Corporate Finance 11th Edition

Chapter 1 INTRODUCTION TO CORPORATE FINANCE SLIDES CHAPTER WEB SITES Section Web Address 1.1 www.cfo.com 1.4 www.business-ethics.com 1.6 www.protiviti.com/en-US/Documents/Surveys/2014-SOX- Compliance-Survey-Protiviti.pdf CHAPTER ORGANIZATION 1.1 What Is Corporate Finance? The Balance Sheet Model of the Firm The Financial Manager 1.2 The Corporate Firm The Sole Proprietorship The Partnership The Corporation 1.1 Key Concepts and Skills 1.2 Chapter Outline 1.3 What Is Corporate Finance? 1.4 Balance Sheet Model

Slide 1.15 The Agency Problem A. Agency Relationships The relationship between stockholders and management is called the agency relationship. This occurs when one party (principal) hires another (agent) to act on their behalf. The possibility of conflicts of interest between the parties is termed the agency problem. B. Management Goals Slide 1.16

CHAPTER 2 - 1 CHAPTER 1 INTRODUCTION TO CORPORATE FINANCE Answers to Concept Questions 1. In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in turn appoint the firms management. This separation of ownership from control in the corporate form of

CHAPTER 10 CASE C-1 CHAPTER 10 A JOB AT EAST COAST YACHTS 1. The biggest advantage the mutual funds have is instant diversification. The mutual funds have a number of assets in the portfolio.2. Both the APR and EAR are infinite. The match is instantaneous, so the number of periods in

Chapter 10 RISK AND RETURN: LESSONS FROM MARKET HISTORY SLIDES CHAPTER WEB SITES Section Web Address 10.1 finance.yahoo.com www.marketwatch.com/markets 10.2 bigcharts.marketwatch.com CHAPTER ORGANIZATION 10.1 Returns Dollar Returns Percentage Returns 10.2 Holding Period Returns 10.1 Key Concepts and Skills 10.2 Chapter Outline 10.3 Returns 10.4 Returns 10.5 Returns: Example 10.6 Returns: Example 10.7 Holding Period Return 10.8 Holding Period Return: Example 10.9 Historical Returns 10.10 Return Statistics 10.11 Historical Returns,

CHAPTER 10 SOME LESSONS FROM CAPITAL MARKET HISTORY Answers to Concepts Review and Critical Thinking Questions 1. They all wish they had! Since they didnt, it must have been the case that the stellar performance was not foreseeable, at least not by most. not foreseeable, at least not by most. not foreseeable, at least not

CHAPTER 10 - 14. The return of any asset is the increase in price, plus any dividends or cash flows, all divided by the initial price. This preferred stock paid a dividend of $3.50, so the return for the year was: R = ($96.12 92.07 + 3.50) / $92.07 R

CHAPTER 11 CASE C-1 CHAPTER 11 A JOB AT EAST COAST YACHTS, PART 2 1. There should be little, if any, money allocated to the company stock. The principle of diversification indicates that an individual should hold a diversified portfolio. Investing heavily in company stock does not create a diversified portfolio. This is

Chapter 11 RETURN AND RISK THE CAPITAL ASSET PRICING MODEL (CAPM) SLIDES 11.1 Key Concepts and Skills 11.2 Chapter Outline 11.3 Individual Securities 11.4 Expected Return, Variance, and Covariance 11.5 Expected Return 11.6 Expected Return 11.7 Variance 11.8 Variance 11.9 Standard Deviation 11.10 Covariance 11.11 Correlation 11.12 The Return and Risk for Portfolios 11.13 Portfolios 11.14 Portfolios 11.15 Portfolios 11.16 Portfolios 11.17 The Efficient Set for Two Assets 11.18 The

Slide 11.15 Slide 11.16 Portfolios 11.4. The Efficient Set for Two Assets With two assets, you can form portfolios composed of different percentages of each asset. The possible portfolios are referred to as the opportunity set, and the set of portfolios with the highest return for a given level of risk is referred

CHAPTER 11 RISK AND RETURN: THE CAPITAL ASSET PRICING MODEL (CAPM) Answers to Concepts Review and Critical Thinking Questions 1. Some of the risk in holding any asset is unique to the asset in question. By investing in a variety of assets, this unique portion of the total risk can be eliminated at

20. For a portfolio that is equally invested in large-company stocks and long-term bonds: Return = (12.1% + 6.1%) / 2 Return = 9.10%For a portfolio that is equally invested in small stocks and Treasury bills:Return = (16.7% + 3.5%) / 2 Return = 10.10% Return = (12.1% + 6.1%) /

CHAPTER 11 - 31. First, we can calculate the standard deviation of the market portfolio using the Capital Market Line (CML). We know that the risk-free asset has a return of 4.3 percent and a standard deviation of zero and the portfolio has an expected return of 8 percent and

CHAPTER 12 CASE C-1 CHAPTER 12 THE FAMA-FRENCH MULTI-FACTOR MODEL AND MUTUAL FUND RETURNS NOTE: The example below shows the results for returns between October 2010 and September 2015. The actual answer to the case will change based on current market conditions. 1. For a large-company stock fund, we would expect the beta for

Chapter 12 AN ALTERNATIVE VIEW OF RISK AND RETURN: THE ARBITRAGE PRICING THEORY SLIDES CHAPTER ORGANIZATION 12.1 Introduction 12.2 Systematic Risk and Betas 12.3 Portfolios and Factor Models Portfolios and Diversification 12.4 Betas, Arbitrage, and Expected Returns The Linear Relationship The Market Portfolio and the Single Factor 12.1 Key Concepts and Skills 12.2 Chapter Outline 12.3 Arbitrage Pricing Theory 12.4 Total Risk 12.5 Risk: Systematic

CHAPTER 12 AN ALTERNATIVE VIEW OF RISK AND RETURN: THE ARBITRAGE PRICING THEORY Answers to Concept Questions 1. Systematic risk is risk that cannot be diversified away through formation of a portfolio. Generally, systematic risk factors are those factors that affect a large number of firms in the market, however, those factors will not

CHAPTER 12 B- 8. To determine which investment an investor would prefer, you must compute the variance of portfolios created by many stocks from

CHAPTER 12 B- 8. To determine which investment an investor would prefer, you must compute the variance of portfolios created by many stocks from either market. Because you know that diversification is good, it is reasonable to assume that once an investor has chosen the market in which she will invest,

CHAPTER 13 CASE C-1 CHAPTER 13 COST OF CAPITAL FOR SWAN MOTORS NOTE: The example below shows the results during November 2012. The actual answer to the case will change based on current market conditions. 1. The book value of the companys liabilities and equity can be found from a number of sources. We

Chapter 13 - Risk, Cost of Capital, and Valuation Chapter 13 RISK, COST OF CAPITAL, AND VALUATION SLIDES CHAPTER WEB SITES Section Web Address 13.10 finance.yahoo.com www.reuters.com 13-1 Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 13.1 Key Concepts and Skills 13.2 Chapter Outline 13.3 Where Do We

CHAPTER 13 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING Answers to Concepts Review and Critical Thinking Questions 1. No. The cost of capital depends on the risk of the project, not the source of the money. 2. Interest expense is tax-deductible. There is no difference between pretax and aftertax equity costs. 1. No.

CHAPTER 13 B- 18. The total cost of the equipment including flotation costs was: Total costs = $19,000,000 + 1,150,000 Total costs = $20,150,000 Total costs = $19,000,000 + 1,150,000 Total costs = $20,150,000 Total costs = $19,000,000 + 1,150,000 Total costs = $20,150,000 Using the equation to calculate the

CHAPTER 14 CASE C-1 CHAPTER 14 YOUR 401k ACCOUNT AT EAST COAST YACHTS 1. Before the fact, you would expect that mutual funds managers would be able to outperform the market. This is due, in part, to the Darwinian nature of the business. Good performing fund managers are richly rewarded, and poor performing fund

Chapter 14 EFFICIENT CAPITAL MARKETS AND BEHAVIORAL CHALLENGES SLIDES CHAPTER ORGANIZATION 14.1 Key Concepts and Skills 14.2 Chapter Outline 14.3 Can Financing Decisions Create Value? 14.4 Creating Value through Financing 14.5 A Description of Efficient Capital Markets 14.6 Foundations of Market Efficiency 14.7 Stock Price Reactions 14.8 Stock Price Reactions 14.9 The Different Types of Efficiency 14.10 Weak Form Market Efficiency 14.11 Why

CHAPTER 14 B- CHAPTER 14 CORPORATE FINANCING DECISIONS AND EFFICIENT CAPITAL MARKETS Answers to Concepts Review and Critical Thinking Questions 1. To create value, firms should accept financing proposals with positive net present values. Firms can create valuable financing opportunities in three ways: 1) Fool investors. A firm can issue a complex security to

Chapter 15 LONG-TERM FINANCING: AN INTRODUCTION SLIDES CHAPTER WEB SITES Section Web Address 15.2 www.investinginbonds.com www.nasdbondinfo.com www.sifma.org www.sec.gov CHAPTER ORGANIZATION 15.1 Some Features of Common and Preferred Stocks Common Stock Features Preferred Stock Features 15.2 Corporate Long-Term Debt Is It Debt or Equity? Long-Term Debt: The Basics The Indenture 15.3 Some Different Types of Bonds Floating-Rate Bonds 15.1 Key Concepts and Skills 15.2 Chapter Outline 15.3 Features of

Slide 15.7 Bond Classifications Slide 15.8 Required Yields Security debt classified by collateral and mortgage Collateral strictly speaking, pledged securities Mortgage securities secured by mortgage on real property Debenture an unsecured debt with 10 or more years to maturity Note a debenture with 10 years or less to maturity Seniority order of precedence of claims Subordinated debenture of

CHAPTER 15 B- CHAPTER 15 LONG-TERM FINANCING: AN INTRODUCTION Answers to Concepts Review and Critical Thinking Questions 1. The indenture is a legal contract and can run into 100 pages or more. Bond features which would be included are: the basic terms of the bond, the total amount of the bonds issued, description

CHAPTER 16 C-1 CHAPTER 16 STEPHENSON REAL ESTATE RECAPITALIZATION 1. If Stephenson wishes to maximize the overall value of the firm, it should use debt to finance the $45 million purchase. Since interest payments are tax deductible, debt in the firms capital structure willdecrease the firms taxable income, creating a tax shield that

Chapter 16 CAPITAL STRUCTURE: BASIC CONCEPTS SLIDES CHAPTER ORGANIZATION 16.1 The Capital Structure Question and the Pie Theory 16.2 Maximizing Firm Value versus Maximizing Stockholder Interests 16.3 Financial Leverage and Firm Value: An Example Leverage and Returns to Shareholders The Choice between Debt and Equity A Key Assumption 16.4 Modigliani and Miller: Proposition II (No Taxes) 16.1 Key Concepts and

CHAPTER 16 CAPITAL STRUCTURE: BASIC CONCEPTS Answers to Concepts Review and Critical Thinking Questions 1. Assumptions of the Modigliani-Miller theory in a world without taxes: 1) Individuals can borrow at the same interest rate at which the firm borrows. Since investors can purchase securities on margin, an individuals effective interest rate is probably no

9. a. The rate of return earned will be the dividend yield. The company has debt, so it must make an interest payment. The net income for the company is: NI = $69,000 .08($320,000) NI = $43,400 NI = $69,000 .08($320,000) NI = $43,400 NI = $69,000 .08($320,000) NI = $43,400

CHAPTER 16 - 23. a. Before the announcement of the stock repurchase plan, the market value of the outstanding debt is $3,100,000. Using the debtequity ratio, we can find that the value of the outstanding equity must be: Debtequity ratio = B / S .35 = $3,100,000 / SS = $8,857,143

CHAPTER 17 C-1 CHAPTER 17 McKENZIE CORPORATIONS CAPITAL BUDGETING 1. We assume the $5,700,000 is spent immediately so we can ignore time value of money considerations. If we include the time value of money, the numerical solutions will change slightly, but the analysis will remain the same. The expected value of the company in

Chapter 17 CAPITAL STRUCTURE: LIMITS TO THE USE OF DEBT SLIDES CHAPTER ORGANIZATION 17.1 Costs of Financial Distress Bankruptcy Risk or Bankruptcy Cost? 17.2 Description of Financial Distress Costs Direct Costs of Financial Distress: Legal and Administrative Costs of Liquidation or Reorganization Indirect Costs of Financial Distress Agency Costs 17.3 Can Costs of Debt Be Reduced? Protective Covenants Consolidation of

CHAPTER 17 - CHAPTER 17 CAPITAL STRUCTURE: LIMITS TO THE USE OF DEBT Answers to Concepts Review and Critical Thinking Questions 1. Direct costs are potential legal and administrative costs. These are the costs associated with the litigation arising from a liquidation or bankruptcy. These costs include lawyers fees, courtroom costs, and expert

CHAPTER 18 CASE C-1 CHAPTER 18 THE LEVERAGED BUYOUT OF CHEEK PRODUCTS, INC. In this leveraged buyout, the debt level of the company changes through time. Since the debt level changes through time, the APV method is appropriate for evaluating the LBO. The steps we must undertake are: Step 1: Calculating the present value of unlevered

Chapter 18 VALUATION AND CAPITAL BUDGETING FOR THE LEVERED FIRM SLIDES CHAPTER ORGANIZATION 18.1 Adjusted Present Value Approach 18.2 Flow to Equity Approach Step 1: Calculating Levered Cash Flow (LCF) Step 2: Calculating Rs Step 3: Valuation 18.3 Weighted Average Cost of Capital Method 18.4 A Comparison of the APV, FTE, and WACC Approaches A Suggested Guideline 18.1 Key Concepts and

CHAPTER 18 VALUATION AND CAPITAL BUDGETING FOR THE LEVERED FIRM Answers to Concepts Review and Critical Thinking Questions 1. APV is equal to the NPV of the project (i.e. the value of the project for an unlevered firm) plus the NPV of financing side effects.2. The WACC is based on a target debt level

CHAPTER 18 - 11. If the company had to issue debt under the terms it would normally receive, the interest rate on the debt would increase to the companys normal cost of debt. The NPV of an all-equity project would remain unchanged, but the NPV of the financing side effects would

C-1 CASE SOLUTIONS CHAPTER 19 ELECTRONIC TIMING, INC. 1. The value of the company will decline by the amount of the dividend. Ignoring taxes, shareholders wealth will not be affected because the stock price will drop by the amount of the dividend payment. wealth will not be affected because the stock price will drop

Chapter 19 DIVIDENDS AND OTHER PAYOUTS SLIDES CHAPTER WEB SITES Section Web Address 19.2 www.earnings.com 19.10 www.investmenthouse.com finance.yahoo.com 19.1 Key Concepts and Skills 19.2 Chapter Outline 19.3 Different Types of Payouts 19.4 Standard Method of Cash Dividend 19.5 Procedure for Cash Dividend 19.6 Price Behavior 19.7 The Irrelevance of Dividend Policy 19.8 Homemade Dividends 19.9 Dividend Policy Is Irrelevant 19.10 Dividends and Investment Policy 19.11 Repurchase

Slide 19.16 Personal Taxes and Dividends .A Firms without Sufficient Cash to Pay a Dividend Slide 19.17 Firms without Sufficient Cash In the absence of taxes, issuing stock to pay a dividend would be a zero NPV decision. However, with taxes, it would be a negative NPV situation, particularly once issuance costs

CHAPTER 19 DIVIDENDS AND OTHER PAYOUTS Answers to Concepts Review and Critical Thinking Questions 1. Dividend policy deals with the timing of dividend payments, not the amounts ultimately paid. Dividend policy is irrelevant when the timing of dividend payments doesnt affect the present valueof all future dividends. Dividend policy is irrelevant when the timing

CHAPTER 19 - 13. a. If the company makes a dividend payment, we can calculate the wealth of a shareholder as: Dividend per share = $6,300 / 1,500 shares Dividend per share = $4.20 Dividend per share = $6,300 / 1,500 shares Dividend per share = $4.20 Dividend per share

C-1 CASE SOLUTIONS CHAPTER 2 CASH FLOWS AT WARF COMPUTERS The operating cash flow for the company is: (NOTE: All numbers are in thousands of dollars) OCF = EBIT + Depreciation Current taxes OCF = $2,080 + 248 605 OCF = $1,723 To calculate the cash flow from assets, we need to find the capital spending

Chapter 2 FINANCIAL STATEMENTS AND CASH FLOW SLIDES CHAPTER WEB SITES Section Web Address 2.1 Key Concepts and Skills 2.2 Chapter Outline 2.3 Sources of Information 2.4 The Balance Sheet 2.5 U.S. Composite Corporation Balance Sheet 2.6 Balance Sheet Analysis 2.7 Liquidity 2.8 Debt versus Equity 2.9 Value versus Cost 2.10 The Income Statement 2.11 U.S.C.C. Income Statement 2.12 U.S.C.C. Income Statement 2.13 U.S.C.C. Income

Slide 2.17 Non-Cash Items The matching principle also creates the recognition of non-cash items. For example, when we purchase a machine, the cash flow occurs immediately, but we recognize the expense of the machine over time as it is used in the production process (i.e., depreciation). The largest non-cash deduction for most

CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW Answers to Concepts Review and Critical Thinking Questions 1. True. Every asset can be converted to cash at some price. However, when we are referring to a liquid asset, the added assumption that the asset can be quickly converted to cash at or near market

16. The market value of shareholders equity cannot be negative. A negative market value in this case would imply that the company would pay you to own the stock. The market value of shareholders equity can be stated as: Shareholders equity = Max [(TA TL), 0]. So, if TA is $12,400,

C-1 CASE SOLUTIONS CHAPTER 20 EAST COAST YACHTS GOES PUBLIC 1. The main difference in the costs is the reduced possibility of underpricing in a Dutch auction. As to which is better, we dont actually know. In theory, the Dutch auction should be better since it should eliminate underpricing. However, as Google shows, underpricing

Chapter 20 Raising Capital SLIDES CHAPTER ORGANIZATION 20.1 Early-Stage Financing and Venture Capital Venture Capital Stages of Financing Some Venture Capital Realities Venture Capital Investments and Economic Conditions 20.2 The Public Issue 20.1 Key Concepts and Skills 20.2 Chapter Outline 20.3 Venture Capitalists (VCs) 20.4 Stages of Financing 20.5 The Public Issue 20.6 The Process of a Public Offering 20.7 An Example of a Tombstone 20.8 Alternative

Slide 20.16 IPO Underpricing The underpricing (there is a large increase above the offer price the first day of trading) of IPOs is very common. The record year is still 1999, with an average first day return of almost 70%. Lecture Tip: An article in the Red Herring supplemental issue Going Public

CHAPTER 20 ISSUING SECURITIES TO THE PUBLIC Answers to Concepts Review and Critical Thinking Questions 1. A companys internally generated cash flow provides a source of equity financing. For a profitable company, outside equity may never be needed. Debt issues are larger because large companies have the greatest access to public debt markets (small

CHAPTER 20 - 11. The current ROE of the company is: ROE0 = NI0 / TE0 ROE0 = $980,000 / ($9,400,000 4,100,000) ROE0 = .1849, or 18.49% ROE0 = NI0 / TE0 ROE0 = $980,000 / ($9,400,000 4,100,000) ROE0 = .1849, or 18.49% ROE0 = NI0 / TE0 ROE0 =

CHAPTER 21 CASE C-1 CHAPTER 21 THE DECISION TO LEASE OR BUY AT WARF COMPUTERS 1. The decision to buy or lease is made by looking at the incremental cash flows. The incremental cash flows from leasing the machine are the security deposit, the lease payments, the tax savings on the lease, the

CHAPTER 21 LEASING SLIDES CHAPTER ORGANIZATION 21.1 Key Concepts and Skills 21.2 Chapter Outline 21.3 Types of Leases 21.4 Buying versus Leasing 21.5 Operating Leases 21.6 Financial Leases 21.7 Sale and Lease-Back 21.8 Leveraged Leases 21.9 Leveraged Leases 21.10 Accounting and Leasing 21.11 Accounting and Leasing (Balance Sheet) 21.12 Capital Lease 21.13 Taxes, the IRS, and Leases 21.14 Taxes, the IRS, and Leases 21.15 The Cash Flows of

CHAPTER 21 LEASING Answers to Concepts Review and Critical Thinking Questions 1. Some key differences are: (1) Lease payments are fully tax-deductible, but only the interest portion of the loan is; (2) The lessee does not own the asset and cannot depreciate it for tax purposes; (3) Inthe event of a default, the

CHAPTER 21 - 12. The decision to lease results in a debt capacity that is lowered by the present value of the aftertax lease payments. The aftertax lease payment is: Aftertax lease payment = $295,000(1 .38) Aftertax lease payment = $182,900The aftertax interest rate is:Aftertax interest rate = .07(1 .38) Aftertax

CHAPTER 22 CASE C-1 CHAPTER 22 CLISSOLD INDUSTRIES OPTIONS 1. Since the BlackScholes model uses the standard deviation of the underlying asset, and there is only one underlying asset no matter how many strike prices are available, we would only expect to seeone implied standard deviation. one underlying asset no matter how many

CHAPTER 22 OPTIONS AND CORPORATE FINANCE SLIDES 22.1 Key Concepts and Skills 22.2 Chapter Outline 22.3 Options 22.4 Options 22.5 Call Options 22.6 Call Option Pricing at Expiry 22.7 Call Option Payoffs 22.8 Call Option Profits 22.9 Put Options 22.10 Put Option Pricing at Expiry 22.11 Put Option Payoffs 22.12 Put Option Profits 22.13 Option Value 22.14 Selling Options 22.15 Call Option Payoffs 22.16 Put Option Payoffs 22.17 Option

Slide 22.35 American Call Lecture Tip: You may want to discuss the importance of arbitrage in the valuation of options. The classic definition of arbitrage is trading in more than one market simultaneously to earn a riskless profit. It is designed to exploit price discrepancies between markets. Risk arbitrage, on the

CHAPTER 22 OPTIONS AND CORPORATE FINANCE Answers to Concept Questions 1. A call option confers the right, without the obligation, to buy an asset at a given price on or before a given date. A put option confers the right, without the obligation, to sell an asset at a given price on or

23. We can use the BlackScholes model to value the equity of a firm. Using the asset value of $27,200 as the stock price, and the face value of debt of $25,000 as the exercise price, the value of the firms equity is: d1 = [ln($27,200/$25,000) + (.05 + .532/2) 1] /

CHAPTER 22 - 29. To construct the collar, the investor must purchase the stock, sell a call option with a high strike price, and buy a put option with a low strike price. So, to find the cost of the collar, we need to find the price of the call

CHAPTER 23 CASE C-1 CHAPTER 23 EXOTIC CUISINES EMPLOYEE STOCK OPTIONS 1. We can use the BlackScholes equation to value the employee stock options. We need to use the risk-free rate that is the same as the maturity as the options. So, assuming expiration in three years, the value of the stock options

CHAPTER 23 OPTIONS AND CORPORATE FINANCE EXTENSIONS AND APPLICATIONS SLIDES CHAPTER ORGANIZATION 23.1 Executive Stock Options Why Options? Valuing Executive Compensation 23.1 Key Concepts and Skills 23.2 Chapter Outline 23.3 Executive Stock Options 23.4 Valuing Executive Compensation 23.5 Valuing a Start-Up 23.6 Campusteria Pro Forma Income Statement 23.7 Valuing a Start-Up 23.8 Valuing a Start-Up with Balck-Scholes 23.9 Valuing a Start-Up with Balck-Scholes 23.10 Valuing a

CHAPTER 23 OPTIONS AND CORPORATE FINANCE: EXTENSIONS AND APPLICATIONS Answers to Concepts Review and Critical Thinking Questions 1. One of the purposes to giving stock options to CEOs (instead of cash) is to tie the performance of the firms stock with the compensation of the CEO. In this way, the CEO has an

CHAPTER 23 - 8. Using the binomial mode, we will find the value of u and d, which are: u = e/ n u = e.70/ 12 u = 1.2239 d = 1 / u d = 1 / 1.2239 d = .8170 This implies the percentage increase if the stock price increases

CHAPTER 24 CASE C-1 CHAPTER 24 S&S AIRS CONVERTIBLE BOND 1. Chris is suggesting a conversion price of $45 because it means the stock price will have to increase before the bondholders can benefit from the conversion. Even though the company is not publicly traded, the conversion price is important. First, the

CHAPTER 24 WARRANTS AND CONVERTIBLES SLIDES CHAPTER ORGANIZATION 24.1 Warrants 24.2 The Difference between Warrants and Call Options How the Firm Can Hurt Warrant Holders 24.3 Warrant Pricing and the Black-Scholes Model 24.4 Convertible Bonds 24.5 The Value of Convertible Bonds 24.1 Key Concepts and Skills 24.2 Chapter Outline 24.3 Warrants 24.4 Warrants 24.5 The Difference between Warrants and Call Options 24.6 Dilution Example 24.7 Dilution

CHAPTER 24 - CHAPTER 24 WARRANTS AND CONVERTIBLES Answers to Concepts Review and Critical Thinking Questions 1. A warrant is issued by the company, and when a warrant is exercised, the number of shares increases. A call option is a contract between investors and does not affect the number of shares ofthe firm. increases.

CHAPTER 25 CASE C-1 CHAPTER 25 WILLIAMSON MORTGAGE, INC. 1. Jerrys mortgage payments form a 25-year annuity with monthly payments, discounted at the long- term interest rate of 5.5 percent. We can solve for the payment amount so that the present value of the annuity equals $500,000, the amount of principal that he

CHAPTER 25 DERIVATIVES AND HEDGING RISK SLIDES 22.1 Key Concepts and Skills 22.2 Chapter Outline 22.3 Forward Contracts 22.4 Futures Contracts 22.5 Futures Contracts 22.6 Daily Resettlement: An Example 22.7 Daily Resettlement: An Example 22.8 Daily Resettlement: An Example 22.9 Daily Resettlement: An Example 22.10 Selected Futures Contracts 22.11 Futures Markets 22.12 Wall Street Journal Futures Price Quotes 22.13 Basic Futures Relationships 22.14 Hedging 22.15 Hedging

Slide 25.17 Interest Rate Futures Contracts .A Pricing of Treasury Bonds Slide 25.18 Slide 25.19 Pricing of Treasury Bonds Recall the general expression for the value of a bond: Bond value = present value of coupons + present value of par Bond value = [C[1 1/(1+R)T] / R] + [FV / (1+R)T] This formula assumes a

CHAPTER 25 DERIVATIVES AND HEDGING RISK Answers to Concepts Review and Critical Thinking Questions 1. Since the firm is selling futures, it wants to be able to deliver the lumber; therefore, it is a supplier. Since a decline in lumber prices would reduce the income of a lumber supplier, it has hedged its price

CHAPTER 25 - 7. The duration of a bond is the average time to payment of the bonds cash flows, weighted by the ratio of the present value of each payment to the price of the bond. Since the bond is selling at par, the market interest rate must equal 8.6

CHAPTER 26 CASE C-1 CHAPTER 26 KEAFER MANUFACTURING WORKING CAPITAL MANAGEMENT 1. The cash flow each quarter will consist of the sales collection, minus the suppliers paid, expenses, dividends, interest, and capital outlays. The cash flows for each quarter will be: Cash Flow Q1 Q2 Q3 Q4 Collections from previous quarter $607,500.00 $753,768.00

Chapter 26 SHORT-TERM FINANCE AND PLANNING SLIDES CHAPTER WEB SITES Section Web Address Introduction www.afponline.org 26.2 www.businessdebts.com www.opiglobal.com CHAPTER ORGANIZATION 26.1 Key Concepts and Skills 26.2 Chapter Outline 26.3 Balance Sheet Model of the Firm 26.4 Tracing Cash and Net Working Capital 26.5 Defining Cash in Terms of Other Elements 26.6 Defining Cash in Terms of Other Elements 26.7 The Operating Cycle and

Slide 26.14 Carrying Costs and Shortage Costs Slide 26.15 Appropriate Flexible Policy Slide 26.16 Appropriate Restrictive Policy Lecture Tip: The just-in-time inventory system is designed to reduce the inventory period. In essence, companies pay their suppliers to carry the inventory for them. Reducing the inventory period reduces the operating cycle and thus the

CHAPTER 26 - CHAPTER 26 SHORT-TERM FINANCE AND PLANNING Answers to Concepts Review and Critical Thinking Questions 1. These are firms with relatively long inventory periods and/or relatively long receivables periods. Thus, such firms tend to keep inventory on hand, and they allow customers to purchase on credit andtake a relatively long time

Appendix 27A DETERMINING THE TARGET CASH BALANCE SLIDES CHAPTER ORGANIZATION 27A.1 The Basic Idea 27A.2 The BAT Model 27A.3 The Miller-Orr Model: A More General Approach 27A.4 Implications of the BAT and Miller-Orr Models 27A.5 Other Factors Influencing the Target Cash Balance ANNOTATED CHAPTER OUTLINE Lecture Note: In most chapters, the appendixes are not covered in the instructors manual,

CHAPTER 26 CASE C-1 CHAPTER 27 CASH MANAGEMENT AT RICHMOND CORP. 1. The amount the company will have available is the future value of the transfers, which are an annuity. The amount of each transfer is one minus the wire transfer cost, times the number of transfers, which is four since there are

Chapter 27 CASH MANAGEMENT SLIDES CHAPTER WEB SITES Section Web Address 27.2 www.carreker.fiserr.com 27.3 www.gtnews.com 27.4 www.toolkit.cch.com/tools/tools.asp 27.5 www.bloomberg.com CHAPTER ORGANIZATION 27.1 Reasons for Holding Cash The Speculative and Precautionary Motives The Transaction Motive Compensating Balances Costs of Holding Cash Cash Management versus Liquidity Management 27.2 Understanding Float Disbursement Float Collection Float and Net Float 27.1 Key Concepts and Skills 27.2 Chapter Outline 27.3 Reasons for

CHAPTER 27 APPENDIX - CHAPTER 27 CASH MANAGEMENT Answers to Concepts Review and Critical Thinking Questions 1. Yes. Once a firm has more cash than it needs for operations and planned expenditures, the excess cash has an opportunity cost. It could be invested (by shareholders) in potentially more profitableways. Question 9 discusses another

CHAPTER 28 CASE C-1 CHAPTER 28 CREDIT POLICY AT BRAAM INDUSTRIES To decide on the optimal credit policy, we need to calculate the NPV of each policy. We will begin with the calculation of the NPV of the current policy. Current Policy First, we need to calculate the average daily sales which are: Average

Chapter 28 CREDIT AND INVENTORY MANAGEMENT SLIDES CHAPTER WEB SITES Section Web Address 28.1 www.pnc.com www.treasurystrat.com www.insidearm.com 28.2 www.newyorkfed.org/education/addpub/credit.html www.nacm.org 28.4 www.creditworthy.com 28.5 www.dnb.com 28.7 www.simba.org 28.1 Key Concepts and Skills 28.2 Chapter Outline 28.3 Credit Management: Key Issues 28.4 Components of Credit Policy 28.5 The Cash Flows from Granting Credit 28.6 Terms of Sale 28.7 Example: Cash Discounts 28.8 Credit Policy

Slide 28.14 Example: One Time Sale Repeat Business NPV = -v + (1 - )(P v)/R Slide 28.15 Example: Repeat Customers A. Credit information: -Financial statements -Credit reports (i.e., Dun and Bradstreet) -Banks -Customers payment history Slide 28.16 Credit Information B. Credit Evaluation and Scoring Slide 28.17 The Five Cs of Credit Credit evaluation trying to estimate the probability of default Five Cs

CHAPTER 28 CREDIT AND INVENTORY MANAGEMENT Answers to Concepts Review and Critical Thinking Questions 1. a. A sight draft is a commercial draft that is payable immediately. b. A time draft is a commercial draft that does not require immediate payment. c. A bankers acceptance is when a bank guarantees the future payment

CHAPTER 28 - 15. The cash flow from the old policy is: Cash flow from old policy = ($289 226)(1,105) Cash flow from old policy = $69,615And the cash flow from the new policy will be:Cash flow from new policy = ($296 229)(1,125) Cash flow from new policy = $75,375 Cash

CHAPTER 29 CASE C-1 CHAPTER 29 THE BIRDIE GOLFHYBRID GOLF MERGER 1. As with any other merger analysis, we need to examine the present value of the incremental cash flows. The cash flow today from the acquisition is the acquisition cost plus the dividends paid today, or: Acquisition of Hybrid $352,000,000 Dividends from

CHAPTER 29 MERGERS AND ACQUISITIONS SLIDES CHAPTER ORGANIZATION 29.1 The Basic Forms of Acquisitions Merger or Consolidation Acquisition of Stock Acquisition of Assets A Classification Scheme A Note about Takeovers 29.2 Synergy 29.1 Key Concepts and Skills 29.2 Chapter Outline 29.3 The Basic Forms of Acquisitions 29.4 Merger versus Consolidation 29.5 Acquisitions 29.6 Varieties of Takeovers 29.7 Synergy 29.8 Synergy 29.9 Sources of Synergy 29.10 Calculating Value 29.11 Two Financial Side

Slide 29.12 A Cost to Stockholders from Reduction in Risk The coinsurance effect in a merger or acquisition occurs because even if one of the pre-merger firm fails, bondholders will be still be paid by the surviving firm. The coinsurance effect can reduce the costs of financial distress if the cash

CHAPTER 29 MERGERS, ACQUISITIONS, AND DIVESTITURES Answers to Concepts Review and Critical Thinking Questions 1. In the purchase method, assets are recorded at market value, and goodwill is created to account for the excess of the purchase price over this recorded value. In the pooling of interests method, the balance sheets of the two

CHAPTER 29 - 12. a. The synergy will be the present value of the incremental cash flows of the proposed purchase. Since the cash flows are perpetual, the synergy value is: Synergy value = $425,000 / .08Synergy value = $5,312,500 Synergy value = $425,000 / .08Synergy value = $5,312,500 Synergy value = $425,000

CHAPTER 3 CASE C-1 CHAPTER 3 RATIOS AND FINANCIAL PLANNING AT EAST COAST YACHTS 1. The calculations for the ratios listed are: Current ratio = $15,823,700 / $21,320,300 Current ratio = .74 times Current ratio = $15,823,700 / $21,320,300 Current ratio = .74 times Current ratio = $15,823,700 / $21,320,300 Current ratio = .74

Chapter 3 FINANCIAL STATEMENTS ANALYSIS AND FINANCIAL MODELS SLIDES CHAPTER WEB SITES Section Web Address 3.2 www.reuters.com/finance/stocks www.sba.gov 3.4 www.planware.org CHAPTER ORGANIZATION 3.1 Key Concepts and Skills 3.2 Chapter Outline 3.3 Financial Statements Analysis 3.4 Ratio Analysis 3.5 Categories of Financial Ratios 3.6 Computing Liquidity Ratios 3.7 Computing Leverage Ratios 3.8 Computing Coverage Ratios 3.9 Computing Inventory Ratios 3.10 Computing Receivables Ratios 3.11 Computing Total Asset

Slide 3.14 Using Financial Statements Ratios cannot be interpreted in isolation, but are rather to be considered as comparative metrics either across time or between firms. Lecture Tip: What is EEBS? Under the heading A Wire Story Wed Like to See, those people at Fortune magazine have proposed a new earnings metric:

CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH Answers to Concepts Review and Critical Thinking Questions 1. Time trend analysis gives a picture of changes in the companys financial situation over time. Comparing a firm to itself over time allows the financial manager to evaluate whether some aspects of the firms operations, finances, or investment

14. This is a multi-step problem involving several ratios. It is often easier to look backward to determine where to start. We need receivables turnover to find days sales in receivables. To calculate receivables turnover, we need credit sales, and to find credit sales, we need total sales. Since we are given

CHAPTER 3 - 1 24. The pro forma income statements for all three growth rates will be: MOOSE TOURS INC. Pro Forma Income Statement 15 % Sales Growth 20% Sales Growth 25% Sales Growth Sales $865,375 $903,000 $940,625 Costs 673,440 702,720 732,000 Other expenses 17,710 18,480 19,250 EBIT $174,225 $181,800 $189,375Interest 11,340 11,340 11,340Taxable income $162,885 $170,460 $178,035Taxes (35%) 57,010 59,661 62,312Net

Chapter 30 FINANCIAL DISTRESS SLIDES CHAPTER ORGANIZATION 30.1 What Is Financial Distress? 30.2 What Happens in Financial Distress? 30.3 Bankruptcy Liquidation and Reorganization Bankruptcy Liquidation Bankruptcy Reorganization 30.4 Private Workout or Bankruptcy: Which Is Best? The Marginal Firm Holdouts Complexity Lack of Information 30.5 Prepackaged Bankruptcy 30.1 Key Concepts and Skills 30.2 Chapter Outline 30.3 What Is Financial Distress? 30.4 Insolvency 30.5 Insolvency 30.6 Largest U.S. Bankruptcies 30.7 What Happens in

CHAPTER 30 - CHAPTER 30 FINANCIAL DISTRESS Answers to Concepts Review and Critical Thinking Questions 1. Financial distress is often linked to insolvency. Stock-based insolvency occurs when a firm has a negative net worth. Flow-based insolvency occurs when operating cash flow is insufficient to meetcurrent obligations. negative net worth. Flow-based insolvency occurs when operating

CHAPTER 31 EAST COAST YACHTS GOES INTERNATIONAL 1. The biggest advantage is the increased sales, while the biggest risk is exchange rate risk. 1. The biggest advantage is the increased sales, while the biggest risk is exchange rate risk. 1. The biggest advantage is the increased sales, while the biggest risk

Chapter 31 INTERNATIONAL CORPORATE FINANCE SLIDES CHAPTER WEB SITES Section Web Address 31.1 www.adr.com 31.1 Key Concepts and Skills 31.2 Chapter Outline 31.3 Terminology 31.4 Terminology 31.5 Foreign Exchange Markets and Exchange Rates 31.6 FOREX Market Participants 31.7 Exchange Rates 31.8 Example 31.9 Cross Rates 31.10 Triangle Arbitrage 31.11 Triangle Arbitrage 31.12 Triangle Arbitrage 31.13 Triangle Arbitrage 31.14 Types of Transactions 31.15 Absolute Purchasing Power Parity 31.16 Relative Purchasing Power

Slide 31.18 Slide 31.20 Interest Rate Parity .A Covered Interest Arbitrage A covered interest arbitrage exists when a riskless profit can be made by borrowing in the U.S. at the risk-free rate, converting the borrowed dollars into a foreign currency, investing at that countrys rate of interest, taking a forward contract to

CHAPTER 31 INTERNATIONAL CORPORATE FINANCE Answers to Concepts Review and Critical Thinking Questions 1. a. The dollar is selling at a premium because it is more expensive in the forward market than in the spot market (SF 1.11 versus SF 1.09). the spot market (SF 1.11 versus SF 1.09). the spot market (SF 1.11 versus

Appendix 4A Net Present Value: First Principles of Finance SLIDES APPENDIX ORGANIZATION 4A.1 Making Consumption Choices over Time 4A.2 Making Investment Choices 4A.3 Illustrating the Investment Decision ANNOTATED APPENDIX OUTLINE Slide 4A.0 Appendix 4 Title Slide Slide 4A.1 Key Concepts and Skills Slide 4A.2 Appendix Outline 4A.1. Making Consumption Choices over Time Slide 4A.3 Making Consumption Choices over Time An individual is assumed

CHAPTER 4 CASE C-1 CHAPTER 4 THE MBA DECISION 1. Age is obviously an important factor. The younger an individual is, the more time there is for the (hopefully) increased salary to offset the cost of the decision to return to school for an MBA. The cost includes both the explicit costs such as

Chapter 4 DISCOUNTED CASH FLOW VALUATION SLIDES 4.41 Int ere st- Only Loans 4.1 Key Concepts and Skills 4.2 Chapter Outline 4.3 The One-Period Case 4.4 Future Value 4.5 Present Value 4.6 Present Value 4.7 Net Present Value 4.8 Net Present Value 4.9 Net Present Value 4.10 The Multiperiod Case 4.11 Future Value 4.12 Future Value and Compounding 4.13 Future Value and Compounding 4.14 Present Value and Discounting 4.15 Finding

Slide 4.17 Calculator Keys Lecture Tip: Texas Instruments offers instructors an Emulator software that allows the face of the calculator to be projected onto a computer. This enables instructors to demonstrate key stroke sequences. Slide 4.18 Slide 4.19 Multiple Cash Flows Slide 4.20 Valuing Lumpy Cash Flows There are two ways to calculate

CHAPTER 4, APPENDIX NET PRESENT VALUE: FIRST PRINCIPLES OF FINANCE Solutions to Questions and Problems NOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer

CHAPTER 4 DISCOUNTED CASH FLOW VALUATION Answers to Concepts Review and Critical Thinking Questions 1. Assuming positive cash flows and interest rates, the future value increases and the present value decreases. 2. Assuming positive cash flows and interest rates, the present value will fall and the future value will rise. 2. Assuming positive cash flows

19. The time line is: 0 1 ? $18,450 $500 $500 $500 $500 $500 $500 $500 $500 $500 Here, we need to find the length of an annuity. We know the interest rate, the PV, and the payments. Using the PVA equation: PVA = C({1 [1 / (1 + r)]t } / r)$18,450 = $500{ [1

42. The time line is: 0 3 PV $135,000 The profit the firm earns is just the PV of the sales price minus the cost to produce the asset. We find the PV of the sales price as the PV of a lump sum: PV = $135,000 / 1.133 PV = $93,561.77And the firms

58. To answer this question, we should find the PV of both options, and compare them. Since we are purchasing the car, the lowest PV is the best option. The PV of the leasing option is the PV of the lease payments, plus the $2,400. The interest rate we would use

73. To answer this, we can diagram the perpetuity cash flows, which are: (Note, the subscripts are only to differentiate when the cash flows begin. The cash flows are all the same amount.) .. C3 C2C2 C1C1C1 Thus, each of the increased cash flows is a perpetuity in itself. So, we can

46. PV@ t = 14: $2,150 / .056 = $38,392.86 Enter 7 5.6% $38,392.86N I/Y PV PMT FVSolve for $26,218.21 Enter 7 5.6% $38,392.86N I/Y PV PMT FVSolve for $26,218.21 Enter 7 5.6% $38,392.86 N I/Y PV PMT FV Solve for $26,218.21 47. Enter 12 $23,000 $2,242.50 N I/Y PV PMT FV Solve for 2.502% APR = 2.502%

CHAPTER 5 BULLOCK GOLD MINING 1. An example spreadsheet is: 2. Since the NPV of the mine is positive, the company should open the mine. We should note, it may be advantageous to delay the mine opening because of real options, a topic covered in more detail in alater chapter. advantageous to

Chapter 5 NET PRESENT VALUE AND OTHER INVESTMENT RULES SLIDES CHAPTER WEB SITES Section Web Address 5.1 www.missouribusiness.net CHAPTER ORGANIZATION 5.1 Key Concepts and Skills 5.2 Chapter Outline 5.3 Why Use Net Present Value? 5.4 The Net Present Value (NPV) Rule 5.5 Calculating NPV with Spreadsheets 5.6 The Payback Period Method 5.7 The Payback Period Method 5.8 The Discounted Payback Period 5.9 The

Slide 5.8 The Discounted Payback Period Lecture Tip: The discounted payback period is the length of time until accumulated discounted cash flows equal or exceed the initial investment. Use of this technique entails all the work of NPV, but its decision rule is arbitrary. Redeeming features of this approach are that

CHAPTER 5 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA Answers to Concepts Review and Critical Thinking Questions 1. Assuming conventional cash flows, a payback period less than the projects life means that the NPV is positive for a zero discount rate, but nothing more definitive can be said. For discount rates greater than zero,

13. a. The equation for the NPV of the project is: NPV = $78,000,000 + $110,000,000 / 1.1 $13,000,000 / 1.12 NPV = $11,256,198.35 The NPV is greater than 0, so we would accept the project. NPV = $78,000,000 + $110,000,000 / 1.1 $13,000,000 / 1.12 NPV = $11,256,198.35 The NPV

CHAPTER 5 - 25. First, we need to find the future value of the cash flows for the one year in which they are blocked by the government. So, reinvesting each cash inflow for one year, we find: Year 2 cash flow = $255,000(1.04) = $265,200Year 3 cash flow

CHAPTER 6 CASE #1 C-1 CHAPTER 6, Case #1 BETHESDA MINING To analyze this project, we must calculate the incremental cash flows generated by the project. Since net working capital is built up ahead of sales, the initial cash flow depends in part on this cash outflow. So, we will begin by calculating sales. Each

Chapter 6 MAKING CAPITAL INVESTMENT DECISIONS SLIDES CHAPTER ORGANIZATION 6.1 Incremental Cash Flows: The Key to Capital Budgeting Cash FlowsNot Accounting Income Sunk Costs Opportunity Costs Side Effects Allocated Costs 6.1 Key Concepts and Skills 6.2 Chapter Outline 6.3 Incremental Cash Flows 6.4 Cash FlowsNot Accounting Income 6.5 Incremental Cash Flows 6.6 Incremental Cash Flows 6.7 Estimating Cash Flows 6.8 Interest Expense 6.9 The Baldwin Company 6.10 The Baldwin

Slide 6.9 Slide 6.14 The Baldwin Company .A Which Set of Books? Firms are allowed to keep two sets of books: one for tax purposes and one for stockholder reporting. The tax effects represent a cash flow that is relevant to our analysis. .B A Note about Net Working Capital Accounts receivable and inventory

CHAPTER 6 MAKING CAPITAL INVESTMENT DECISIONS Answers to Concepts Review and Critical Thinking Questions 1. In this context, an opportunity cost refers to the value of an asset or other input that will be used in a project. The relevant cost is what the asset or input is actually worth today, not, for

17. To calculate the nominal cash flows, we increase each item in the income statement by the inflation rate, except for depreciation. Depreciation is a nominal cash flow, so it does not need to be adjusted for inflation in nominal cash flow analysis. Since the resale value is given in nominal

25. Replacement decision analysis is the same as the analysis of two competing projects; in this case, keep the current equipment, or purchase the new equipment. We will consider the purchase of the new machine first. Purchase new machine: The initial cash outlay for the new machine is the cost of the

CHAPTER 6 - 33. a. Since the two computers have unequal lives, the correct method to analyze the decision is the EAC. We will begin with the EAC of the new computer. Using the depreciation tax shield approach, the OCF for the new computer system is: OCF = ($85,000)(1 .38) +

CHAPTER 7 C-1 CHAPTER 7 BUNYAN LUMBER, LLC The company is faced with the option of when to harvest the lumber. Whatever harvest cycle the company chooses, it will follow that cycle in perpetuity. Since the forest was planted 20 years ago, the options available in the case are 40-, 45-, 50, and 55-year

Chapter 7 RISK ANALYSIS, REAL OPTIONS, AND CAPITAL BUDGETING SLIDES CHAPTER ORGANIZATION 7.1 Sensitivity Analysis, Scenario Analysis, and Break-Even Analysis Sensitivity Analysis and Scenario Analysis Break-Even Analysis 7.2 Monte Carlo Simulation Step 1: Specify the Basic Model 7.1 Key Concepts and Skills 7.2 Chapter Outline 7.3 Sensitivity, Scenario, and Break-Even 7.4 Example: Stewart Pharmaceuticals 7.5 NPV Following Successful

CHAPTER 7 RISK ANALYSIS, REAL OPTIONS, AND CAPITAL BUDGETING Answers to Concepts Review and Critical Thinking Questions 1. Forecasting risk is the risk that a poor decision is made because of errors in projected cash flows. The danger is greatest with a new product because the cash flows are probably harder to predict. The

15. The upper and lower bounds for the variables are: Base Case Best Case Worst Case Unit sales (new) 60,000 66,000 54,000 Price (new) $850 $935 $765 VC (new) $430 $387 $473Fixed costs $9,300,000 $8,370,000 $10,230,000Sales lost (expensive) 12,000 10,800 13,200Sales gained (cheap) 15,000 16,500 13,500 VC (new) $430 $387 $473Fixed costs $9,300,000 $8,370,000

CHAPTER 7 - 23. a. The NPV of the project is the sum of the present value of the cash flows generated by the project. The cash flows from this project are an annuity, so the NPV is: NPV = $59,000,000 + $13,500,000(PVIFA13%,10)NPV = $14,254,286.93 NPV = $59,000,000 + $13,500,000(PVIFA13%,10)NPV =

CHAPTER 8 C-1 CHAPTER 8 FINANCING EAST COAST YACHTS EXPANSION PLANS WITH A BOND ISSUE 1. A rule of thumb with bond provisions is to determine who the provisions benefit. If the company benefits, the bond will have a higher coupon rate. If the bondholders benefit, the bond will have a lower coupon

Chapter 8 INTEREST RATES AND BOND VALUATION SLIDES CHAPTER WEB SITES 8.1 Key Concepts and Skills 8.2 Chapter Outline 8.3 Bonds and Bond Valuation 8.4 Bond Valuation 8.5 The Bond-Pricing Equation 8.6 Bond Example 8.7 Bond Example 8.8 Bond Example: Calculator 8.9 Bond Example 8.10 YTM and Bond Value 8.11 Bond Concepts 8.12 Interest Rate Risk 8.13 Maturity and Bond Price Volatility 8.14 Coupon Rates and Bond

Slide 8.22 Pure Discount Bonds Example Zero coupon bonds are bonds that are offered at deep discounts because there are no periodic coupon payments. Although no cash interest is paid, firms deduct the implicit interest, while holders report it as income. Interest expense equals the periodic change in the amortized value

24. To find the number of years to maturity for the bond, we need to find the price of the bond. Since we already have the coupon rate, we can use the bond price equation, and solve for the number of years to maturity. We are given the current yield of

CHAPTER 8 - 16. P0 Enter 50 3.15% $1,000 N I/Y PV PMT FV Solve for $212.10P1 Enter 48 3.15% $1,000N I/Y PV PMT FVSolve for $225.67$225.67 212.10 = $13.57 Solve for $212.10P1 Enter 48 3.15% $1,000N I/Y PV PMT FVSolve for $225.67$225.67 212.10 = $13.57 Solve for $212.10 P1 Enter 48 3.15% $1,000 N I/Y

CHAPTER 9 CASE C-1 CHAPTER 9 STOCK VALUATION AT RAGAN THERMAL SYSTEMS 1. The total dividends paid by the company were $640,000. Since there are 300,000 shares outstanding, the total earnings for the company were: Total earnings = 300,000($5.35) = $1,605,000 Total earnings = 300,000($5.35) = $1,605,000 Total earnings = 300,000($5.35) = $1,605,000 This means the payout

Chapter 9 Stock Valuation SLIDES CHAPTER WEB SITES Section Web Address 9.6 www.bloomberg.com www.nyse.com www.nasdaq.com finance.yahoo.com CHAPTER ORGANIZATION 9.1 The Present Value of Common Stocks Dividends versus Capital Gains 9.1 Key Concepts and Skills 9.2 Chapter Outline 9.3 The PV of Common Stocks 9.4 Case 1: Zero Growth 9.5 Case 2: Constant Growth 9.6 Constant Growth Example 9.7 Case 3: Differential Growth 9.8 Case 3: Differential Growth 9.9 Case

Slide 9.16 Where Does R Come From Slide 9.17 Using the DGM to Find R Rearrange P0 = D1 / (R g) to find R: R = (D1 / P0 ) + g Dividend yield = D1 / P0 Capital gains yield = g, so R = dividend yield + capital gains yield Lecture Tip: An

CHAPTER 9 STOCK VALUATION Answers to Concept Questions 1. The value of any investment depends on the present value of its cash flows; i.e., what investors will actually receive. The cash flows from a share of stock are the dividends.2. Investors believe the company will eventually start paying dividends (or be sold to

CHAPTER 9 - 23. The required return of a stock consists of two components, the capital gains yield and the dividend yield. In the constant dividend growth model (growing perpetuity equation), the capital gains yield is the same as the dividend growth rate, or algebraically: R = D1 / P0 +