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Instructors Manual Contents Preface Alternative Formats for the Introductory Course v Contents of the Instructor’s Manual v Integrated Cases and Lecture Presentation Software v Electronic Slide Show vi Comprehensive/Spreadsheet Problems vii Spreadsheet Models vii World Wide Web Site vii NewsWire: Finance in the News viii Study Guide viii Test Bank viii Technology Supplement ix Instructor’s Resource CD-ROM ix Ordering Ancillary Materials ix Conclusion x Course Syllabus xi Course Schedule xv Answers to End-of-Chapter Problems xvii Chapter 1 An Overview of Financial Management 1 Chapter 2 Time Value of Money 7 Chapter 3 Financial Statements, Cash Flow, and Taxes 49 Chapter 4 Analysis of Financial Statements 73 Chapter 5 Financial Markets and Institutions 103 Chapter 6 Interest Rates 117 Chapter 7 Bonds and Their Valuation 141 Chapter 8 Risk and Rates of Return 179 Chapter 9 Stocks and Their Valuation 213 Chapter 10 The Cost of Capital 243 Preface iii Chapter 11 The Basics of Capital Budgeting 265 Chapter 12 Cash Flow Estimation and Risk Analysis 303 Chapter 13 Other Topics in Capital Budgeting 341 Chapter 14 Capital Structure and Leverage 363 Chapter 15 Distributions to Shareholders: Dividends and Share Repurchases 399 Chapter 16 Working Capital Management 425 Chapter 17 Financial Planning and Forecasting 453 Chapter 18 Derivatives and Risk Management 475 Chapter 19 Multinational Financial Management 493 Chapter 20 Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles 523 Chapter 21 Mergers and Acquisitions 553 iv Preface Preface This preface explains how we have used Fundamentals of Financial Management, Eleventh Edition, and it then describes the instructional aids contained in the Instructor’s Manual or available separately from South- Western. 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 Fundamentals has been used at Florida and elsewhere. Fundamentals was designed for use in the introductory undergraduate finance course. This course is typically taught in one term, although some schools cover the material in two terms. At Florida, we require a one- semester, 4-credit hour course that has approximately 58 fifty-minute class periods. Our syllabus is provided later in this manual. 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 quantitative end-of chapter problems, except for the comprehensive problems. Appendix B, at the end of the text, provides quantitative solutions only to even-numbered problems. So for those instructors who wish to provide solutions to all quantitative problems, we provide this at the end of the preface. We have organized the Instructor’s Manual by chapter for your convenience. Integrated Cases and Lecture Presentation Software One of the most important pedagogic aids in Fundamentals is the set of ―Integrated Cases‖ provided with the end-of-chapter problems. In past editions of Fundamentals, these cases were called ―Integrative Problems,‖ but since they are actually mini cases, we changed the names. Whatever they are called, the integrated cases have been extremely well received by instructors and students alike. They provide an excellent vehicle for covering the key elements of each chapter in a coherent, systematic, and interesting manner. They are equally effective in small, discussion-oriented classes or in larger lecture-based classes. The cases are coordinated with the opening vignettes whose purpose is to motivate students to focus on the chapter. For example, each vignette provides background material on a company and provides a lead- in to the chapter. The case then covers the key elements of the chapter, and its solution is set up in a lecture format, with more detail than our normal end-of-chapter problem solutions. Preface v Since the cases are highly structured, one might think that they seriously reduce instructors’ flexibility. However, this is less true than you would imagine, because the cases are written in a manner that makes it easy to delete sections, to add new material, and to provide alternative and/or supplemental examples. The cases are good lecture vehicles for three reasons. First, they reduce instructors’ preparation time—we spent a tremendous amount of time producing carefully structured ―lecture problems‖ so that instructors will not have to. Second, students like lectures 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. Since our surveys indicate that more and more instructors are basing their lectures on the integrated cases, we developed a set of electronic 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 electronic slides. Both transparencies and the blackboard can be used effectively, but all of the instructors who participated in debugging the slide show concluded that it dominates the older technologies. Electronic slides are easier to use than transparencies (and far easier than the blackboard), crisper, more colorful, and more complete, and they capture the attention of students brought up in the TV generation. We originally thought the slides would be too inflexible, but that was not the case—it is extremely easy to break away from the slides and use the blackboard to clarify examples, to make additional points, and the like. All in all, the electronic slides really are a great addition to our ancillary package, and all instructors would be well advised to get a set, insert the CD-ROM, and run a quick slide show to get an idea of just how useful they can be. 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. 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 continually update their lecture notes. To illustrate, at Florida and elsewhere, Ph.D. students who were under heavy pressure to complete dissertations or other research have been able to teach the introductory undergraduate financial management course for the first time and get excellent student evaluations with relatively little preparation. We do not recommend teaching without adequate preparation, but we do believe that almost anyone can use the Integrated Cases for lectures and obtain good classroom results without an inordinate amount of preparation time. Electronic Slide Show As mentioned earlier, a set of electronic slides has been developed. Previously, we used the Integrated Cases, transparencies, and a black board as a complete lecture system, and with good results. But just as new computer and communication technologies are altering the world of finance, so are these advances influencing the way we learn and teach. Thus, along with Larry Wolken, we created a computerized ―slide show‖ lecture presentation that matches the Integrated Case solutions. In addition, Christopher Buzzard has made improvements to the slides—adding even more current data and pictures to them. The slides are developed in ―layers,‖ which makes them more effective than static slides and more similar to a blackboard presentation, but neater. For example, we can create a slide that begins with an equation that shows how historical rates of return are calculated, then brings in illustrative data, then plots the data on a graph, and vi Preface then uses the graph to explain the concept of a beta coefficient. Color-coding is used to differentiate the stock and market returns, which helps keep things clear and in focus. On simpler slides, one can click down a list, much like moving the piece of tablet paper used to conceal parts of a transparency until you want people to see it. But clicking is easier, static electricity is never a problem, and things are always in alignment and never upside down or backwards! In addition, new this year, are Turning Point slides. These slides are meant to make an instructor’s lectures more interactive. A question can be posed to the class, students are given time to respond with their student response units, and then with a click of the mouse the answer is given. Instructors can add these slides to the ―main‖ slides for class participation as they wish. The slide show is available in Microsoft PowerPoint®. Any instructors with access to PowerPoint will have the ability to customize the Lecture Presentation Software. Comprehensive/Spreadsheet Problems We have added the Comprehensive/Spreadsheet Problem to all chapters, except Chapters 1 and 5. The purpose of this section is to provide to those instructors who use the Integrated Case for their lectures with another problem that integrates chapter concepts. In addition, for those instructors who want to emphasize financial modeling, many of these problems can be used. Excel spreadsheet models have also been developed for them. Spreadsheet Models Spreadsheet programs such as Microsoft Excel® are ideally suited for analyzing many financial issues, and a knowledge of spreadsheets is rapidly becoming essential for people in business. Therefore, we ―modernized‖ the book by indicating how spreadsheets are used to deal with the issues discussed in the text. We developed a spreadsheet model for each chapter in the book except Chapters 1 and 5. These models show exactly how the decisions dealt with 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 the particular chapter. Excel spreadsheet models have also been added for the Integrated Cases and the Comprehensive/Spreadsheet problems. The models are contained on the instructor’s resource CD-ROM. They are also accessible from the South- Western Web site. The models are not necessary for going through the book and learning the essential financial concepts. However, if a student wants to learn how these concepts are implemented in the real world, and thus get a leg up in the job market, the disk and the models will be a big help. And, of course if an instructor wants to build spreadsheet analysis into the course, our models will provide an excellent platform. World Wide Web Site Designed to be both a teaching and learning tool, the Fundamentals Web site, at http://brigham .swlearning.com, has separate areas for instructors and students. In the instructor’s password-protected area, a number of the Fundamentals ancillaries can be downloaded, and instructors also have access to NewsWire: Finance in the News articles, chapter-specific finance links, data files for companies featured in opening vignettes, spreadsheet problems, online quizzing, and many more financial resources. Preface vii NewsWire: Finance in the News One of the problems inherent in textbooks is keeping them current in a constantly changing world. Fortunately, the advent of the World Wide Web can help us keep up to date. Adopters of Fundamentals will have access to a password-protected portion of the South-Western Finance Web site, where they will be provided with summaries of recent articles in The Wall Street Journal, BusinessWeek, or other major business publications, along with discussion questions and references to the text. These summaries, written by Emery Trahan and Paul Bolster of Northeastern University, facilitate incorporating late-breaking news into classroom discussions. One can also use the accompanying questions for quizzes and/or exams. Study Guide We have found, in common with reviewers, that many students need a supplement (1) that contains a summarized treatment of the main concepts of each chapter, and (2) that gives students an opportunity to apply the concepts to relatively short, focused problems with immediate feedback on the accuracy of their solutions. Thus, a Study Guide has been prepared to accompany Fundamentals. The Study Guide contains learning objectives, an overview, and an outline of each chapter, plus over 400 questions and 140 numerical problems in multiple-choice format with answers and solutions. The Study Guide is useful both to help students get the ―big picture‖ prior to reading the text and later as a self-test tool. The Study Guide can be ordered concurrently with the textbook, thus making it available at bookstores for purchase by students who believe it would be beneficial. (We make the Study Guide available, emphasize that it is optional, and find that about two-thirds of our students use it. Feedback from users is very positive.) Test Bank The Test Bank that accompanies Fundamentals is available (1) in bound-book form, (2) as self-contained computer software (the standard computerized test bank), and (3) as Microsoft Word files. New this year, the Test Bank has been divided into two sections. The first section consists of new questions which have been carefully reviewed and revised and new problems for which algorithms are available to create numerous additional problems for use in large classes to make up multiple exams of the same difficulty level or to use for quizzes, homework, etc. The second section consists of our older problems that do not have algorithms. 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 hardcopy test bank is constructed such that questions and problems can be reproduced directly, after using white-out to remove the correct answer and level of difficulty notation. The computerized versions of the test bank allow 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 over and over again. The Microsoft Word version uses an endnote format that makes it very easy to create and reorder exams since (1) the questions and problems selected are automatically renumbered as you create an exam, and (2) the solutions to the problems selected are also ―pulled out,‖ renumbered, and made available for review and printing. We personally resisted using multiple-choice tests for years, but due to our own growing class sizes (and pressure from adopters), we decided to assemble the best possible set of objective questions. Now that it is done, we are glad that we did, because we have become convinced that relatively short, objective questions really are the best way to construct and fairly grade an exam that covers a large amount of viii Preface material and is given to a large number of students. Incidentally, it is very easy to make a set of short- answer essay questions or ―regular‖ exam problems by removing the set of possible answers from selected questions and problems. We should also note that one of the biggest problems with multiple-choice exams is that the students themselves resist being tested in this manner. We sought and obtained the help of education (as opposed to finance) professionals, and the Test Bank now provides some useful information, including procedures for reducing the luck element and for setting curves, which improve the process and help justify it to students. For additional information regarding the Test Bank, read the preface provided in the Test Bank. Technology Supplement Another ancillary, called the Technology Supplement, contains calculator, spreadsheet, and presentation software tutorials. We found that many of our students were having trouble with the rather huge manuals now supplied with financial calculators. Those manuals have lots of useful information, but not all of it is necessary for the introductory course, and the size of the manuals was keeping students from getting started with their calculators. Therefore, we decided to write a 10- to 15-page set of instructions that would tell our students what they needed for the course. Eventually, we produced similar instructions for the four leading calculators (3 HPs and a TI); those instructions are contained in the Technology Supplement. We also decided to make available spreadsheet tutorials that students can use to learn the basics of spreadsheet modeling. Although the spreadsheet tutorials are based on Excel, the command structure of other spreadsheet software packages is sufficiently similar to permit the tutorials to be used with whatever software is available to students. These tutorials provide students with an introduction to spreadsheet modeling and its usefulness in financial management decision making. Then, students can learn on their own the skills necessary to create and/or use spreadsheet models. In addition to the calculator and spreadsheet tutorials, we’ve added a PowerPoint tutorial. This tutorial covers all the basics, and it will aid both students who must make presentations with PowerPoint and instructors who want to make slides for their lectures. Instructor’s Resource CD-ROM This innovative instructor’s resource system includes electronic versions of the Instructor’s Manual, Word Test Bank, chapter spreadsheet models, solutions to the end-of-chapter spreadsheet problems, and PowerPoint presentations. It is laid out so as to maximize accessibility and minimize search time. Ordering Ancillary Materials Ancillary materials may be ordered by adopters through their local South-Western sales representative or directly by calling Thomson Learning Academic Resource Center at 1-800-423-0563. The Study Guide, which is purchased by students from bookstores, can be ordered through your local bookstore. South-Western will provide complimentary supplements or supplement packages to those adopters qualified under our adoption policy. Please contact your sales representative to learn how you may qualify. If as an Preface ix adopter or potential user you receive supplements you do not need, please return it 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 the manual will be greatly appreciated. Address your correspondence to us at the address below. Eugene F. Brigham Joel F. Houston 4723 NW 53rd Avenue, Suite A Gainesville, FL 32606 e-mail address: Fundamentals@joelhouston.com December 2005 x Preface Syllabus for Finance 3403 Finance 3403 Course Outline Spring 2006 Instructor: Joel F. Houston 321A 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, Fundamentals Eleventh 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 trouble getting help with another calculator. The HP-17BII does more and costs more. Some argue that the 17BII is easier to use once you get used to it. Also, some students argue that the 17BII is better to have in some of the upper level Finance classes. Again, however, everything in this class can be done with a 10BII. As you will soon see, the ability to use a financial calculator is critical to success in the class. You are responsible for learning how to operate your financial calculator—and it is crucial that you are familiar with your calculator by the time we begin Chapter 2. Calculator tutorials for both the 10BII and 17BII are included in the Course Packet. Makes sure that you bring your calculator to class. Students may not share calculators on exams. Please be sure to check your batteries before exams. Optional materials Study Guide for Fundamentals of Financial Management, Fundamentals Eleventh Edition. This workbook contains learning objectives and outlines of the chapter plus questions and problems with detailed answers. It is useful when studying, especially when preparing for exams, but it is not required. 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: 1. To introduce you to the world of finance. Anyone involved with the management of a business needs to have at least some minimal knowledge of business finance. 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 events in Finance and will provide a solid framework for any subsequent courses you may take in Finance. Hopefully, by the end of the semester you will want to take additional classes in Finance! 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 assigned chapters and having some familiarity with them before class will greatly assist your understanding of the lecture. After the lecture, you should study your notes and work relevant problems from the end of the chapter and sample exam questions. 2. Throughout the semester we will also have a number of review sessions. These review sessions will take place during the regularly scheduled class periods, and will generally be offered by the head teaching assistant (TA). I will generally conduct the review sessions prior to each of the examinations. You will find that the review sessions are much more helpful if you keep up with the assigned reading, and make an effort to work the relevant problems. 3. There are a number of 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 study the text, your notes, and the problems, and then ask the TAs for help in clearing up any questions you might have. The head TA has also established an e-mail address for the course: FIN3403@CBA.UFL.EDU. Students may use this forum to ask administrative questions about the course, or to provide any comments they have about the class. This forum is not appropriate for answering long and detailed questions about the course material—for those questions you should see the TAs in person. You may think that your questions are ―too dumb to ask,‖ but they aren’t! Finance covers some tough material, and most students have trouble with at least some of it. The TAs have all gone xii Preface through it recently, and they know what you are up against. They are also really nice people who want very much to help you, so use them! (b) Tapes of the lectures will be maintained on file in the Media Center for one week following the original presentation. Tapes can also be purchased from University Book and Supply. 4. There is also a home page for Finance 3403 on the World Wide Web. The address is http://www.cba.ufl.edu/classes/fin3403/index.html. The class Web page will include the course outline, office hours schedules, class examples, and exam solutions. As time goes by, the resources available on the class Web page will expand, so it is worth checking it from time to time. 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: Tuesday February 7, 7:00-9:00 P.M. Second Midterm: Monday March 20, 7:00-9:00 P.M. Final Exam: Tuesday May 2, 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: Total Score = (1st Exam Score) + (2nd Exam Score) + (Final Exam Score). 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. Therefore, if the curve was set such that you needed 17 or higher to get an A on the first exam, 16 or higher to get an A on the second exam, and 17 or higher to get an A on the final, the cutoff for an A in the course would be 50 (17 + 16 + 17). In this hypothetical example, if your total score is 50 points or higher you would earn an A in the class. Obviously, the actual cutoff for an A will depend on the curves set for the individual examinations. 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 Preface xiii make it up the following term. If you do not have a valid excuse for missing an exam, it will count as a zero. In order 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). The exams will all be cumulative. Most of the questions on each exam will be taken from chapters covered since the last exam, but some will come from earlier chapters. I will tell you several days before the exam, how many questions will come from each chapter. In general, the coverage will reflect the amount of time spent in class on the different chapters. For the exams you will be allowed to bring in a financial calculator, and an 8½ by 11 sheet of paper on which you can write, type, or copy anything that you like (yes you can write on both sides!) Included with the test will also be sheets that summarize the major formulas used in the text chapters. No other materials may be used during the exam. The exams will all be multiple choice. Each will have 10 conceptual questions and 10 numerical problems, for a total of 20 questions. Since the exams are multiple choice, you will receive no partial credit. This lowers scores considerably from what they would be if partial credit were given. Thus, if you get 50% correct, this does not mean that you know only 50% of the material—you probably know a lot more. Therefore, we curve the exams, and only the curved grade is meaningful. xiv Preface Course Schedule Spring 2006 This schedule is extremely tentative, and subject to change. Any variations will be announced in class. Jan 9 Introduction/Chapter 1: An Overview of Financial Management Jan 10 Chapter 2: Time Value of Money Jan 11 Chapter 2: Time Value of Money Jan 12 Chapter 2: Time Value of Money Jan 16 MARTIN LUTHER KING DAY (NO CLASS) Jan 17 Chapter 2: Time Value of Money Jan 18 Chapter 3: Financial Statements, Cash Flow, and Taxes Jan 19 Chapter 3: Financial Statements, Cash Flow, and Taxes Jan 23 Chapter 4: Analysis of Financial Statements Jan 24 Chapter 4: Analysis of Financial Statements Jan 25 Chapter 4: Analysis of Financial Statements Jan 26 Chapter 5: Financial Markets and Institutions Jan 30 Chapter 6: Interest Rates Jan 31 Chapter 7: Bonds and Their Valuation Feb 1 Chapter 7: Bonds and Their Valuation Feb 2 Chapter 7: Bonds and Their Valuation Feb 6 Review Feb 7 EXAM (NO CLASS) Feb 8 Chapter 8: Risk and Rates of Return Feb 9 Chapter 8: Risk and Rates of Return Feb 13 Chapter 8: Risk and Rates of Return Feb 14 Chapter 9: Stocks and Their Valuation Feb 15 Chapter 9: Stocks and Their Valuation Feb 16 Chapter 9: Stocks and Their Valuation Feb 20 Chapter 10: The Cost of Capital Feb 21 Chapter 10: The Cost of Capital Feb 22 Chapter 10: The Cost of Capital Feb 23 Chapter 11: The Basics of Capital Budgeting Feb 27 Chapter 11: The Basics of Capital Budgeting Feb 28 Chapter 11: The Basics of Capital Budgeting Mar 1 Chapter 12: Cash Flow Estimation and Risk Analysis Mar 2 Chapter 12: Cash Flow Estimation and Risk Analysis Preface xv Mar 6 Chapter 12: Cash Flow Estimation and Risk Analysis Mar 7 Chapter 13: Other Topics in Capital Budgeting Mar 8 Chapter 13: Other Topics in Capital Budgeting Mar 9 Review MARCH 11-18 SPRING BREAK Mar 20 EXAM (NO CLASS) Mar 21 Chapter 14: Capital Structure and Leverage Mar 22 Chapter 14: Capital Structure and Leverage Mar 23 Chapter 14: Capital Structure and Leverage Mar 27 Chapter 15: Distributions to Shareholders Mar 28 Chapter 15: Distributions to Shareholders Mar 29 Chapter 15: Distributions to Shareholders Mar 30 Chapter 16: Working Capital Management Apr 3 Chapter 16: Working Capital Management Apr 4 Chapter 17: Financial Planning and Forecasting Apr 5 Chapter 17: Financial Planning and Forecasting Apr 6 Chapter 17: Financial Planning and Forecasting Apr 10 Review Apr 11 Chapter 18: Derivatives and Risk Management Apr 12 Chapter 18: Derivatives and Risk Management Apr 13 Chapter 19: Multinational Financial Management Apr 17 Chapter 19: Multinational Financial Management Apr 18 Chapter 19: Multinational Financial Management Apr 19 Chapter 20: Hybrid Financing Apr 20 Chapter 20: Hybrid Financing Apr 24 Chapter 21: Mergers and Acquisitions Apr 25 Chapter 21: Mergers and Acquisitions Apr 26 Review May 2 FINAL EXAM xvi Preface 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 the problems may have more than one correct solution, depending on what assumptions are made in working the problem. Finally, many of the problems involve some verbal discussion as well as numerical calculations; this verbal material is not presented here. 2-1 FV5 = $16,105.10. 2-24 a. $279.20. 2-2 PV = $1,292.10. b. $276.84. 2-3 I/YR = 8.01%. c. $443.72. 2-4 N = 11.01 years. 2-25 a. $5,272.32. 2-5 N = 11 years. b. $5,374.07. 2-6 FVA5 = $1,725.22; FVA5 Due = $1,845.99. 2-26 $17,290.89; $19,734.26. 2-7 PV = $923.98; FV = $1,466.24. 2-27 a. Bank A = 4%. 2-8 PMT = $444.89; EAR = 12.6825%. 2-28 INOM = 7.8771%. 2-9 a. $530. 2-29 3%. d. $445. 2-30 a. E = 63.74 yrs.; K = 41.04 yrs. 2-10 a. $895.42. b. $35,825.33. b. $1,552.92. 2-31 a. $35,459.51. c. $279.20. b. $27,232.49. d. $499.99; $867.13. 2-32 $496.11. 2-11 a. 14.87%. 2-33 $17,659.50. 2-12 b. 7%. 2-34 a. PMT = $10,052.87. c. 9%. b. Yr 3: Int/Pymt = 9.09%; Princ/Pymt = d. 15%. 90.91%. 2-13 a. 10.24 years. 2-35 a. PMT = $34,294.65. c. 4.19 years. b. PMT = $7,252.78. 2-14 a. $6,374.97. c. Balloon PMT = $94,189.69. d(1). $7,012.47. 2-36 a. $5,308.12. 2-15 a. $2,457.83. b. $4,877.09. c. $2,000. 2-37 a. 50 mos. d(1). $2,703.61. b. 13 mos. 2-16 PV7% = $1,428.57; PV14% = $714.29. c. $112.38. 2-17 9%. 2-38 $309,015. 2-18 a. Stream A: $1,251.25. 2-39 $36,950. 2-19 a. $423,504.48. 2-40 $9,385. b. $681,537.69. c(2). $84,550.80. 3-1 $1,000,000. 2-20 Contract 2; PV = $10,717,847.14. 3-2 $2,500,000. 2-21 a. 30-year payment plan; PV = $68,249,727. 3-3 $3,600,000. b. 10-year payment plan; PV = $63,745,773. 3-4 $20,000,000. c. Lump sum; PV = $61,000,000. 3-5 a, possibly c. 2-22 a. $802.43. 3-6 $89,100,000. c. $984.88. 3-7 a. $50,000. 2-23 a. $881.17. b. $115,000. b. $895.42. 3-8 NI = $450,000; NCF = $650,000; OCF = c. $903.06. $650,000. d. $908.35. 3-9 10,500,000 shares. e. $910.97. Preface xvii 3-10 a. $2,400,000,000. 6-7 5.5%. b. $4,500,000,000. 6-8 8.5%. c. $5,400,000,000. 6-9 6.8%. d. $1,100,000,000. 6-10 6.0%. 3-11 $12,681,482. 6-11 1.55%. 3-12 a. $592 million. 6-12 0.35%. b. RE04 = $1,374 million. 6-13 1.775%. c. $1,600 million. 6-14 a. r1 in Year 2 = 6%. d. $15 million. b. I1 = 2%; I2 = 5%. e. $620 million. 6-15 r1 in Year 2 = 9%; I2 = 7%. 3-13 a. $90,000,000. 6-16 14%. b. NOWC05 = $192,000,000; NOWC04 = 6-17 7.2%. $210,000,000. 6-18 a. r1 = 9.20%; r5 = 7.20%. c. OC04 = $460,000,000; OC05 = $492,000,000. 6-19 a. 8.20%. d. FCF = $58,000,000. b. 10.20%. 3-14 a. $2,400,000. c. r5 = 10.70%. b. NI = 0; NCF = $3,000,000. c. NI = $1,350,000; NCF = $2,100,000. 7-1 $935.82. 7-2 a. 7.11%. 4-1 AR = $800,000. b. 7.22%. 4-2 D/A = 58.33%. c. $988.46. 4-3 TATO = 5; EM = 1.5. 7-3 $1,028.60. 4-4 M/B = 4.2667. 7-4 YTM = 6.62%; YTC = 6.49%; most likely yield 4-5 P/E = 12.0. = 6.49%. 4-6 ROE = 8%. 7-5 a. VL at 5% = $1,518.98; VL at 8% = $1,171.19; 4-7 $112,500. VL at 12% = $863.78. 4-8 15.31%. 7-6 a. C0 = $1,012.79; Z0 = $693.04; C1 = $1,010.02; 4-9 $142.50. Z1 = $759.57; C2 = $1,006.98; Z2 = $832.49; 4-10 NI/S = 2%; D/A = 40%. C3 = $1,003.65; Z3 = $912.41; C4 = $1,000.00; 4-11 2.9867. Z4 = $1,000.00. 4-12 TIE = 2.25. 7-7 10-year, 10% coupon = 6.75%; 10-year zero = 4-13 TIE = 3.86. 9.75%; 5-year zero = 4.76%; 30-year zero = 4-14 ROE = 23.1%. 32.19%; $100 perpetuity = 14.29%. 4-15 ROE = +5.54%; QR = 1.2. 7-8 15.03%. 4-16 7.2%. 7-9 a. YTM at $829 ≈ 15%. 4-17 a. 7-10 a. YTM = 9.69%. 4-18 6.0. b. CY = 8.875%; CGY = 0.816%. 4-19 $262,500. 7-11 a. YTM = 10.37%; YTC = 10.15%; YTC. 4-20 $405,682. b. 10.91%. 4-21 $50. c. -0.54% (based on YTM); -0.76% (based on 4-22 A/P = $90,000; Inv = $90,000; FA = $138,000. YTC). 4-23 a. Current ratio = 1.98; DSO = 76.3 days; Total 7-12 a. YTM = 8%; YTC = 6.1%. assets turnover = 1.73; Debt ratio = 61.9%. 7-13 VB = $974.42; YTM = 8.64%. 4-24 a. TIE = 11; EBITDA coverage = 9.46; Profit 7-14 10.78%. margin = 3.40%; ROE = 8.57%. 7-15 a. 5 years. b. YTC = 6.47%. 6-1 b. Upward sloping yield curve. 7-16 $987.87. c. Inflation expected to increase. 7-17 $1,067.95. d. Borrow long term. 7-18 8.88%. 6-2 2.25%. 7-19 a. ABS = 6.3%; F = 8%. 6-3 6%; 6.33%. 7-20 a. 8.35%. 6-4 1.5%. b. 8.13%. 6-5 0.2%. 6-6 21.8%. xviii Preface 8-1 r = 11.40%; = 26.69%; CV = 2.34. ˆ 9-12 a(1). $9.50. 8-2 bp = 1.12. a(2). $13.33. 8-3 r = 10.9%. a(3). $21.00. 8-4 rM = 11%; r = 12.2%. a(4). $44.00. 8-5 a. b = 1. b(1). Undefined. b. r = 13%. b(2). -$48.00, which is nonsense. 8-6 ˆ a. r Y = 14%. 9-13 a. rC = 8.6%; rD = 5%. b. X = 12.20%. ˆ b. No; PC = $32.61. 8-7 bp = 0.7625; rp = 12.1%. ˆ 9-14 P = $27.32. 8-8 b = 1.33. 3 8-9 4.5%. 9-15 a. P0 = $32.14. 8-10 4.2%. b. P0 = $37.50. 8-11 r = 17.05%. c. P0 = $50.00. 8-12 rM – rRF = 4.375%. d. P0 = $78.28. 8-13 a. ri = 15.5%. 9-16 P0 = $19.89. b(1). rM = 15%; ri = 16.5%. 9-17 a. $713.33 million. c(1). ri = 18.1%. b. $527.89 million. 8-14 bN = 1.16. c. $42.79. 8-15 7.2%. 9-18 6.25%. 8-16 rp = 11.75%. 9-19 a. $2.10; $2.205; $2.31525. 8-17 1.7275. b. PV = $5.29. 8-18 a. $0.5 million. c. $24.72. d(2). 15%. d. $30.00. 8-19 a. CVX = 3.5; CVY = 2.0. e. $30.00 c. rX = 10.5%; rY = 12%. 9-20 a. P0 = $54.11; D1/P0 = 3.55%; CGY = 6.45%. d. Stock Y. 9-21 a. $24,112,308. e. rp = 10.875%. b. $321,000,000. 8-20 a. rA = 11.30%. c. $228,113,612. c. A = 20.8%; p = 20.1%. d. $16.81. 8-21 a. ri = 6% + (5%)bi. 9-22 $35.00. b. 15%. 9-23 a. New price = $44.26. c. Indifference rate = 16%. b. beta = 0.5107. 9-24 a. $2.01; $2.31; $2.66; $3.06; $3.52. 9-1 D1 = $1.6050; D3 = $1.8376; D5 = $2.0259. b. P0 = $39.43. ˆ c. D1/P0 2006 = 5.10%; CGY2006 = 6.9%; D1/P0 2011 9-2 P0 = $6.25. = 7.00%; CGY2011 = 5%. ˆ 9-3 P = $21.20; rs = 11.30%. 1 9-4 b. $37.80. 10-1 rd(1 – T) = 7.80%. c. $34.09. 10-2 rp = 8%. 9-5 $60. 10-3 rs = 13%. 9-6 rp = 8.33%. 10-4 rs = 15%; re = 16.11%. 9-7 a. 13.33%. 10-5 Projects A through E should be accepted. b. 10%. 10-6 a. rs = 16.3%. c. 8%. b. rs = 15.4%. d. 5.71%. c. rs = 16%. 9-8 a. $125. d. rs AVG = 15.9%. b. $83.33. 10-7 a. rs = 14.83%. 9-9 a. 10%. b. F = 10%. b. 10.38%. c. re = 15.81%. 9-10 $23.75. 10-8 rs = 16.51%; WACC = 12.79%. 9-11 $13.11. 10-9 WACC = 12.72%. 10-10 WACC = 11.4%. 10-11 wd = 20%. Preface xix 10-12 a. rs = 14.40%. 11-16 a. NPVA = $14,486,808; NPVB = $11,156,893; b. WACC = 10.62%. IRRA = 15.03%; IRRB = 22.26%. c. Project A. b. Crossover rate ≈ 12%. 10-13 re = 17.26%. 11-17 a. NPVA = $200.41; NPVB = $145.93. 10-14 11.94%. b. IRRA = 18.1%; IRRB = 24.0%. 10-15 a. g = 9.10%. c. MIRRA = 15.10%; MIRRB = 17.03%. b. Payout = 50.39%. f. MIRRA = 18.05%; MIRRB = 20.48%. 10-16 a. g = 8%. 11-18 a. No; PVOld = -$89,910.08; PVNew = - b. D1 = $2.81. $94,611.45. c. rs = 15.81%. b. $2,470.80. 10-17 a. g = 3%. c. 22.94%. b. EPS1 = $5.562. 11-19 b. NPV10% = -$99,174; NPV20% = $500,000. 10-18 a. rd = 7%; rp = 10.20%; rs = 15.72%. d. 9.54%; 22.87%. b. WACC = 13.86%. 11-20 $10,239.20. c. Projects 1 and 2 will be accepted. 11-21 MIRR = 10.93%. 10-19 a. Projects A, C, E, F, and H should be accepted. 11-22 $250.01. b. Projects A, F, and H should be accepted; $12 million. 12-1 a. $12,000,000. c. Projects A, C, F, and H should be accepted; 12-2 a. $2,600,000. $15 million. 12-3 $4,600,000. 10-20 a. rd(1 – T) = 5.4%; rs = 14.6%. 12-4 b. Accelerated method; $12,781.64. b. WACC = 10.92%. 12-5 E(NPV) = $3,000,000; NPV = $23.622 million; CV = 7.874. 11-1 NPV = $7,486.68. 12-6 a. -$178,000. 11-2 IRR = 16%. b. $52,440; $60,600; $40,200. 11-3 MIRR = 13.89%. c. $48,760. 11-4 4.34 years. d. NPV = -$19,549; Do not purchase. 11-5 DPP = 6.51 years. 12-7 b. -$126,000. 11-6 a. 5%: NPVA = $3.52; NPVB = $2.87. c. $42,518; $47,579; $34,926. 10%: NPVA = $0.58; NPVB = $1.04. d. $50,702. 15%: NPVA = -$1.91; NPVB = -$0.55. e. NPV = $10,841; Purchase. b. IRRA = 11.10%; IRRB = 13.18%. 12-8 a. Expected CFA = $6,750; Expected CFB = c. 5%: Choose A; 10%: Choose B; 15%: Do not $7,650; CVA = 0.0703. choose either one. b. NPVA = $10,036; NPVB = $11,624. 11-7 a. NPVA = $866.16; IRRA = 19.86%; MIRRA = 12-9 NPV5 = $2,211; NPV4 = -$2,081; NPV8 = 17.12%; PaybackA = 3 yrs; Discounted $13,329. Payback = 4.17 yrs; 12-10 a. NPV = $37,035.13. NPVB = $1,225.25; IRRB = 16.80%; MIRRB = b. +20%: $77,975.63; -20%: NPV = -$3,905.37. 15.51%; PaybackB = 3.21 yrs; Discounted c. E(NPV) = $34,800.21; NPV = $35,967.84; CV Payback = 4.58 yrs. = 1.03. 11-8 a. Without mitigation: NPV = $12.10 million; With mitigation: NPV = $5.70 million. 13-1 a. E(NPV) = -$446,998.50. 11-9 a. Without mitigation: NPV = $15.95 million; b. E(NPV) = $2,806,803.16. With mitigation: NPV = -$11.25 million. c. $3,253,801.66. 11-10 Project A; NPVA = $30.16. 13-2 a. Project B; NPVB = $2,679.46. 11-11 NPVS = $448.86; NPVL = $607.20; Accept b. Project A; NPVA = $3,773.65. Project L. c. Project A; EAAA = $1,190.48. 11-12 IRRL = 11.74%. 13-3 NPV190-3 = $20,070; NPV360-6 = $22,256. 11-13 MIRRX = 13.59%. 13-4 A; EAAA = $1,407.85. 11-14 a. HCC; PV of costs = -$805,009.87. 13-5 Projects A, B, C, and D; Optimal capital budget c. HCC; PV of costs = -$767,607.75. = $3,900000. LCC; PV of costs = -$686,627.14. 13-6 NPVA = $9.93 million. 11-15 a. IRRA = 20%; IRRB = 16.7%; Crossover rate ≈ 13-7 Machine B; Extended NPVB = $3.67 million. 16%. 13-8 EAAY = $7,433.12. xx Preface 13-9 Wait; NPV = $2,212,964. 15-7 a. $1.44. 13-10 No, NPV3 = $1,307.29. b. 3%. 13-11 a. Accept A, B, C, D, and E; Capital budget = c. $1.20. $5,250,000. d. 33⅓%. b. Accept A, B, D, and E; Capital budget = 15-8 a. 12%. $4,000,000. b. 18%. c. Accept B, C, D, E, F, and G; Capital budget = c. 6%; 18%. $6,000,000. d. 6%. 13-12 a. NPV = $4.6795 million. e. 28,800 new shares; $0.13 per share. b. No, NPV = $3.2083 million. 15-9 a(1). $3,960,000. c. 0. a(2). $4,800,000. 13-13 a. NPV = -$2,113,481.31. a(3). $9,360,000. b. NPV = $1,973,037.39. a(4). Regular = $3,960,000; Extra = $5,400,000. c. E(NPV) = -$70,221.96. c. 15%. d. E(NPV) = $832,947.27. d. 15%. e. $1,116,071.43. 16-1 103.41 days; 86.99 days; $400,000; $32,000. 14-1 QBE = 500,000. 16-2 73 days; 30 days; $1,178,082. 14-2 30% debt and 70% equity. 16-3 $1,205,479; 20.5%; 22.4%; 10.47%; bank debt. 14-3 a. E(EPSC) = $5.10. 16-4 a. 83 days. 14-4 bU = 1.0435. b. $356,250. 14-5 a. ROELL = 14.6%; ROEHL = 16.8%. c. 4.87. b. ROELL = 16.5%. 16-5 a. DSO = 28 days. 14-6 a(1). -$60,000. b. A/R = $70,000. b. QBE = 14,000. 16-6 a. 32 days. 14-7 No leverage: ROE = 10.5%; = 5.4%; CV = b. $288,000. 0.51; 60% leverage: ROE = 13.7%; = 13.5%; c. $45,000. CV = 0.99. d(1). 30. 14-8 rs = 17%. d(2). $378,000. 14-9 a. P0 = $25. 16-7 a. 57.33 days. b. P0 = $25.81. b(1). 2. 14-10 a. FCA = $80,000; VA = $4.80/unit; PA = b(2). 12%. $8.00/unit. c(1). 46.5 days. 14-11 a. 10.96%. c(2). 2.1262. b. 1.25. c(3). 12.76%. c. 1.086957. 16-8 a. ROET = 11.75%; ROEM = 10.80%; ROER = d. 14.13%. 9.16%. e. 10.76%. 16-9 b. $420,000. 14-12 a. EPSOld = $2.04; New: EPSD = $4.74; EPSS = c. $35,000. $3.27. 16-10 a. Oct. loan = $22,800. b. 339,750 units. c. QNew, Debt = 272,250 units. 17-1 AFN = $410,000. 14-13 Debt used: E(EPS) = $5.78; EPS = $1.05; E(TIE) 17-2 AFN = $610,000. = 3.49. 17-3 AFN = $200,000. Stock used: E(EPS) = $5.51; EPS = $0.85; 17-4 a. $133.50 million. E(TIE) = 6.00. b. 39.06%. 17-5 a. $5,555,555,556. 15-1 Payout = 55%. b. 30.6%. 15-2 P0 = $60. c. $13,600,000. 15-3 P0 = $40. 17-6 $67 million; 5.01. 15-4 D0 = $3.44. 17-7 $156 million. 15-5 $3,250,000. 17-8 a. $480,000. 15-6 Payout = 31.39%. b. $18,750. 17-9 ∆S = $68,965.52. Preface xxi 17-10 $34.338 million; 34.97 ≈ 35 days. 19-12 b. $1.6488. 17-11 $19.10625 million; 6.0451. 19-13 a. $2,772,003. 17-12 a. $2,500,000,000. b. $2,777,585. b. 24%. c. $3,333,333. c. $24,000,000. 19-14 +$250,000. 17-13 a. AFN = $128,783. 19-15 b. $19,865. b. 3.45%. 19-16 $468,837,209. 17-14 a. 33%. 19-17 a. $52.63; 20%. b. AFN = $2,549. b. 1.5785 SF per U.S. $. c. ROE = 13.06%. c. 41.54 Swiss francs; 16.92%. 18-1 a. $5.00. 20-1 55.6%; 50%. b. $2.00. 20-2 $196.36. 18-2 $27.00; $37.00. 20-3 CR = 25 shares. 18-3 a, b, and c. 20-4 a. D/AJ-H = 50%; D/AM-E = 67%. 18-4 $1.82. 20-5 a. PV cost of leasing = -$954,639; Lease 18-5 rd = 5.95%; $91,236. equipment. 18-6 b. Futures = +$4,180,346; Bond = -$2,203,701; 20-6 a. EV = -$3; EV = $0; EV = $4; EV = $49. Net = $1,976,645. d. 9%; $90. 18-7 a. $3.06; $4.29. 20-8 a. PV cost of owning = -$185,112; PV cost of b. 16.67%, 61.46%; -100%. leasing = -$187,534; Purchase loom. c. -16.67%; -100%; 63.40%. 20-9 b. Percent ownership: Original = 80%; Plan 1 = d. No; $30.00 and $27.00. 53%; Plans 2 and 3 = 57%. e. Yes; $37.50 and $37.50. c. EPS0 = $0.48; EPS1 = $0.60; EPS2 = $0.64; EPS3 = $0.86. 19-1 0.6667 pound per dollar. d. D/A0 = 73%; D/A1 = 13%; D/A2 = 13%; D/A3 19-2 27.2436 yen per shekel. = 48%. 19-3 1 yen = $0.00907. 19-4 1 euro = $0.68966 or $1 = 1.45 euros. 21-1 P0 = $37.04. 19-5 21-2 P0 = $43.48. Dollars per 1,000 Units of: 21-3 $37.04 to $43.48. Pounds Can. Dollars Euros Yen Pesos Kronas 21-4 a. 16.8%. $1,747.10 $820.60 $1,206.90 $8.97 $93.10 $128.10 b. V = $14.93 million. 19-7 6.49351 krones. 21-5 NPV = -$6,747.71; Do not purchase. 19-8 15 kronas per pound. 21-6 a. 14%. 19-10 rNOM-U.S. = 4.6%. b. TV = $1,143.4; V = $877.2. 19-11 117 pesos. xxii Preface