Archives: Solution Manual

P12-27. Integrative—optimal capital structure LG 3, 4, 5, 6; Challenge a. Probability 0.30 0.40 0.30 Sales $600,000 $900,000 $1,200,000 b. Debt Ratio Amount of Debt Amount of Equity Number of Shares of Common Stock* 0% $ 0 $1,000,000 40,000 15% […]

P12-22. EBIT-EPS and capital structure LG 5; Intermediate a. Using $50,000 and $60,000 EBIT: Structure A Structure B EBIT $50,000 $60,000 $50,000 $60,000 Less: Interest 16,000 16,000 34,000 34,000 Financial breakeven points: Structure A Structure B $16,000 $34,000 b. c. […]

P12-9. DOL LG 2; Intermediate a. $380,000 8,000 units ( ) $63.50 $16.00 FC QP VC = = = – – 9,000 Units 10,000 Units 11,000 Units b. c. Change in unit sales 1,000 0 1,000 % change in sales […]

Part 6 Long-Term Financial Decisions Chapters in this Part Chapter 12 Leverage and Capital Structure Chapter 13 Payout Policy Chapter 12 Leverage and Capital Structure  Instructor’s Resources Overview This chapter introduces the student to the concepts of operating and financial […]

216 Gitman/Zutter Principles of Managerial Finance, Brief, Seventh Edition P11-22 Personal Finance: Impact of inflation on investments LG 2; Easy a.  c. Year Investment Cash Flows Current NPV (a) Higher Inflation NPV (b) Lower Inflation NPV (c) 0 1 […]

P11-10. Calculating initial investment LG 3, 4; Challenge a.Book value  ($60,000  0.31)  $18,600 b. Sales price of old equipment $35,000 Taxes on recapture of depreciation  $16,400  0.40  $6,560 Sale price of old roaster $35,000 […]

Chapter 11 Capital Budgeting Cash Flows and Risk Refinements  Instructor’s Resources Overview This chapter expands upon the capital budgeting techniques presented in the previous chapter (Chapter 10). Shareholder wealth maximization relies upon selection of projects that have positive net present […]

172 Gitman/Zutter Principles of Managerial Finance, Brief, Seventh Edition P9-11. Retained earnings versus new common stock LG 5; Intermediate 1 0 r D r g P = +     1 n n D r g N = + Firm Calculation […]

Chapter 9 The Cost of Capital  Instructor’s Resources Overview This chapter introduces the student to an important financial concept, the cost of capital. The mechanics of computing the sources of capital debt, preferred stock, common stock, and retained earnings are […]

P8-20. Interpreting beta LG 5; Basic Effect of change in market return on asset with beta of 1.20: P8-21. Betas LG 5; Basic a. and b. Asset Beta Increase in Market Return Expected Impact on Asset Return Decrease in Market […]

P8-10. Assessing return and risk LG 2; Challenge a. Project 257 (1) Range: 1.00  (.10)  1.10 (2) Expected return: =1 n i ri i r r P= ´ å Rate of Return ri Probability Pr i Weighted Value […]

Part 4 Risk and the Required Rate of Return Chapters in This Part Chapter 8 Risk and Return Chapter 9 The Cost of Capital Chapter 8 Risk and Return  Instructor’s Resources Overview This chapter focuses on the fundamentals of the […]

Chapter 7: Stock Valuation 123 P7-13. Personal finance: Common stock value—variable growth LG 4; Challenge P0  0 1 1 (1 ) (1 ) Nt t ts D g r = ´ + + å  1 2 1 (1 […]

Chapter 7 Stock Valuation  Instructor’s Resources Overview This chapter continues on the valuation process introduced in Chapter 6 for bonds. Models for valuing preferred and common stock are presented. For common stock, the zero growth, constant growth, and variable growth […]

P6-8. Risk-free rate and risk premiums LG 1; Basic a. Risk-free rate: RF  r*  IP Security r*IP RF c. Nominal rate: r  r*  IP  RP Security r*IP RP r A 3%  6% 3% 12% […]

Part 3 Valuation of Securities Chapters in This Part Chapter 6 Interest Rates and Bond Valuation Chapter 7 Stock Valuation Chapter 6 Interest Rates and Bond Valuation  Instructor’s Resources Overview This chapter begins with a thorough discussion of interest rates, […]

Chapter 5: Time Value of Money 73 P5-37. Compounding frequency, time value, and effective annual rates LG 5; Intermediate a. Compounding frequency: AN  10, I  3%, PV  $2,500 BN  18, I  2%, PV  $50,000 […]

P5-14. Time value: Present value of a lump sum LG 2; Intermediate N  6, I  8%, FV  $100 Solve for PV  $63.02 P5-15. Personal finance: Time value and discount rates LG 2; Intermediate (3) N  […]

Chapter 5 Time Value of Money  Instructor’s Resources Overview This chapter introduces an important financial concept: the time value of money. The present value and future of a sum, as well as the present and future values of an annuity, […]

Chapter 4: Cash Flow and Financial Planning 49 P4-17. Pro forma balance sheet—basic LG 5; Intermediate a. Pro Forma Balance Sheet Leonard Industries December 31, 2016 Assets Current assets Pro Forma Balance Sheet Leonard Industries December 31, 2016 Liabilities and […]

P4-7. Cash receipts LG 4; Basic April May June July August Sales $65,000 $60,000 $70,000 $100,000 $100,000 P4-8. Cash disbursement schedule LG 4; Basic February March April May June July Sales $500,000 $500,000 $560,000 $610,000 $650,000 $650,00 0 Purchases (0.60) […]

P3-21. The relationship between financial leverage and profitability LG 4, 5; Challenge a. (1) total liabilities Debt ratio total assets = Pelican Timberland $1,000,000 Debt ratio 0.10 10% $10,000,000 $5,000,000 Debt ratio 0.50 50% $10,000,000 = = = = = […]

P3-5. Calculation of EPS and retained earnings LG 1; Intermediate a. Earnings per share: Net profit before taxes $436,000 Less: Taxes at 40% 174,400 Net profit after tax $261,600 Less: Preferred stock dividends 64,000 Earnings available to common stockholders $197,600 […]

Part 2 Financial Tools Chapters in This Part Chapter 3 Financial Statements and Ratio Analysis Chapter 4 Cash Flow and Financial Planning Chapter 5 Time Value of Money Chapter 3 Financial Statements and Ratio Analysis  Instructor’s Resources Overview This chapter […]

Chapter 2: The Financial Market Environment 13 Chapter 2 The Financial Market Environment  Instructor’s Resources Overview Money and capital markets and their major components are introduced in this chapter. Firms need to raise capital in order to survive. Financial institutions […]

Part 1 Introduction to Managerial Finance Chapters in This Part Chapter 1 The Role of Managerial Finance Chapter 2 The Financial Market Environment Chapter 1 The Role of Managerial Finance  Instructor’s Resources Overview This chapter introduces the students to the […]

Chapter 19 International Managerial Finance    145 Chapter 19 International Managerial Finance  Instructor’s Resources Overview In today’s global business environment, the financial manager must also be aware of the international aspects of finance. A variety of international finance topics are presented […]

P18-6. Personal finance: Divestitures LG 3; Easy P18-7. Ratio of exchange and EPS LG 3; Intermediate a. Number of additional shares needed 1.8  4,000 7,200 EPS of merged firm $28,000 ¸ (20,000  7,200) $1.029 EPS of Marla’s Cafe […]

128  Gitman/Zutter • Principles of Managerial Finance,  Fourteenth Edition Chapter 18 Mergers, LBOs, Divestitures, and Business Failure  Instructor’s Resources Overview This chapter covers the fundamentals of mergers, leveraged buyouts (LBOs), and divestitures, as well as methods for reorganizing or liquidating a firm […]

P17-5. Lease versus purchase LG 2; Challenge a. Lease Purchase Year Loan Payment (1) Main- tenance (2) Depre- ciation (3) Interest at 14% (4) Total Deductions (2  3  4) (5) Tax Shields [(0.40)  (5)] (6) After-Tax Cash […]

Part 8 Special Topics in Managerial Finance Chapters in This Part Chapter 17 Hybrid and Derivative Securities Chapter 18 Mergers, LBOs, Divestitures, and Business Failure Chapter 19 International Managerial Finance Integrative Case 8: Organic Solutions © 2015 Pearson Education, Inc. […]

P16-15. Cost of commercial paper LG 4; Intermediate a. $1,000,000 $978,000 Effective 90-day rate = 2.25% $978,000 –= Effective annual rate  (1  0.0225)365/90  1  9.44% b. Effective 90-day rate with transaction costs: P16-16. Accounts receivable as […]

Chapter 16 Current Liabilities Management Instructor’s Resources  Overview This chapter introduces the fundamentals and describes the interrelationship of net working capital, profitability, and risk in managing the firm’s current liability accounts. The management of current liabilities requires choosing appropriate levels […]

P15-3. Multiple changes in CCC LG 2; Intermediate a. AAI 365  6 times inventory  61 days b. OC 56 days  35 days 91 days CCC 91 days  40 days 51 days Resources needed $8,219  51 […]

Part 7 Short-Term Financial Decisions Chapters in This Part Chapter 15 Working Capital and Current Assets Management Chapter 16 Current Liabilities Management Integrative Case 7: Casa de Diseño © 2015 Pearson Education, Inc. Chapter 15 Working Capital and Current Assets […]

P14-13. Stock split—firm LG 6; Intermediate a. CS  $1,800,000 (1,200,000 shares @ $1.50 par) P14-14. Stock splits LG 6; Easy a. 400  2  800 shares will be owned by Nathan after the split. b. $75.14  2 […]

Chapter 14 Payout Policy Instructor’s Resources  Overview Chapter 14 concentrates on the payout decision from the viewpoint of both the firm and the investors. The types of payout policies, forms of dividends, and their possible effects on the value of […]

P13-23. EBIT-EPS and preferred stock LG 5: Intermediate a. Structure A Structure B EBIT $30,000 $50,000 $30,000 $50,000 Less: Interest 12,000 12,000 7,500 7,500 Net profits before taxes $18,000 $38,000 $22,500 $42,500 Less: Taxes 7,200 15,200 9,000 17,000 Net profit […]

P13-6. Breakeven point—changing costs/revenues LG 1; Intermediate a. Q  F  (P  VC)Q  $40,000  ($10  $8.00)  20,000 books b. Q  $44,000  ($10 − $8.00)  22,000 books c. Q  $40,000  […]

Chapter 13 Leverage and Capital Structure  Instructor’s Resources Overview This chapter introduces the student to the concepts of operating and financial leverage and the associated business and financial risks. As a prerequisite to operating leverage, breakeven analysis is presented through […]

P12-12. Risk classes and RADR LG 4; Basic a. Project X Project Y CF0  −$235,000, CF1  $50,000, CF2  $60,000, CF3  $70,000, CF4  $80,000, CF5  $90,000 Set I  13% Solve for NPV  $2,663.99 […]

Chapter 12 Risk and Refinements in Capital Budgeting  Instructor’s Resources Overview Chapters 10 and 11 developed the major decision-making aspects of capital budgeting. Cash flows and budgeting models have been integrated and discussed in providing the principles of capital budgeting. […]

P11-27. Integrative—determining relevant cash flows LG 3, 4, 5, 6; Challenge a. Initial Investment A B Installed cost of new asset *Book value of old asset: [1  (0.20  0.32  0.19)]  ($32,000)  $9,280 © 2015 Pearson […]

P11-15. Depreciation LG 5; Basic Depreciation Schedule Year Depreciation Expense 1 $68,000 0.20 $13,600 P11-16. Incremental operating cash inflows LG 5; Intermediate a. Incremental profits before depreciation and tax $1,200,000  $480,000 $720,000 each year b. Year (1) (2) (3) […]

Chapter 11 Capital Budgeting Cash Flows Instructor’s Resources  Overview This chapter expands upon the capital budgeting techniques presented in the last chapter (Chapter 10). Shareholder wealth maximization relies upon selection of projects that have positive net present values. The most […]

Project B c. Data for NPV Profiles NPV Discount Rate A B 0% $80,000 $35,000 12% $15,238 $9,161 15% — $ 4,177 16% 0 — 18% — 0 CF0  $85,000; CF1  $40,000; CF2  $35,000; CF3  $30,000 […]

P10-10. NPV—mutually exclusive projects LG 3; Intermediate a. and b. Press A c. Ranking—using NPV as criterion Rank Press NPV 1 C $15,043.89 2 B 2,584.34 3 A 4,228.21 d. Profitability Indexes Profitability Index  S Present Value Cash Inflows […]

Part 5 Long-Term Investment Decisions Chapters in This Part Chapter 10 Capital Budgeting Techniques Chapter 11 Capital Budgeting Cash Flows Chapter 12 Risk and Refinements in Capital Budgeting Integrative Case 5: Lasting Impressions Company Chapter 10 Capital Budgeting Techniques nInstructor’s […]

P9-13. WACC—book weights LG 6; Basic a. Type of Capital Book Value Weight Cost Weighted Cost Long-term debt $700,000 0.500 5.3% 2.650% b. The WACC is the rate of return that the firm must receive on long-term projects to maintain […]

Chapter 9 The Cost of Capital Instructor’s Resources  Overview This chapter introduces the student to an important financial concept, the cost of capital. The mechanics of computing the sources of capital debt, preferred stock, common stock, and retained earnings are […]