317,2462,946942

Table 6.2Period012345671Sales52312,88732,61048,90135,83419,7172Cost of goods sold8377,72919,55229,34521,49211,8303Other costs4,0002,2001,2101,3311,4641,6111,7724Tax on operations(1,400)(1,434)8283,5505,7783,9021,5865Cash flow from operations (1-2-3-4)(2,600)(1,080)3,1208,17712,3148,8294,5296Change in working capital(550)(739)(1,972)(1,629)1,3071,5812,0027Capital investment and disposal(10,000)1,4428Net cash flow (5+6+7)(12,600)(1,630)2,3816,20510,68510,1366,1103,4449Present value at 20%(12,600)(1,358)1,6543,5915,1534,0742,046961Net Present value= +3520 (sum of 9)

Table 6.4Tax Depreciation Schedules by Recovery-Period ClassYear(s)3-Year5-Year7-Year10-Year15-Year20-Year133.332014.291053.75244.453224.49189.57.22314.8119.217.4914.48.556.6847.4111.5212.4911.527.76.18511.528.939.226.935.7165.768.927.376.235.2878.936.555.94.8984.456.555.94.5296.565.94.46106.555.94.46113.295.94.46125.94.46135.914.46145.94.46155.914.46162.994.4617-204.46212.23

Table 6.5Period012345671Sales52312,88732,61048,90135,83419,7172Cost of goods sold8377,72919,55229,34521,49211,8303Other Costs4,0002,2001,2101,3311,4641,6111,7724Tax depreciation2,0003,2001,9201,1525765Pretax profit (1-2-3-4)(4,000)(4,514)7489,80716,94011,5795,5391,9496Taxes at 35%(1,400)(1,580)2623,4325,9294,0531,939682

Table 6.6Period012345671Sales52312,88732,61048,90135,83419,7172Cost of goods sold8377,72919,55229,34521,49211,8303Other costs4,0002,2001,2101,3311,4641,6111,7724Tax(1,400)(1,580)2623,4325,9294,0531,9396825Cash flow from operations (1-2-3-4)(2,600)(934)3,6868,29512,1638,6784,176(682)6Change in working capital(550)(739)(1,972)(1,629)1,3071,5812,0027Capital investment and disposal(10,000)1,9498Net cash flow (5+6+7)(12,600)(1,484)2,9476,32310,5349,9855,7573,2699Present Value= +3802 (sum of 9)(12,600)(1,237)2,0473,6595,0804,0131,928912Net present value= +3802 (sum of 9)

7.1Plotting data Fig 7.1EquitiesBondsBills19001901190219031904190519061907190819091910191119121913191419151916191719181919192019211922192319241925192619271928192919301931193219331934193519361937193819391940194119421943194419451946194719481949195019511952195319541955195619571958195919601961196219631964196519661967196819691970197119721973197419751976197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200419001.001.001.00Equities1.001.241.471.551.331.702.082.161.532.242.692.462.602.792.572.433.373.592.913.484.203.453.855.035.186.588.449.2412.3017.0614.5810.465.875.298.348.7012.5316.5810.8413.8914.2913.2611.9513.8617.7821.5829.7828.0229.0129.6435.6746.1755.7563.2463.6195.48119.55129.40116.09168.32190.44192.01244.70219.72265.71308.62353.13322.38414.85473.70421.87422.01496.62585.91477.42341.89473.43599.30583.50637.61800.601,070.161,030.031,222.751,509.691,555.692,062.292,394.212,448.672,888.003,730.543,499.964,697.095,118.315,695.735,692.057,766.729,414.1312,359.9215,255.9718,850.1716,796.6014,953.3411,834.1115,578.5119011.241.041.04Bonds1.001.041.071.091.131.151.191.221.231.281.311.351.401.451.491.551.601.651.701.651.661.761.982.052.172.312.442.632.862.862.963.102.943.433.433.773.964.264.274.504.775.065.115.275.385.536.136.125.966.166.566.576.316.386.617.097.006.617.106.676.527.417.498.008.108.388.448.757.957.937.528.439.5510.099.9810.4211.3713.2813.1913.0312.8712.3612.5917.6817.7920.5526.9133.5132.6035.7542.2344.8453.4957.8068.3463.0382.9982.2295.26107.7098.05119.11123.51145.54147.6519021.471.071.09Bills1.001.041.091.141.201.251.311.381.471.531.591.671.731.811.912.012.082.142.242.372.502.702.883.023.183.313.443.553.663.793.984.074.114.154.174.174.184.194.204.204.204.204.204.214.234.244.264.274.294.334.384.434.504.574.654.694.774.885.045.125.275.415.525.675.856.066.296.596.877.237.708.218.578.909.5110.2710.8711.4212.0112.8714.2015.8018.1220.0421.8023.9525.7927.3828.8830.7133.2935.8937.8939.2240.3641.9344.2846.5949.0451.4253.8257.0059.1860.1560.7719031.551.091.1419041.331.131.2019051.701.151.2519062.081.191.3119072.161.221.3819081.531.231.4719092.241.281.5319102.691.311.5919112.461.351.6719122.601.401.7319132.791.451.8119142.571.491.9119152.431.552.0119163.371.602.0819173.591.652.1419182.911.702.2419193.481.652.3719204.201.662.5019213.451.762.7019223.851.982.8819235.032.053.0219245.182.173.1819256.582.313.3119268.442.443.4419279.242.633.55192812.302.863.66192917.062.863.79193014.582.963.98193110.463.104.0719325.872.944.1119335.293.434.1519348.343.434.1719358.703.774.17193612.533.964.18193716.584.264.19193810.844.274.20193913.894.504.20194014.294.774.20194113.265.064.20194211.955.114.20194313.865.274.21194417.785.384.23194521.585.534.24194629.786.134.26194728.026.124.27194829.015.964.29194929.646.164.33195035.676.564.38195146.176.574.43195255.756.314.50195363.246.384.57195463.616.614.65195595.487.094.691956119.557.004.771957129.406.614.881958116.097.105.041959168.326.675.121960190.446.525.271961192.017.415.411962244.707.495.521963219.728.005.671964265.718.105.851965308.628.386.061966353.138.446.291967322.388.756.591968414.857.956.871969473.707.937.231970421.877.527.701971422.018.438.211972496.629.558.571973585.9110.098.901974477.429.989.511975341.8910.4210.271976473.4311.3710.871977599.3013.2811.421978583.5013.1912.011979637.6113.0312.871980800.6012.8714.2019811,070.1612.3615.8019821,030.0312.5918.1219831,222.7517.6820.0419841,509.6917.7921.8019851,555.6920.5523.9519862,062.2926.9125.7919872,394.2133.5127.3819882,448.6732.6028.8819892,888.0035.7530.7119903,730.5442.2333.2919913,499.9644.8435.8919924,697.0953.4937.8919935,118.3157.8039.2219945,695.7368.3440.3619955,692.0563.0341.9319967,766.7282.9944.2819979,414.1382.2246.59199812,359.9295.2649.04199915,255.97107.7051.42200018,850.1798.0553.82200116,796.60119.1157.00200214,953.34123.5159.18200311,834.11145.5460.15200415,578.51147.6560.77

7.2Plotting data Fig 7.2EquitiesBondsBills19001901190219031904190519061907190819091910191119121913191419150.916191719181919192019211922192319241925192619271928192919301931193219331934193519361937193819391940194119421943194419451946194719481949195019511952195319541955195619571958195919601961196219631964196519661967196819691970197119721973197419751976197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200419001.001.001.00Equities1.001.231.441.511.271.591.952.011.382.002.442.202.272.412.182.042.772.641.811.801.891.521.892.542.553.244.014.456.058.477.235.523.423.445.395.527.7210.086.398.438.718.016.586.988.6810.3213.9211.0910.5310.4812.8415.7117.9220.1420.1430.3737.8939.8734.7249.4755.1554.7969.3661.5373.2084.0294.3283.31104.05113.4595.2290.29102.80117.2887.8456.0672.5487.6179.9080.0888.74105.5393.24106.56126.75125.65160.51184.26180.50203.87251.65222.51289.74306.82332.30323.44430.40504.92651.82791.78952.74821.14719.86556.47719.0319011.231.031.04Bonds1.001.031.051.061.071.081.111.141.111.151.191.211.221.251.261.301.321.211.060.850.750.770.971.041.071.141.161.271.411.421.471.641.712.232.222.392.442.592.522.732.913.062.812.662.632.652.872.422.162.182.362.232.032.032.092.252.222.042.121.961.892.122.122.242.232.282.252.261.991.901.701.801.982.021.841.711.741.941.811.641.431.221.141.541.491.662.092.582.402.522.852.853.303.463.993.584.604.415.025.594.965.825.956.846.8119021.441.051.07Bills1.001.041.071.111.151.181.221.291.321.371.441.491.511.571.621.681.711.581.391.221.131.181.421.521.561.631.631.711.801.891.972.152.402.702.692.652.572.552.482.552.562.542.312.122.062.031.991.691.561.531.581.511.441.461.471.491.511.501.511.501.521.541.571.591.611.651.681.701.721.731.741.761.771.781.751.681.671.671.641.621.571.561.641.751.831.932.012.112.132.172.252.282.342.352.352.382.452.502.592.672.722.792.852.832.8019031.511.061.1119041.271.071.1519051.591.081.1819061.951.111.2219072.011.141.2919081.381.111.3219092.001.151.3719102.441.191.4419112.201.211.4919122.271.221.5119132.411.251.5719142.181.261.6219152.041.301.680.9162.771.321.7119172.641.211.5819181.811.061.3919191.800.851.2219201.890.751.1319211.520.771.1819221.890.971.4219232.541.041.5219242.551.071.5619253.241.141.6319264.011.161.6319274.451.271.7119286.051.411.8019298.471.421.8919307.231.471.9719315.521.642.1519323.421.712.4019333.442.232.7019345.392.222.6919355.522.392.6519367.722.442.57193710.082.592.5519386.392.522.4819398.432.732.5519408.712.912.5619418.013.062.5419426.582.812.3119436.982.662.1219448.682.632.06194510.322.652.03194613.922.871.99194711.092.421.69194810.532.161.56194910.482.181.53195012.842.361.58195115.712.231.51195217.922.031.44195320.142.031.46195420.142.091.47195530.372.251.49195637.892.221.51195739.872.041.50195834.722.121.51195949.471.961.50196055.151.891.52196154.792.121.54196269.362.121.57196361.532.241.59196473.202.231.61196584.022.281.65196694.322.251.68196783.312.261.701968104.051.991.721969113.451.901.73197095.221.701.74197190.291.801.761972102.801.981.771973117.282.021.78197487.841.841.75197556.061.711.68197672.541.741.67197787.611.941.67197879.901.811.64197980.081.641.62198088.741.431.571981105.531.221.56198293.241.141.641983106.561.541.751984126.751.491.831985125.651.661.931986160.512.092.011987184.262.582.111988180.502.402.131989203.872.522.171990251.652.852.251991222.512.852.281992289.743.302.341993306.823.462.351994332.303.992.351995323.443.582.381996430.404.602.451997504.924.412.501998651.825.022.591999791.785.592.672000952.744.962.722001821.145.822.792002719.865.952.852003556.476.842.832004719.036.812.80

7.3Denmark4.3Belgium4.7DenmarkBelgiumSwitzerlandSpainCanadaIrelandGermanyUKAverageNetherlandsUSASwedenSouth AfricaAustraliaFranceJapanItalySwitzerland5.14.34.75.15.35.85.95.96.36.46.67.68.18.28.69.31010.7Spain5.3Canada5.8Ireland5.9Germany5.9UK6.3Average6.4Netherlands6.6USA7.6Sweden8.1South Africa8.2Australia8.6France9.3Japan10Italy10.7

7.4190024.2%190118.0%19026.1%19001901190219031904190519061907190819091910191119121913191419151916191719181919192019211922192319241925192619271928192919301931193219331934193519361937193819391940194119421943194419451946194719481949195019511952195319541955195619571958195919601961196219631964196519661967196819691970197119721973197419751976197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120021903-14.6%24.2%18.0%6.1%-14.6%28.1%22.1%4.1%-29.3%46.8%20.0%-8.5%5.7%7.2%-7.8%-5.5%38.8%6.4%-18.9%19.6%20.6%-17.9%11.6%30.6%3.0%27.0%28.3%9.5%33.1%38.7%-14.6%-28.3%-43.9%-9.8%57.6%4.4%44.0%32.3%-34.6%28.2%2.9%-7.2%-9.9%16.0%28.3%21.4%38.0%-5.9%3.6%2.2%20.3%29.4%20.8%13.4%0.6%50.1%25.2%8.2%-10.3%45.0%13.1%0.8%27.4%-10.2%20.9%16.2%14.4%-8.7%28.7%14.2%-10.9%0.0%17.7%18.0%-18.5%-28.4%38.5%26.6%-2.6%9.3%25.6%33.7%-3.8%18.7%23.5%3.1%32.6%16.1%2.3%17.9%29.2%-6.2%34.2%9.0%11.3%-0.1%36.5%21.2%31.3%23.4%23.6%-10.9%-11.0%-20.9%190428.1%190522.1%19064.1%1907-29.3%190846.8%190920.0%1910-8.5%19115.7%19127.2%1913-7.8%1914-5.5%191538.8%19166.4%1917-18.9%191819.6%191920.6%1920-17.9%192111.6%192230.6%19233.0%192427.0%192528.3%19269.5%192733.1%192838.7%1929-14.6%1930-28.3%1931-43.9%1932-9.8%193357.6%19344.4%193544.0%193632.3%1937-34.6%193828.2%19392.9%1940-7.2%1941-9.9%194216.0%194328.3%194421.4%194538.0%1946-5.9%19473.6%19482.2%194920.3%195029.4%195120.8%195213.4%19530.6%195450.1%195525.2%19568.2%1957-10.3%195845.0%195913.1%19600.8%196127.4%1962-10.2%196320.9%196416.2%196514.4%1966-8.7%196728.7%196814.2%1969-10.9%19700.0%197117.7%197218.0%1973-18.5%1974-28.4%197538.5%197626.6%1977-2.6%19789.3%197925.6%198033.7%1981-3.8%198218.7%198323.5%19843.1%198532.6%198616.1%19872.3%198817.9%198929.2%1990-6.2%199134.2%19929.0%199311.3%1994-0.1%199536.5%199621.2%199731.3%199823.4%199923.6%2000-10.9%2001-11.0%2002-20.9%

Fig 8.1Price Change %Coca ColaNormal-8.56150.00070-8.117700-7.67390.00020-7.2300-6.78620.00020-6.34240.00050.0001-5.89860.00090.0002-5.45480.00180.0005-5.0110.00070.0011-4.56720.00230.0023-4.12330.00160.0044-3.67950.00480.008-323570.00710.0136-2.79190.01270.0217-2.34810.02190.0325-1.90430.0320.0457-1.46040.05190.0605-1.01660.08070.0752-0.57280.10670.0878-0.1290.12120.09640.31480.13090.09950.75860.10880.09641.20250.09260.08781.64630.07350.07522.09010.04890.06052.53390.030.04572.97770.02280.03253.42150.01340.02173.86540.00970.01364.30920.00550.0084.7530.00410.00445.19680.00370.00235.64060.00210.00116.08440.00140.00056.52830.00070.00026.97210.00090.00017.41590.000207.85970.000508.30350.000708.74730.00020

Fig 8.4Std Devr18.21017.8810.2517.6510.517.5110.7517.481117.5311.2517.6911.517.9411.7518.271218.6912.2519.212.519.7712.7520.411321.1213.2521.8713.522.6813.7523.531424.4314.2525.3514.526.3114.7527.315

Fig 8.9InvestorBetaRisk Premium, %10.49920.631030.751040.851250.931261.051371.151481.221491.3515101.5315Mkt portfolio112.2

Fig 8.10 AInvestorBetaRisk premium, %10.491120.631330.751540.851650.931761.061871.172081.242191.3722101.5325Mkt portfolio117.9

Fig 8.10 BInvestorBetaRisk premium, %10.5620.63630.75640.85750.95861.03871.11981.18891.38101.526Mkt portfolio16.8

Fig 8.1119261119261927192819291930193119321933193419351936193719381939194019411942194319441945194619471948194919501951195219531954195519561957195819591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984198519861987198819891990199119921993199419951996199719981999200020012002200319270.970.9410.971.010.720.690.720.751.121.411.591.831.581.761.851.881.791.892.462.883.643.493.232.943.033.092.942.752.712.662.492.472.412.762.912.842.862.592.432.392.943.024.545.654.864.34.574.013.053.033.493.974.895.586.727.17.618.289.448.638.557.696.897.366.475.546.456.967.487.516.986.856.65.065.655.336.857.149.1519281.010.8610.940.860.970.840.710.750.0870.610.650.840.80.690.570.560.630.761.021.191.351.391.511.561.511.911.821.871.732.162.272.222.082.342.362.242.362.613.013.33.493.463.143.713.314.033.573.654.34.75.116.346.836.866.715.066.317.148.4810.0610.1811.210.9112.4211.7210.478.8910.9412.812.7912.3512.3813.7511.697.088.5910.9411.3413.0619290.720.9719300.690.8419310.720.7119320.750.7519331.120.08719341.410.6119351.590.6519361.830.8419371.580.819381.760.6919391.850.5719401.880.5619411.790.6319421.890.7619432.461.0219442.881.1919453.641.3519463.491.3919473.231.5119482.941.5619493.031.5119503.091.9119512.941.8219522.751.8719532.711.7319542.662.1619552.492.2719562.472.2219572.412.0819582.762.3419592.912.3619602.842.2419612.862.3619622.592.6119632.433.0119642.393.319652.943.4919663.023.4619674.543.1419685.653.7119694.863.3119704.34.0319714.573.5719724.013.6519733.054.319743.034.719753.495.1119763.976.3419774.896.8319785.586.8619796.726.7119807.15.0619817.616.3119828.287.1419839.448.4819848.6310.0619858.5510.1819867.6911.219876.8910.9119887.3612.4219896.4711.7219905.5410.4719916.458.8919926.9610.9419937.4812.819947.5112.7919956.9812.3519966.8512.3819976.613.7519985.0611.6919995.657.0820005.338.5920016.8510.9420027.1411.3420039.1513.06

Table 9.1Standard ErrorBurlington Northern & Santa Fe0.530.2CSX Transportation0.580.23Norfolk Southern0.470.28Union Pacific Corp0.470.19Industry portfolio0.490.18

Table 9.2Ratio of Standard DeviationsCorrelation CoefficientBetaBrazil6.290.1340.84Egypt5.670.1040.59India6.10.1731.05Indonesia7.290.1761.28Mexioco3.920.1310.51Poland3.210.2640.85Thailand6.320.2761.74South Africa4.040.2110.85

TABLE 10.1TABLE 10.1 Preliminary cash-flow forecastsfor Otabai's electric motor project(figures in billions of yen)Year 0Years 1-10Investment15.00Revenue37.50Variable cost30.00Fixed cost3.00Depreciation1.50Pretax Profit3.00Tax1.05Net profit1.95Operating cash flow3.45Net cash flow(15.00)3.45NPV6.20Notes:Market size (million)1.00Market share %0.10Price per unit (yen)375,000Variable costs (yen)300,000Tax rate %35Cost of capital %10

TABLE 10.2TABLE 10.2 To undertake a sensitivity analysis of the electric scooter project, we set each variable in turnto its most pessimistic or optimistic value and recalculate the NPV of the projectOperating cash flow (yen bn) =Rangenet income + depreciation tax shieldNPV (billions of yen)VariablePessimisticExpectedOptimisticPessimisticExpectedOptimisticPessimisticExpectedOptimisticMarket size (million)0.911.13.03.53.93.26.29.2Market share0.040.100.160.53.56.4-11.86.224.2Unit price (yen)350,000375,000380,0001.83.53.8-3.86.28.2Unit variable cost (yen)360,000300,000275,000-0.53.55.1-17.86.216.2Fixed cost (bns of yen)4322.83.54.12.26.210.2

TABLE 10.3TABLE 10.3 How the NPV of the electric scooter project would be affectedby higher oil prices and a world recessionCash Flows, Years 1- 10, billions of yenBase CaseHigh Oil Prices and Recession CaseRevenue37.544.9Variable cost3035.9Fixed cost33.5Depreciation1.51.5Pretax Profit34.0Tax1.051.4Net profit1.952.6Net cash flow3.454.1PV of cash flows21.225.1NPV6.210.1AssumptionsBase CaseHigh Oil Prices and Recession CaseMarket size (million)10.8Market share0.100.13Unit price (yen)375,000431,300Unit variable cost (yen)300,000345,000Fixed cost (bns of yen)33.5

TABLE 10.4TABLE 10.4 NPV of electric scooter project under different assumptions about unit sales(figures in billions of yen excepted as noted)OutflowsYear 0Years 1-10Unit Sales,RevenuesVariableFixedPVPVThousandsYears 1-10InvestmentCostsCostsTaxesInflowsOutflowsNPV001503-2.250.019.6-19.610037.5153031.5230.4227.03.420075.0156035.25460.8434.426.5Notes:Price per unit (yen)375,000Variable costs (yen)300,000Fixed costs (bns of yen)3Depreciation (bns of yen)1.5Tax rate %50Cost of capital %10TABLE 10.5 The electric scooter project's accounting profit under different assumptions about unit sales(figures in billions of yen excepted as noted)Unit Sales,RevenuesVariableFixedTotalProfitThousandsYears 1-10CostsCostsDepreciationTaxesCostsafter Tax00031.5-2.252.25-2.2510037.53031.51.536.001.5020075.06031.55.2569.755.25

Table 10.1 (2)Year 0Year 1-10Investment151. Revenue37.52. Variabke cost303. Fixed cost34. Depreciation1.55. Pretax profit (1-2-3-4)36. Tax1.57. Net Profit (5-6)1.58. Operating cash flow (4+7)3Net Cash Flow-153

Table 10.2 (2)RangeNPV, BillionsVariablePessimisticExpectedOptimisticPessimisticExpectedOptimisticMarket Size.9 million1 million1.1 million1.13.45.7Market share0.040.10.16-10.43.417.3Unit price350000375000380000-4.23.45Unit variable cost360000300000275000-153.411.1Fixed cost4 billion3 billion2 billion0.43.46.5

Table 10.3 (2)Cash Flows, Years 1-10, BillionsBase CaseHigh Oil Prices and Recession Case1Revenue37.544.92Variable cost30.035.93Fixed cost3.03.54Depreciation1.51.55Pretax profit (1-2-3-4)3.04.06Tax1.52.07Net profit (5-6)1.52.08Net cash flow (4+7)3.03.5PV of cash flows18.421.5NPV3.46.5AssumptionsBase CaseHigh Oil Prices and Recession CaseMarket size1 million.8 millionMarket share0.10.13Unit Price375000431300Unit variable cost300000345000Fixed cost3 billion3.5 billion

Table 10.4 (2)InflowsOutflowsYear 0Years 1-10Unit Sales, ThousandsRevenue, Years 1-10InvestmentVariable CostsFixed CostsTaxesPV InflowsPV OutflowsNPV001503-2.25019.6-19.610037.5153031.5230.42273.420075156035.25460.8434.426.4

Table 10.5Unit Sales, ThousandsRevenueVariable CostsFixed CostsDepreciationTaxesTotal CostsProfit after Tax00031.5-2.252.25-2.2510037.53031.51.5361.5200756031.55.2569.755.25

Table 10.6Year 0Year 1-10Investment15.001. Revenue37.502. Variable cost12.003. Fixed cost19.004. Depreciation1.505. Pretax profit (1-2-3-4)5.006.Tax2.507. Net profit (5-6)2.508. Operating cash flow (4+7)4.00Net cash flow(15.00)4.00

Table 10.7Year0123417-MayInvestment:Land30Construction203010Operations:Rental121212Share of retail sales242424Operating and maintenance costs244101010Real estate taxes223444

Table 11.1Year 0Year 1Year 2Year 3-10Investment1005 - 10Production, Millions of pounds per year004080Spread, dollars per pound1.21.21.21.2Net revenues004896Production costs003030Transport0048Other costs0202020Cash flow-100-20-638NPV (at r=8%) = $63.6 million

Table 11.2Year 0Year 1Year 2Year 3-10Investment1005 - 10Production, Millions of pounds per year004080Spread, dollars per pound0.950.950.950.95Net revenues003876Production costs003030Transport0000Other costs0202020Cash flow-100-20-1226NPV (at r=8%) = 0

Table 11.3Year012345 - 10Investment100Production, Millions of pounds per year0040808080Spread, dollars per pound1.21.21.21.21.10.95Net revenues0048968876Production costs0030303030Transport004888Other costs02020202020Cash flow-100-20-6383018NPV (at r= 8%)= -9.8

Table 11.4Capacity, Millions of UnitsTechnologyIndustryMarvinCapital Cost per Unit ($)Manufacturing Cost per Unit ($)Salvage Value per Unit ($)First generation (2014)120_17.55.52.5Second generation (2022)1202417.53.52.5

Table 12.1IncomeAssetsSales$550Net working capital$805 - 10Cost of goods sold275Property, plant, and equipment investment1770Selling, general, and administrative expenses75360200Net investment810Taxes at 35%70Other assets110Net income$130Total assets$1,000

Table 12.2Econimic Value Added (EVA)Capital InvestedReturn on CapitalCost of CapitalWal-Mart Stores4,52579,17712.30%6.60%Johnson & Johnson4,45951,50817.68.9Microsoft4,02724,67729.813.5Merck3,34740,94116.98.7Coca Cola2,72920,50320.16.7Intel Corp.(57)31,21615.615.8Dow Chemical(1,503)44,1583.67Boeing(1,974)50,0462.26.1Delta Airlines(2,288)27,238-0.97.5Viacom(5,508)96,5153.59.2IBM(7,505)108,9264.611.5

Table 12.3Year123456Cash flow100200250298298298Book value at start of year, straight-line depreciation1000833667500333167Book depreciation167167167167167Book income-673383131131Book ROI-0.670.040.1240.2620.3930.784Forecasted EVA-167-50178198115

Table 12.4Year123456Cash flow10001000901741517271Economic depreciation0100160224246271Economic income10010090745227Rate of return0.10.10.10.10.10.1Forecasted EVA (5-.1*2)000000

Table 12.5Year123456Book Income for store1-6733831311311312-6733831311313-6733831314-6733835-67336-67Total book income-67-3449180311442Book value for store110008336675003331672100083366750033331000833667500410008336675100083361000Total book value100018332500300033333500Book ROI for all stores-0.067-0.0190.020.060.0930.126EVA for all stores-167-217-201-120-2292

Table 12.6Income statement for 2004Assets, December 31, 2004Revenue$56.66Net working capital$7.08Raw materials cost$18.72Operating cost$21.09Investment in plant and equipment69.33Depreciation4.5Less accumulated depreciation21.01Pretax income12.35Net plant and equipment48.32Tax at 35%4.32Net income$8.03Total assets$55.40

Table 12.7Start of YearMarket ValueCash Flow119.69217.99$3.67316.793415.782.69514.892.47614.092.29713.362.14812.682.02912.051.91011.461.81110.911.71210.391.61139.911.52149.441.46159.011.37168.591.32

Fig 12.1Basic CompensationVariable BonusOptions & OthersPerksBenefitsAustraliaCanadaChinaFanceGermanyIndiaItalyJapanMexicoNetherlandsSingaporeSpainSwedenSwitzerlandUnited KingdomUnited StatesAustralia293193.3117.234.35.8Basic Compensation293333.5347.6323.6344.175.7365.4261.5465.5302.6329.3295276.9500348.3587.8Canada333.5166.8300.22069.5Variable Bonus193.3166.8128.893.8309.237.8127.934.1173.1173.7124.3132.768.1249.8104.5335.7China347.6128.8160.262.946.9Options & Others117.2300.2160.2115.8172.10127.951182.9105.9442.111876.2230.6174.11087Fance323.693.8115.846.9155.2Perks34.32062.946.921.984.42437.367.619.933.712.312.824.949.6108.5Germany344.1309.2172.121.9107.5Benefits5.869.546.9155.2107.524.9215.273.171.672.93062266.3185.8153.8130India75.737.8084.424.9Italy365.4127.9127.924215.2Japan261.534.15137.373.1Mexico465.5173.1182.967.671.6Netherlands302.6173.7105.919.972.9Singapore329.3124.3442.133.730Spain295132.711812.362Sweden276.968.176.212.8266.3Switzerland500249.8230.624.9185.8United Kingdom348.3104.5174.149.6153.8United States587.8335.71087108.5130

Fig 13.8-21Jan-73-21-21-22.2-16.4-19.6-21.7-20.8-4.54.3-1.64.4-1.38.4-5.2-11.83.8-5.30.8710.410.712.910.925.829.38.6-4.3-3.7-2.1-6.5-10.7-5.8-8.5-9.6-8.6-13.9-14.6-14-7.4-24.2-36.6-40.5-33.7-34.1-26.5-18.9-24.1-15.7-20.1-15.7-20.4-11.8-11.7-8.9-8.8-18-18.7-16-17.5-17.2-13.3-13.7-11.3-11.2-11.3-11.1-8.7-10.9-9.6-7-5.8-2.7-0.50.55.11.2-22.2Feb-73-22.2Jan-73Feb-73Mar-73Apr-73May-73Jun-73Jul-73Aug-73Sep-73Oct-73Nov-73Dec-73Jan-74Feb-74Mar-74Apr-74May-74Jun-74Jul-74Aug-74Sep-74Oct-74Nov-74Dec-74Jan-75Jan-78Feb-78Mar-78Apr-78May-78Jun-78Jul-78Aug-78Sep-78Oct-78Nov-78Dec-78Jan-79Feb-79Mar-79Apr-79May-79Jun-79Jul-79Aug-79Sep-79Oct-79Nov-79Dec-79Jan-80Jan-83Feb-83Mar-83Apr-83May-83Jun-83Jul-83Aug-83Sep-83Oct-83Nov-83Dec-83Jan-84Feb-84Mar-84Apr-84May-84Jun-84Jul-84Aug-84Sep-84Oct-84Nov-84Dec-84Jan-85-16.4Mar-73-16.4-19.6Apr-73-19.6-21.7May-73-21.7-20.8Jun-73-20.8-4.5Jul-73-4.54.3Aug-734.3-1.6Sep-73-1.64.4Oct-734.4-1.3Nov-73-1.38.4Dec-738.4-5.2Jan-74-5.2-11.8Feb-74-11.83.8Mar-743.8-5.3Apr-74-5.30.8May-740.87Jun-74710.4Jul-7410.410.7Aug-7410.712.9Sep-7412.910.9Oct-7410.925.8Nov-7425.829.3Dec-7429.38.6Jan-758.6-4.3Jan-78-4.3-3.7Feb-78-3.7-2.1Mar-78-2.1-6.5Apr-78-6.5-10.7May-78-10.7-5.8Jun-78-5.8-8.5Jul-78-8.5-9.6Aug-78-9.6-8.6Sep-78-8.6-13.9Oct-78-13.9-14.6Nov-78-14.6-14Dec-78-14-7.4Jan-79-7.4-24.2Feb-79-24.2-36.6Mar-79-36.6-40.5Apr-79-40.5-33.7May-79-33.7-34.1Jun-79-34.1-26.5Jul-79-26.5-18.9Aug-79-18.9-24.1Sep-79-24.1-15.7Oct-79-15.7-20.1Nov-79-20.1-15.7Dec-79-15.7-20.4Jan-80-20.4-11.8Jan-83-11.8-11.7Feb-83-11.7-8.9Mar-83-8.9-8.8Apr-83-8.8-18May-83-18-18.7Jun-83-18.7-16Jul-83-16-17.5Aug-83-17.5-17.2Sep-83-17.2-13.3Oct-83-13.3-13.7Nov-83-13.7-11.3Dec-83-11.3-11.2Jan-84-11.2-11.3Feb-84-11.3-11.1Mar-84-11.1-8.7Apr-84-8.7-10.9May-84-10.9-9.6Jun-84-9.6-7Jul-84-7-5.8Aug-84-5.8-2.7Sep-84-2.7-0.5Oct-84-0.50.5Nov-840.55.1Dec-845.11.2Jan-851.2

Table 13.1Month(A) Market Return(B) Executive Cheese Return(C) Paddington Beer Return2002-0.4-1.9Aug-0.4-1.9-0.5Sep-12-10.1-17.2Oct8.58.19.8Nov3.27.516.5Dec-5.54.36.72003Jan-9.5-5.3-11.1Feb2.55.7-7.3Mar-1.2-9.74.5Apr8.7-4.723May3.1-10-1.1June-0.4-2.7-1.2July3.10.16.2Aug0.13.412.4Sep-1.75.6-7.9Oct4.8-2.211.5Nov1.3-6.54.3Dec3.1-0.23.42004Jan-1.9-3.74.1Feb2.3-9-14.1Mar-2.47.3-6.5Apr2.44.712.6May-1.3-7.1-14.1

Fig 13.1 B100105.84112.04116.91126.04118.8125.12125.1296.55100.86102.44103.48110.77116.31117.36115.15119.69118.3101.06107.36115.98122.84129.76135.09130.72135.8140.95137.43144.91140.27139.39135.41143.88146.62155.1147.21144.25158.2153.33149.97153.56151.05160.21151.65150.9138.81139.81144.2130.89122.49131.9132.57129.26127.86119.67109.89111.79120.29121.2

Fig 14.3Book Debt ratioItaly71ItalyItalySwedenGermanyAustriaFranceUSABelgiumJapanDenmarkPortugalSpainFinlandNetherlandsSweden68Sweden71686765646362615957575348Germany67GermanyAustria65AustriaFrance64FranceUSA63USABelgium62BelgiumJapan61JapanDenmark59DenmarkPortugal57PortugalSpain57SpainFinland53FinlandNetherlands48Netherlands

Table 14.4Common shares ($.25 par value per share)$108Additional paid-in capital317Retained earnings4433Treasury shares2880Other adjustments838Net common equity1199Note:Authorized shares600Issued sgares of which:431Outstanding shares351Treasury shares80

Fig 14.4Households36.8HouseholdsPension FundsInsurance CompaniesMutual Funds, etc.Rest of WorldOtherPension Funds21.136.821.17.42110.43.2Insurance Companies7.4Mutual Funds, etc.21Rest of World10.4Other3.299.9

Fig 14.1198919901991199219931994199519961997199819992000200120022003Internal92.386.1108.989.59087.478.78376.779.173.975.481.2100.391.2Equity-26.8-12.44.65.63.8-6.9-7.4-5.9-8.4-25.5-11-11.9-5.1-4.8-4.7Debt34.526.2-13.456.219.528.722.931.746.437.136.523.94.613.5

Table 15.1January 2003 to December 2003UnderwriterValue of Issues ($billion)Number of issuesCitigroup5431872Morgan Stanley3951365Merrill Lynch3801914Lehman Brothers3541264J.P. Morgan3541417

Table 15.3TypeCompanyIssue Amount ($ millions)Underwriter's spreadCommon Stock:IPOBuffalo Wild Wings457.0%7.000.07IPOCarter's Inc.1197.0%70.07IPOGenitope Corp.417.0%70.07IPOInternational Steel Group4626.5%6.50.07IPOIpass987.0%70.070.0SeasonedGeneral Cable Corp.415.5%5.500.06SeasonedBig 5 sporting Goods Corp.945.0%50.05SeasonedRed Robin Goods Corp.925.3%5.250.05SeasonedGibraltar Steel1025.0%50.05SeasonedInterstate hotels475.3%5.250.050.0Debt (cupon rate, type, maturity) :0.04.85% Fixed Rate Notes, 2011Raytheon5000.6%0.6250.014.85% Notes, 2015Procter & Gamble1500.5%0.4750.006.3% Notes, 2018Eastman Chemical2480.8%0.750.015.9% Senior Notes, 2008Bausch & Lomb501.0%10.016.25% Convertible Senior Debentures, 2033General Motors4,0001.8%1.750.02

Fig 15.119933.71993199419951996199719981999200020012002200319944.23.74.27.611.514.821.254.4106.240.721.218.419957.6199611.5199714.8199821.2199954.42000106.2200140.7200221.2200318.4

Fig 15.2China256.9Brazil78.5Korea74.3Greece49India35.3Switzerland34.9Mexico33Taiwan31.1Sweden30.5Singapore29.6Japan28.4Germany27.7Italy21.7USA19.1UK17.4Hing Kong17.3Australia12.1France11.6Spain10.7Netherlands10.2Canada6.3

Table 16.3Rate of Income Tax15%30%47%Operating income100100100Corporate tax (Tc = .3)303030After tax income707070Grossed-up dividend100100100Income Tax153047Tax credit for corporate payment-30-30-30Tax due from shareholder-15017Available to shareholder857053

Fig 16.1DividendsRepurchasesEarnings less purchases & Dividends198071.18.2104198182.2898198292.812.664.2198398.511.978.71984106.234.289.8198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120021985108.451.542Repurchases8.2812.611.934.251.553.666.361.661.84130.139.146.850.579.297.2136173.8160.6182140.299.11986121.153.617.4Earnings less purchases & Dividends1049864.278.789.84217.438.180.155.835.915.131.446.7143.7132.2158.1132.237.2122.8193.84.573.11987131.566.338.1Dividends71.182.292.898.5106.2108.4121.1131.5150.4140.7113.7148.9148161.1169.5189.8203.8192226.5200.5211.3202.1108.21988150.461.680.1Dividends71.182.292.898.5106.2108.4121.1131.5150.4140.7113.7148.9148161.1169.5189.8203.8192226.5200.5211.3202.1108.21989140.761.855.81990113.74135.91991148.930.115.1199214839.131.41993161.146.846.71994169.550.5143.71995189.879.2132.21996203.897.2158.11997192136132.21998226.5173.837.21999200.5160.6122.82000211.3182193.82001202.1140.24.52002108.299.173.1

Table 17.1DataNumber of shares1000Price per share$10Market value of shares$10,000OutcomesOperating income ($)500100015002000Earning per share ($)0.511.52Return on shares(%)5101520Expected Outcome

Table 17.2DataNumber of shares500Price per share$10Market value of shares$5,000Market value of debt$5,000Interest at 10 percent$500OutcomesOperating income ($)$500100015002000Interest ($)$500500500500$050010001500Earning per share ($)$0123Return on shares(%)$0102030Expected Outcome

Table 17.3Operating Income ($)500100015002000Earnings on two shares ($)1234Less interest at 10% ($)1111Net earnings on investment ($)0123Return on $10 investment (%)0102030Expected Outcome

Table 17.4 If operating income falls from$500ChangeNo debt:Earnings per share$1.50$0.50($1)Return15%5%-10%50% debt:Earnings per share$20($2)Return20%0-20%

table 18.1Income Statement of Firm UIncome Statement of Firm LEarnings before interest and taxes$1,000$1,000Interest paid to bondholders0.080Pretax income1,000920Tax at 35%350322Net income to stockholders650598Total income to both bondholders and stockholders$0+650=$650$80+598=$678Interest tax shield (.35 x interest)$0$28

Space baby($ 1,000 s)All Equity1/2 DebtEBIT900900Interest Pmt0100Pretax Income900800Taxes @ 35%315280Net Cash Flow585520

Table 18.3 aBook valuesNet working capital$10,752$7,144Long-term debt21460Other long-term liabilitiesLong-term assets8690069048EquityTotal assets$97,652$97,652Total valueMarket valuesNet working capital$10,752$7,144Long-term debtPV interest tax shield250021460Other long-term liabilitiesLong-term assests283373268021EquityTotal assets$296,625$296,625Total value

Table 18.3 bBook valuesNet working capital$10,752$8,144Long-term debt21460Other long-term liabilitiesLong-term assets8690068048EquityTotal assets$97,652$97,652Total valueMarket valuesNet working capital$10,752$8,144Long-term debtPV interest tax shield285021460Other long-term liabilitiesLong-term assests283373267371EquityTotal assets$296,975$296,975Total value

Fig 18.1InterestEquity IncomeIncome before tax$1$1Less corporate tax at Tc =.3500.35Income after corpotare tax10.65Personal tax at Tp = .35 and Tpe = .1$0.350.068Income after all taxes$675$582Advantage to debt= $ .068

Table 19.1Latest yearForecast012345671Sales83.689.595.8102.5106.6110.8115.2118.72Cost of goods sold63.166.271.376.379.983.18790.23EBITDA (1-2)20.523.324.426.126.627.728.228.54Depreciation3.39.910.611.311.812.312.713.15Profit before tax (EBIT) (3-4)17.213.413.814.814.915.415.515.46Tax64.74.85.25.25.45.45.47Profit after tax (5-6)11.28.799.69.71010.1108Investment in fixed assets1114.615.516.61515.616.215.99Investment in working capital10.50.80.90.50.60.60.410Free cash flow (7+4-8-9)2.53.53.23.45.96.166.8PV Free cash flow, years 1-620.3PV Horizon value67.6PV of company87.9AssumptionsSales growth (percent)6.7777444375.57474.574.5757575.57613.31313131313131379.279797979797979514141414141414Tax rate, percent35%WACC9%Long term growth forecast3%Fixed assets and working capitalGross fixed assets95109.6125.1141.8156.8172.4188.6204.52938.949.560.872.684.997.6110.7Net fixed assets6670.775.680.984.287.59193.8Depreciation3.39.910.611.311.812.312.713.1Working capital11.111.612.413.313.914.41515.4

Table 19.2Latest yearForecast0123456710Free cash flow (7+4-8-9)2.53.53.23.45.96.166.8PV Free cash flow, years 1-619.7Pv Horizon value64.6Base-case PV of company84.3Debt515049484746453.0632.942.882.822.761.071.051.031.010.990.97PV Interest tax shields5APV89.3Tax rate, percent35%Opportunity cost of capital9.84%WACC (To discount horizon value to year 6)9%Lomg term growth forecast3%Interest rate (years 1-6)6%After tax debt service2.992.952.912.872.832.79

Table 19.5Number of outstanding shares (N)324.5 millionPrice per share (P)$40.59Beta0.46Treasury bill rate1%20-year Treasury bond rate5.20%Cost of debt (rD)7%Marginal tax rate35%

Table 19.-Current assets899.1Current liabilities820.4Net property, plant, and equipment11260.1Long-term debt2327Investments and other assets256.9Deferred taxes1697.2Other liabilities1038.7Shareholders' equity6532.8Total12416.1Total12416.1

Fig 19.1rdrrewacc069.849.849.840.169.8410.229.650.269.8410.619.490.2569.8410.89.420.369.8410.999.360.469.8411.389.240.569.8411.769.140.669.8412.149.050.6769.8412.4190.76.049.8412.58.970.86.189.8412.778.880.96.319.8413.028.7916.439.8413.258.711.16.549.8413.478.641.26.659.8413.678.571.36.749.8413.878.511.46.839.8414.058.451.56.919.8414.248.39

Table 20.1Option MaturityExercise PricePrice of Call OptionPrice of Put OptionApr-04$50$10.50$1.25556.72.5603.854.6651.957.7700.911.65Jul-04$50$11.30$2.05557.83.6605.155.75653.158.75701.8912.4Jan-05$50$13.10$3.4555105.2607.37.5655.210.4703.6513.75Lomg term options are called 'LEAPS"

Fig 21.1-69-65-60-47-39-29-19-7723426387115148185227Bottom right histogramPercent price changes:-60-54-47-39-29-19-77Probability %:0.150.692.295.6510.7215.9718.9317.95Percent price changes:23426387115Probability %:13.628.223.91.420.39

Table 21.1Changes per interval (%)Intervals in a Year (1/h)UpsideDownsideEstimated Option Value1.533.3-258.83322.6-18.46.351212.4-11.16.99525.8-5.57.1Black-Scholes value=7.13

Table 21.2Establishment IndustriesDigital OrganicsINPUTSStock price(P)2222Exercise price (EX)2525Interest rate, percent 44Maturity in years (t)55Annual standard deviation, percent ()2436Are these rates compounded annually (A) or continuously ?aaequivalent continously compounded rate, percent3.923.92INTERMEDIATE CALCULATIONS:PV(EX)20.548220.5482d1=log[P/PV(EX)]/.0.39550.4873d2=d1-..-0.1411-0.3177N(d1)= delta0.65380.687N(d2)0.44390.3754OPTION VALUES:Call value = N(d1) * P - N(d2)* PV(EX)5.267.4Put value = Call value + PV(EX) - S3.815.95

Table 21.3YearInterest RateMarket ReturnEnd-Year Dividend Yield198411-2.35.119851544.14.6198617.152.23.9198714.1-7.94.8198811.711.95.4198917.317.45.5199015.9-17.56199111.134.23.819926.8-2.33.819935.345.43.219945.4-8.74.11995820.23.919967.414.63.619975.512.23.61998511.63.819994.919.33.520004.953.220014.810.13.320024.8-8.1420034.915.93.5

Fig 21.1 -2-69-65-60-54-47-39-29-19-7723426387115148185227

Table 22.1Year198219831984198519861987After-tax operating cash flow (1)1001592951850Capital investment (2)45000000Increase in working capital (3)050100100-125-125Net cash flow (1)-(2)-(3)-4506059195310125NPV at 20% = - $46.45, or about -$46 million

Table 23.2YearCtPV_Ct) at 2.75%Proportion of Total Value [PV(Ct)/V]Proportion of Total Value Time5553.530.0490.04495552.10.0470.0945550.70.0460.1381055946.510.8583.433V = 1102.831Duration= 3.714 years

Fig 24.2100604020111.05240027.850.760.04036.471.10.14045.651.310.26055.11.440.370.0164.691.530.470.0374.381.590.560.0584.131.630.630.0793.921.650.70.1103.741.670.750.13113.591.680.80.16123.461.690.840.19133.341.70.880.22143.241.70.910.24153.151.70.940.27163.061.690.970.3172.991.690.990.32182.921.691.010.35192.851.681.030.37202.81.671.040.39212.741.671.060.41222.691.661.070.43232.641.661.080.45242.61.651.090.47252.561.641.10.49

Table 24.2RatioAAAAAABBBBBBCCCEBIT interest cover21.410.16.13.72.10.80.1return on capital %34.921.719.413.611.66.61Gross profit margin %2722.118.615.415.911.911.9Total debt/capital %22.937.742.548.262.674.887.7

Table 24.3Percentage Defaulting WithinRating at Time of Issue1 Year after issue5 Years after Issue10 Years after IssueAAA00.10.5AAA00.30.9AAA0.10.72BBB0.43.46.9BBB1.412.421BBB6.126.835.4CCC30.95358.4

Fig 23.14/1/863.678.74May-863.419.13Jun-863.549.32Jul-863.679.51Aug-863.629.41Sep-863.9510.77Oct-864.110.73Nov-864.1411Dec-864.0610.34Jan-87Jan-0010.09Feb-87Jan-009.6Mar-873.379.18Apr-873.678.93May-873.638.84Jun-873.919.22Jul-873.849.83Aug-873.9410.23Sep-874.1310.14Oct-874.349.42Nov-873.679.37Dec-873.769.66Jan-883.889.39Feb-883.749.24Mar-883.489.13Apr-883.449.39May-883.539.48Jun-883.499.7Jul-883.579.64Aug-883.739.94Sep-883.799.67Oct-883.459.37Nov-883.689.79Dec-883.81Jan-893.69Feb-893.5Mar-893.53Apr-893.65May-893.76Jun-893.76Jul-893.41Aug-893.35Sep-893.55Oct-893.54Nov-893.6Dec-893.53Jan-903.69Feb-903.97Mar-904.13Apr-904.26May-904.21Jun-904.24Jul-904.36Aug-904.28Sep-904.35Oct-904.22Nov-904.01Dec-904.09Jan-914.1Feb-914.1Mar-914.08Apr-914.06May-914.09Jun-914.24Jul-914.34Aug-914.24Sep-914.14Oct-914.15Nov-914.23Dec-914.42Jan-924.24Feb-924.2Mar-924.47Apr-924.5May-924.38Jun-924.42Jul-924.71Aug-924.95Sep-924Oct-923.36Nov-923.58Dec-923.62Jan-933.35Feb-933.04Mar-933.01Apr-933.21May-933.25Jun-933.25Jul-933.13Aug-933.09Sep-933.07Oct-932.97Nov-932.92Dec-932.66Jan-942.7Feb-943.06Mar-943.21Apr-943.33May-943.72Jun-943.86Jul-943.94Aug-943.71Sep-943.79Oct-943.86Nov-943.81Dec-943.83Jan-953.87Feb-953.87Mar-953.86Apr-953.78May-953.51Jun-953.71Jul-953.55Aug-953.46Sep-953.58Oct-953.61Nov-953.45Dec-953.44Jan-963.46Feb-963.67Mar-96Apr-96May-96Jun-96Jul-96Aug-96Sep-96Oct-96Nov-96Dec-96Jan-97Feb-97Mar-97Apr-97May-97Jun-97Jul-97Aug-97Sep-97Oct-97Nov-97Dec-97Jan-98Feb-98Mar-98Apr-98May-98Jun-98Jul-98Aug-98Sep-98Oct-98Nov-98Dec-98Jan-99Feb-99Mar-99Apr-99May-99Jun-99Jul-99Aug-99Sep-99Oct-99Nov-99Dec-99Jan-00Feb-00Mar-00Apr-00May-00Jun-00Jul-00Aug-00Sep-00Oct-00Nov-00Dec-00Jan-01Feb-01Mar-01Apr-01May-01Jun-01Jul-01Aug-01Sep-04Oct-01Nov-01

Fig 24.3

3.6Inflation1900190119021903190419051906190719081909191019111912191319141915191619171918191919201921192219231924192519261927192819291930193119321933193419351936193719381939194019411942194319441945194619471948194919501951195219531954195519561957195819591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984198519861987198819891990199119921993199419951996199719981999200020