Archives: Solution Manual

Chapter 27 Multinational Financial Management ANSWERS TO BEGINNING-OF–CHAPTER QUESTIONS Most of the questions are illustrated in the BOC spreadsheet model. 27-1 A purely domestic firm does not have to deal with exchange rates, different laws in different countries, transferring funds […]

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. 35 36 37 38 39 (2) Economic and legal […]

Although we don’t need this calculation for the valuation, after the merger, BCC will have 50 percent of debt costing 10%, so its levered cost of equity and WACC will be: Answers and Solutions: 26 – 16 © 2016 Cengage […]

Chapter 26 Mergers and Corporate Control ANSWERS TO BEGINNING-OF–CHAPTER QUESTIONS The BOC questions lead us through a verbal discussion of mergers and merger analysis. This is a useful exercise, but it does not explain the type of quantitative analysis that […]

25-4 a. The total amount available for distribution is $3,190,000 proceeds + $10,000 cash = b. The following table shows the liquidation distribution (in thousands of dollars): Priority Creditor Subordination Claimant Distribution Distribution Adjustment Percentage Accounts payable $ 384 $ […]

Chapter 25 Bankruptcy, Reorganization, and Liquidation ANSWERS TO BEGINNING-OF–CHAPTER QUESTIONS 25-1 Bankruptcies occur in firms of all sizes. Small firms, with fewer creditors, are often able to work out informal settlements and thus avoid the time and expense of formal […]

21 22 23 24 25 (2) Do business failures occur evenly over time? Answer: See Chapter 25 Mini Case Show a. (1.) What are the major causes of business failure? Answer: See Chapter 25 Mini Case Show 28 Why? Answer: […]

Chapter 24 Enterprise Risk Management ANSWERS TO BEGINNING-OF–CHAPTER QUESTIONS 24-1 “Managing Risks” means taking steps to mitigate the effects of adverse events. Buying fire insurance is an attempt to mitigate the adverse consequences of a fire. Risk managers attempt to […]

1/13/2015 d. Describe the eight components of the COSO ERM framework. Answer: See Chapter 24 Mini Case Show. Answer: See Chapter 24 Mini Case Show. g. What are forward contracts? How can they be used to manage foreign exchange risk? […]

Chapter 23 Other Topics in Working Capital Management ANSWERS TO BEGINNING-OF-CHAPTER QUESTIONS 23-1 The Economic Ordering Quantity (EOQ) model combines the annual costs associated with ordering different quantities with the annual costs of carrying different average inventory balances. Ordering costs […]

10 11 12 13 14 15 plans to use as an example one of Webster’s “big ticket” items, a customized computer microchip which the firm uses in its laptop computer. Each chip costs Webster $200, and in addition it must […]

MINI CASE Rich Jackson, a recent finance graduate, is planning to go into the wholesale building supply business with his brother, Jim, who majored in building construction. The firm would sell primarily to general contractors, and it would start operating […]

Chapter 22 Providing and Obtaining Credit ANSWERS TO BEGINNING-OF–CHAPTER QUESTIONS 22-1 The term “credit policy” embraces four variables: (1) credit period, (2) discount offered, including the discount percentage and when payment must be made to get the discount, (3) credit […]

1 2 3 4 5 6 7 8 9 10 11 12 16 17 18 19 20 21 22 23 a. Discuss, in general, what it means for the brothers to set a collections policy. Answer: See Ch. 22 Mini […]

21-17 a. Size of bank loan = (Purchases/Day)(Days late) =      −        30 goutstandin payables Days goutstandin payables Days Purchases = ($600,000/60)(60 – 30) = $10,000(30) = $300,000. c. […]

Chapter 21 Supply Chains and Working Capital Management ANSWERS TO BEGINNING-OF–CHAPTER QUESTIONS 21-1 The CCC is defined as the number of days between a company’s paying for some product or service that it sells and the receipt of cash from […]

18 19 20 21 22 If EVA is positive then the firm’s management is creating value. On the other hand, if EVA is negative, then the firm is not covering its cost of capital and stockholders’ value is being eroded. […]

b. $1,000 = ∑ =+ + + 7 1t cc )r1( 42.210,1$ )r1( 80$ . Answers and Solutions: 20 – 14 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly […]

Chapter 20 Hybrid Financing: Preferred Stock, Warrants, and Convertibles ANSWERS TO BEGINNING-OF–CHAPTER QUESTIONS 20-1 Both companies and investors have different preferences regarding risks, maturities, and 20-2 Preferred dividends are not normally deductible by the issuing corporation, so they have a […]

23 24 25 26 27 28 Number of shares outstanding 20 Expected growth rate of FCF 8.00% Current stock price $20.00 Cost of equity, rs13.40% Interest rate on straight debt, rd10.00% Tax rate 40.00% 35 common stock? What is floating […]

III. Cost Comparison Net advantage to leasing (NAL)= PV of leasing – PV of owning = −$777,532.77 – (−$885,679.47) = $108,146.69. 19-5 a. Borrow and buy analysis: Depreciation Schedule of New Equipment Year 0 1 2 3 4 5 6 […]

Chapter 19 Lease Financing ANSWERS TO BEGINNING-OF–CHAPTER QUESTIONS 19-1 An operating lease is one that typically requires the lessor to service the equipment, that has a lease term that is much shorter than the life of the equipment, and that […]

12 13 14 15 computer, so it falls into the MACRS 3-year class. If the system were purchased, a 4-year maintenance contract could be obtained at a cost of $20,000 per year, payable at the beginning of each year. The […]

f. The interest on the old issue is 0.11($40,000,000) = $4,400,000 annually, or $2,200,000 semiannually. Since interest payments are tax deductible, the after–tax semiannual amount is 0.6($2,200,000) = $1,320,000. g. The net amortization tax effects are ─$3,200 per year for […]

Chapter 18 Initial Public Offerings, Investment Banking, and Financial Restructuring ANSWERS TO BEGINNING-OF–CHAPTER QUESTIONS 18-1 Reasons for going public include the following. Note that, generally, several of these reasons will be important at the time of the IPO. • To […]

1/6/2015 Situation 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 Number of existing shares = 4 million Underwriter spread = 7% Gross required […]

17-11 a. The inputs to the Black and Scholes option pricing model are P = 5, X = 2, rRF = 6%, σ = 50%, and t = 2 years. Given these inputs, the value of a call option is […]

Chapter 17 Dynamic Capital Structures and Corporate Valuation ANSWERS TO BEGINNING-OF–CHAPTER QUESTIONS 17-1 Arbitrage is generally thought of as the process of buying an item in one market and simultaneously selling it at a higher price in another market and […]

22 23 24 25 cost of equity is rsU = 14%. Firm L has $1 million of debt outstanding at a cost of rd = 8%. There are no taxes. Assume that the MM assumptions hold, and then: a. Find […]

SOLUTION TO SPREADSHEET PROBLEM 16-12 The detailed solution for the problem is available in the file Ch16 P12 Build a Model Solutions.xls on the textbook’s Web site. Answers and Solutions: 16 – 14 © 2016 Cengage Learning. All Rights Reserved. […]

Chapter 16 Capital Structure Decisions ANSWERS TO BEGINNING-OF–CHAPTER QUESTIONS 16-1 Business risk is the risk inherent in the firm’s operating income. It is measured by the standard deviation of expected future operating income. It is affected by many factors, including […]

29 30 31 32 can affect the weighted average cost of capital and free cash flows. Answer: See Chapter 16 Mini Case Show b. (1.) What is business risk? What factors influence a firm’s business risk? Answer: See Chapter 16 […]

Answers and Solutions: 15 – 15 15-12 Prior to Repurchase After Repurchase Value of operations = (FCF(1+g))/(WACC-g) = $848,000,000.0 $848,000,000.0 + Value of nonoperating assets 30,000,000.0 0.0 Total intrinsic value of firm $878,000,000.0 $848,000,000.0 − Debt 368,000,000.0 368,000,000.0 − Preferred […]

Answers and Solutions: 15 – 1 Chapter 15 Distributions to Shareholders: Dividends and Repurchases ANSWERS TO BEGINNING-OF-CHAPTER QUESTIONS 15-1 Investors who prefer a high payout policy would generally (a) need current cash income and (b) be in a low income […]

1/6/2015 Situation Net Income $140.00 Distribution = Net Income – [(Target equity ratio) * (Total capital budget)] Capital budget $112.50 Net income $140 Required equity (Equity ratio X Capital budget) $90 Distributions paid (NI – Required equity) $50 Payout ratio […]

SOLUTION TO SPREADSHEET PROBLEMS 14-9 The detailed solution for the problem is available in the file, Ch 14 P9 Build a Model Solution.xls, on the textbook’s Web site. Answers and Solutions: 14 – 15 © 2016 Cengage Learning. All Rights […]

Chapter 14 Real Options ANSWERS TO BEGINNING-OF–CHAPTER QUESTIONS 14-1 Financial options deal with securities like stocks and debt instruments, whereas real options deal with physical assets like capital budgeting projects. There are many different types of real options, ranging from […]

1/6/2014 REAL OPTIONS: THE INVESTMENT TIMING OPTION Cost= ($70) WACC= 10% Risk-free rate= 6% Demand Prob. Annual Cash Prob. x (CF) Procedure 1: DCF Only Year 1 2 3 Expected CF $30.00 $30.00 $30.00 NPV= $4.61 Procedure 3: Decision Tree […]

MINI CASE Shrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Sidney Johnson, a recently graduated MBA. The production line would be set up in unused space […]

(2) Savings decrease by 20%: 0 1 2 3 4 5 Machine cost (350,000) Net working capital (35,000) Cost savings 88,000 88,000 88,000 88,000 88,000 Depreciation 116,655 155,575 51,835 25,935 – Return of NWC 35,000 Sale of machine 33,000 Tax […]

Chapter 13 Capital Budgeting: Estimating Cash Flows and Analyzing Risk ANSWERS TO BEGINNING-OF–CHAPTER QUESTIONS 13-1 The firm’s FCFs reflect both its past and current investments. Past investments produce current FCFs, but current investments are expected to add to FCF at […]

1/1/2015 Chapter 13 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 Annual Depreciation Expense Depreciable Basis = Equipment + Freight + Installation […]

A financial calculator is extremely helpful when calculating IRRs. The cash flows are d. 2. How is the IRR on a project related to the YTM on a bond? Answer: The IRR is to a capital project what the YTM […]

c. NPV (Millions of Dollars) Crossover Rate = 11.7% A B 125 100 75 Answers and Solutions: 12 – 21 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible […]

Chapter 12 Capital Budgeting: Decision Criteria ANSWERS TO BEGINNING-OF–CHAPTER QUESTIONS 12-1 The 6 criteria are discussed below. All are calculated and analyzed in the spreadsheet model for the chapter. Payback. Easy to calculate and understand, but doesn’t tell us if […]

1 2 3 4 5 6 7 8 9 10 11 12 19 20 21 22 24 25 26 27 28 29 30 0($100) ($100) (100) 70 50 20 170 10 250 60 Franchise L 320 80 0 1 2 […]

CAPM: We would use rRF = T-bond rate = 10%. For RPM, we would use 4.5% to 5.5%. For beta, we would use a beta in the 1.3 to 1.7 range. Combining these values, we obtain this range of values […]

Chapter 11 Determining the Cost of Capital ANSWERS TO BEGINNING-OF–CHAPTER QUESTIONS The answers to a number of the question are illustrated in the Excel model. 11-1 (1) Debt, (2) preferred stock, and common equity from (3) sale of common stock […]

25 26 27 28 29 (WACC)? Answer: See Chapter 11 PowerPoint file. (2.) Should the component costs be figured on a before-tax or an after-tax basis? Answer: See Chapter 11 (3.) Should the costs be historical (embedded) costs or new […]

Chapter 10 Corporate Governance ANSWERS TO BEGINNING-OF–CHAPTER QUESTIONS 10-1 An agent is someone who does some work on behalf of someone else, the principal. In the case of a company that is run by a manager for the owner, then […]