Archives: Solution Manual

d. An operating merger occurs when the operations of two companies are integrated with the expectation of obtaining synergistic gains. These may occur due to economies of scale, management efficiency, or a host of other reasons. In a pure financial […]

29 30 31 32 33 34 35 36 37 Debt ratio (percent financed with debt) before the merger 30% Cost of debt before merger 9% Debt ratio (percent financed with debt) after the merger 40% Cost of debt after merger […]

12/10/2012 2013 2014 2015 2016 2017 2018 Net sales 60.00 90.00 112.50 127.50 139.70 Cost of goods sold (60%) 36.00 54.00 67.50 76.50 83.80 Selling/administrative expense 4.50 6.00 7.50 9.00 11.00 a. Economically justifiable reasons: Synergy: Value of the whole […]

d. The adjusted present value model discounts projected free cash flows and interest tax shields at the unlevered cost of equity to arrive at the value of operations. You add in the value of non-operating assets to get the value […]

Solution 12/8/2012 Chapter: 21 Problem: 14 Current 1 2 3 4 Free cash flow $200.0 $280.0 $320.0 $340.0 Horizon unlevered value of operations $5,100.00 Current value of unlevered operations $4,086.77 Current 1 2 3 4 Interest expense $100.0 $120.0 $120.0 […]

Solution 12/8/2012 Chapter: 21 Problem: 13 a. Using the Black-Scholes Option Pricing Model, how much is the equity worth? Black-Scholes Option Pricing Model Total Value of Firm 200.00 this is the current value of operations b. How much is the […]

26 27 28 29 30 31 32 Proposition I. Proposition II. The cost of equity, rsL = rsU + Risk premium = rsU + (rsU -rd)(D/S) 1. The weighted average cost of capital is independent of the firm’s capital structure. […]

f. The conversion ratio is the number of shares of common stock received upon conversion of one convertible security. The conversion price is the effective price per share of stock if conversion occurs. Thus, the conversion price is the par […]

42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 2 25.19 806.01 No $899.41 $60.00 3 26.95 862.43 No $902.37 $60.00 4 28.84 922.80 No $905.53 $60.00 5 30.86 987.40 No $908.92 $60.00 […]

40 41 42 43 44 45 EduSoft’s investment banker estimates that EduSoft could issue a bond-with-warrants package consisting of a 20-year bond and 27 warrants. Each warrant would have a strike price of $25 and 10 years until expiration. It […]

c. Off-balance sheet financing refers to the fact that for many years neither leased assets nor the liabilities under lease contracts appeared on the lessees’ balance sheets. To correct this problem, the Financial Accounting Standards Board issued FASB Statement 13. […]

34 35 36 37 38 39 40 Maintenance fee $20,000 Tax Rate 40% Lease fee $70,000 Equipment expected life 8 Expected salvage value $0 Market value after 4 years $42,500 Book value after 4 years $42,500 48 49 50 51 […]

23 24 25 26 27 28 (4) What effect does leasing have on a firm’s balance sheet? Answer: See Chapter 19 Mini Case Show (2) What are the four primary types of leases, and what are their characteristics? Answer: See […]

Before an IPO, the senior management team and the investment banker make presentations to potential investors. They make presentations in ten to twenty cities, with three to five presentations per day, over a two week period. The spread is the […]

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 32 33 34 35 36 37 38 39 40 41 42 43 44 Old flotation costs already expensed = 1,200,000.00$ […]

12/10/2012 Situation For answers to the individual discussion questions, see the Chapter 18 PowerPoint Show. Setting the Offer Price and Number of New Shares to Be Sold Pre-IPO value of equity = $63 million Target net proceeds = $18.60 million […]

countries after adjusting for risk. Purchasing power parity, sometimes referred to as the “law of one price,” implies that the level of exchange rates adjusts so that identical goods cost the same in different countries. f. The spot rate is […]

30 31 denotes the actual quotes, which are reported out to digits to the right of the decimal; orange is the inverse of the provided quote and is not rounded. 1 2 3 4 5 6 7 8 9 10 […]

25 26 27 28 29 To seek new supplies of raw materials. To gain new technologies. To gain production efficiencies. To avoid political and regulatory obstacles. To reduce risk by diversification. 36 37 38 39 (3) Language differences (4) Cultural […]

d. A moderate short-term financing policy matches asset and liability maturities. It is also referred to as the maturity matching, or “self-liquidating” approach. When a firm finances all of its fixed assets with long-term capital but part of its permanent […]

Forecasted Sales Sales (gross) $60,000 $100,000 $130,000 $120,000 $100,000 $80,000 $60,000 $40,000 $30,000 Collections During month of sale 19500 18000 15000 12000 9000 6000 During 1st month after sale 65000 84500 78000 65000 52000 39000 During 2nd month after sale […]

23 24 25 26 27 28 Historically, RR has done little to examine working capital, mainly because of poor communication among business functions. In the past, the production manager resisted Johnson’s efforts to question his holdings of raw materials, the […]

15-3 Firms with relatively high nonfinancial fixed costs are said to have a high degree of operating leverage. Answers and Solutions: 15 – 1 Chapter 15 Capital Structure Decisions ANSWERS TO END-OF-CHAPTER QUESTIONS 15-1 a. Capital structure is the manner […]

Solution 12/8/2012 Chapter: 15 Problem: 12 Input Data Risk-free rate 4.5% Market risk premium 5.5% Unlevered beta 0.8 0% 6.0% Tax rate 40.0% Fill in formulas in the yellow cells to find the optimum capital structure. Debt/Value Equity/Value Debt/Equity A-T […]

31 32 Case Show 34 35 (2.) What is operating leverage, and how does it affect a firm’s business risk? Answer: See Chapter 15 Mini Case Show 41 42 43 44 45 46 47 48 49 50 51 52 53 […]

b. The dividend irrelevance theory holds that dividend policy has no effect on either the price of a firm’s stock or its cost of capital. The principal proponents of this view are Merton Miller and Franco Modigliani (MM). They prove […]

Solution 12/8/2012 Chapter: 14 Problem: 13 Inputs Amount of distribution $500 Actual Projected Income Statement (Millions of Dollars) 6/30/2013 6/30/2014 Net Sales $20,000.00 $21,200.00 Costs (except depreciation) $16,000.00 $16,960.00 Depreciation $1,300.00 $1,378.00 Earning before int. & tax $2,700.00 $2,862.00 Interest […]

12/10/2012 Situation Net Income $140.00 Target equity ratio 80% Total capital budget $112.50 Number of shares 100 What would happen to the payout ratio and DPS if net income were forecasted to decrease to $90 million? Net Income $90.00 Capital […]

b. Agency costs include all costs borne by shareholders to encourage managers to maximize a firm’s stock price rather than act in their own self-interests. The three major categories of agency costs are (1) expenditures to monitor managerial actions, such […]

Answers and Solutions: 12 – 1 Chapter 12 Corporate Valuation and Financial Planning ANSWERS TO END-OF-CHAPTER QUESTIONS 12-1 a. The operating plan provides detailed implementation guidance designed to accomplish corporate objectives. It details who is responsible for what particular function, […]

Solution 12/7/2012 Chapter: 12 Problem: 10 Key Input Data: Used in the forecast Tax rate 40% Dividend growth rate 8% December 31 Balance Sheets (in thousands of dollars) Forecasting 2013 2014 2014 2013 basis Ratios Inputs Without adj. Adj. With […]

5/6/13 2013 Cash $20 Sales $2,000.0 Accts. rec. $280 Op. costs (excl. depr.) $1,800.0 Inventories $400 Depreciation $50.0 Total CA $700 EBIT $150.0 Total liab. & equity $1,200 Selected Ratios and Other Data, 2013 Hatfield Industry Hatfield Industry Op. costs/Sales […]

Answers and Solutions: 11 – 1 Chapter 11 Cash Flow Estimation and Risk Analysis ANSWERS TO END-OF-CHAPTER QUESTIONS 11-1 a. Project cash flow, which is the relevant cash flow for project analysis, represents the actual flow of cash, which includes […]

Solution 12/7/2012 Chapter: 11 Problem: 18 Input Data (in thousands of dollars) Equipment cost $10,000 Key Results: Net operating working capital/Sales 10% NPV = $3,463 Units sold 1,000 1,000 1,000 1,000 Sales price per unit (excl. depr.) $24.00 $24.72 $25.46 […]

12/10/2012 Chapter 11 Mini Case Situation Analysis of New Expansion Project Part I: Input Data Equipment cost $200,000 Key Output: NPV = $88,010 Shipping charge $10,000 Installation charge $30,000 Economic Life 4 Salvage Value $25,000 Annual Depreciation Expense Depreciable Basis […]

present value of the expected future cash inflows and outflows. IRR measures the rate of return on a project, but it assumes that all cash flows can be reinvested at the IRR rate. The profitability index is the ratio of […]

Solution Chapter: 10 Problem: 23 Expected Net Cash Flows Time Project A Project B 0($375) ($575) 1($300) $190 2($200) $190 3($100) $190 4$600 $190 5$600 $190 6$926 $190 7($200) $0 @ 12% cost of capital @ 18% cost of capital […]

1 2 3 4 5 6 7 8 9 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 […]

9-2 The WACC is an average cost because it is a weighted average of the firm’s component costs of capital. However, each component cost is a marginal cost; that is, the cost of new capital. Thus, the WACC is the […]

Solution 12/7/2012 Chapter: 9 Problem: 18 INPUTS USED IN THE MODEL P0$50.00 Net Ppf $30.00 Dpf $3.30 D0$2.10 g 7% B-T rd10% Cost of debt: B-T rd × (1 – T) = A-T rd 10% 65% 6.50% Cost of preferred […]

26 27 28 29 (2.) Should the component costs be figured on a before-tax or an after-tax basis? Answer: See Chapter 9 PowerPoint (3.) Should the costs be historical (embedded) costs or new (marginal) costs? Answer: See Chapter 9 PowerPoint […]

Answers and Solutions: 8 – 1 the time to expiration causes an increase in the value of a call option. (4) An increase in the risk-free rate causes an increase in the value of a call option. (1) An increase […]

1 2 3 4 5 6 11 12 13 14 17 18 19 20 21 22 23 (d2) = -0.316 N(d2) = 0.376125 Using the formula for option value and the values of N(d) from above, we can find the […]

12/10/2012 SITUATION LOOKING AT EXERCISE AND MARKET VALUE OF AN OPTION Strike) price = $25 Price of Strike Exercise the stock Price Value $0 $20.00 $0.00 $5 $20.00 $0.00 $10 $20.00 $0.00 $25 a. What is a financial option? What […]

Answers and Solutions: 7 – 1 acceptable rate of return considering both its riskiness and the returns available on other investments. The expected rate of return, denoted by ^ rs, is the rate of return expected on a stock given […]

Solution 12/7/2012 Chapter: 7 Problem: 23 Selected data for the Derby Corporation are shown below. Use the data to answer the following questions. INPUTS (In millions) WACC 9.00% Number of shares of stock 40 Current 0 1 2 3 4 […]

31 32 33 34 35 P2+ D2 $65.406 + $3.738 P1 = (1 + rs) P1 1 2 3 4 5 6 7 8 9 10 26 27 28 29 30 36 37 38 39 40 41 42 43 44 […]

33 34 35 36 37 38 39 The value of any financial asset is equal to the present value of future cash flows provided by the asset. When an investor buys a share of stock, he or she typically expects […]

f. A risk premium is the difference between the rate of return on a risk-free asset and the expected return on Stock i which has higher risk. The market risk premium is the difference between the expected return on the […]

Solution 12/7/2012 Chapter: 6 Problem: 15 Data as given in the problem are shown below: Market Index Year Stock Price Dividend Stock Price Dividend Includes Divs. 2013 $25.88 $1.73 $73.13 $4.50 17,495.97 2011 62.7% -10.0% 34.9% 2010 2.9% -0.4% 14.8% […]