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Q1 . a) Replacing the machine increases EBITDA by 45,000 – 22,000 = 13,000.
Depreciation expenses rises by $13,000 – $10,455 = $2545.
Therefore, FCF will increase by (13,000) × (1-0.45) + (0.45) (2545) = 8295.25 in years 1 through 10.
In year 0, the initial cost of the machine is $150,000. Because the current machine has a book value of
$115,000 – 10,455 (one year of depreciation) = $104,545 ;
selling it for $50,000 generates a capital gain of 50,000 – 104,545 = –54,545.
This loss produces tax savings of 0.45 × 54,545 = $24,545.25 so that
the after-tax proceeds from the sales including this tax savings is $(50,000+24,545.25) = $74,545.25
Thus, the FCF in year 0 from replacement is –150,000 + 74,545.75 = –$74,454.75
NPV of replacement = –$74,454.75 + 8295.25 × (1 / 0.12)(1 – (1 / 1.12) 10) = -28,584.74
b) There is a loss from replacing the machine.
Q2. The expected cash flow in year 5 is 189,000 × 1.01 = 190,890.
We assume that cash flows in the year 5 and after that as a growing perpetuity:
Therefore,
Continuation Value in Year 4 = 190,890/(0.08 – 0.01) = $ 2,727,000
We can then compute the value of the division by discounting the FCF in years 1 through 4, together
with the continuation value:
-130,000/(1.08) -6,000/(1.08)
2
+ 53,000/(1.08)
3
+ (189,000+2,727,000)/(1.08)
4

= $2,059,905.76
Q3. a) 991.96 = 45 / (1+(ytm/2)) + 45 / (1+(ytm/2)
2
)+ 45 / (1+(ytm/2)
3
)+ ……… + (45 +1000) / (1+(ytm/2)
20
)
Solving the above equation, ytm = 9.12%
b) Price = 45 / (1+(0.09/2)) + 45 / (1+(0.09/2)
2
)+ 45 / (1+(0.09/2)
3
)+ ……… + (45 +1000) / (1+(0.09/2)
20
)
Solving the above equation, price = $1000
Q4. a) When coupon rate is greater than yield to maturity, bond trades at premium.
b) Price = 42.05 / (1+(0.0585/2)) + 42.05 / (1+(0.0585/2)
2
)+ 42.05 / (1+(0.0585/2)
3
)+ ……… +
(42.05 +1000) / (1+(0.0585/2)
14
)
Solving the above equation, price = $1141.64
Q5.
Year 0 Year1 Year2 Year3 Year4 Year5 Year6
EPS Growth rate 26% 26% 13.52% 13.52% 7.03%
EPS 2.95 3.72 4.22 4.79 5.44 5.82
Retention ratio 100% 100% 52% 52% 21% 21%
Dividend payout 0 0 48% 48% 79% 79%
Dividend (EPS*
dividend payout)
- - 2.03 2.30 4.30 4.60
From year 5, dividends grow at constant rate of 7.03%, thus
P(4) = 4.60/ (0.111-0.0703) = 105.65
P(0) = 2.03/(1.111)
3
+ (2.30+105.65)/...