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Chapter 3 CFIN5
Chapter 3 Solutions
3-1 Free and efficient financial markets allocate funds more efficiently than would occur without free
financial markets. As a result, the real output of the economy is increased with such financial markets;
3-2 In economically efficient markets, funds are allocated to their optimal use at the lowest costs, which
means that funds are invested in the assets that yield the highest returns and the costs associated with
3-3 Even when financial markets are informationally efficient, investors can earn abnormal returns. But,
3-4 No, the real value of a security is determined by the equilibrium forces of an efficient market. Assuming
3-5 Financial intermediaries are business organizations that receive funds in one form and repackage them
3-6 When financial catastrophes occur, such as the near collapse of the financial markets during the 2007
through 2009 period, Congress is quick to call for greater regulation of financial institutions and markets.
3-7 The primary change that is evident from the deregulation of the financial services industry is that the
differences that previously existed among the various financial institutions are disappearing. Now
3-8 Even with recent deregulation, the banking industry in the United States is very heavily regulated. U.S.
banks are prohibited from many activities that banks in other countries are not, such as owning the
stocks of corporations. In addition, U.S. banks are not as free as foreign banks to conduct business
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
Chapter 3 CFIN5
3-9 Net proceeds = Amount of issue x (1 – Flotation costs)
$141,000,000 = Amount of issue x (1 – 0.06)
Check:
3-10 Net proceeds = Amount of issue x (1 – Flotation costs)
Check:
Total amount issued = $250,000,000 = $1,000 x 250,000
3-11 Net proceeds = Amount of issue x (1 – Flotation costs)
$115,000,000 = Amount of issue x (1 – 0.08)
3-12 Net proceeds = Amount of issue x (1 – Flotation costs)
$600,000,000 = Amount of issue x (1 – 0.04)
Amount of issue = $600,000,000/0.96 = $625,000,000
3-13 Net proceeds = Amount of issue x (1 – Flotation costs)
$95,000,000 = Amount of issue x (1 – 0.05)
Amount of issue = $95,000,000/0.95 = $100,000,000
Chapter 3 CFIN5
3-14 Net proceeds = Amount of issue x (1 – Flotation costs)
$345,000,000 = Amount of issue x (1 – 0.08)
3-15 Net proceeds = Amount of issue x (1 – Flotation costs)
$225,000,000 = Amount of issue x (1 – 0.10)
Amount of issue = $225,000,000/0.90 = $250,000,000
Number of shares = $250,000,000/$160 = 1,562,500 shares
3-16 Net proceeds = Amount of issue – Flotation costs
$345,000,000 = Amount of issue x (1 – 0.065) – $576,000
Amount of issue = ($345,000,000 + $576,000)/0.935 = $369,600,000
3-17 Net proceeds = Amount of issue – Flotation costs
$84,000,000 = Amount of issue x (1 – 0.03) – $487,000
Amount of issue = ($84,000,000 + $487,000)/0.97 = $87,100,000
Number of bonds = $87,100,000/$1,000 = 87,100 bonds
3-18 Net proceeds = Amount of issue – Flotation costs)
$360,000,000 = Amount of issue x (1 – 0.04) – $288,000
Amount of issue = ($360,000,000 + $288,000)/0.96 = $375,300,000
Number of shares = $375,300,000/$60 = 6,255,000 shares
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
Chapter 3 CFIN5
If 6,255,000 shares are issued:
3-19 Net proceeds = Amount of issue – Flotation costs
$175,000,000 = Amount of issue x (1 – 0.025) – $500,000
3-20 Net proceeds = Amount of issue – Flotation costs
$192,000,000 = Amount of issue x (1 – 0.08) – $280,000
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
