Economics Chapter 10 Homework Excuses Will Granted The Student Unable Take

Contents iii

Instructors Manual

Contents

Preface

Alternative Formats for the Introductory Course v

Contents of the Instructor’s Manual v

Integrated Cases v

PowerPoint

Slide Show vi

Comprehensive/Spreadsheet Problems vii

Chapter Spreadsheet Models vii

Textbook Companion Website vii

Test Bank viii

MindTap viii

Ordering Ancillary Materials viii

Conclusion ix

Sample Course Syllabus x

Course Schedule xiv

Answers to End–of-Chapter Problems xvi

Chapter 1 An Overview of Financial Management 1

Chapter 2 Financial Markets and Institutions 7

Chapter 3 Financial Statements, Cash Flow, and Taxes 23

Chapter 4 Analysis of Financial Statements 49

Chapter 5 Time Value of Money 81

Chapter 6 Interest Rates 125

Chapter 7 Bonds and Their Valuation 151

Chapter 8 Risk and Rates of Return 189

Chapter 9 Stocks and Their Valuation 225

Chapter 10 The Cost of Capital 259

Chapter 11 The Basics of Capital Budgeting 281

Chapter 12 Cash Flow Estimation and Risk Analysis 321

Chapter 13 Capital Structure and Leverage 363

Chapter 14 Distributions to Shareholders: Dividends and Share Repurchases 401

Chapter 15 Working Capital Management 427

Chapter 16 Financial Planning and Forecasting 455

Chapter 17 Multinational Financial Management 481

Preface

This preface explains how we have used

Fundamentals of Financial Management, Concise Tenth

Edition

, and it then describes the instructional aids contained in the

Instructor’s Manual

or

available separately from Cengage Learning.

Alternative Formats for the Introductory Course

There is no one best way to teach the introductory finance class—the optimal course structure

varies with students’ backgrounds, instructors’ interests, number of credit hours, and position of

the course in the overall curriculum. Further, since these factors change over time, most of us

vary our approaches from year to year. Still, you may find it useful to learn how

Concise

has

been used at Florida and elsewhere.

Contents of the Instructor’s Manual

This

Instructor’s Manual

contains Learning Objectives, Lecture Suggestions, Answers to End-of–

Chapter Questions, Solutions to End-of-Chapter Problems, Solutions to Comprehensive/

Spreadsheet Problems, and complete restatement and full solution to the Integrated Cases. In

addition, at the end of this preface we have included brief quantitative answers for the end-of

Integrated Cases

One of the most important pedagogic aids in

Concise

is the set of “Integrated Cases” provided

with the end-of-chapter problems. The integrated cases have been extremely well received by

instructors and students alike. They provide an excellent vehicle for covering the key elements

vi Preface

based on the cases because this ensures that the lecture is consistent with the text, and that

the two reinforce one another. Third, the case-oriented lectures are useful for both prepared

and unprepared students, and that is helpful for instructors whose students don’t always read

the material before class.

Note also that the Integrated Cases can be assigned as homework or used by students as self–

study problems if you decide against using them as lecture vehicles. In addition, we have

added

Excel

spreadsheet models for the cases in Chapters 3-17. We have also added a

Comprehensive/Spreadsheet Problem, which we discuss later, for those instructors who want to

assign a comprehensive problem and still use the slides for their lectures.

One final point about the Integrated Cases is worth noting—they are particularly useful for new,

inexperienced teachers and for experienced teachers who are under too much time pressure to

PowerPoint

Slide Show

When we first heard several years ago that more and more instructors were basing their

lectures on the integrated cases, we developed a set of

PowerPoint

slides (Lecture Presentation

Software). Dr. Larry Wolken of Texas A & M University brought this idea to our attention and

helped in the initial development of the

PowerPoint

slides. Over the years, we have continually

updated and improved the

PowerPoint

slides. In the

Tenth Edition,

we have taken even more

significant steps to redesign the slides to make them more presentable, easier to read, and fully

Comprehensive/Spreadsheet Problems

We have added the Comprehensive/Spreadsheet Problem to Chapters 3–17. This problem

provides instructors who use the Integrated Case for their lectures with another problem that

Chapter Spreadsheet Models

Spreadsheet programs such as Microsoft

Excel®

are ideally suited for analyzing many financial

issues, and knowledge of spreadsheets is becoming essential for people in business.

Throughout the text, we illustrate how spreadsheets are used to deal with the financial

concepts/analyses covered.

We developed spreadsheet models for Chapters 3–17. These chapter models show exactly how

the decisions discussed in the chapter can be analyzed with an

Excel

spreadsheet. Therefore,

our models include a good bit of explanation and serve both as an

Excel

tutorial and as a

template for analyzing whatever financial issues are covered in a particular chapter. The

Instructor Resource Center

Designed to be both a teaching and learning tool, the

Concise

10e

instructor’s companion

website can be accessed via www.cengage.com/login. (You must log in using your Faculty

Account username and password and use ISBN 9781337902571 to add

Concise

10e

resources

to your “Bookshelf.”) Many of the

Concise

ancillaries can be downloaded from the instructor

Test Bank

The

Test Bank

that accompanies

Concise

is available in the Cognero online test creation system,

and as Blackboard, Angel, and Microsoft Word files on the Instructor Companion Website. The

Test Bank is also available through Respondus.

The questions and problems are all machine gradable, and we have used them often enough so

that most of the ambiguities that frequently plague objective tests have been removed. The

Cognero test bank allows users to select test questions and problems from the bank, add or

modify them as necessary, and then print the final product. Of course, the algorithmic

problems can be changed numerous times to give different unique answers each time for use in

large classes, different sections, or over time for instructors who want to keep the difficulty

level the same for multiple copies of the same exam or have favorite questions that they want

to use repeatedly.

MindTap

“MindTap® Finance for Brigham/Houston’s

Fundamentals of Financial Management: Concise

10e, is the digital learning solution that helps instructors engage and transform today’s students

into critical thinkers. Through paths of dynamic assignments and applications that you can

personalize, real-time course analytics and an accessible reader, MindTap helps you turn cookie

cutter into cutting edge, apathy into engagement, and memorizers into higher-level thinkers.”

Ordering Ancillary Materials

Ancillary materials typically can be downloaded from the Instructor Resource Center, by

contacting your local Cengage Learning sales representative directly, by calling Cengage

Cengage Learning will provide complimentary supplements or supplement packages to qualified

adopters. Please contact your local Cengage sales representative to learn how you may qualify.

If you are an adopter or a potential user who receives supplements you do not need, please

return them to your sales representative.

Conclusion

We have tried to make this

Instructor’s Manual

as clear and error-free as possible; however,

there are almost certainly some mistakes and unclear sections. Any suggestions for improving

x Preface

NOTE: This is a sample illustration of a potential course syllabus

that covers each of the 17 chapters. Because of differences in

course schedules and overall curriculum, some professors may

choose to cover fewer topics in the introductory course and/or

slightly change the chapter sequence.

Syllabus for Finance 3403

Finance 3403

Course Outline

Spring 2020

Instructor: Joel F. Houston

303D STZ

392-7546

Office Hours: M W 10:30 A.M. – 11:30 A.M., and by appointment.

Course Pre-requisite: ACG 2021 or an approved equivalent.

Required materials

E.F. Brigham and J. Houston,

Fundamentals of Financial Management, Concise Tenth Edition

.

Course Packet for FIN 3403: Includes the syllabus, a calculator tutorial, detailed solutions to some of the

end–of–chapter questions, and past exams.

Calculator

You must have a financial calculator to get through the course. Many of the exam problems involve

complex arithmetic and financial calculations—and a financial calculator is necessary to solve them.

I recommend either the HP-10BII+ or the HP–17BII+. The 10BII+ does everything needed in the course. I

will use one in class and explain how to work various problems with it, so you can follow lectures most easily if

you use a 10BII+. Moreover, the TAs will all know how to help you with a 10BII+, but you might have

Preface xi

Course objectives

This course is designed for the general business student, not just the finance major. Since this is a survey

course, we will cover a lot of ground. We will begin with a general overview and then go into more detail

on several concepts, financial instruments, and techniques used in financial decision making.

The chief objectives of the course are:

2. To introduce you to basic financial concepts such as the time value of money, asset valuation, and risk

and return.

My hope is that by the end of the class you have a basic grasp of finance principles and that you go beyond

just memorizing a number of facts and formulas. Doing so will enable you to better understand current

Class procedures

1. The structure of this class makes your individual study and preparation outside class extremely

important. The lecture material will focus on the major points introduced in the text. Reading the

2. Throughout the semester we will also have several review sessions. These review sessions will take

place during the regularly scheduled class periods and will generally be offered by the head teaching

3. There are several learning aids offered in addition to the regularly scheduled lectures and review

sessions. You should utilize those that may contribute to your understanding of the material.

(a) There are several teaching assistants associated with this course. The TAs will hold office hours in

Bryan 125A. The TA schedule will vary from week to week and will be posted (1) outside the

Finance office, 321 STZ, (2) outside Bryan 125A, and (3) on the class web page. The TAs know the

material quite well and they are more than willing to help you, so you should use them. You should

xii Preface

Examinations

There will be three exams, two during the semester and one during the final exam week. The exam

schedule is as follows:

First Midterm: Monday February 3, 2020, 7:00-9:00 P.M.

Second Midterm: Thursday February 27, 2020 7:00-9:00 P.M.

Final Exam: Monday April 27, 2020, 1:00-3:00 P.M.

Exam locations will be announced in class, and posted at Bryan 125, the FIN3403 notice board outside

STZ 321, and on the class web page.

Your grade in the course will be determined based on your performance on the three examinations. Each

examination will count as one-third of your final course grade.

To determine your final grade in the course, we will first calculate your total score as follows:

Your total score has a maximum of 60 points.

To calculate the “cutoffs” for each course grade, we calculate a weighted average of the lowest scores for

each grade. So, for example, to determine the cutoff for an A:

Lowest A = (Lowest A, 1st Exam) + (Lowest A, 2nd Exam) + (Lowest A, Final Exam).

Likewise, the lowest C grade would be a weighted average of the lowest C grades from each of the exams.

Please recognize that the size of this class makes it necessary for the cutoffs to be firm, i.e.,

there will be no rounding up, regardless of how close you are to the higher grade.

There will be NO makeup exams. If you have a valid excuse for missing either of the first two exams,

your final grade will be based on your performance on the other two examinations—each of these

examinations will count as 50% of your final grade. If you miss the final with a valid excuse, you must make

it up the following term. If you do not have a valid excuse for missing an exam, it will count as a zero.

Preface xiii

To be excused from an exam, the student must contact me before the exam. If you cannot reach me,

leave a message with the department secretaries at 392-0153. In most cases I will require students to

provide me with additional documentation to justify why the student is unable to take the exam. Please

note that a simple note indicating that you were seen at the health center the day of the exam does not,

in and of itself, provide sufficient documentation. Excuses will be granted if the student is unable to take

the exam because of serious illness or injury, or a significant personal or professional commitment. Excuses

will not be granted for social activities such as ski trips, cruises, and trips to sporting events (unless you are

participating).

xiv Preface

Course Schedule

Spring 2020

This schedule is extremely tentative, and subject to change. Any variations will be announced

in class.

Jan 6 Introduction/Chapter 1: An Overview of Financial Management

Jan 7 Chapter 2: Financial Markets and Institutions

Jan 8 Chapter 2: Financial Markets and Institutions

Jan 9 Chapter 3: Financial Statements, Cash Flow, and Taxes

Jan 20 MARTIN LUTHER KING DAY (NO CLASS)

Jan 21 Chapter 4: Analysis of Financial Statements

Jan 22 Chapter 5: Time Value of Money

Jan 23 Chapter 5: Time Value of Money

Jan 27 Chapter 5: Time Value of Money

Jan 28 Chapter 5: Time Value of Money

Jan 29 Chapter 6: Interest Rates

Jan 30 Chapter 6 and Review Interest Rates

Feb 3 EXAM (NO CLASS)

Feb 4 Chapter 7: Bonds and Their Valuation

Feb 5 Chapter 7: Bonds and Their Valuation

Feb 6 Chapter 7: Bonds and Their Valuation

FEB 27 EXAM (NO CLASS)

FEBRUARY 29-MARCH 7 SPRING BREAK

Preface xv

Mar 9 Chapter 11: The Basics of Capital Budgeting

Mar 10 Chapter 11: The Basics of Capital Budgeting

Mar 30 Chapter 13: Capital Structure and Leverage

Mar 31 Chapter 14: Distributions to Shareholders

Apr 1 Chapter 14: Distributions to Shareholders

Apr 2 Chapter 14: Distributions to Shareholders

Apr 6 Chapter 15: Working Capital Management

Apr 27 FINAL EXAM

Answers to End-of-Chapter Problems

We present here some intermediate steps and final answers to end-of-chapter problems. Please note that

your answer may differ slightly from ours due to rounding differences. Also, although we hope not, some of

3-1 a. $900,000.

b. $2,500,000.

g. $400,000.

3-2 $800,000.

3-4 $34,000,000.

3-6 $22,000,000.

3-8 a. $83,379.

b. 32%.

3-10 $71,600,000.

3-12 a. $62,000.

b. $72,000.

3-14 a. NOWC2018 = $42,000; NOWC2019 = $50,220.

b. $22,780.

c. CS = $40,000; RE = $46,220.

3-15 $12,893,333.

3-17 a. NOWC2018 = $210,000,000; NOWC2019 =

3-18 a. $16,739.50.

b. 22%.

4-1 AR = $230,000.

4-2 47.64%.

4-4 M/B = 1.1765; EV/EBITDA = 12.5.

4-5 P/E = 24.57×.

4-6 ROE = 14.25%.

4-10 P0 = $72.22; EV/EBITDA = 9.875.

4-11 PM = 3.0769%; Debt/Capital = 50%.

4-13 TIE = 7.00×; ROIC = 18.375%.

4-15 ROE = +5.54%; QR = 1.2×.

4-17 a.

4-18 3.67×.

4-21 $30.13.

$90,000; FA = $150,000; CL = $75,000.

4-23 a. CR = 1.98×; DSO = 76.3 days; TATO =

EV/EBITDA = 6.24.

b. Firm: ROE = 10.2%; Ind: ROE = 12.1%.

4-24 a. CR = 3.56×; Debt–to-total capital = 20.05%;

b. Firm: ROE = 10.7%; Ind.: ROE = 16.1%.

5-1 FV5 = $2,676.45.

5-4 N = 17.67 years.

5-6 FVA5 = $4,420.51; FVA5 Due = $4,641.53.

5-8 PMT = $811.06; EAR = 8.30%.

5-9 a. $636.

d. $534.

5-10 a. $296.05.

c. $135.11.

5-11 a. 14.87%.

5-12 a. 10%.

5-13 a. 11.90 years.

b. 5.67 years.

5-14 a. $6,616.38.

d(1). $7,542.67.

d(3). $2,800.

5-15 a. $4,521.65.

d(2). $1,635.55.

5-16 PV5% = $12,000; PV10% = $6,000.

5-18 a. Stream A: $1,505.84; Stream B: $1,522.73.

b. PVA = $1,750; PVB = $1,750.

c(1). $377,231.24.

5-20 Contract 2; PV = $12,358,739.18.

5-21 a. 30-year payment plan; PV = $69,490,630.63.

$484.88; Princ.2 = $317.55.

c. $984.88.

5-23 a. $881.17.

b. $895.42.

5-24 a. $279.20.

5-26 $17,290.89; $19,734.26.

5-28 INOM = 11.73%.

5-30 a. A = 59.89 yrs. old; L = 50.08 yrs. old.

b. $12,649.64.

5-31 a. $17,325.53.

5-32 $1,297.13.

5-33 $30,626.10.

Princ/Pymt = 85.73%; Yr. 3: Int/Pymt =

7.41%; Princ/Pymt = 92.59%.

c. Balloon PMT = $128,217.83.

5-37 a. 55 mos.

c. $140.88.

5-38 $580,191.

6-1 b. Upward sloping yield curve.

MRP.

6-2 2.55%.

6-3 5.625%; 5.92%.

6-6 23.9%.

6-8 8.36%.

6-9 5.11%.

6-14 a. r1 in Year 2 = 5%.

b. I1 = 2.2%; I2 = 4%.

6-15 rT1 in Year 2 = 9%; I2 = 7%.

6-16 14%.

6.30%.

7-2 a. 8.27%.

7-3 $788.18.

7-4 YTM = 6.42%; YTC = 6.32% (most likely).

7-5 a. VL at 6% = $1,419.19; VL at 8% = $1,226.08;

7-6 a. C0 = $1,108.82; Z0 = $729.61; C1 =

9.75%; 5–year zero = 4.76%; 30–year zero =

7-8 11.75%.

6.56%.

b. Yes, purchase if VB < $917.77.

7-11 a. YTM = 9.63%; YTC = 9.39%; YTC.

b. 10.83%.

7-14 a. 6 years.

b. YTC = 6.64%.

9: 8.38%; call would be expected no later than

r

8-2 bp = 2.10.

8-4 rM = 7.5%; r = 6.7%.

8-6 a.

B

r

ˆ

= 14%.

b(1). rM = 11%; ri = 13.4%.

b(2). rM = 9%; ri = 11.4%.

8-13 a. rM – rRF = 4.5%.

8-14 bN = 1.24.

d(1). $75,000.

8-19 a. CVX = 3.5; CVY = 2.0.

c. rX = 10.5%; rY = 12%.

d. Stock Y.

8-20 a. rA = 11.30%; rB = 11.30%.

b. rp Avg = 11.30%.

c. Indifference rate = 16.5%.

9-1 D1 = $1.12; D2 = $1.2544; D3 = $1.4049; D4 =

$1.4752; D5 = $1.5489.

P

ˆ

9-4 a. End of Year 2.

c. $59.88.

9-6 rp = 9.17%.

b. 11.11%.

d. 7.25%.

9-9 a. 8.89%.

9-10 $17.63.

3

9-14 P0 = $10.08.

9-15 a. $787.50 million.

b. $612.60 million.

9-17 a. $2.10; $2.205; $2.31525.

b. PV = $5.28.

9-18 a. P0 = $54.11; D1/P0 = 3.55%; CGY = 6.45%.

9-19 a. $25,314,645.

9-21 a. $2.01; $2.31; $2.66; $3.06; $3.52.

b. P0 = $39.43.

b. No;

C

P

ˆ

= $32.61.

10-1 rd(1 – T) = 7.50%.

10-5 Projects A through E should be accepted.

10-9 WACC = 11.81%.

10–16 a. g = 8%.

10–17 a. g = 3%.

b. WACC = 14.26%.

c. Projects 1 and 2 will be accepted.

million.

c. Projects A, C, F, and H should be accepted;

11-1 NPV = $6,942.96.

11-2 IRR = 11.57%.

11-6 a. 5%: NPVA = $3.52; NPVB = $2.87.

11-7 a. NPVM = $4,330.81; IRRM = 19.86%; MIRRM

11-8 a. Without mitigation: NPV = $12.10 million;

$5.70 million; IRR = 15.24%.

-$11.25 million; IRR = 15.24%.

11–17 a. NPVA = $240.64; NPVB = $161.89.

xx Preface

11–18 a. No; PVOld = –$89,910.08; PVNew =

c. 22.94%.

d. 9.54%; 22.87%.

11–21 MIRR = 11.60%.

12–2 a. $1,125,000.

b. $750,000.

12–4 Yes, NPV = $4,156.54.

12–6 a. SL Deprec.: $200,000/yr. (Years 1 – 4); Bonus

CV = 7.874.

12–9 b. -$112,250.

12–11 Yes, NPV = $28,026.28.

12–12 a. Expected CFA = $6,750; Expected CFB =

12–13 a. NPV = $43,362.03; IRR = 16.40%; MIRR =

c. E(NPV) = $40,592.06; NPV = $44,578.50; CV

12–14 a. -$75,625.

b. CF1 = $27,875; CF2 = $27,875; CF3 =

12–16 a. No, NPV2 = $460.

b. Accept A, B, D, and E; Capital budget =

$6,000,000.

13–1 QBE = 277,419.

13–3 a. E(EPSC) = $5.10.

13–5 a.ROICHL = 15%; ROICLL = 15%.

c. ROELL = 20.63%.

13–6 a(1). -$38,000.

b. QBE = 11,923.

13–7 No leverage: ROE = 13.125%;  = 6.76%; CV

leverage: ROE = 17.06%;  = 16.90%; CV =

0.9905.

13–9 a. P0 = $22.15.

b. P0 = $25.54.

c. 50,000 units.

13–11 a. 12.1875%.

c. 0.9714.

d. 16.20%.

e. 12.87%.

13–12 a. EPSOld = $2.55; New: EPSD = $5.93; EPSS =

$4.09.

c. QOld = 316,957 units; QNew, Debt = 272,250

units; QNew, Stock = 204,750 units.

14–3 PNew = $74.44.

14–5 $10,750,000.

14–6 Payout = 36%.

14–7 a. $1.28.

b. 3.46%.

14–8 a. 12%.

b. 18%.

14–9 a(1). $3,960,000.

a(3). $9,360,000.

a(4). Regular = $3,960,000; Extra = $5,400,000.

15–1 169.83 days; 142.71 days; $750,000; $60,000.

15–2 45.62 days; 30 days; $513,698.63.

debt.

c. 7.60.

15–5 a. DSO = 46 days.

b. A/R = $242,098.63.

15–6 a. 32 days.

c. 48.09 days; S/TA = 1.82×; ROA = 3.64%.

15–9 a. $4,600,000.

15–10 a. Oct. loan = $22,800.

16–2 AFN = $646,000.

16–4 a. $166.875 million.

b. 39.06%.

c. $68,055,556.

16–6 $67 million; 5.01×.

16–9 ∆S = $84,507.04.

16–11 $19.10625 million; 6.0451×.

16–12 a. $3,750,000,000.

$207,900; RE2020 = $137,362.50.

b. 4.35%.

16–14 a. 33.33%.

b. Notes payable2020 = $3,553.2; Bonds2020 =

17–1 0.7692 pound per dollar.

17–2 30.83 yen per shekel.

Pounds

Can. $

Euros

Yen

Pesos

Kronas

17–12 a. $1.298389.

b. $2,909,302.

17–15 b. $19,865.

b. 0.95587 SF per U.S. $.

.