Solutions Guide: Please reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as your own.

Stock quotation Assume that the following quote for the Advanced Business Machines stock (traded on the NYSE) was found in the Thursday, December 14, issue of the Wall Street Journal. 3.2 84.13 51.25 AdvBusMach ABM 1.32 1.6 23 12432 81.75 1.63 Given this information, answer the following questions: a. On what day did the trading activity occur? b. At what price did the stock sell at the end of the day on Wednesday, December 13? c. What percentage change has occurred in the stock’s closing price since the beginning of the calendar year? d. What is the firm’s price/earnings ratio? What does it indicate? e. What is the last price at which the stock traded on the day quoted? f. How large a dividend is expected in the current year? g. What are the highest and the lowest price at which the stock traded during the latest 52-week period? h. How many shares of stock were traded on the day quoted? i. How much, if any, of a change in stock price took place between the day quoted and the day before? At what price did the stock close on the day before?

(a)Wednesday, December 13

(b)$81.75

(c)3.2%

(d)P/E ratio  23

The P/E is calculated by dividing the closing market price by the firm’s most recent annual earnings per share. The P/E is believed to reflect investor expectations concerning the firm’s future prospects. Higher (lower) P/E ratios reflect investor optimism (pessimism) and confidence (concern).

(e)$81.75

(f)$1.32

(g)Highest price  $84.13; Lowest price  $51.25

(h)12,432 round lots for total shares of 12,432  100  1,243,200 shares.

(i)The price increased by $1.63. This increase tells us that the previous close was $80.12.

Breakeven cash inflows and risk Pueblo Enterprises is considering investing in either of two mutually exclusive projects, X and Y. Project X requires an initial investment of $30,000; project Y requires $40,000. Each project’s cash inflows are 5-year annuities: Project X’s inflows are $10,000 per year; project Y’s are $15,000. The firm has unlimited funds and, in the absence of risk differences, accepts the project with the highest NPV. The cost of capital is 15%. a. Find the NPV for each project. Are the projects acceptable? b. Find the breakeven cash inflow for each project. c. The firm has estimated the probabilities of achieving various ranges of cash inflows for the two projects, as shown in the following table. What is the probability that each project will achieve the breakeven cash inflow found in part b? d. Which project is more risky? Which project has the potentially higher NPV? Discuss the risk–return tradeoffs of the two projects. e. If the firm wished to minimize losses (that is, NPV$0), which project would you recommend? Which would you recommend if the goal was achieving a higher NPV? Probability of achieving cash inflow in given range Range of cash inflow Project X Project Y $0 to $5,000 0% 5% $5,000 to $7,500 10 10 $7,500 to $10,000 60 15 $10,000 to $12,500 25 25 $12,500 to $15,000 5 20 $15,000 to $20,000 0 15 Above $20,000 0 10 LG2 LG2 480 PART THREE Long-Term Investment Decisions INTERMEDIATE INTERMEDIATE<br /<br /<br />In Excel Please

(a)Project XProject Y

PVn PMT  (PVIFA15%,5 yrs.)PVnPMT  (PVIFA15%,5 yrs.)

PVn $10,000  (3.352)PVn$15,000  (3.352)

PVn $33,520PVn $50,280

NPV  PVn Initial investmentNPV  PVn Initial investment

NPV  $33,520  $30,000NPV  $50,280  $40,000

NPV $3,520NPV  $10,280

Calculator solution: $3,521.55Calculator solution: $10,282.33

(b)Project XProject Y

$CF  3.352  $30,000$CF  3.352  $40,000

$CF  $30,000  3.352$CF  $40,000  3.352

$CF  $8,949.88$CF  $11,933.17

(c)Project XProject Y

Probability  60%Probability  25%

(d)Project Y is more risky and has a higher potential NPV. Project X has less risk and less return while Project Y has more risk and more return, thus the risk-return trade-off.

(e)Choose Project X to minimize losses; to achieve higher NPV, choose Project Y.