Finance for Executives: Managing for Value Creation 4th Edition

Chapter 10 Answers to Review Problems Finance For Executives 4th Edition 1. Historical returns. a. If one accepts that stocks are riskier than corporate bonds, which are riskier than government bonds, which are riskier than Treasury bills, then the annual data does not appear to support a nave understanding of theory. In 2000, 2001, 2002, and in

Chapter 11 Answers to Review Problems Finance For Executives 4th Edition 1. EBITEPS analysis. a. The following tables show the calculations of Chlorolines EPS and return on investment as a function of the firms EBIT, without debt and with debt. Current Capital Structure: No Debt and Two Million Shares Outstanding Recession Expected Expansion Earnings before interest and

Chapter 12 Answers to Review Problems Finance For Executives 4th Edition 1. Valuation issues. a. When the yield on government securities rises, equity investors require a higher return to hold shares. This reduces share prices and decreases (not increases) price-earnings ratios. shares. This reduces share prices and decreases (not increases) price-earnings ratios. shares. This reduces share

Chapter 13 Answers to Review Problems Finance For Executives 4th Edition 1. Various types of risk. a. Business risk results from the choice of nonfinancial assets the firm has made (the left side of the balance sheet), whereas financial risk results from the firms decision toborrow (financial debt on the right side of the balance

Chapter 14 Answers to Review Problems Finance For Executives 4th Edition 1. Exposure. This problem illustrates one of the dilemmas facing multinational companies. It is basically about changes in the valuation of a foreign subsidiarys assets and liabilities, how to report them in the consolidated accounts of the group, and ultimately whether they can have an impact

Chapter 15 Answers to Review Problems Finance For Executives 4th Edition 1. Understanding market value added and economic value added. a. The firm with the highest market value added, which is not necessarily the one with the highest market value, is the one that has created the most value for its shareholders. value, is the one that

7. Return on invested capital versus economic value added based bonus systems. a. Currently, Fionas division generates a 100 percent return on invested capital ($1,000,000 of NOPAT divided by $1,000,000 of invested capital). If the new project is launched, the division return on invested capital would drop to 75 percent ($1,500,000 of NOPAT divided

Chapter 2 Answers to Review Problems Finance For Executives 4th Edition 1. Accounting allocation of transactions. CA NC ACL NCL OE REV EXP RE 1. Factory equipment purchased for cash 2. Goodwill impairment loss 3. Interest income received 4. Dividend declared 5. Shares repurchased 6. Sell merchandise on account 7. Pay two months rent

5. Balance sheet changes. Figures in millions a. Year 1 Noncurrent assets = Total assets Current assets = $21,094 $3,092 = $18,002 = $21,094 $3,092 = $18,002 = $21,094 $3,092 = $18,002 Total liabilities and owners equity = Total assets = $21,094 = $21,094 = $21,094 Owners equity = Total

Chapter 3 Answers to Review Problems Finance For Executives 4th Edition 1. Transactions. NLF WCR NSF NET PROFIT Shares are issued for cash. + 0 0Goods for inventory are sold for cash. + +Goods from inventory are sold on account. + + 0 +A fixed asset is sold for cash for less than book value.

8. Financing strategies. The managerial balance sheet of the three firms can be directly constructed from the data with Working capital requirement = Accounts receivable + Inventories Accounts payable: Working capital requirement = Accounts receivable + Inventories Accounts payable: Working capital requirement = Accounts receivable + Inventories Accounts payable: Firm A Firm B Firm C Invested

Chapter 4 Answers to Review Problems Finance For Executives 4th Edition 1. Transactions. 2. Profits, losses, and cash flows. A company can show a profit, while, during the same period, the cash flows from operating activities are negative because the investment component of the operating cycle (working capital requirement)increased more than the margin component of the

6. From the statement of cash flows (FASB 95) to the cash-flow statement (direct approach). There are two adjustments to make on the FASB 95 statement to prepare the firms cash flow statement: a. The interest payments of $280 millions must be deducted to the net cash provided by operating activities to get the firms

Chapter 5 Answers to Review Problems Finance For Executives 4th Edition 1. Transactions. Operatin g margin Invested capital turnover Debt ratio 1. Shares are issued for cash. 0 2. Goods from inventory are sold for cash at a profit. + + 3. A fixed asset is sold for cash at its book value. 0 0 0 4. A fixed

8. The effect of the management of the operating cycle on the firms profitability. a. Working capital requirement (WCR) = Accounts receivable + Inventories + Prepaid expenses Accounts payable Accrued expenses December 31, 2008 WCR = $2,730 + $2,800 + $0 $1,400 $200 = $3,930 WCR = $2,730 + $2,800 + $0 $1,400

$1,000 $2,000 $3,000 $1,000 $2,000 $3,000 $1,500 Let FV($amount)Year N = future value of the $ amount at the end of year N. Value at year-end 5 = FV($1,000)4 + FV($2,000)3 + FV($3,000)3 = $1,000 (1 + 0.04)4 + $2,000 (1 + 0.04)3 + $3,000 (1 + 0.04)2 = $1,000

7. Financial deals. a. Time line: The objective is to compute the discount rate implicit in the proposed deal. The aunt would receive $250,000 now [present value] and give up $50,000 per year [annuity] for the next 9 years. Using a calculator The implicit discount rate k is the solution of: 9832 )k1( 1 )k1( 1 ...... )k1( 1 )k1( 1 k1 1 000,50$000,250$ A trial-and-error calculation will

Chapter 7 Answers to Review Problems Finance For Executives 4th Edition 1. Investment criteria. a. Impact on earnings per share (EPS) is an accounting measure of performance. Its main drawbacks are that it ignores capital investment required for the project, penalizes projects whose earnings are not immediately realized, and is subject to accounting manipulation. Yet there

Chapter 8 Answers to Review Problems Finance For Executives 4th Edition 1. Pondering an investment offer. The offer is not ridiculous. The problem is that the cash flows in the deal have been incorrectly specified. The $15,000 investment promises a $17,000 payoff in one year. The less than 4 percent return calculation is presumably based on

6. The effect of accounts receivables, accounts payables, overhead, and financial costs on the investment decision. a. The new product would increase both accounts receivable and accounts payable. Annual sales of $12 million spread evenly over the year would mean $32,877 per day ($12 million/365 days). If the collection period on average were 50

Chapter 9 Answers to Review Problems Finance For Executives 4th Edition 1. Structure and characteristics of financial markets. a. In a rights offering, shares are issued exclusively to the firms existing shareholders, whereas in a general cash offering they are sold to any interested buyer. general cash offering they are sold to any interested buyer. general cash

than the returns on corporate bonds. In 1994, 1996, 2001, and in 2006, Treasury bills yielded a higher return than government bonds. In 1995, 1997, 1998, 2000, 2002, 2005, and in 2007 the government bond rate was higher than the corporate bond rate. These observations lead one to accept that

Equals earnings before tax $5.0 million $15.0 million $20.0 million Less tax (40 percent of earnings before tax) $2.0 million $6.0 million $8.0 million Equals net earnings $3 million $9.0 million $12.0 million Divided by the number of shares 2 million 2 million 2 million Equals earnings per share

For typical cash-flow streams, it is the present value of the cash flows expected beyond the 5- to 10-year forecasting period that dominates: it usually accounts for more than 50% of a companys estimated DCF value. For typical cash-flow streams, it is the present value of the cash flows expected

side of the balance sheet), whereas financial risk results from the firms decision to borrow (financial debt on the right side of the balance sheet). side of the balance sheet), whereas financial risk results from the firms decision to borrow (financial debt on the right side of the balance sheet).

Appendix 14.1, all assets and liabilities of the subsidiary are translated at the rate prevailing on the date of the balance sheet. This means, other things equal, that if the subsidiarys currency depreciates, the value of its equity will fall, thus producing a loss. Under FASB52, such a loss would

b. Positive MVA means that the present value of the future stream of EVAs is positive. This does not necessarily imply that current ROIC exceeds the firms WACC. b. Positive MVA means that the present value of the future stream of EVAs is positive. This does not necessarily

2-1 Chapter 2 Answers to Review Problems Finance For Executives 4th Edition 1. Accounting allocation of transactions. CA NCA CL NCL OE REV EXP RE 1. Factory equipment purchased for cash 2. Goodwill impairment loss

3-1 Chapter 3 Answers to Review Problems Finance For Executives 4th Edition 1. Transactions. NLF WCR NSF NET PROFIT Shares are issued for cash. + 0 0 Goods for inventory are sold for cash. + + Goods from inventory

4-1 Chapter 4 Answers to Review Problems Finance For Executives 4th Edition 1. Transactions. 2. Profits, losses, and cash flows. A company can show a profit, while, during the same period, the cash flows from operating activities are negative because the

5-1 5-1 5-1 Chapter 5 Answers to Review Problems Finance For Executives 4th Edition 1. Transactions. Operating margin Invested capital turnover Debt ratio 1. Shares are issued for cash. 0 2. Goods from inventory are sold for cash at a profit.

Let FV($amount)Year N = future value of the $ amount at the end of year N. Value at year-end 5 = FV($1,000)4 + FV($2,000)3 + FV($3,000)3 = $1,000 (1 + 0.04)4 + $2,000 (1 + 0.04)3 + $3,000 (1 + 0.04)2 = $1,000 1.16986 + $2,000 1.12486 + $3,000

belief among managers that changes in EPS have a primary influence on share prices, and consequently that the impact of an investment proposal should be taken into account when making the decision to undertake the project. The payback period measures the number of years to recover the capital investment outlay.

of $15,560. This sum related to the total investment of $15,000 is indeed less than 4% [it is 3.7%]. However, your investment [equity] would only be $3,000, if the bank will lend you $12,000 for one year at 12 percent. So at time 0, your net outflow will be $3,000.

In an underwritten issue, the investment bank buys the securities from the issuer and then sells them to the public at its own risk (the bank acts as a dealer in this case), whereas in a best-efforts distribution, the investment bank does not buy the securities from the issuer;