《财务管理双语习题解答》由会员分享，可在线阅读，更多相关《财务管理双语习题解答（167页珍藏版）》请在金锄头文库上搜索。
1、Chapter 1An Overview of Financial ManagementLEARNING OBJECTIVESAfter reading this chapter, students should be able to: Explain the career opportunities available within the three interrelatedareas of finance. Identify some of the forces that will affect financial management in thenew millennium. Des
2、cribe the advantages and disadvantages of alternative forms ofbusiness organization. Briefly explain the responsibilities of the financial staff within anorganization. State the primary goal in a publicly traded firm, and explain how socialresponsibility and business ethics fit in with that goal. De
3、fine an agency relationship, give some examples of potential agencyproblems, and identify possible solutions. Identify major factors that determine the price of a company7 s stock,including those that managers have control over and those that they donot. Discuss whether financial managers should con
4、centrate strictly on cashflow and ignore the impact of their decisions on EPS.LECTURE SUGGESTIONSChapter 1 covers some important concepts, and discussing them in class can beinteresting. However, students can read the chapter on their own, so it can beassigned but not covered in class.We generally s
5、pend much of the first day going over the syllabus anddiscussing grading and other mechanics relating to the course. To the extentthat time permits, we talk about the topics that will be covered in the courseand the structure of the book. We also discuss briefly the fact that it isassumed that manag
6、ers try to maximize stock prices, but that they may haveother goals, hence that it is useful to tie executive compensation tostockholder-oriented performance measures. If time permits, we think itz sworthwhile to spend at least a full day on the chapter. If not, we askstudents to read it on their ow
7、n, and to keep them honest, we ask one or twoquestions about the material on the first mid-term exam.One point we emphasize in the first class is that students should get acopy of Blueprints and a financial calculator immediately, and bring both toclass regularly. We also put copies of the various v
8、ersions of our BriefCalculator Manual,“ which in about 12 pages explains how to use the mostpopular calculators, in the copy center. We want students to start learning touse their calculators early, because in the past we have found that manystudents wait to learn to use their calculators at the sam
9、e time they aretrying to understand time value of money concepts. If students learn how touse the calculator early, they are less likely to get confused by time valueconcepts .We are often asked what calculator students should buy. If they alreadyhave a financial calculator that can find 工RRs, we te
10、ll them that it will do,but if they do not have one, we recommend either the HP-10B or 17B. Please seethe Lecture Suggestions“ for Chapter 7 for more on calculators.DAYS ON CHAPTER: 1 OF 58 DAYS (50-minute periods)Lecture Suggestions: 1 - 2ANSWERS TO END-OF-CHAPTER QUESTIONS1-1 The three principal f
11、orms of business organization are soleproprietorship, partnership, and corporation. The advantages of thefirst two include the ease and low cost of formation. The advantages ofthe corporation include limited liability, indefinite life, ease ofownership transfer, and access to capital markets.The dis
12、advantages of a sole proprietorship are (1) difficulty inobtaining large sums of capital; (2) unlimited personal liability forbusiness debts; and (3) limited life. The disadvantages of a partnershipare (1) unlimited liability (2) limited life, (3) difficulty oftransferring ownership, and (4) difficu
13、lty of raising large amounts ofcapital. The disadvantages of a corporation are (1) double taxation ofearnings and (2) setting up a corporation and filing required state andfederal reports, which are complex and time-consuming.1-2 No. The normal rate of return on investment would vary among industrie
14、s,principally due to varying risk. The normal rate of return would beexpected to change over time due to (1) underlying changes in theindustry and (2) business cycles.1-3 An increase in the inflation rate would most likely increase the relativeimportance of the financial manager. Virtually all of th
15、e managersfunctions, from obtaining funds for the firm to internal cost accountingbecome more demanding in periods of high inflation. Usually, uncertaintyis also increased by inflation, and hence, the effects of a poor decisionare magnified.1-4 Stockholder wealth maximization is a long-run goal. Com
16、panies, andconsequently the stockholders, prosper by management making decisionsthat will produce long-term earnings increases. Actions that arecontinually shortsighted often catch up with a firm and, as a result,it may find itself unable to compete effectively against its competitors.There has been
17、 much criticism in recent years that U.S. firms are tooshort-run profit-oriented. A prime example is the U.S. auto industry,which has been accused of continuing to build large gas guzzler” automobiles because they had higher profit margins rather than retooling forsmaller, more fuel-efficient models
18、.1-5 Even though firms follow generally accepted accounting principles (GAAP),there is still sufficient margin for firms to use different procedures.Leasing and inventory accounting (LIFO versus FIFO) are two of the manyareas where procedural differences could complicate relative performancemeasures
19、.1-6 The management of an oligopolistic firm would be more likely to engagevoluntarily in socially conscious practices. Competitive firms wouldAnswers and Solutions: 1-3be less able to engage in such practices unless they were cost-justifiedAbecause they would have to raise prices to cover the added
20、 costs quicklyfinding themselves uncompetitive.1-7 Profit maximization abstracts from (1) the timing of profits and (2) theriskiness of different operating plans. However, both of these factorsare reflected in stock price maximization. Thus, profit maximizationwould not necessarily lead to stock pri
21、ce maximization.1-8 The president of a large, publicly owned corporation should maximizeshareholders wealth or he risks losing his job. Many have argued thatwhen only a small percentage of the stock is owned by managementshareholder wealth maximization can take a back seat to any number ofconflictin
22、g managerial goals. Such factors as a compensation systembased on management performance (bonuses tied to profits, stock optionplans) as well as the possibility of being removed from office (voted outof office, an unfriendly tender offer by another firm) serve to keepmanagementz s focus on stockhold
23、ers7 interests.1-9 a . Corporate philanthropy is always a sticky issue, but it can bejustified in terms of helping to create a more attractive communitythat will make it easier to hire a productive work force. Thiscorporate philanthropy could be received by stockholders negatively,especially those s
24、tockholders not living in its headquarters city.Stockholders are interested in actions that maximize share price, andif competing firms are not making similar contributions, the cost/ ofthis philanthropy has to be borne by someone the stockholders. Thus,stock price could decrease.b . Companies must
25、make investments in the current period in order togenerate future cash flows. Stockholders should be aware of this, andassuming a correct analysis has been performed, they should reactpositively to the decision. The Mexican plant is in this category.Capital budgeting is covered in depth in Part 4 of
26、 the text. Assumingthat the correct capital budgeting analysis has been made, the stockprice should increase in the future.c . Provided that the rate of return on assets exceeds the interest rateon debt, greater use of debt will raise the expected rate of return onstockholders7 equity. Also, the int
27、erest on debt is tax deductibleand this provides a further advantage. However, (1) greater use ofdebt will have a negative impact on the stockholders if the companysreturn on assets falls below the cost of debt, and (2) increased useof debt increases the chances of going bankrupt. The effects of deb
28、tusage, called financial leverage,are spelled out in detail in thechapter titled, Capital Structure and Leverage., zd. Today (2003), nuclear generation of electricity is regarded as beingquite risky. If the company has a heavy investment in nucleargenerators, its risk will be high, and its stock pri
29、ce will beadversely affected unless its costs are much lower, hence its profitsare much higher.Answers and Solutions: 1 - 4Answers and Solutions: 1-5e . The company will be retaining more earnings, so its growth rate shouldrise, which should increase its stock price. The decline in dividendszhowever
30、z will pull the stock price down. It is unclear whether the neteffect on its stock will be an increase or a decrease in its price,but the change will depend on whether stockholders prefer dividends orincreased growth. This topic will be discussed in greater detail inthe chapter titled, Distributions
31、 to Shareholders: Dividends andShare Repurchases1-10 The executive wants to demonstrate strong performance in a short periodof time, which can be demonstrated either through improved earningsand/or a higher stock price. The current board of directors is wellserved if the manager works to increase th
32、e stock price; however, theboard is not well served if the manager takes short-run actions that bumpup short-run earnings at the expense of long-run profitability and thecompanyz s stock price. Consequently the board may want to rely more onstock options and less on performance shares that are tied
33、to accountingperformance.1-11 As the stock market becomes more volatile, the link between the stockprice and the management ability of senior executives is weakened.Therefor ， in this environment companies may choose to de-emphasize theawarding of stock and stock options and rely more on bonuses and
34、performance shares that are tied to other performance measures besidesthe companys stock price. Moreover, in this environment it may beharder to attract or retain top talent if the compensation is tied toomuch to the companys stock price.1-12 a . No, TIAA-CREF is not an ordinary shareholder. Because
35、 it is one ofthe largest institutional shareholders in the United States and itcontrols nearly $280 billion in pension funds, its voice carries a lotof weight. This shareholder in effect consists of many individualshareholders whose pensions are invested with this group.b. The owners of TIAA-CREF ar
36、e the individual teachers whose pensions areinvested with this group.c . For TIAA-CREF to be effective in wielding its weight, it must act as acoordinated unit. In order to do this, the funds managers shouldsolicit from the individual shareholders their votes on the fundspractices, and from those vo
37、tesz , act on the majoritys wishes. In sodoing, the individual teachers whose pensions are invested in the fundhave in effect determined the funds voting practices.1-13 a. If the capital markets perceive the project as risky and thereforeincreasing the firms risk, the value of the firms outstanding
38、bondswill decline一 一 hurting the firms existing bondholders. Subsequently,if managementz s analysis of the project proves to be correct, thevalue of the firms bonds should increase.b . Dividends are paid from earnings after bondholders and the governmenthave been paid. A dividend increase decreases
39、the firms addition toAnswers and Solutions: 1 - 6CINTEGRATED CASEretained earnings and subsequently lowers its growth rate; however,shareholders receive more dividends so the net effect on stock priceis indeterminate. If the firms stock price increases as currentmanagement believes it will, this may
40、 cause some bondholders to selltheir bonds and buy the firms stock to earn a higher return. So, theproposed dividend increase may cause a decline in the value of thefirmz s existing bonds.c. Yes, assuming that management has performed the correct analysis itshould undertake projects/actions that wil
41、l increase the firms stockprice. Stockholder wealth maximization is the goal of management.d. Bondholders can take the following actions to protect themselvesagainst managerial decisions that reduce bond values:1. Place restrictive covenants in debt agreements.2. Charge a higher-than-normal interest
42、 rate to compensate for therisk of possible exploitation.3. Refuse to deal with management entirely.Firms that deal unfairly with creditors either lose access to the debtmarkets or are saddled with high interest rates and restrictivecovenants, all of which are detrimental to shareholders.1-14 a. Inc
43、reasing corporate tax rates and reducing individual tax rates willcause the firm to remain as an unincorporated partnership. Inaddition to higher corporate tax rates, corporations are exposed todouble taxation.b . By increasing environmental and labor regulations to include firmswith 50+ employees,
44、this firm will choose to remain an unincorporatedpartnership due to the additional costs it would have to bear if itoperated as a corporation.1-15 Earnings per share in the current year will decline due to the cost ofthe investment made in the current year and no significant performanceimpact in the
45、 short run. However, the companyz s stock price shouldincrease due to the significant cost savings expected in the future.Answers and Solutions: 1-7INTEGRATED CASETake a DiveFinancial Management Overview1-1 KATO SUMMERS OPENED TAKE A DIVE 17 YEARS AGO； THE STORE IS LOCATED INMALIBU, CALIFORNIA, AND
46、SELLS SURFING-RELATED EQUIPMENT. TODAY, TAKEA DIVE HAS 50 EMPLOYEES INCLUDING KATO AND HIS DAUGHTER AMBER, WHOWORKS PART TIME IN THE STORE TO HELP PAY FOR HER COLLEGE EDUCATION.KATO7 S BUSINESS HAS BOOMED IN RECENT YEARS, AND HE IS LOOKING FORNEW WAYS TO TAKE ADVANTAGE OF HIS INCREASING BUSINESS OPP
47、ORTUNITIES.ALTHOUGH KATOS FORMAL BUSINESS TRAINING IS LIMITED, AMBER WILL SOONGRADUATE WITH A DEGREE IN FINANCE. KATO HAS OFFERED HER THEOPPORTUNITY TO JOIN THE BUSINESS AS A FULL-FLEDGED PARTNER. AMBER ISINTERESTED, BUT SHE IS ALSO CONSIDERING OTHER CAREER OPPORTUNITIES INFINANCE.RIGHT NOW, AMBER I
48、S LEANING TOWARD STAYING WITH THE FAMILY BUSINESS,PARTLY BECAUSE SHE THINKS IT FACES A NUMBER OF INTERESTING CHALLENGESAND OPPORTUNITIES. AMBER IS PARTICULARLY INTERESTED IN FURTHEREXPANDING THE BUSINESS AND THEN INCORPORATING IT. KATO IS INTRIGUEDBY HER IDEAS, BUT HE IS ALSO CONCERNED THAT HER PLAN
49、S MIGHT CHANGE THEWAY IN WHICH HE DOES BUSINESS. IN PARTICULAR, KATO HAS A STRONGCOMMITMENT TO SOCIAL ACTIVISM, AND HE HAS ALWAYS TRIED TO STRIKE ABALANCE BETWEEN WORK AND PLEASURE. HE IS WORRIED THAT THESE GOALSWILL BE COMPROMISED IF THE COMPANY INCORPORATES AND BRINGS IN OUTSIDESHAREHOLDERS.AMBER
50、AND KATO PLAN TO TAKE A LONG WEEKEND OFF TO SIT DOWN ANDTHINK ABOUT ALL OF THESE ISSUES. AMBER, WHO IS HIGHLY ORGANIZED, HASOUTLINED A SERIES OF QUESTIONS FOR THEM TO ADDRESS:A. WHAT KINDS OF CAREER OPPORTUNITIES ARE OPEN TO FINANCE MAJORS?ANSWER: SHOW Sl-1 AND Sl-2 HERE. CAREER OPPORTUNITIES FOR FI
51、NANCE MAJORSEXIST IN THREE INTERRELATED AREAS: (1) MONEY AND CAPITAL MARKETS,WHICH DEALS WITH SECURITIES MARKETS AND FINANCIAL INSTITUTIONS;(2) INVESTMENTS, WHICH FOCUSES ON THE DECISIONS OF BOTH INDIVIDUAL ANDIntegrated Case: 1 - 8INSTITUTIONAL INVESTORS AS THEY CHOOSE SECURITIES FOR THEIR INVESTME
52、NTPORTFOLIOS; AND (3) FINANCIAL MANAGEMENT, OR BUSINESS FINANCE,“ WHICHINVOLVES THE ACTUAL MANAGEMENT OF FIRMS.IN THE MONEY AND CAPITAL MARKETS AREA, MANY FINANCE MAJORS GO TOWORK FOR FINANCIAL INSTITUTIONS, INCLUDING BANKS, INSURANCE COMPANIES,MUTUAL FUNDS, AND INVESTMENT BANKING FIRMS. FINANCE GRA
53、DUATES WHO GOINTO INVESTMENTS OFTEN WORK FOR A BROKERAGE HOUSE EITHER IN SALES ORAS A SECURITY ANALYST. OTHERS WORK FOR BANKS, MUTUAL FUNDS, ORINSURANCE COMPANIES IN THE MANAGEMENT OF THEIR INVESTMENT PORTFOLIOS;FOR FINANCIAL CONSULTING FIRMS THAT ADVISE INDIVIDUAL INVESTORS ORPENSION FUNDS ON HOW T
54、O INVEST THEIR FUNDS; FOR AN INVESTMENT BANKWHOSE PRIMARY FUNCTION IS TO HELP BUSINESSES RAISE NEW CAPITAL; OR ASA FINANCIAL PLANNER WHOSE JOB IS TO HELP INDIVIDUALS DEVELOP LONG-TERMFINANCIAL GOALS AND PORTFOLIOS. THE JOB OPPORTUNITIES IN FINANCIALMANAGEMENT RANGE FROM MAK工NG DECISIONS REGARDING PL
55、ANT EXPANSIONS TOCHOOSING WHAT TYPES OF SECURITIES TO ISSUE TO FINANCE EXPANSION.FINANCIAL MANAGERS ALSO HAVE THE RESPONSIBILITY FOR DECIDING THECREDIT TERMS UNDER WHICH CUSTOMERS MAY BUY, HOW MUCH INVENTORY THEFIRM SHOULD CARRY, HOW MUCH CASH TO KEEP ON HAND, WHETHER TO ACQUIREOTHER FIRMS, AND HOW
56、MUCH OF THE FIRMS EARNINGS TO PLOW BACK INTO THEBUSINESS VERSUS TO PAY OUT AS DIVIDENDS.B. WHAT ARE THE PRIMARY RESPONSIBILITIES OF A CORPORATE FINANCIAL STAFF?ANSWER: SHOW Sl-3 AND Sl-4 HERE. THE FINANCIAL MANAGERS TASK IS TO ACQUIREAND USE FUNDS SO AS TO MAXIMIZE THE FIRMS VALUE. SPECIFIC ACTIVITI
57、ESINCLUDE: (1) FORECASTING AND PLANNING, (2) MAKING MAJOR INVESTMENT ANDFINANCING DECISIONS, (3) COORDINATING AND CONTROLLING, (4) DEALINGWITH THE FINANCIAL MARKETS, AND (5) MANAGING RISK.C. WHAT ARE THE MOST IMPORTANT FINANCIAL MANAGEMENT ISSUES TODAY?ANSWER: SHOW Sl-5 AND Sl-6 HERE. THE FOCUS ON V
58、ALUE MAXIMIZATION CONTINUESAS WE BEGIN THE 21st CENTURY. HOWEVER, TWO OTHER TRENDS HAVE BECOMEINCREASINGLY IMPORTANT IN RECENT YEARS: THE GLOBALIZATION OF BUSINESSIntegrated Case: 1 - 9AND THE INCREASED USE OF INFORMATION TECHNOLOGY. THESE TRENDS WILLUNDOUBTEDLY CONTINUE IN THE YEARS AHEAD.D. 1. WHA
59、T ARE THE ALTERNATIVE FORMS OF BUSINESS ORGANIZATION?ANSWER: SHOW Sl-7 HERE. THE THREE MAIN FORMS OF BUSINESS ORGANIZATION ARE(1) SOLE PROPRIETORSHIPS, (2) PARTNERSHIPS, AND (3) CORPORATIONS.D. 2. WHAT ARE THEIR ADVANTAGES AND DISADVANTAGES?ANSWER: SHOW Sl-8 AND Sl-9 HERE. THE PROPRIETORSHIP HAS THR
60、EE IMPORTANTADVANTAGES: (1) IT IS EASILY AND INEXPENSIVELY FORMED, (2) IT ISSUBJECT TO FEW GOVERNMENT REGULATIONS, AND (3) THE BUSINESS PAYS NOCORPORATE INCOME TAXES. THE PROPRIETORSHIP ALSO HAS THREE IMPORTANTLIMITATIONS: (1) IT IS DIFFICULT FOR A PROPRIETORSHIP TO OBTAIN LARGESUMS OF CAPITAL; (2)
61、THE PROPRIETOR HAS UNLIMITED PERSONAL LIABILITYFOR THE BUS工NESSS DEBTS, AND (3) THE LIFE OF A BUSINESS ORGANIZED AS APROPRIETORSHIP IS LIMITED TO THE LIFE OF THE INDIVIDUAL WHO CREATED IT.THE MAJOR ADVANTAGE OF A PARTNERSHIP IS ITS LOW COST AND EASE OFFORMATION. THE DISADVANTAGES ARE SIMILAR TO THOS
62、E ASSOCIATED WITHPROPRIETORSHIPS: (1) UNLIMITED LIABILITY, (2) LIMITED LIFE OF THEORGANIZATION, (3) DIFFICULTY OF TRANSFERRING OWNERSHIP, AND (4)DIFFICULTY OF RAISING LARGE AMOUNTS OF CAPITAL. THE TAX TREATMENT OF APARTNERSHIP IS SIMILAR TO THAT FOR PROPRIETORSHIPS, WHICH IS OFTEN ANADVANTAGE.THE CO
63、RPORATE FORM OF BUSINESS HAS THREE MAJOR ADVANTAGES:(1) UNLIMITED LIFE, (2) EASY TRANSFERABILITY OF OWNERSHIP INTEREST,AND (3) LIMITED LIABILITY. WHILE THE CORPORATE FORM OFFERSSIGNIFICANT ADVANTAGES OVER PROPRIETORSHIPS AND PARTNERSHIPS, IT DOESHAVE TWO PRIMARY DISADVANTAGES: (1) CORPORATE EARNINGS
64、 MAY BE SUBJECTTO DOUBLE TAXATION AND (2) SETTING UP A CORPORATION AND FILING THEMANY REQUIRED STATE AND FEDERAL REPORTS IS MORE COMPLEX AND TIMECONSUMING THAN FOR A PROPRIETORSHIP OR A PARTNERSHIP.WHAT IS THE PRIMARY GOAL OF THE CORPORATION?Integrated Case: 1-10ANSWER: SHOW Sl-10 AND Sl-11 HERE. TH
65、E CORPORATIONS PRIMARY GOAL ISSTOCKHOLDER WEALTH MAXIMIZATION, WHICH TRANSLATES TO MAXIMIZING THEPRICE OF THE FIRMS COMMON STOCK.E. 1. DO FIRMS HAVE ANY RESPONSIBILITIES TO SOCIETY AT LARGE?ANSWER: FIRMS HAVE AN ETHICAL RESPONSIBILITY TO PROVIDE A SAFE WORKINGENVIRONMENT, TO AVOID POLLUTING THE AIR
66、OR WATER, AND TO PRODUCE SAFEPRODUCTS. HOWEVER, THE MOST SIGNIFICANT COST-INCREASING ACTIONS WILLHAVE TO BE PUT ON A MANDATORY RATHER THAN A VOLUNTARY BASIS TO ENSURETHAT THE BURDEN FALLS UNIFORMLY ON ALL BUSINESSES.E. 2. IS STOCK PRICE MAXIMIZATION GOOD OR BAD FOR SOCIETY?ANSWER: THE SAME ACTIONS T
67、HAT MAXIMIZE STOCK PRICES ALSO BENEFIT SOCIETY.STOCK PRICE MAXIMIZATION REQUIRES EFFICIENT, LOW-COST OPERATIONS THATPRODUCE HIGH-QUALITY GOODS AND SERVICES AT THE LOWEST POSSIBLE COST.STOCK PRICE MAXIMIZATION REQUIRES THE DEVELOPMENT OF PRODUCTS ANDSERVICES THAT CONSUMERS WANT AND NEED, SO THE PROFI
68、T MOTIVE LEADS TONEW TECHNOLOGY, TO NEW PRODUCTS, AND TO NEW JOBS. ALSO, STOCK PRICEMAXIMIZATION NECESSITATES EFFICIENT AND COURTEOUS SERVICE, ADEQUATESTOCKS OF MERCHANDISE, AND WELL-LOCATED BUSINESS ESTABLISHMENTSFACTORS THAT ARE ALL NECESSARY TO MAKE SALES, WHICH ARE NECESSARY FORPROFITS.E. 3. SHO
69、ULD FIRMS BEHAVE ETHICALLY?ANSWER: YES. EXECUTIVES OF MOST MAJOR FIRMS IN THE UNITED STATES BELIEVE THATFIRMS DO TRY TO MAINTAIN HIGH ETHICAL STANDARDS IN ALL OF THEIRBUSINESS DEALINGS. FURTHERMORE, MOST EXECUTIVES BELIEVE THAT THERE ISA POSITIVE CORRELATION BETWEEN ETHICS AND LONG-RUN PROFITABILITY
70、.CONFLICTS OFTEN ARISE BETWEEN PROFITS AND ETHICS. COMPANIES MUST DEALWITH THESE CONFLICTS ON A REGULAR BASIS, AND A FAILURE TO HANDLE THESITUATION PROPERLY CAN LEAD TO HUGE PRODUCT LIABILITY SUITS AND EVENTO BANKRUPTCY. THERE IS NO ROOM FOR UNETHICAL BEHAVIOR IN THE BUSINESSWORLD.Learning Objective
71、s: 5 -11WHAT IS AN AGENCY RELATIONSHIP?ANSWER:F. 1ANSWER:F. 2ANSWER：F. 3ANSWER:SHOW Sl-12 HERE. AN AGENCY RELATIONSHIP EXISTS WHENEVER APRINCIPAL ENGAGES AN 、 AGENT AND GRANTS THE AGENT SOME DECISION-MAK工NG POWER. WHAT AGENCY RELATIONSHIPS EXIST WITHIN A CORPORATION?WITHIN THE FINANCIAL MANAGEMENT C
72、ONTEXT, THE PRIMARY AGENCYRELATIONSHIPS ARE THOSE (1) BETWEEN STOCKHOLDERS AND MANAGERS AND (2)BETWEEN DEBTHOLDERS AND STOCKHOLDERS (THROUGH MANAGERS).WHAT MECHANISMS EXIST TO INFLUENCE MANAGERS TO ACT IN SHAREHOLDERSzBEST INTERESTS?SHOW Sl-13 HERE. TO REDUCE AGENCY CONFLICTS, STOCKHOLDERS MUSTINCUR
73、 AGENCY COSTS, WHICH INCLUDE ALL COSTS BORNE BY SHAREHOLDERS TOENCOURAGE MANAGERS TO MAXIMIZE THE FIRMS STOCK PRICE RATHER THAN ACTIN THEIR OWN SELF-INTERESTS.SOME SPECIFIC MECHANISMS THAT ENCOURAGE MANAGERS TO ACT INSHAREHOLDERSz INTERESTS INCLUDE: (1) PERFORMANCE-BASED MANAGERIALCOMPENSATION, (2)
74、DIRECT INTERVENTION BY SHAREHOLDERSz (3) THE THREATOF FIRING, AND (4) THE THREAT OF TAKEOVER.SHOULD SHAREHOLDERS (THROUGH MANAGERS) TAKE ACTIONS THAT AREDETRIMENTAL TO BONDHOLDERS?SHOW Sl-14 HERE. NO. SUCH BEHAVIOR IS UNETHICAL, AND THERE IS NOROOM FOR UNETHICAL BEHAVIOR IN THE BUSINESS WORLD. SECON
75、D, IF SUCHATTEMPTS ARE MADE, CREDITORS WILL PROTECT THEMSELVES AGAINSTSTOCKHOLDERS BY PLACING RESTRICTIVE COVENANTS IN FUTURE DEBTAGREEMENTS. FINALLY, IF CREDITORS PERCEIVE THAT A FIRMS MANAGERS ARETRYING TO TAKE ADVANTAGE OF THEM, THEY WILLEITHER REFUSE TO DEALFURTHER WITH THEFIRM OR ELSE WILL CHAR
76、GEA HIGHER THAN NORMALINTEREST RATE TOCOMPENSATE FOR THE RISK OFPOSSIBLE EXPLOITATION.THUS, FIRMS THATDEAL UNFAIRLY WITH CREDITORSEITHER LOSE ACCESS TOLearning Objectives: 5 -12Dryden PressTHE DEBT MARKETS OR ARE SADDLED WITH HIGH INTEREST RATES ANDRESTRICTIVE COVENANTS, ALL OF WHICH ARE DETRIMENTAL
77、 TO SHAREHOLDERS.G. IS MAXIMIZING STOCK PRICE THE SAME THING AS MAXIMIZING PROFIT?ANSWER: NO. GENERALLY, THERE IS A HIGH CORRELATION BETWEEN EPS, CASH FLOW,AND STOCK PRICE, AND ALL OF THEM GENERALLY RISE IF A FIRMS SALES RISENEVERTHELESS, STOCK PRICES DEPEND NOT JUST ON TODAYZS EARNINGS ANDCASH FLOW
78、S FUTURE CASH FLOWS AND THE RISKINESS OF THE FUTURE EARNINGSSTREAM ALSO AFFECT STOCK PRICES. SOME ACTIONS MAY INCREASE EARNINGSAND YET REDUCE STOCK PRICES WHILE OTHER ACTIONS MAY BOOST STOCK PRICEBUT REDUCE EARNINGS. CONSIDER A COMPANY THAT UNDERTAKES LARGEEXPENDITURES TODAY THAT ARE DESIGNED TO IMP
79、ROVE FUTURE PERFORMANCE.THESE EXPENDITURES WILL LIKELY REDUCE EARNINGS PER SHARE, YET THESTOCK MARKET MAY RESPOND POSITIVELY IF IT BELIEVES THAT THESEEXPENDITURES WILL SIGNIFICANTLY ENHANCE FUTURE EARNINGS. BY CONTRAST,A COMPANY THAT UNDERTAKES ACTIONS TODAY TO ENHANCE ITS EARNINGS MAYSEE A DROP IN
80、ITS STOCK PRICE, IF THE MARKET BELIEVES THAT THESEACTIONS COMPROMISE FUTURE EARNINGS AND/OR DRAMATICALLY INCREASE THEFIRMS RISK.H. WHAT FACTORS AFFECT STOCK PRICES?ANSWER: SHOW Sl-15 AND Sl-16 HERE. THE FIRM7 S STOCK PRICE IS DEPENDENT ONMANAGERIAL ACTIONS, SUCH AS INVESTMENT DECISIONS, FINANCING DE
81、CISIONS,DIVIDEND POLICY DECISIONS, AND EXTERNAL FACTORS, INCLUDING LEGALCONSTRAINTS THE GENERAL LEVEL OF ECONOMIC ACTIVITY, TAX LAWS, ANDCONDITIONS IN THE STOCK MARKET. MANAGERS CAN ENHANCE THEIR FIRMSVALUE (AND ITS STOCK PRICE) BY INCREASING THEIR FIRMS EXPECTED CASHFLOWS, SPEEDING UP CASH FLOWS, A
82、ND REDUCING THEIR RISKINESS.I. WHAT FACTORS AFFECT THE LEVEL AND RISKINESS OF CASH FLOWS?ANSWER: SHOW Sl-17 HERE. MANAGERIAL ACTIONS, SUCH AS INVESTMENT DECISIONS,FINANCING DECISIONS, AND DIVIDEND POLICY DECISIONS AFFECT THE LEVEL,TIMING, AND THE RISKINESS OF THE FIRMS CASH FLOWS.Learning Objectives
83、: 5 -13Chapter 2Risk and Rates of ReturnLEARNING OBJECTIVESAfter reading this chapter, students should be able to: Define dollar return and rate of return. Define risk and calculate the expected rate of return, standard deviation,and coefficient of variation for a probability distribution. Specify h
84、ow risk aversion influences required rates of return. Graph diversifiable risk and market risk; explain which of these isrelevant to a we11-diversified investor. State the basic proposition of the Capital Asset Pricing Model (CAPM) andexplain how and why a portfolios risk may be reduced. Explain the
85、 significance of a stocks beta coefficient, and use theSecurity Market Line to calculate a stocks required rate of return. List changes in the market or within a firm that would cause the requiredrate of return on a firms stock to change. Identify concerns about beta and the CAPM. Explain how stock
86、price volatility is more likely to imply risk thanearnings volatility.Learning Objectives: 5-14Dryden PressLECTURE SUGGESTIONSRisk analysis is an important topic, but it is difficult to teach at theintroductory level. We just try to give students an intuitive overview of howrisk. can be defined and
87、measured, and leave a technical treatment to advancedcourses. Our primary goals are to be sure students understand (1) thatinvestment risk is the uncertainty about returns on an asset, (2) the conceptof portfolio risk, and (3) the effects of risk on required rates of return.What we cover, and the wa
88、y we cover it, can be seen by scanningBlueprints, Chapter 5. For other suggestions about the lecture, please see theLecture Suggestions in Chapter 2, where we describe how we conduct ourclasses.DAYS ON CHAPTER: 3 OF 58 DAYS (50-minute periods)South-WesternLecture Suggestions: 5 -15ANSWERS TO END-OF-
89、CHAPTER QUESTIONS5-1 a.The probability distribution for complete certainty is a vertical line.b . The probability distribution for total uncertainty is the X-axis from-oo to +8.5-2 Security A is less risky if held in a diversified portfolio because ofits negative correlation with other stocks. In a
90、single-asset portfolio.Security A would be more risky because QA C TB and CVA CVB.5-3 a. No, it is not riskless. The portfolio would be free of default riskand liquidity risk, but inflation could erode the portfolioz spurchasing power. If the actual inflation rate is greater than thatexpected, inter
91、est rates in general will rise to incorporate a largerinflation premium (IP) and- as we shall see in Chapter 7- the value ofthe portfolio would decline.b . No, you would be subject to reinvestment rate risk. You might expectto roll over“ the Treasury bills at a constant (or even increasing)rate of i
92、nterest, but if interest rates fall, your investment incomewill decrease.c. A U.S. government-backed bond that provided interest with constantpurchasing power (that is, an indexed bond) would be close to riskless.The U.S. Treasury currently issues indexed bonds.5-4 a. The expected return on a life i
93、nsurance policy is calculated just asfor a common stock. Each outcome is multiplied by its probability ofoccurrence, and then these products are summed. For example, supposea 1-year term policy pays $10,000 at death, and the probability of thepolicyholders death in that year is 2 percent. Then, ther
94、e is a 98percent probability of zero return and a 2 percent probability of$10,000:Expected return = 0.98 ($0) + 0.02 ($10, 000) = $200.This expected return could be compared to the premium paid.Generally, the premium will be larger because of sales andadministrative costs, and insurance company prof
95、its, indicating anegative expected rate of return on the investment in the policy.b. There is a perfect negative correlation between the returns on thelife insurance policy and the returns on the policyholder7 s humancapital. In fact, these events (death and future lifetime earningscapacity) are mut
96、ually exclusive.Answers and Solutions: 5 -16c. People are generally risk averse. Therefore, they are willing to pay a premium to decrease theuncertainty of their fiiture cash flows. A life insurance policy guarantees an income (the face value of thepolicy) to the policyholders beneficiaries when the
97、 policyholders future earnings capacity drops to zero.5-5The risk premium on a high-beta stock would increase more.RPj = Risk Premium for Stock j = (kM - kRF) bj.If riskaversion increases, the slope of the SML will increase, and sowillthemarket risk premium (kMkRF), The product (kMkRF) bj is the5-65
98、-7risk premium of the jth stock. If bj is low (sayz 0.5), then the productwillbe small;RPj will increaseby only half the increase inRPM However, if bj is large (say, 2.0)twice the increase in RPK.According to the Security Market Linewill increase a companys expectedmarket risk premium times the chan
99、gethe risk-free rateIf the companysincreases from 10companyz s expectedthen its risk premium will(SML) equation, an increasereturn byin beta.an amount equalrise byintoFor example, assumebetathethatis 6 percent, and the marketbeta doubles from 0.8 topercent to 14 percent.return will not doublewhen: r
100、isk premium is 5 percent.1 . 6 its expected returnTherefore, in general, aits beta doubles.Yes, if the portfolio7 s beta is equal to zero.In practice, however, itmay be in)ossible to find individualstocks that have a nonpositivebeta. In this case it would also be impossible to have a stockportfolio
101、with a zero beta. Even if such a portfolio could beconstructed, investors would probably be better off just purchasingTreasury bills, or other zero beta investments.5-8No. For a stock to have a negative beta, its returnswould have tologically be expected to go up inthe future whenotherstocksreturns
102、were falling. Just becausein one year thestocksreturnincreases whenthe market declineddoesnt mean the stockhas anegative beta.A stock in a givenyear may move counterto theoverall market, even though the stocks beta is positive.Answers and Solutions: 5-17SOLUTIONS TO END-OF-CHAPTER PROBLEMS5-1 k = (0
103、.1) (-50%) + (0.2) (-5%) + (0.4) (16%) + (0.2) (25%) + (0.1) (60%)=11.40%.C T2 = (-50% - 11.40%)2(0.1) + (-5% - 11.40%)2(0.2) + (16% - 11.40%)2(0.4)+ (25% - 11.40%)2(0.2) + (60% - 11.40%)2(0.1)C T2 = 712.44; a = 26.69 %.26.69 %CV = - = 2.34.11.40%5-2I nve stme ntBe ta$35,0000.840,0001.4T ota l $75,0
104、00bp = ($35,000/$75, 000) (0.8) + ($40,000/575,000) (1.4) = 1.12.5-3 kR F = 5%; RPM = 6%; kM = ?kM = 5% + (6%)1 = 11%.k wh e n b = 1 .2 = ?k = 5% + 6% (1.2) = 12.2%.5-4 kR F = 6%; kM = 13%; b = 0.7; k = ?k = k R F + (- kR F) b= 6% + (13% - 6%)0.7=10.9 %.5-5 a . k = 11%; kR F = 7%; R PM = 4%.k = + (k
105、 . - k .R F )b11% = 7% + 4%b4% = 4%bb = 1.Answers and Solutions: 5 -18b. kR F = 7%; RPM = 6%; b = 1 .k = k R F + (k w - k j kN = 15%, the new stock should not be purchasedThe expected rate of return that would make the fund indifferent topurchasing the stock is 16 percent.Answers and Solutions: 5 -
106、24Ch 叩 ter 3Time Value of MoneyLEARNING OBJECTIVES5-21 The answers to a, bz c, and d are given below:kA kB_ P o rtfo lio1998(18.00%)(14.50%)(16.25%)199933.0021.8027.40200015.0030.5022.752001(0.50)(7.60)(4.05)200227.0026.3026.65Mean11.3011.3011.30Std. Dev.20.7920.7820.13Coef. Var.1.841.841.78e . A ri
107、sk-averse investor would choose the portfolio over either Stock Aor Stock B alone, since the portfolio offers the same expected returnbut with less risk. This result occurs because returns on A and B arenot perfectly positively correlated (rAB = 0.88).OUR CAPITAL BUDGETING DISCUSSION.After reading t
108、his chapter, students should be able to: Convert time value of money (TVM) problems from words to time lines. Explain the relationship between compounding and discounting, betweenfuture and present value. Calculate the future value of some beginning amountz and find the presentvalue of a single paym
109、ent to be received in the future. Solve for time or interest rate, given the other three variables in the TVMequation. Find the future value of a series of equal, periodic payments (an annuity)as well as the present value of such an annuity. Explain the difference between an ordinary annuity and an
110、annuity due, andcalculate the difference in their values.Calculate the value of a perpetuity.Answers and Solutions: 5-25Demonstrate how to find the present and future values of an uneven seriesof cash flows.Distinguish among the following interest rates: Nominal (or Quoted) rate,Periodic rate, and E
111、ffective (or Equivalent) Annual Rate; and properlychoose between securities with different compounding periods.Solve time value of money problems that involve fractional time periods.Construct loan amortization schedules for both fully-amortized andpartially-amortized loans.Learning Objectives: 6 -
112、26Harcourt Brace & CompanyLECTURE SUGGESTIONSWe regard Chapter 6 as the most important chapter in the book, so we spend a goodbit of time on it. We approach time value in three ways. First, we try to getstudents to understand the basic concepts by use of time lines and simple logic.Second, we explai
113、n how the basic formulas follow the logic set forth in the timelines. Third, we show how financial calculators and spreadsheets can be used tosolve various time value problems in an efficient manner. Once we have beenthrough the basics, we have students work problems and become proficient with theca
114、lculations and also get an idea about the sensitivity of output, such aspresent or future valuez to changes in input variables, such as the interest rateor number of payments.Some instructors prefer to take a strictly analytical approach and havestudents focus on the formulas themselves. Others pref
115、er to use the PresentValue Tables, which have for many years been supplied with the text. In bothcases, the argument is made that students treat their calculators as blackboxes,“ and that they do not understand where their answers are coming from orwhat they mean. We disagree. We think that our appr
116、oach shows students thelogic behind the calculations as well as alternative approaches, and becausecalculators are so efficient, students can actually see the significance of whatthey are doing better if they use a calculator. We also think it is important toteach students how to use the type of tec
117、hnology (calculators and spreadsheets)they must use when they venture into the real world.In the past, the biggest stumbling block to many of our students has beentime value, and the biggest problem there has been that they did not know how touse their calculator when we got into time value. Therefo
118、re, we stronglyencourage students to get a calculator early, learn to use it, and bring it toclass so they can work problems with us as we go through the lectures. Oururging, plus the fact that we can now provide relatively brief, course-specificmanuals for the leading calculators, has reduced if no
119、t eliminated the problem.Our research suggests that the best calculator for the money for moststudents is the HP-10B. Finance and accounting majors might be better off with amore powerful calculator, such as the HP-17B. We recommend these two for peoplewho do not already have a calculator, but we te
120、ll them that any financialcalculator that has an IRR function will do.We also tell students that it is essential that they work lots of problemsfincluding the end-of-chapter problems. We emphasize that this chapter iscritical, so they should invest the time now to get the material down. We stresstha
121、t they simply cannot do well with the material that follows without havingthis material down cold. Cost of capital and capital budgeting make little sense,and one certainly cannot work problems in these areas, without understanding timevalue of money first.For other suggestions about the lecture, pl
122、ease see the LectureSuggestions in Chapter 2r where we describe how we conduct our classes.DAYS ON CHAPTER: 4 OF 58 DAYS (50-minute periods)Harcourt Brace & CompanyLecture Suggestions: 6 - 27ANSWERS TO END-OF-CHAPTER QUESTIONS6-1 The opportunity cost rate is the rate of interest one could earn on an
123、alternative investment with a risk equal to the risk of the investment inquestion. This is the value of i in the TVM equations, and it is shown onthe top of a time line, between the first and second tick marks. It is nota single rate-一the opportunity cost rate varies depending on the riskinessand ma
124、turity of an investment, and it also varies from year to yeardepending on inflationary expectations (see Chapter 5).6-2 True. The second series is an uneven payment stream, but it contains anannuity of $400 for 8 years. The series could also be thought of as a $100annuity for 10 years plus an additi
125、onal payment of $100 in Year 2t plusadditional payments of $300 in Years 3 through 10.6-3 True, because of compounding effects- growth on growth. The followingexample demonstrates the point. The annual growth rate is i in thefollowing equation:$1 (1 + i)10 = $2.The term (1 + i)10 is the FVIF for i p
126、ercent, 10 years. We can find i asfollows:Using a financial calculator input N = 10, PV = -1, PMT = 0, FV = 2, andI = ? Solving for I you obtain 7.18 percent.Viewed another way, if earnings had grown at the rate of 10 percent peryear for 10 years, then EPS would have increased from $1.00 to $2.59, f
127、oundas follows: Using a financial calculator, input N = 10, I = 10, PV = -1,PMT = 0z and FV = ?. Solving for FV you obtain $2.59. This formulationrecognizes the interest on interest phenomenon.6-4 For the same stated rate, daily compounding is best. You would earn moreinterest on interest.6-5 False.
128、 One can find the present value of an embedded annuity and add thisPV to the PVs of the other individual cash flows to determine the presentvalue of the cash flow stream.6-6 The concept of a perpetuity implies that payments will be received forever.FV (Perpetuity) = PV (Perpetuity) (1 + i)0 0 = o o
129、.Answers and Solutions: 6 - 28SOLUTIONS TO END-OF-CHAPTER PROBLEMS6-1 0 1 0 % 1 2 3 4 5I-1 - 1 - 1 -1 - 1-PV = 10,000 FV5 = ?FV5 = $10,000 (1.10)5=$10,000 (1.61051) = $16,105.10.Alternatively, with a financial calculator enter the following: N = 5,I = 10, PV = -10000, and PMT = 0. Solve for FV = $16
130、,105.10.6-2 0 7 % 5 10 15 20I- 1 -1 -1 -FPV = ? FV20 = 5,000With a financial calculator enter the following: N = 20, I = 7Z PMT = 0,and FV = 5000. Solve for PV = $1,292.10.6 7 0 6.5 % n = ?I-pPV = 1 FVn = 22 = l(1.065)n.With a financial calculator enter the following: I = 6.5, PV = -1, PMT = 0,and F
131、V = 2. Solve for N = 11.01 2 11 years.6-4 Using your financial calculator, enter the following data: I = 12; PV =-42180.53; PMT = -5000; FV = 250000; N = ? Solve for N = 11. It will take11 years for John to accumulate $250,000.6-5 0 18i = ?I- FPV = 250,000 FV18 = 1,000,000With a financial calculator
132、 enter the following: N = 18, PV = -250000, PMT=0, and FV = 1000000. Solve for I = 8.01% * 8%.6-6 0 / 1 2 3 4 5I -1 -1 - 1 - 1 -H300 300 300 300 300FVA5 = ?Answers and Solutions: 6-29With a financial calculator enter the following: N = 5, I = 7, PV = 0, and PMT = 300. Solve for FV =$1,725.22.6-7 0 7
133、% 1 2 3 4 5300 300 300 300 300With a financialcalculator, switch to BEG and enter the following: N =5 , 1 =7,to switchPV = 0zback toand PMT =、END mode300.Solve for FV = $lz 845.99.Dont forget6-80 8%1234561PV = ?I100l100I100l200I300l500FV = ?Using a financialcalculator , enterthe following:CF0 = 0CFa
134、 = 100,CF4 = 200CF5 = 300CF6 = 500and 1 = 8 .Nj = 3(Note(Note(NoteSolvecalculatorcalculatorcalculatorfor NPV =willwillwill$923.show CF2 onshow CF3 onshow CF4 on98.screen.)screen.)screen.)To solve for the FV of the cash flow stream with a calculator that doesnt have the NFV key, do the following:Ente
135、r N = 6,1 = 8, PV = -923.98, and PMT = 0. Solve for FV = S1,466.24. You can check this as follows:6-91, PVEAR(1.01)12 - 1.012.68%.Alternatively, using a financial calculator, enter the following: NOM% = 12 and P/YR = 12. Solve fbr EFF% =12.6825%. Remember to change back to P/YR = 1 on your calculato
136、r.Answers and Solutions: 6 - 306-10 a. 1997 ? 1998 1999 2000 2001 2002I:- 1 -1 - 1 - 1 - F-6 12 (in millions)With a calculator, enter N = 5, PV = -6, PMT = 0, FV = 12f and thensolve for I = 14.87%.b. The calculation described in the quotation fails to take account of thecompounding effect. It can be
137、 demonstrated to be incorrect as follows:$6,000,000(1.20)5 = $6,000,000(2.4883) = $14,929,800,which is greater than $12 million. Thus, the annual growth rate is lessthan 20 percent; in fact, it is about 15 percent, as shown in Part a.6-11 0. _ 1 2 3 4 5 6 7 8 9 10I1 = ?l - 1 -1 - 1 -1 -1 -1 - 1 -1 -
138、 H-4 8 (in millions)With a calculator, enter N = 10, PV = -4, PMT = 0, FV = 8, and then solvefor I = 7.18%.6-12 0 . 1 2 3 4 30| - - -1 - 1 - 1 - 1 - - 1 85,000 -8,273.59 -8,273.59 -8,273.59 -8,273.59 -8,273.59With a calculator, enter N = 30, PV = 85000, PMT = -8273.59, FV = 0, andthen solve for 1 =
139、9 % .6-13 a. 0 7% 1 2 3 4I - -1 - 1 - 1 - FPV = ? -10,000 -10,000 -10,000 -10,000With a calculator, enter N = 4, 1 = 1 , PMT = -10000, and FV = 0. Thenpress PV to get PV = $33,872.11.b. 1. At this point, we have a 3-year, 7 percent annuity whose value is$26,243.16. You can also think of the problem
140、as follows:$33,872 (1.07) - $10,000 = $26,243.04.2. Zero after the last withdrawal.6-14 0 d 1 2 3 4 5 6M_i _i _i _i _i -1,250 1,250 1,250 1,250 1,250 ?FV = 10,000With a financial calculator, get a ballpark estimate of the years byentering I = 12, PV = 0, PMT = -1250, and FV = 10000, and then pressin
141、g theAnswers and Solutions: 6-31N key to find N = 5 .94 years. This answer assumes that a payment of $1,250will be made 94/I00th of the way through Year 5.Now find the FV of $1,250 fbr 5 years at 12 percent; it is $7,941.06. Compound this value for 1 year at 12percent to obtain the value in the acco
142、unt after 6 years and before the last payment is made; it is $7,941.06(1.12)= $8,893.99. Thus, you will have to make a payment of $10,000 - $8,893.99 = SI,106.01 at Year 6, so theanswer is: it will take 6 years, and $1,106.01 is the amount of the last payment.$3,000,000 $3,000,000 $3,000,000 $3,000,
143、000=-1 - - + -；- 1 - - 1.1 (1.1)2 (1.1)3 ( 1 I)4= $2,727,272.73 + $2,479,338.84 + $2,253,944.40 + $2,049,040.37= $9,509,596.34.Using your financial calculator, enter the following data: CF0 = 0; CF.4 =3000000; I = 10; NPV = ? Solve for NPV = $9,509,596.34.CF0 = 0;NPV = ?ContractContract 2- P V $2,00
144、0,000 + $3,000,000 + $4,000,000 + $5,000,0001.10 (1.10)2 (1.10)3 (1.10)4= $1,818,181.82 + $2,479,338.84 + $3,005,259.20 + $3,415,067.28= $10,717,847.14.Alternatively, using your financial calculator, enter the following data:CFi = 2000000; CF2 = 3000000; CF3 = 4000000; CF4 = 5000000; I = 10;Solve fo
145、r NPV = $10,717,847.14.3. p v $7,000,000 + $1,000,000 + $1,000,000 + $1,000,000i.io- (1.10)2 (1.10)3 (1.10)4= $6,363,636.36 + $826,446.28 + $751,314.80 + $683,013.46= $8,624,410.90.Alternatively, using your financial calculator, enter the following data:CF0 = 0; CFi = 7000000; CF2 = 1000000; CF3 = 1
146、000000; CF4 = 1000000; I = 10;NPV = ? Solve for NPV = $8,624,410.90.Contract 2 gives the quarterback the highest present value; therefore, heshould accept Contract 2 .6-16 PV = $100/0.07 = $1,428.57. PV = $100/0.14 = $714.29.When the interest rate is doubled, the PV of the perpetuity is halved.6-17
147、0 4 8 121阴I - 1 -1 - 1 - 1 - 1 - 1 -1 -1 - 1 - 1 - 1 - 1 - 1 -1 -1 - 1PV = ? 0 0 0 50 0 0 0 50 0 0 0 50 0 0 0 1, 050i PER = 8 % / 4 = 2 % .Answers and Solutions: 6 - 32The cash flows are shown on the time line above. With a financial calculator enter the following cash flows into your cash flow regi
148、ster: CF0 = 0,C FJ-3 = 0 / CF4 = 50, CF 5 - 7 = 0 f CF3 = 50, CF 9Tl = 01 CF12 = 50, CF13-15 = 0 rCF16 = 1050; enter 1 = 2 , and then press the NPV key to find PV = $893.16.6-18 This can be done with a calculator by specifying an interest rate of5 percent per period for 20 periods with 1 payment per
149、 period.N = 10 x 2 = 20.I = 10%/2 = 5.PV = -10000.FV = 0.Solve for PMT = $802.43.function. Find the interest in each 6-month period, sum them, and you havethe answer. Even simpler, with some calculators such as the HPT7B, justinput 2 for periods and press INT to get the interest during the first yea
150、r,$984.88. The HP-10B does the same thing.Set up an amortization table:BeginningPayment ofEndingPeriodBalancePaymentInterestPrincipalBalance1$10,000.00$802.43$500.00$302.43$9,697.5729,697.57802.43484.88$984.88You canalso work theproblemwith a calculator havingan amortization6-19 $1,000,000 loan 15 p
151、ercentf annual PMT, 5-year amortization. What is thefraction of PMT that is principal in the second year? First, find PMT byusing your financial calculator: N = 5, I/YR = 15, PV = -1000000, andFV = 0. Solve for PMT = $298,315.55.Then set up an amortization table:YearBeginningBalancePaymentInterestPr
152、incipalEndingBalance1$1,000,000.00$298,315.55$150,000.00$148,315.55$851,684.452851,684.45298,315.55127,752.67170,562.88681,121.57Fraction that is principal = $170,562.88/5298,315.55 = 0.5718 = 57.18%=57.2%.6-20 a. Begin with a time line:0123456789 100 1 2 3 4 56%I _ I _ I_ I _ I _I _ I _ I_ I_I_ |-1
153、00 100 100 100 100 FVA16 17 18 19 20 6-mos.8 9 10 YearsAnswers and Solutions: 6-33Since the first payment is made today, we have a 5-period annuity due.The applicable interest rate is 12%/2 = 6%. First, we find the FVA ofthe annuity due in period 5 by entering the following data in thefinancial calc
154、ulator: N = 5, I = 12/2 = 6, PV = 0, and PMT = -100.Setting the calculator on BEG, we find FVA (Annuity due) = $597.53.Now, we must compound out for 15 semiannual periods at 6 percent.$597.53 20 - 5 = 15 periods 6% $1,432.02.b. 0 1 2 3 4 5 40 quarters| ; - 1 - i- 1 - 1 - |-PMT PMT PMT PMT PMT FV = 1
155、, 432.02The time line depicting the problem is shown above. Because thepayments only occur for 5 periods throughout the 40 quartersz thisproblem cannot be immediately solved as an annuity problem. Theproblem can be solved in two steps:1 . Discount the $1,432.02 back to the end of Quarter 5 to obtain
156、 the PVof that future amount at Quarter 5.Input the following into your calculator: N = 35, 工 =3, PMT = 0,FV = 1432.02z and solve for PV at Quarter 5. PV = $508.92.2 . Then solve for PMT using the value solved in Step 1 as the FV of thefive-period annuity due.The PV found in step 1 is now the FV for
157、 the calculations in thisstep. Change your calculator to the BEGIN mode. Input thefollowing into your calculator: N = 5, I = 3Z PV = 0z FV = 508.92,and solve for PMT = $93.07.6-21 Here we want to have the same effective annual rate on the credit extendedas on the bank loan that will be used to finan
158、ce the credit extension.First, we must find the EAR = EFF% on the bank loan. Enter NOM% = 15,P/YR = 12z and press EFF% to get EAR = 16.08%.Now recognize that giving 3 months of credit is equivalent to quarterlycompounding一 一interest is earned at the end of the quarter, so it isavailable to earn inte
159、rest during the next quarter. Therefore, enter P/YR= 4, EFF% = EAR = 16.08%, and press NOM% to find the nominal rate of 15.19percent. (Dont forget to change your calculator back, to P/YR = 1.)Therefore, if you charge a 15.19 percent nominal rate and give creditfor 3 months, you will cover the cost o
160、f the bank loan.Alternative solution: We need to find the effective annual rate (EAR) thebank is charging first. Then, we can use this EAR to calculate the nominalrate that you should quote your customers.Bank EAR: EAR = (1 + iNom/m)m - 1 = (1 + 0.15/12)12 - 1 = 16.08%.Answers and Solutions: 6 - 34N
161、ominal rate you should quote customers:16.08% = (1 + iNom/4)4 - 11.1608 = (1 + iNom/4)41.0380 = 1 + iwom/ 4iNom = 0.0380 (4) = 15.19%.6-22 Information given:1. Will save for 10 years, then receive payments for 25 years.2 . Wants payments of $40,000 per year in todays dollars for first paymentonly. R
162、eal income will decline. Inflation will be 5 percent.Therefore, to find the inflated fixed payments, we have this time line:0 5% 5 1 0I - 1 - b40,000 FV = ?Enter N = 10, 1 = 5, PV = -40000, PMT = 0, and press FV to get FV =$65,155.79.3. He now has $100, 000 in an account that pays 8 percent, annualc
163、ompounding. We need to find the FV of the $100,000 after 10 years.Enter N = 1 0 ,工 =8, PV = -100000, PMT = 0, and press FV to get FV =$215,892.50.4. He wants to withdraw, or have payments of, $65,155.79 per year for 25 years,with the first payment made at the beginning of the first retirement year.S
164、o, we have a 25-year annuity due with PMT = 65,155.79, at an interest rateof 8 percent. (The interest rate is 8 percent annually, so no adjustmentis required.) Set the calculator t o、 BEG mode, then enter N = 25, 1 = 8,PMT = 65155.79, FV = 0, and press PV to get PV = $751f165.35. This amountmust be
165、on hand to make the 25 payments.5. Since the original $100,000, which grows to $215,89250, will beavailable, we must save enough to accumulate $751,165.35 - $215,892.50= $535,272.85.6. The $535,272.85 is the FV of a 10-year ordinary annuity. The paymentswill be deposited in the bank and earn 8 perce
166、nt interest. Therefore,set the calculator t o、 END mode and enter N = 10, I = 8Z PV = 0, FV =535272.85, and press PMT to find PMT = $36,949.61.6-23 a. Begin with a time line:0 8% 11.75 1.75PV = ?19 201.75(in millions)Answers and Solutions: 6-35It is important to recognize that this is an annuity due
167、 since paymentsstart immediately. Using a financial calculator input the followingafter switching to BEGIN mode:N = 2 0 ,工= 8, PMT = 1750000, FV = 0, and solve for PV = $18,556,299.b. 0 no 1 19 20, 8% . ,I - 1 - - ! - 1 -1.75 1.75 1.75 (in millions)FV = ?It is important to recognize that this is an
168、annuity due since paymentsstart immediately. Using a financial calculator input the followingafter switching to BEGIN mode:N = 20, 1 = 8 , PV = 0, PMT = 1750000, and solve for FV = $86,490,113.c. 0 1 19 20o等I -1 - - 1 -F1.75 1.75 1.75 (in millions)PV = ?Using a financial calculator input the followi
169、ng:N = 2 0 ,工=8, PMT = 1750000, FV = 0, and solve for PV = $17,181,758.0 8% 1 1 9 2 0I -1 - - 1 -F1.75 1.75 1.75 (in millions)FV = ?Using a financial calculator input the following:N = 2 0 ,工=8, PV = 0, PMT = 1750000, and solve for FV = $80,083,438.6-24 a. Begin with a time line:40 41 64 65LN七I -1 -
170、 - 1 - H5,000 5,000 5,000Using a financial calculator input the following:N = 25, I = 12, PV = 0, PMT = 5000, and solve for FV = $666,669.35.b. 40 1 2 % 41 69 70I - _ I - - 1 -H5,000 5,000 5,000FV = ?Using a financial calculator input the following:N = 30, I = 12, PV = 0, PMT = 5000, and solve for F
171、V = $1,206,663.42.Answers and Solutions: 6 - 366-25 Begin with a time line:0 1 2 3 4 512/31/01 o12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 01/01/07| 7 超 _ | _ | _| _ | _| _|_34,000 36,000 37,080 38,192.40 39,338.17 40,518.32 41,733.87100,00020,000PV = ?Step 1: Calculate the PV of the lost back pay
172、:$34,000 (1.07) + $36, 000 = $72,380.Step 2: Calculate the PV of future salary (2003 - 2007):CF0 = 0CE = 36, 000 (1.03) = 37080.00CF2 = 36,000(1.03)2 = 38192.40CF3 = 36,000(1.03)3 = 39338.17CF4 = 36,000(1.03)4 = 40518.32CF5 = 36,000(1.03)5 = 41733.871 = 7Solve for NPV = $160,791.50.Step 3: Because t
173、he costs for pain and suffering and court costs arealready on a present value basis, just add to the PV of costsfound in Steps 1 and 2.PV = $72,380 + $160,791.50 + $100,000 + $20,000 = $353,171.50.6-26 Begin with a time line:0 1 2 35,000 5,500 6,050FV = ?Use a financial calculator to calculate the p
174、resent value of the cash flowsand then determine the future value of this present value amount:Step 1: CF0 = 0CF1 = 5000CF2 = 5500CF3 = 60501 = 7Solve for NPV = $14,415.41.Step 2 : Input the following data:N = 3 ,工=7, PV = -14415.41, PMT = 0, and solve for FV =$17,659.50.Answers and Solutions: 6-376
175、-27 Begin with a time line:0 1 5 6 15-340.4689 50 50 PMT PMTThis security is essentially two annuities and the present value of the security is the sum of the present values fbreach of the two annuities. Using a financial calculator solve as follows:Step 1: Determine the present value of the first a
176、nnuity:Input N = 5 ,工=9, PMT = 50, FV = 0, and solve for PV =$194.4826.Step 2 : Calculate the present value of the second annuity:$340.4689 - $194.4826 = $145.9863.Step 3: Calculate the value of the second annuity as of Year 5:Input N = 5, I = 9Z PV = -145.9863, PMT = 0, and solve for FV =$224.6180.
177、Step 4: Calculate the payment amount of the second annuity:Input N = 1 0 ,工 =9, PV = -224.6180, FV = 0, and solve for PMT =$35.00.6-28 0 n T C O 1 2 3 4 5 6 7 8 QtrsTo solve this problem two steps are needed. First, determine the presentvalue of the cash flow stream. Second, calculate the future val
178、ue of thispresent value. Using a financial calculator input the following:CF0 = 0; CFi = 0; CF2 = 20; CF3 = 0; CF4 = 20; CF5 = 0; CF6 = 20; CF7 = 0; CF8=20; I = 7/4 = 1.75; and then solve for NPV = $73.4082.Calculate the future value of this NPV amount:Input N = 8, I = 1.75, PV = -73.4082, PMT = 0z
179、and solve for FV = $84.34.6-29 a . Using the information given in the problem, you can solve for thelength of time required to reach $1 million.1 = 8; PV = 30000; PMT = 5000; FV = -1000000; and then solve for N =31.7196.Therefore, it will take Erika 31.72 years to reach her investment goal.b. Again,
180、 you can solve for the length of time required to reach $1 million.1 = 9; PV = 30000; PMT = 5000; FV = -1000000; and then solve for N =29.1567.Answers and Solutions: 6 - 38It will take Katherine 29.16 years to reach her investment goal. Thedifference in time is 31.72 - 29.16 = 2.56 years. Using the
181、31.7196 year target, you can solve for the required payment.N = 31.7196; I = 9; PV = 30000; FV = -1000000; then solve for PMT =3,368.00.If Katherine wishes to reach the investment goal at the same time asErika, she can contribute as little as $3,368 every year.6-30If Crissie expects a 7% annual retu
182、rn upon her investments:1 payment10 paymentsN = 101 = 7PMT = 9500000FV = 030 paymentsN = 301 = 7PMT = 5500000FV = 0PV =61,000,000PV = 66,724,025PV = 68,249,727Crissie should accept the 30-year payment option as it carries thehighest present value ($68,249,727). If Crissie expects an 8% annual return
183、 upon her investments:1 payment10 paymentsN = 101 = 8PMT = 9500000FV = 030 paymentsN = 301 = 8PMT = 5500000FV = 0PV = 61,000,000PV = 63,745,773PV = 61,917,808Crissie should accepthighest present valuethe 10-year payment($63,745,773).option as it carriesIf Crissie expects a 9% annual return upon her
184、investments:1 payment 10 payments 30 paymentsN = 10 N = 301 = 9 1 = 9PMT = 9500000 PMT = 5500000FV = 0 FV = 0PV = 61,000,000 PV = 60,967,748 PV = 56,505,097Crissie should accepthighest present valuethe lump-sum payment($61,000,000).option as it carriesAnswers and Solutions: 6-396-31 Using the inform
185、ation given in the problem, you can solve for the maximumcar price attainable.Financed for 48 monthsN = 481 = 1 (12%/12 = 1%)PMT = 350FV = 0Financed for 60 monthsN = 601 = 1PMT = 350FV = 0PV = 13,290.89PV = 15,734.26You must add the value of the down payment to the present value of the carpayments.
186、If financed for 48 months, Jarrett can afford a car valued up to$17z 290.89 ($13z 290.89 + $4,000). If financing for 60 months, Jarrett canafford a car valued up to 19z 734.26 ($15,734.26 + $4,000).6-32 a. Using the information given in the problem, you can solve for thelength of time required to el
187、iminate the debt.1 = 2 (24%/12) ; PV = 305.44; PMT = -10; FV = 0; and then solve for N =47.6638.Because Simon makes payments on his credit card at the end of the month,it will require 48 months before he pays off the debt.b . First, you should solve for the present value of the total paymentsmade th
188、rough the first 47 months.N = 47; 1 = 2 ; PMT = -10; FV = 0; and then solve for PV = 302.8658.This represents a difference in present values of payments of $2.5742($305.44 - $302.8658). Next, you must find the value of thisdifference at the end of the 48th month.N = 48; 1 = 2 ; PV = -2.5742; PMT = 0
189、; and then solve for FV = 6.6596.Therefore, the 48th and final payment will be for $6.66.c. If Simon makes monthly payments of $30, we can solve for the length oftime required before the account is paid off.1 = 2 ; PV = 305.44; PMT = -30; FV = 0; and then solve for N = 11.4978.With $30 monthly payme
190、nts, Simon will only need 12 months to pay offthe account.d. First, we must find out what the final payment will be if $30 paymentsare made for the first 11 months.N = 11; 1 = 2 ; PMT = -30; FV = 0; and then solve for PV = 293.6054.Answers and Solutions: 6 - 406-336-346-35This represents a differenc
191、e in present values of payments of $11.8346($305.44 - $293.6054). Next, you must find the value of this differenceat the end of the 12th month.N = 12; 1 = 2 ; PV = -11.8346; PMT = 0; and then solve for FV = 15.0091.Therefore the 12th and final payment will be for $15.01.The difference in total payme
192、nts can be found to be:(47 x $10) + $6.66 - (11 x $30) + $15.01 = $131.65.Using the information given in the problem, you can solve for the return onthe investment.N = 5; PV = -1300; PMT = 400; FV = 0; and then solve fori = 16.32%.a， 0 6% 1I - $500 (1.06) = $530.00.-500 FV = ?b 0 1 2| - - -1 - ( $50
193、0 (1.06) 2 = $561.80.-500 FV = ?c. 0 ro 16 - 5I - b $500 (1/1.06) = $471.70.PV = ? 500d. 0 o 1 2I - - 1 -卜 $500 (1/1.06)2 = $445.00.PV = ? 500a. 0 1 2 3 4 5 6 7 8 9 10I -J -1 1 1 1 1 1 1 1 - b $500 (1.06)1 = $895.42.-500 FV = ?b. 0 1 23456789 10-1 -1 -1 -1 -1 -1 -1 -1 -F $500(1.12)1 = $1,552.92.-500
194、 FV = ?c. 0 1 2 3 4 5 6 7 8 9 10-1 -1 -1 -1 -1 -1 -1 -1 - F $500/(1.O6)10 = $279.20.PV = ? 500d. 0 1 23456789 10I I II - 1 -1 I -1 -FPV = ? 1,552.90$1,552.90/(1.12)1 = $499.99.$1,552.90/(1.06)1 = $867.13.Answers and Solutions: 6-41The present value is the value today of a sum of money to be received
195、in the future. For example, the value today of $lz 552.90 to bereceived 10 years in the future is about $500 at an interest rate of 12percent, but it is approximately $867 if the interest rate is6 percent. Therefore, if you had $500 today and invested it at 12percent, you would end up with $1,552.90
196、 in 10 years. The presentvalue depends on the interest rate because the interest rate determinesthe amount of interest you forgo by not having the money today.-200 400With a financial calculator, enter 工 = 7, PV = -200, PMT = 0z and FV =400. Then press the N key to find N = 10.24. Override I with th
197、eother values to find N = 7.27, 419, and 1.00.910% ，| - 1 Enter: I = 10, PV = -200, PMT = 0, and FV = 400.-200 400 N = 7.27.I - Enter: I = 18z PV = -200, PMT = 0, and FV = 400.-200 400 N = 4.19.d. ?I - Enter: I = 100, PV = -200, PMT = 0, and FV = 400.-200 400 N = 1.00.6-37 a. 0 1 2 3 4 5 6 7 8 9 10-
198、1 -1 -1 -1 -1 -1 -1 -1 -1 -1-400 400 400 400 400 400 400 400 400 400FV = ?With a financial calculator, enter N = 10, I = 10, PV = 0, and PMT =-400. Then press the FV key to find FV = $6,374.97.b. 0 CQ, 1 2 3 4 5 _!_j_H200 200 200 200 200FV = ?With a financial calculator, enter N = 5, 工 =5, PV = 0, a
199、nd PMT =-200. Then press the FV key to find FV = $lz105.13.c 0 1 2 3 4 5 吉. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .400 400 400 400 400FV = ?With a financial calculator enter N = 5, 工 =0, PV = 0, and PMT =-400. Then press the FV key to find FV = $2Z 000.Ans
200、wers and Solutions: 6 - 42d.To solve Part d using a financial calculator, repeat theproceduresdiscussed in、 BEG mode,after working1. 0 1I 10 会 1Parts a, b, and c, butMake sure you switch thethe problem.2 3 4 5IIIIfirst switch the calculator tocalculator back to END mode6 7 8 9 10_ I_ l_I_ l_400 4004
201、00400 400400400400400 400 FV =With a financialand PMT = -400.calculatorFV = $7,012on BEG,.47.enter:N =10, I =10, PV=0,2.0 1| 5 - 2|3 4| |5_ I200 200200200 200FV = ?With a financialand PMT = -200.calculatorFV = $lz160on BEG,.38.enter : N= 5 ,工 =5, PV=0,3.0 1| 03 |2|3 4| |5_ L400 400400400 400FV = ?Wi
202、th a financialand PMT = -400.calculatorFV = $2Z 000on BEG,enter： N=5 ,工 =0, PV=0,6-38 The general formula is PVAn = PMT (PVIFAirn).a .0 1 2 3 4 56 78 9 101 10： 1 _ 1 _ 1 _ 1 _ L1 1| | |PV = ? 400 400 400 400 400 400 400400 400 400With a financial calculator,simply enter the known 、values and thenpre
203、ss the key for the unknown.Enter: N =10, I = 10,PMT = -400, andFV = 0. PV = $2,457.83.b.0 12 34 5| _5. _ | _ | _ | _PV = ? 200 200 200200 200With a financial calculator,enter: N =5 ,工 =5, PMT=-200,and FV= 0 . PV = $865.90.c .0 12 34 5| 0 吉 | _ | _ |_ | _ l _PV = ? 400 400 400400 400With a financial
204、calculator,enter: N =5, 1 = 0, PMT=-400,and FV= 0 . PV = $2,000.00.d . 1. 0 1 2 3 45 67 8 910| 10% | _ | _ | _ |i ii i i400 400 400 400 400400 400 400 400 400PV = ?With a financial calculator on BEG, enter: N = 10,I = 10,PMT =400, and FV = 0. PV = $2,703.61.Answers and Solutions: 6-432. 0 5 % 1 2 3
205、4 5I -I - 1 -1 - 1 -b200 200 200 200 200PV = ?With a financial calculator on BEG, enter: N = 5, 1 = 5, PMT =-200, and FV = 0. PV = $909.19.3. 0 八 。1 2 3 4 5 _ 2 _, _ _ _H400 400 400 400 400PV = ?With a financial calculator on BEG, enter: N = 5, 工 =0, PMT =-400, and FV = 0. PV = $2,000.00.6-39 a . Ca
206、sh Stream A Cash Stream B0 1 2 3 4 5 0 1 2 3- 4 5 8% 8: PV = ? 100 400 400 400 300 PV = ? 300 400 400 400 100With a financial calculator, simply enter the cash flows (be sure toenter CF0 = 0) , enter 工 =8, and press the NPV key to find NPV = PV =$1,251.25 for the first problem. Override 1 = 8 with I
207、 = 0 to find thenext PV for Cash Stream A. Repeat for Cash Stream B to get NPV = PV =$1,300.32.b. PVA = $100 + $400 + $400 + $400 + $300 = $1,600.PVB = $300 + $400 + $400 + $400 + $100 = $1,600.6-40 These problems can all be solved using a financial calculator by enteringthe known values shown on th
208、e time lines and then pressing the I button.a. 0 , o 1i = ?I - H+700 -749With a financial calculator, enter: N = 1, PV = 700, PMT = 0, and FV=-749. I = 7%.b i 1I-:- b-700 +749With a financial calculator, enter: N = 1, PV = -700, PMT = 0, and FV=749. I = 7%.c. 0 10|-1 = ?-H+85,000 -201,229With a fina
209、ncial calculator, enter: N = 10, PV = 85000, PMT = 0, andFV = -201229. I = 9%.Answers and Solutions: 6 - 44d. 0 , 1 2 3 4 5| - ：-1 - 1 - 1 - 1 - 1 -+ 9, 000 -2Z 684.80 -2Z 684.80 -2Z 684.80 -2,684.80 -2,684.80With a financial calculator f enter: N = 5, PV = 9000, PMT =一2684.80, and FV = 0. I = 15%.6
210、-41 a. 0 1 2 % 1 2 3 4 5-500 FV = ?With a financial calculator, enter N = 5, I = 12, PV = -500, and PMT =0, and then press FV to obtain FV = $881.17.b. 0 1 2 3 4 5 6 7 8 9 10-500 FV = ?Enter the time line values into a financial calculator to obtain FV =$895.42.Alternatively, FVn = Pvl 1 + i = $5001
211、1 + i=$500 (1.06)10 = $895.42.c. 0 0 4 8 12 16 203%| -1 -1 -1 -1 -H-500 FV = ?Enter the time line values into a financial calculator to obtain FV =$903.06.( o 12 TAlternatively, FVn = $500l 1 + I = $500 (1.03)20 = $903.06.d. 0 12 24 36 48 60- -1 - 1 -1 - 1 -1 -500 ?Enter the time line values into a
212、financial calculator to obtain FV =$908.35.( n 1Alternatively, FVn = $500l 1 + I = $500 (l.Ol)60 = $908.35.6-42 a. 0 “ 2 4 6 8 10I I -1 -1 - 1 - FPV = ? 500Enter the time line values into a financial calculator to obtain PV =$279.20.Answers and Solutions: 6-45mn / 2 (5)Alternatively, PV = FVn - 1 +
213、1= $5000.121 +2= $500( 1 = $279.20.U.06Jb. 0 c 4 8 12 16 20.3% , . . , .PV = ? 500Enter the time line values into a financial calculator to obtain PV =$276.84.$276.84.12 F500Enter the time line values into a financial calculator to obtain PV =$443.72.6-43 a. 0 1 2 3 9 10. 6% , . , . ,I-1 -1 -i- -1 -
214、L-400 -400 -400 -400 -400FV = ?Enter N = 5 x 2 = 10, I = 12/2 = 6f PV = 0, PMT = -400, and then pressFV to get FV = $5,272.32.b Now the number of periods is calculated as N = 5 x 4 = 20, I = 12/4=3, PV = 0, and PMT = -200. The calculator solution is $5, 374.07.The solution assumes that the nominal i
215、nterest rate is compounded atthe annuity period.c. The annuity in Part b earns more because some of the money is ondeposit for a longer period of time and thus earns more interest. Ais。 ，because compounding is more frequent, more interest is earned oninterest.Answers and Solutions: 6 - 466-44 a. Fir
216、st City Bank: Effective rate = 7%.Second City Bank:( 0.06) 4Effective rate = 1 + - - -I - 1 . 0 = (1.015)4 - 1.0=1.0614 - 1.0 = 0.0614 = 6.14%.With a financial calculator, you can use the interest rate conversionfeature to obtain the same answer. You would choose the First CityBank.b . If funds must
217、 be left on deposit until the end of the compoundingperiod (1 year for First City and 1 quarter for Second City) , and youthink there is a high probability that you will make a withdrawalduring the year, the Second City account might be preferable. Forexample, if the withdrawal is made after 10 mont
218、hsf you would earnnothing on the First City account but (1.015)3 - 1.0 = 4.57% on theSecond City account.Ten or more years ago, most banks and S&Ls were set up as describedabove, but now virtually all are computerized and pay interest from theday of deposit to the day of withdrawal, provided at leas
219、t $1 is in theaccount at the end of the period.6-45 a. With a financial calculator, enter N = 5, I = 10, PV = -25000, and FV =0, and then press the PMT key to get PMT = $6, 594 94 Then go throughthe amortization procedure as described in your calculator manual toget the entries for the amortization
220、table.RepaymentRemainingYearPaymentInterestof PrincipalBalance1$ 6,594.94$2,500.00$ 4,094.94$20,905.0626,594.942,090.514,504.4316,400.6336,594.94lr640.064,954.8811,445.7546,594.941,144.585,450.365,995.3956,594.93*599.545,995.390$32,974.69$7,974.69$25,000.00*The last payment must be smaller to force
221、the ending balance to zerob . Here the loan size is doubled, so the payments also double in size to$13,189.87.c. The annual payment on a $50,000, 10-year loan at 10 percent interestwould be $8,137.27. Because the payments are spread out over a longertime period, each payment is lower but more intere
222、st must be paid onthe loan. The total interest paid on the 10-year loan is $31A 372.70versus interest of $15,949.37 on the 5-year loan.Answers and Solutions: 6-476-46 a. Using your financial calculator, input the following data: N = 30 x 12= 360; I = 8/12 = 0.6667; PV = -125000; FV = 0; PMT = ? Solv
223、e for PMT=$917.21.b. After finding the monthly mortgage payment, use the amortizationfeature of your calculator to find interest and principal repaymentsduring the year and the remaining mortgage balance as follows:1 INPUT 12 AMORT= $ 9,962.23 (Interest)= $ 1,044.29 (Principal)= $123,955.71 (Balance
224、)Total mortgage payments made during the first year equals 12 x $917.21= $11,006.52.Portion of first year mortgage payments that go towards interest equals$9,962.23/$11,006.52 = 90.51%.c. After finding the monthly mortgage paymentf use the amortizationfeature of your calculator to find interest and
225、principal paymentsduring the first five years and the remaining mortgage balance asfollows:1 INPUT 60 AMORT= $ 48,869.66 (Interest)= $ 6,162.68 (Principal)= $118,837.32 (Balance)The remaining mortgage balance after 5 years will be $118,837.32.d Using your financial calculator, input the following da
226、ta: N = 30 x 12=360; I = 8/12 = 0.6667; PMT = 1200; FV = 0; PV = ? Solve for PV =$163,540.19.If the Jacksons are willing to have a $1,200 monthly mortgage payment,the can borrow $163,540 19 today.6-47 0 9 10Z: -422.41 0 0 0 1,000.00B: -1,000.00 80 80 80 1,080.00a. With a financial calculator, for Z,
227、 enter N = 10z PV = -422.41, PMT=0, FV = 1000A and press I to get I = 9.00%. For B, enter N = 10, PV= -1000, PMT = 80, FV = 1000, and press I to get 1 = 8 % . (Alternatively,enter the values exactly as shown on the time line in the CF register,and use the IRR key to obtain the same answer.)b . With
228、a calculator, for the zero coupon bond,“ enter N = 10, 工=6, PMT= 0, FV = 1000, and press PV to get the value of the security today,$558.39. The profit would be $558.39 - $422.41 = $135.98, and thepercentage profit would be $135.98/$422.41 = 32.2%.Answers and Solutions: 6 - 48For the coupon bond,“ en
229、ter N = 1 0 , 1 =6, PMT = 80, FV = 1000, andthen press PV to get PV = $1,147.20. The profit is $147.20z and thepercentage profit is 14.72 percent.c. Here we compound cash flows to obtain a terminal value“ at Year 10,and then find the interest rate that equates the TV to the cost of thesecurity.There
230、 are no intermediate cash flows with Security Z, so its TV is$1,000, and, as we saw in Part a, 9 percent causes the PV of $lz 000 toequal the cost, $422.41. For Security Bz we must compound the cashflows over 10 years at 6 percent. Enter N = 10z 1 = 6, PV = 0, PMT =80, and then press FV to get the F
231、V of the 10-year annuity of $80 peryear: FV = $1,054.46. Then add the $1,000 to be received at Year 10to get TVB = $2, 054.46. Then enter N = 10, PV = -1000, PMT = 0, FV =2054.46, and press I to get I = 7 .47%.So, if the firm buys Security Z, its actual return will be 9 percentregardless of what hap
232、pens to interest rates一 一this security is a zerocoupon bond that has zero reinvestment rate risk. However, if the firmbuys the 8 percent coupon bond, and rates then fallf its true returnover the 10 years will be only 7 .47 percent, which is an average of theold 8 percent and the new 6 percent.d. The
233、 value of Security Z would fall from $422.41 to $321.97, so a lossof $100.44, or 23.8 percent, would be incurred. The value of SecurityB would fall to $773.99, so the loss here would be $226.01, or 22.6percent of the $1,000 original investment. The percentage losses forthe two bonds is close, but on
234、ly because the zeros original return was9 percent versus 8 percent for the coupon bond.The actual or true return on the zero would remain at 9 percent,but the actual“ return on the coupon bond would rise from 8 percent to9.17 percent due to reinvestment of the $80 coupons at 12 percent.6-48 aFirst,
235、determine the annual$12,500 per year, but that iscost of college. The current cost isescalating at a 5 percent inflation rate:8 percent, compounded annually?Now put13CollegeYearCurrentCostYearsfrom Now5678line:17InflationAdjustmept(1.05)，(1.05)6(1.05)7(1.05)818 19CashRequired$15,95416,75117,58918,46
236、820211234these cost14 1$12,50012z50012,50012,500is on a time5 1611 1 11 1 1-15,954 -16,751 -17,589l-18,468How much must beaccumulatesi by age18 to providethese payments atages 18through21 if thefunds are invested inan account payingAnswers and Solutions: 6-49LEAR 幡 E 4 T IV E SBonds and Their Valuat
237、ionWith a financial calculator enter: CF0 = 15954, CFi = 16751, CF2 =17589, CF3 = 18468, and 1 = 8. Solve for NPV = $61,204.41.Thus, the father must accumulate $61,204 by the time his daughterreaches age 18.b. She has $7Z 500 now (age 13) to help achieve that goal. Five yearshence, that $7,500, when
238、 invested at 8 percent, will be worth $11,020:$7,500(1.08)5 = $11,020.c. The father needs to accumulate only $61z 204 - $11,020 = $50, 184. Thekey to completing the problem at this point is to realize the series ofdeposits represent an ordinary annuity rather than an annuity duezdespite the fact the
239、 first payment is made at the beginning of thefirst year. The reason it is not an annuity due is there is nointerest paid on the last payment that occurs when the daughter is 18.Using a financial calculator, N = 6, 工 = 8, PV = 0, and FV = -50184.PMT = $6,840.85 x $6,841.After reading this chapter, s
240、tudents should be able to: List the four main classifications of bonds and differentiate among them. Identify the key characteristics common to all bonds. Calculate the value of a bond with annual or semiannual interest payments. Explain why the market value of an outstanding fixed-rate bond will fa
241、llwhen interest rates rise on new bonds of equal risk, or vice versa. Calculate the current yield, the yield to maturity, and/or the yield tocall on a bond. Differentiate between interest rate risk, reinvestment rate risk, anddefault risk. List major types of corporate bonds and distinguish among th
242、em. Explain the importance of bond ratings and list some of the criteria usedto rate bonds.Answers and Solutions: 6 - 50Differentiate among the following terms: Insolvent, liquidation, andreorganization.Read and understand the information provided on the bond market page ofyour newspaper.Learning Ob
243、jectives: 7 - 51LECTURE SUGGESTIONSThis chapter serves two purposes. First, it provides important and usefulinformation on bonds per se. Second, it provides a good example of the use oftime value concepts, so it reinforces the topics covered in Chapter 6.We begin our lecture with a discussion of the
244、 different types of bonds andtheir characteristics. Then we move on to how bond values areestablished, how yields are determined, the effects of changinginterest rates on bond prices, and the riskiness inherent in differenttypes of bonds.The details of what we cover, and the way we cover it, can be
245、seen byscanning Blueprints, Chapter 7. For other suggestions about the lecture,please see the Lecture Suggestions in Chapter 2, where we describe how weconduct our classes.DAYS ON CHAPTER: 3 OF 58 DAYS (50-minute periods)Lecture Suggestions: 7 - 52ANSWERS TO END-OF-CHAPTER QUESTIONS7-lYes, the state
246、ment is true.7-2False. Short-term bond prices are less sensitive than long-term bond pricesto interest rate changes because funds invested in short-term bonds canbe reinvested at the new interest rate sooner than funds tied up in longterm bonds.7-3The price of the bond will fall and its YTM will ris
247、e if interest rates rise.If the bond still has a long term to maturity, its YTM will reflectlong-term rates. Of course, the bonds price will be less affected by achange in interest rates if it has been outstanding a long time andmatures shortly. While this is true, it should be noted that the YTMwil
248、l increase only for buyers who purchase the bond after the change ininterest rates and not for buyers who purchased previous to the change.If the bond is purchased and held to maturity, the bondholders YTM willnot change, regardless of what happens to interest rates.7-4If interest rates decline sign
249、ificantly, the values of callable bonds willnot rise by as much as those of bonds without the call provision. It islikely that the bonds would be called by the issuer before maturity, sothat the issuer can take advantage of the new, lower rates.7-5From the corporations viewpoint, one important facto
250、r in establishing asinking fund is that its own bonds generally have a higher yield than dogovernment bonds; hence, the company saves more interest by retiring itsown bonds than it could earn by buying government bonds. This factorcauses firms to favor the second procedure. Investors also would pref
251、erthe annual retirement procedure if they thought that interest rates weremore likely to rise than to fall, but they would prefer the governmentbond purchase program if they thought rates were likely to fall. Inaddition, bondholders recognize that, under the government bond purchasescheme, each bond
252、holder would be entitled to a given amount of cash fromthe liquidation of the sinking fund if the firm should go into default,whereas under the annual retirement plan, some of the holders wouldreceive a cash benefit while others would benefit only indirectly fromthe fact that there would be fewer bo
253、nds outstanding.On balance, investors seem to have little reason for choosing onemethod over the other, while the annual retirement method is clearly morebeneficial to the firm. The consequence has been a pronounced trendtoward annual retirement and away from the accumulation scheme.7-6a. If a bonds
254、 price increases its YTM decreases.b. If a companys bonds are downgraded by the rating agencies, its YTMincreases.Answers and Solutions: 7-53c. If a change in the bankruptcy code made it more difficult forbondholders to receive payments in the event a firm declaredbankruptcy, then the bonds YTM woul
255、d increase.d. If the economy entered a recession, then the possibility of a firmdefaulting on its bond would increase; consequently, its YTM wouldincrease.e. If a bond were to become subordinated to another debt issue, then thebonds YTM would increase.7-7As an investor with a short investment horizo
256、n, I would view the 20-yearTreasury security as being more risky than the 1-year Treasury security.If I bought the 20-year security, I would bear a considerable amount ofinterest rate risk. Since my investment horizon is only one year, Iwould have to sell the 20-year security one year from now, and
257、the priceI would receive for it would depend on what happened to interest ratesduring that year. However, if I purchased the 1-year security I would beassured of receiving my principal at the end of that one year, which isthe 1-year Treasurys maturity date.Answers and Solutions: 7 - 54SOLUTIONS TO E
258、ND-OF-CHAPTER PROBLEMS7-1 With your financial calculator, enter the following:N = 10; I = YTM = 9%; PMT = 0.08 x 1,000 = 80; FV = 1000; PV = VB = ?PV = $935.82.7-2 With your financial calculator, enter the following to find YTM:N = 10 x 2 = 20; PV = -1100; PMT = 0.08/2 x 1,000 = 40; FV = 1000; I = Y
259、TM = ?YTM = 3.31% x 2 = 6.62%.With your financial calculator, enter the following to find YTC:N = 5 x 2 = 10; PV = -1100; PMT = 0.08/2 x 1,000 = 40; FV = 1050; I = YTC = ?YTC = 3.24% x 2 = 6.49%.7-3 The problem asks you to find the price of a bond, given the followingfacts: N = 16; I = 8.5/2 = 4.25;
260、 PMT = 45; FV = 1000.With a financial calculator, solve for PV = $1,028.60.7-4 VB = $985; M = $1,000; Int = 0.07 x $1,000 = $70.a . Current yield = Annual interest/Current price of bond= $70/$985.00=7.11%.b. N = 10; PV = -985; PMT = 70; FV = 1000; YTM = ?Solve for I = YTM = 7.2157% 7.22%.C. N = 7; I
261、 = 7.2157; PMT = 70; FV = 1000; PV = ?Solve for VB = PV = $988.46.7-5a . 1. 5%: Bond LBond S2. 8%: Bond LBond SInput N = 1 5 ,工= 5 , PMT = 100, FV = 1000, PV = ?, PV=$1,518.98.Change N = 1, PV = ? PV = $1,047.62.From Bond S inputs, change N = 15 and IPV = $lz171.19.Change N = 1, PV = ? PV = $1,018.5
262、2.8, PV = ?,Answers and Solutions: 7-553. 12%: Bond L: From Bond S inputs, change N = 15 and I = 12, PV = ?,PV = $863.78.Bond S: Change N = 1, PV = ? PV = $982.14.b Think about a bond that matures in one month. Its present value isinfluenced primarily by the maturity value, which will be received in
263、only one month. Even if interest rates double, the price of the bondwill still be close to $1,000. A 1-year bonds value would fluctuatemore than the one-month bonds value because of the difference in thetiming of receipts. However, its value would still be fairly close to$1,000 even if interest rate
264、s doubled. A long-term bond payingsemiannual coupons, on the other hand, will be dominated by distantreceipts, receipts that are multiplied by 1/ (1 + kd/2)zr and if kdincreases, these multipliers will decrease significantly. Another wayto view this problem is from an opportunity point of view. A 1-
265、monthbond can be reinvested at the new rate very quickly, and hence theopportunity to invest at this new rate is not lost; however, the longterm bond locks in subnormal returns for a long period of time.7-6 a.VB = Zt= l工NT- + -( 1 + kJ ( 1 + kd)NM = $1, 000. I = 0.09 ($lz 000) = $90.1. VB = $829: In
266、put N = 4, PV = -829, PMT = 90, FV = 1000, I = ? I =14.99%.2. VB = $1,104: Change PV = -1104, I = ? I = 6.00%.b . Yes. At a price of $829, the yield to maturity, 15 percent, isgreater than your required rate of return of 12 percent. If yourrequired rate of return were 12 percent, you should be willi
267、ng to buythe bond at any price below $908.88.7-7 The rate of return is approximately 15.03 percent, found with acalculator using the following inputs:N = 6; PV = -1000; PMT = 140; FV = 1090; 1 = 2 Solve for I = 15.03%.7-8 a. Using a financial calculator, input the following:N = 20, PV = -1100, PMT =
268、 60, FV = 1000, and solve for I = 5.1849%.However, this is a periodic rate. The nominal annual rate = 5.1849%(2)= 10.3699% x 10.37%.b . The current yield = $120/$lz100 = 10.91%.c. YTM = Current Yield + Capital Gains (Loss) Yield10.37% = 10.91% + Capital Loss YieldAnswers and Solutions: 7 - 56-0.54%
269、= Capital Loss Yield.d. Using a financial calculator, input the following:N = 8, PV = -1100, PMT = 60, FV = 1060, and solve for I = 5.0748%.However, this is a periodic rate. The nominal annual rate = 5.0748% (2)=10.1495% x 10.15%.7-9 The problem asks you to solve for the YTM, given the following fac
270、ts:N = 5, PMT = 80, and FV = 1000. In order to solve for I we need PV.However, you are also given that the current yield is equal to 8.21%.Given this information, we can find PV.Current yield = Annual interest/Current price0.0821 = $80/PVPV = $80/0.0821 = $974.42.Now, solve for the YTM with a financ
271、ial calculator:N = 5, PV = -974.42, PMT = 80, and FV = 1000. Solve for I = YTM = 8.65%.7-10 The problem asks you to solve for the current yield, given the followingfacts: N = 14, I = 10.5883/2 = 5.29415, PV = -1020, and FV = 1000. Inorder to solve for the current yield we need to find PMT. With afin
272、ancial calculator, we find PMT = $55.00. However, because the bond isa semiannual coupon bond this amount needs to be multiplied by 2 toobtain the annual interest payment: $55.00(2) = $110.00. Finally, findthe current yield as follows:Current yield = Annual interest/Current price = $110/$lz 020 = 10
273、.78%.7-11 The bond is selling at a large premium, which means that its coupon rateis much higher than the going rate of interest. Therefore, the bond islikely to be called- it is more likely to be called than to remainoutstanding until it matures. Thus, it will probably provide a returnequal to the
274、YTC rather than the YTM. So, there is no point incalculating the YTM- just calculate the YTC. Enter these values:N = 10, PV = -1353.54, PMT =70, FV = 1050, and then solve for I.The periodic rate is 3.2366 percent, so the nominal YTC is 2 x 3.2366% =6.4733% 6.47%. This would be close to the going rat
275、e, and it is aboutwhat the firm would have to pay on new bonds.7-12 a. To find the YTM:N = 10, PV = -1175, PMT = 110, FV = 1000I = YTM = 8.35%.Answers and Solutions: 7-57b. To find the YTC, if called in Year 5:N = 5, PV = -1175, PMT = 110, FV = 1090I = YTC = 8.13%.c. The bonds are selling at a premi
276、umhave fallen since the bonds wereinterest rates do not change fromexpect to earn the yield to call.YTM.)which indicates that interest ratesoriginally issued. Assuming thatthe present level, investors would(Note that the YTC is less than thed. Similarly from abovez YTC can be found, if called in eac
277、h subsequentyear.If called in Year 6:N = 6, PV = -1175, PMT = 110, FV = 1080I = YTM = 8.27%.If called in Year 7：N = 7, PV = -1175, PMT = 110, FV = 1070I = YTM = 8.37%.If called in Year 8:N = 8, PV = -1175, PMT = 110, FV = 1060I = YTM = 8.46%.If called in Year 9:N = 9, PV = -1175, PMT = 110, FV = 105
278、0I = YTM = 8.53%.According to these calculations, the latest investors might expect acall of the bonds is in Year 6. This is the last year that theexpected YTC will be less than the expected YTM. At this time, thefirm still finds an advantage to calling the bonds, rather than seeingthem to maturity.
279、7-13 First, we must find the amount of money we can expect to sell this bondfor in 5 years. This is found using the fact that in five years, therewill be 15 years remaining until the bond matures and that the expectedYTM for this bond at that time will be 8.5%.N = 1 5 ,工=8.5, PMT = 90, FV = 1000PV =
280、 -$lz041.52. VB = $1,041.52.This is the value of the bond in 5 years. Thereforez we can solve forthe maximum price we would be willing to pay for this bond today, subjectto our required rate of return of 10%.N = 5 ,工=10, PMT = 90, FV = 1041.52PV = -$987.87, VB = $987.87.We are willing to pay up to $
281、987.87 for this bond today.7-14 Before you can solve for the price, we must find the appropriateAnswers and Solutions: 7 - 58semiannual rate at which to evaluate this bond.EAR = (1 + NOM/2)2 - 10.0816 = (1 + NOM/2)2 - 1NOM = 0.08.Semiannual interest rate = 0.08/2 = 0.04 = 4%.Solving for price:N = 2
282、0 ,工= 4, PMT = 45, FV = 1000PV = -$1,067.95. VB = $1,067.95.7-15 a. The current yield is defined as the annual coupon payment divided bythe current price.CY = $80/$901.40 = 8.875%.b . Solving for YTM:N = 9, PV = -901.40, PMT = 80, FV = 1000I = YTM = 9.6911%.c. Expected capital gains yield can be fou
283、nd as the difference betweenYTM and the current yield.CGY = YTM - CY = 9.691% - 8.875% = 0.816%.Alternatively, you can solve for the capital gains yield by firstfinding the expected price next year.N = 8, I = 9.6911, PMT = 80, FV = 1000PV = -$908.76. VB = $908.76.Hence, the capital gains yield is th
284、e percent price appreciation overthe next year.CGY = (Px - Po)/Po = ($908.76 - $901.40)/$901.40 = 0.816%.7-16 Using the TIE ratio, we can solve for the firm* s current operating income.TIE = EBIT/Int Exp3.2 = EBIT/$10z 500z 000EBIT = $33,600,000.Using the same methodology, you can solve for the maxi
285、mum interestexpense the firm can bear without violating its covenant.2.5 = $33,600,000/ 工nt ExpMax Int Exp = $13,440,000.Therefore, the firm can raise debt to the point that its interest expenseincreases by $2.94 million ($13.44 - $10.50) . The firm can raise $25million at 8%, which would increase t
286、he cost of debt by $25 x 0.08 = $2million. Additional debt will be issued at 10%, and the amount of debtto be raised can be found, since we know that only an additional $0.94million in interest expense can be incurred.Answers and Solutions: 7-59Additional Int Exp = Additional Debt x Cost of debt$0.9
287、4 million = Additional Debt x 0.10Additional Debt = $9.40 million.Hence, the firm may raise up to $34.4 million in additional debt withoutviolating its bond covenants.7-17 First, we must find the price Baili paid for this bond.N = 10, I = 9.79, PMT = 110, FV = 1000PV = -$1,075.02. VB = $1,075.02.The
288、n to find the one-period return, we must find the sum of the change inprice and the coupon received divided by the starting price. , Ending price - Beginning price + Coupon receivedOne-period return = -Beginning priceOne-period return = ($1,060.49 - $lz 075.02 + $110)/$lz 075.02One-period return = 8
289、.88%.7-18 The answer depends on when one works the problem. We used The WallStreet Journal, February 3, 2003:a. AT&Ts 8.625%, 2031 bonds had an 8.6 percent current yield. The bondssold at a premium, 100.75% of par, so the coupon interest rate wouldhave to be set lower than 8.625% for the bonds to se
290、ll at par. If weassume the bonds arent callable, we can do a rough calculation oftheir YTM. Using a financial calculator, we input the following values:0.08625N = 29 x 2 = 58, PV = 1.0075 x -1,000 = -1007.50, PMT = - x21,000 = 86.25/2 = 43.125z FV = 1000, and then solve for YTM = kd =4.2773% x 2 = 8
291、.5546%.Thus, AT&T would have to set a rate of 8.55 percent on new long-termbonds.b . The return on AT&Ts bonds is the current yield of 8.6 percent, less asmall capital loss in 2031. The total return is about 8.55 percent.7-19 a. Yield t。maturity (YTM):With a financial calculator, input N = 28, PV =
292、-1165.75, PMT = 95, FV= 1000, I = ? I = kd = YTM = 8.00%.Yield to call (YTC):With a calculator, input N = 3, PV = -1165.75, PMT = 95, FV = 1090,I = ? I = kd = YTC = 6.11%.b. Knowledgeable investors would expect the return to be closer to 6.1percent than to 8 percent. If interest rates remain substan
293、tiallyAnswers and Solutions: 7 - 60lower than 9.5 percent, the company can be expected to call the issueat the call date and to refund it with an issue having a coupon ratelower than 9.5 percent.7-20c. If thebond had sold atadiscount, thiswould implythat currentinterestrates are above the coupon rat
294、e. Therefore, the company wouldnot call the bonds, so the10-year, 10% annual coupon10-year zero5-year zero30-year zero$100 perpetuityYTM would be morePrice at 8%$1,134.20463.19680.5899.381,250.00relevant thanPrice at 7%$1,210.71508.35712.99131.371,428.57the YTC.Percentagechange6.75%9.754.7632.1914.2
295、97-21a .tPrice of Bond CPrice of Bond Z0$1,012.79$ 693.0411,010.02759.5721,006.98832.4931,003.65912.4141,000.001,000.007-22The detailed solution for the spreadsheet problem is available both on theinstructor* s resource CD-ROM and on the instructors side of South-Westerns web site, http:/.Answers an
296、d Solutions: 7-61Chapter 5Stocks and Their ValuationLEARNING OBJECTIVESAfter reading this chapter, students should be able to: Identify some of the more important rights that come with stock ownershipand define the following terms: proxy, proxy fight, takeover, andpreemptive right. Briefly explain w
297、hy classified stock might be used by a corporation andwhat founders shares are. Differentiate between closely held and publicly owned corporations and listthe three distinct types of stock market transactions. Determine the value of a share of common stock when: (1) dividends areexpected to grow at
298、some constant rate, (2) dividends are expected toremain constant, and (3) dividends are expected to grow at some supernormal, or nonconstant, growth rate. Calculate the expected rate of return on a constant growth stock. Apply the total company (corporate value) model to value a firm insituations wh
299、en the firm does not pay dividends or is privately held. Explain why a stocks intrinsic value might differ between the totalcompany model and the dividend growth model. Explain the following terms: equilibrium, marginal investor, and EfficientMarkets Hypothesis (EMH); distinguish among the three lev
300、els of marketefficiency; briefly explain the implications of the EMH on financialdecisions; and discuss the results of empirical studies on marketefficiency and the implication of behavioral finance on those results.Read and understand the stock market page given in the daily newspaper.Explain the r
301、easons for investing in international stocks and identify thean investor is making when he does invest overseas.Define preferred stock, determine the value of a share of preferred stock,or given its value, calculate its expected return.Learning Objectives: 8 - 62Harcourt Brace & CompanyLearning Obje
302、ctives: 8 - 63LECTURE SUGGESTIONSThis chapter provides important and useful information on common and preferredstocks. Moreover, the valuation of stocks reinforces the concepts covered inboth Chapters 6 and 7, so Chapter 8 extends and reinforces those chapters.We begin our lecture with a discussion
303、of the characteristics of commonstocks, after which we discuss how stocks are valued in the market and howstock prices are reported in the press. We conclude the lecture with adiscussion of preferred stocks.The details of what we cover, and the way we cover it, can be seen byscanning Blueprints Chap
304、ter 8. For other suggestions about the lecture, pleasesee the Lecture Suggestions in Chapter 2, where we describe how we conductour classes.DAYS ON CHAPTER: 3 OF 58 DAYS (50-minute periods)Lecture Suggestions: 8 - 64ANSWERS TO END-OF-CHAPTER QUESTIONS8-1 True. The value of a share of stock is the PV
305、 of its expected futuredividends. If the two investors expect the same future dividend stream,and they agree on the stocks riskiness, then they should reach similarconclusions as to the stockz s value.8-2 A perpetual bond is similar to a no-growth stock and to a share ofpreferred stock in the follow
306、ing ways:1. All three derive their values from a series of cash inflows- couponpayments from the perpetual bond, and dividends from both types ofstock.2. All three are assumed to have indefinite lives with no maturity value(M) for the perpetual bond and no capital gains yield for the stocks.8-3 Yes.
307、 If a company decides to increase its payout ratio, then the dividendyield component will rise, but the expected long-term capital gains yieldwill decline.8-4 No. The correct equation has Dx in the numerator and a minus sign in thedenominator.8-5 a. The average investor in a listed firm is not reall
308、y interested inmaintaining his proportionate share of ownership and control. If hewanted to increase his ownership, he could simply buy more stock on theopen market. Consequently, most investors are not concerned withwhether new shares are sold directly (at about market prices) orthrough rights offe
309、rings. However, if a rights offering is being usedto effect a stock split, or if it is being used to reduce theunderwriting cost of an issue (by substantial underpricing), thepreemptive right may well be beneficial to the firm and to itsstockholders.b. The preemptive right is clearly important to th
310、e stockholders ofclosely held firms whose owners are interested in maintaining theirrelative control positions.Answers and Solutions: 8-65SOLUTIONS TO END-OF-CHAPTER PROBLEMS8-1 Do = $1.50; gx-3 = 5%; gn = 10%; D】through D5 = ?Di = D o (lD2 = D0( lD3 = Do (1D4 = D0( lD5 = D0( l+ g j = $1.50(1.05) =
311、$1.5750.+ g j (1 + g2) = $1.50(1.05)2 = $1.6538.+ g J (1 + g2) (1 + g3) = $ i.5 0 (i.0 5 )3 = $1.7364.+ gi) (I + g2) (I + g3) d + gn) = $ i.5 0 (i.0 5 )3(1.10) = $1.9101.+ g J (i + g2) (1 + g3) d + gn)2 = $I.5 0(I.0 5)3(I.1 0)2 = $2.1011.8-2 Di = $0.50; g = 7%; ks = 15%; Po = ?K - g$0.500 .1 5 -0 .0
312、 7= $ 6 .2 5 .8-3 Po = $20; Do = $1.00; g = 10%; = ?; ks = ?R = P0(l + g) = $20(1.10) = $22.D. $1.00 (1.10)- -+ cr =-P.$l.1 0$20+ 0.10 = 15.50%.0.10ks = 15.50%.8-4 Dp = $5.00; Vp = $60; kp = ?$5.00$60.00= 8.33%.8-5 a. The term in al, or horizon, date is th e d ate when the growth ra tebecomes c o n
313、sta n t. This occurs a t the end of Year 2 .b 1 k s = 10% ： j ；1.25 g s = 20% 1.50 g s = 20互.go 1.8937.801.890 .1 0 -0 .0 5The horizon, or te rm in a lr value isa ll dividends expected th e re a fte r.as fo llo w s:the value a t th e horizon date ofIn th is problem i t is c a lc u la te d$l.80Q .05)
314、0 .1 0 -0 .0 5= $ 3 7 .8 0 .Answers and Solutions: 8 - 66c. The firms intrinsic value is calculated as the sum of the presentvalue of all dividends during the supernormal growth period plus thepresent value of the terminal value. Using your financial calculatorenter the following inputs: CF0 = 0, CF
315、r = 1.50, CF2 = 1.80 + 37.80 =39 60, I = 10, and then solve for NPV = $34.09.8-6 The firms free cash flow is expected to grow at a constant rate, hencewe can apply a constant growth formula to determine the total value ofthe firm.Firm Value = FCFj./ (WACC - g)Firm Value = $150, 000,000/ (0.10 - 0.05
316、)Firm Value = $3,000,000,000.To find the value of an equity claim upon the company (share of stock),we must subtract out the market value of debt and preferred stock. Thisfirm happens to be entirely equity funded, and this step is unnecessary.Hence, to find the value of a share of stock, we divide e
317、quity value (orin this case, firm value) by the number of shares outstanding.Equity Value per share = Equity Value/Shares outstandingEquity Value per share = $3,000,000,000/50,000,000Equity Value per share = $60.Each share of common stock is worth $60, according to the corporatevaluation model.3,000
318、,000 6,000,000 10,000,000 15,000,000Using a financial calculator, enter the following inputs: CF0 = 0;CFi = 3000000; CF2 = 6000000; CF3 = 10000000; CF4 = 15000000; I = 12;and then solve for NPV = $24,112,308.b . The firms terminal value is calculated as follows:$15,000,000(1.07) ccc. - - - - = $321,
319、000,000.0.12-0.07Answers and Solutions: 8-67c . The firm7 s to ta l value is c a lc u la te d as fo llo w s: WACC = 12% 12353,000,000 6,000,000 10,000,000gn =15,000,000 16,050,000PV = ?321,000,000 =16,050,0000 .1 2 -0 .0 7Using your fin a n c ia l c a lc u la to r, e n te r the follow ing in p u ts:
320、 CF0 = 0;CFi = 3000000; CF2 = 6000000; CF3 = 10000000; CF4 = 15000000 +321000000 = 336000000; I = 12; and then solve fo r NPV = $228,113,612.d. To fin d B a rr e tts stock p ric e , you need to f i r s t fin d th e value of i tseq u ity . The value of B a rr e tts e q u ity is equal to the value of
321、theto ta l firm le s s the m arket value of i t s debt and p re fe rre d stock.T otal firm value $228,113,612M arket value, debt + p re fe rre d 60,000,000 (given in problem)M arket value of e q u ity $168,113,612B a rr e tts p ric e per share is c a lc u la te d a s :$168,113,61210,000,000= $ 1 6 .
322、8 1 .8C -8C FMCLF = EBIT (1 - T) +i D epreciati on - C a p it, al - AA ( Ne.t . o p e r a t一in g .、l ex p en d itu res working c a p ita l= $500,000,000 + $100,000,000 - $200,000,000 - $0= $400,000,000.Firm value =-WACC - g$400,000,0000 .1 0 -0 .0 6=$400,000,0000.04= $ 1 0,000,000,000.This is the to
323、 ta l firm v a lu e. Now fin d th e m arket value of i t s eq u ity .MVTotal = MVEquity + Debt$10, 000, 000,000 = M VE quity + $3, 000,000,000M VEquity = $7,000,000, 000.This is the market value of all the equity. Divide by the number of shares to find the price per share.$7,000,000,000/200,000,000
324、= $35.00.Answers and Solutions: 8 - 68$40(1.07) $42.808-9 a . Term inal value = - = -= $713. 33 m illio n .0.13 - 0.07 0.0613%7x 1/1.($ 17.70)23.49 4522.10 $527.89：.32 o)x 1/(1.13)zx 1/(1.13)，2 3 430 40 gn =J Vopj = 713-33-753.33Using a fin a n c ia l c a lc u la to r, e n te r the follow ing in p u
325、 ts: CF0 = 0;CF1 = -20; CF2 = 30; CF3 = 753.33; I = 13; and then solve fo r NPV =$527.89 m illio n .c . T otal v alu et.o = $527 89 m illio n .Value of common eq u ity = $527. 89 - $100 = $427. 89 m illio n .$427. 8 9P rice per share = -1 = $42. 79.10.008-10 The problem asks you to determ ine the va
326、lue of P3 , given the follow ingf a c ts : D = $2Z b = 0.9, kRF = 5 . 6%r RP = 6%, and P。 = $25. Proceed asfo llo w s:Step 1 : C alcu late the re q u ired ra te of re tu rn :ks = kRF + (kM - kRF) b = 5 . 6% + (6%) 0 . 9 = 11%.Step 2 : Use th e co n stan t growth ra te form ula to c a lc u la te g:入
327、D七 = + 9$20.11 = + g$25g = 0 . 03 = 3% .Step 3 : C alcu late P3 :P3 = Po(l + g)3 = $25(1.03)3 = $27.3182 $27.32.A lte rn a tiv e ly , you could c a lc u la te D4 and then use the co n stan t growthra te form ula to solve fo r P3 :D4 = D JI + g )3 = $2.00 (1.03) 3 = $2.1855.P3 = $2.1855/(0.11 - 0.03)
328、 = $27.3182 $27.32.8-11 Vp = Dp/kp； th e re fo re , kp = Dp/Vp.Answers and Solutions: 8-69a. kp = $8/$60 = 13.3%.b. kp = $8/$80 = 10.0%.c. kp = $8/$100 = 8.0%.d. kp = $8/$140 = 5.7%.8-12D, ( 1 + g)k3 - g$5口 + (-0.05)0.15 ( 0.05)$5(0.95)0.15 + 0.05$4.750.20=$23.75.8-13a.匕 =kc =kp =kRF9%9%( k j 4 - kR
329、F) bj.(13% - 9%)0.4 =(13% - 9%) (-0.5)10.6%.7%.Notelikethatan ikD is below the risk-free rate.Butinsurance policy because it pays off”sincewhenthis stock issomething badhappens(the market falls)z the low return is not unreasonable.In thissituation, the expected rate of return is as follows:kc = DjPo
330、 + g = $1.50/$25 + 4% = 10%.Howeverzseek tothe required rate of return is 10.6 percent. Investors willsell thestock, dropping its price to the following:- $1.50Pc = -=$22.73.0.106 -0.04At thispoint,r $1.50kc = -1 - 4% =$22.7310.6% , and the stock will be in“b .k- g+equilibrium.8-14 Calculate the div
331、idend cash flows and place them on a time line. Also,calculate the stock price at the end of the supernormal growth period,and include itz along with the dividend to be paid at t = 5, as CF5.Then, enter the cash flows as shown on the time line into the cash flowregister, enter the required rate of r
332、eturn as I = 15z and then find thevalue of the stock using the NPV calculation. Be sure to enterCFQ = 0, or else your answer will be incorrect.Do = 0; Di = 0; D2 = 0; D3 = 1 .00; D4 = 1.00(1.5) = 1 .5; D5 = 1.00 (1.5)2 =2.25; D6 = 1.00 (1.5)2 (1.08) = $2.43. Po = ?$19.894 = Po? = 15%1 21I3 41 I5|6_
333、i_1.00 = 5Oi.5O2：25g“ = 哆.430.658 -X 1 /( 1 .15)31+34.71= 2.430.858 _x 1 /( 1 .15)40.15-0.0818.378 4 5 % ,Po $54.11Dividend yield = 3.55%Capital gains yield = 6.4510.00% = ks.b. Due to the longer period of supernormal growth, the value of the stockwill be higher for each year. Although the total ret
334、urn will remainthe samez ks = 10%, the distribution between dividend yield and capitalgains yield will differ: The dividend yield will start off lower andthe capital gains yield will start off higher for the 5-yearsupernormal growth condition, relative to the 2-year supernormal growthstate. The divi
335、dend yield will increase and the capital gains yieldwill decline over the 5-year period until dividend yield = 4% andcapital gains yield = 6%.c . Throughout the supernormal growth period, the total yield will be 10percent, but the dividend yield is relatively low during the earlyyears of the superno
336、rmal growth period and the capital gains yield isrelatively high. As we near the end of the supernormal growth period,the capital gains yield declines and the dividend yield rises. Afterthe supernormal growth period has ended, the capital gains yield willequal gn = 6%. The total yield must equal ks
337、= 10%z so the dividendyield must equal 10% - 6% = 4%.d. Some investors need cash dividends (retired people), while otherswould prefer growth. Also, investors must pay taxes each year on thedividends received during the year, while taxes on capital gains canbe delayed until the gain is actually reali
338、zed.Answers and Solutions: 8-778-24 a. ks = kRF + (kM - kRF)b = 11% + (14% - 11%)1.5 = 15.5%.Po = D (ks - g) = $2.25/(0.155 - 0.05) = $21.43.b. ks = 9% + (12% - 9%)1.5 = 13.5%. Po = $2.25/ (0.135 -0 .05) = $26.47.c. ks = 9% + (11% - 9%) 1.5 = 12.0%. Po = $2.25/ (0.12 - 0.05) = $32.14.d. New data g i
339、v en : kRF = 9%; kM = 11%; g = 6%, b = 1.3.ks = kRF + (kM - kRF)b = 9% 4 - (11% - 9%)1.3 = 11.6%.Po = Di/ (ks - g) = $2.27/(0.116 - 0.06) = $40.54.8-25 a . Old ks = kRF + (kM - kRF) b = 9% + (3%) 1 .2 = 12.6%.New ks = 9% + (3%)0.9 = 11.7%.c D Dc (1 + g)Old p ric e : Po = - = -院 一 g k3 - g$2(1.07)0.1
340、26 - 0.07= $ 3 8 .2 1 .New p ric e :Since the new p ric e is lower than the old p ric e , the expansion inconsumer products should be re je c te d . The decrease in ris k is nots u ffic ie n t to o ffse t the d eclin e in p ro f ita b ility and the reducedgrowth r a te .b Poid$38.21.$2(1.05)ks - 0.0
341、5 ,Solving fo r ks we have the follow ing:$38.21$2.10k3 - 0.05$2.10 = $38.21 (ks) - $1.9105$4.0105 = $38.21 (ks)ks = 0.10496.Solving fo r b:10.496% = 9% + 3%(b)1.496% = 3%(b)b = 0.49865.Check: ks = 9% + (3%)0.49865 = 10.496%.$2.100.10496 - 0.05= $ 3 8 .2 1 .T herefore, only i f managementz s a n a l
342、y sis concludes th a t ris k can belowered to b = 0.49865, or approxim ately 0.5, should the new p o licy beput in to e f f e c t.Spreadsheet Problem: 8 - 78Chapter 6The Cost of CapitalLEARNING OBJECTIVESAfter reading this chapter, students should be able to: Explain what is meant by a firm7 s weigh
343、ted average cost of capital. Define and calculate the component costs of debt and preferred stock. Explain why retained earnings are not free and use three approaches toestimate the component cost of retained earnings. Briefly explain why the cost of new common equity is higher than the costof retai
344、ned earnings, calculate the cost of new common equity, andcalculate the retained earnings breakpoint which is the point where newcommon equity would have to be issued. Briefly explain the two alternative approaches that can be used toaccount for flotation costs. Calculate the firms composite, or wei
345、ghted average, cost of capital. Identify some of the factors that affect the overall, composite cost ofcapital. Briefly explain how firms should evaluate projects with different risks,and the problems encountered when divisions within the same firm all usethe firms composite WACC when considering ca
346、pital budgeting projects. List and briefly explain the three separate and distinct types of riskthat can be identified, and explain the procedure many firms use whendeveloping subjective risk-adjusted costs of capital. List some problem areas in estimating the cost of capital.Learning Objectives: 9-
347、79LECTURE SUGGESTIONSChapter 9 uses the rate of return concepts covered in previous chapters, alongwith the concept of the weighted average cost of capital (WACC), to develop acorporate cost of capital for use in capital budgeting.We begin by describing the logic of the WACC, and why it should be us
348、edin capital budgeting. We next explain how to estimate the cost of eachcomponent of capital, and how to put the components together to determine theWACC. We go on to discuss factors that affect the WACC, how to adjust the costof capital for risk, and estimating project risk. We conclude the chapter
349、 witha discussion on some problem areas in the cost of capital.The details of what we cover, and the way we cover it, can be seen byscanning Blueprints f Chapter 9. For other suggestions about the lecture,please see the Lecture Suggestions in Chapter 2, where we describe how weconduct our classes.DA
350、YS ON CHAPTER: 3 OF 58 DAYS (50-minute periods)Lecture Suggestions: 9 - 80ANSWERS TO END-OF-CHAPTER QUESTIONS9-1Probable Effect onkd(l - T) ks WACCa. The corporate tax rate is lowered. + 0 +b. The Federal Reserve tightens credit. + + +c. The firm uses more debt; that is, itincreases its debt/assets
351、ratio. + + 0d. The dividend payout ratio isincreased, _0_ _0_ _0e. The firm doubles the amount of capitalit raises during the year. 0 or + 0 or + 0 or +f. The firm expands into a riskynew area. _+_ _+_ _+g The firm merges with another firmwhose earnings are counter-cyclicalboth to those of the first
352、 firm andto the stock market. _二 _ _二 _ _ _h. The stock market falls drastically,and the firms stock falls along withthe rest. 0 + +i . Investors become more risk averse. _+_ _+_ _+j. The firm is an electric utility with alarge investment in nuclear plants.Several states propose a ban onnuclear powe
353、r generation. _+_ _+_ _+9-2Beta (market) risk refers to the projects effect on the corporate betacoefficient. Within-firm (corporate) risk refers to the projects effecton the stability of the firms earnings. Stand-alone risk refers to theinherent riskiness of the projects expected returns when viewe
354、d alone.Theoretically, beta (market) risk is the most relevant measure because ofits effect on stock prices.9-3The cost of capital for average-risk projects would be the firms cost ofcapital, 10 percent. A somewhat higher cost would be used for more riskyprojects, and a lower cost would be used for
355、less risky ones. Forexample, we might use 12 percent for more risky projects and 9 percentfor less risky projects. These choices are arbitrary.Answers and Solutions: 9-819-4 Each firm has an optimal capital structure, defined as that mix of debt,preferred, and common equity that causes its stock pri
356、ce to be maximized.A value-maximizing firm will determine its optimal capital structure, useit as a target, and then raise new capital in a manner designed to keepthe actual capital structure on target over time. The target proportionsof debt, preferred stock, and common equity, along with the costs
357、 ofthose components, are used to calculate the firms weighted average costof capital, WACC.The weights could be based either on the accounting values shown onthe firms balance sheet (book values) or on the market values of thedifferent securities. Theoretically, the weights should be based onmarket
358、values, but if a firms book value weights are reasonably close toits market value weights, book value weights can be used as a proxy formarket value weights. Consequently, target market value weights shouldbe used in the WACC equation.9-5 An increase in the risk-free rate will increase the cost of d
359、ebt.Remember from Chapter 4, k = kRF + DRP + LP + MRP. Thus, if kRF increasesso does k (the cost of debt). Similarly, if the risk-free rate increasesso does the cost of equity. From the CAPM equation, ks = kRF + (kM - kRF)bConsequently, if k .RF increases ks will increase too.9-6 In general, failing
360、 to adjust for differences in risk would lead the firmto accept too many risky projects and reject too many safe ones. Overtime, the firm would become more risky, its WACC would increase, and itsshareholder value would suffer.Answers and Solutions: 9 - 82SOLUTIONS TO END-OF-CHAPTER PROBLEMS9-1 40% D
361、 ebt; 60% E q u ity ; kd = 9%; T = 40%; WACC = 9.96%; ks = ?WACC = (wd) (kd) (1 - T) + (Wc)化)0.0996 = (0.4) (0.09) (1 - 0.4) + (0 .6 )ks0.0996 = 0.0216 + 0 .6 ks0.078 = 0 .6 ksks = 13%.Pp = $47.50; Dp = $ 3.80; kp = ?DpPP$3.80$47.509-3 PQ = $30; Di = $3.00; g = 5%; F = 10%; k3 = ? ; ke = ?$3.00R (1
362、- F)$30(1 - 0.10)+ g+ 0.059-4 P ro je c ts A, B, C, D, and E would be a ccep ted sin c e each p r o je c ts re tu rnis g re a te r th an th e firm s WACC.9-5 kd(l - T) = 0.12 (0.65) = 7.80%.Answers and Solutions: 9-839-7a .ks =k =y + g$3.18 八“-+ 0.06$3614.83%.b . F = ($36.00 - $ 3 2 .4 0 )/$ 36.00 =
363、 $ 3 .6 0 /$ 3 6 .0 0 = 10%.c . ke = Di/P0(1F ) + g = $ 3 .1 8 /$ 3 2 .4 0 + 6% = 9.81% + 6% = 15.81%.9-8C a p ita l SourcesAmount C a p ita l S tru c tu re W eightL ong-term d eb tE q u ity$1,1521,728$2,88040.0%60.0100.0%WACC = wdkd(l -T)+ wcks = 0 .4 (0 . 13) (0.6) + 0 .6 (0 .1 6 )= 0 .0 3 1 2 + 0
364、.,0960 = 12.72%.9-9 ks = Di/Po + g = $2 (1.07) /$ 2 4 .7 5 + 7%= 8.65% + 7% = 15.65% .WACC = wd(kd) (1 - T) + wc (ks) ; wc = 1 - wd.13.95% = wd(ll% ) (1 - 0.35) + (1 - wd) (15.65%)0.1395 = 0.0715wd + 0.1565 - 0.1565wd-0 .0 1 7 = -0.085wdW d = 0.20 = 20%.9-10 a . kd = 10%, kd(l - T) = 10% (0.6) = 6%.
365、D/A = 45%; Do = $2; g = 4%; Po = $20; T = 40%.P ro je c t A: R ate o f re tu rn = 13%.P ro je c t B: R ate o f re tu rn = 10%.ks = $ 2 (1 .0 4 )/$20 + 4% = 14.40%.b. WACC = 0.45 (6%) + 0.55 (14.40%) = 10.62%.c . S ince th e fir m s WACC is 10. 62% and each o f th e p ro je c ts is e q u a llyris k y
366、 and as ris k y as th e firm,s o th e r a s s e ts , MEC should a ccep tP ro je c t A. I ts r a te o f re tu rn is g re a te r th an th e fir m s WACC. P ro je c tB sh o u ld n o t be ac c e p ted , sin c e i t s r a te o f re tu rn i s le s s th an MECsWACC.9-11 Debt = 40%, E q u ity = 60%.Po = $22
367、.50, Do = $2.00, E = $2.00 (1.07) = $2.14, g = 7%.Answers and Solutions: 9 - 84Di+ g =$2.14$22.50+ 7% = 16.51%.WACC = (0.4) (0.12) (1 - 0.4) + (0.6) (0.1651)=0.0288 + 0.0991 = 12.79%.9-12 If the firm* s dividend yield is 5% and its stock price is $46.75, thenext expected annual dividend can be compu
368、ted.Dividend yield = D P( )5% = D$46.75Di = $2.3375.Next, the firms cost of new common stock can be determined from the DCFapproach for the cost of equity.ke = DPo(l - F) + gke = $2.3375/$46.75(l - 0.05) + 0.12ke = 17.26%.9-13 a . Examining the DCF approach to the cost of retained earnings, theexpec
369、ted growth rate can be determined from the cost of common equity,price, and expected dividend. However, first, this problem requiresthat the formula for WACC be used to determine the cost of commonequity.WACC = wd(kd) (1 - T) + wc(ks)13.0% = 0.4 (10%) (1 - 0.4) + 0.6(ks)10.6% = 0.6ksks = 0.17667 or
370、17.67%.From the cost of common equity, the expected growth rate can now be determined.ks = DPo + g0.17667 = $3/$35 + gg = 0.090952 or 9.10%.b . From the formula for the long-run growth rate:g = (1 - Div. payout ratio) x ROE = (1 - Div. payout ratio) x (NI/Equity)0 .090952 = (1 - Div. payout ratio) x
371、 ($lz100 million/$6f 000 million)0 .090952 = (1 - Div. payout ratio) x 0 .18333330.496104 = (1 - Div. payout ratio)Div. payout ratio = 0.503896 or 50.39%.9-14 If the investment requires $5.9 million, that means that it requires $3.54million (60%) of equity capital and $2.36 million (40%) of debt cap
372、ital. InAnswers and Solutions: 9-85this scenario, the firm would exhaust its $2 million of retained earningsand be forced to raise new stock at a cost of 15%. Needing $2.36 million indebt capital, the firm could get by raising debt at only 10%. Therefore, itsweighted average cost of capital is: WACC
373、 = 0.4 (10%) (1 - 0.4) + 0.6 (15%) =11.4%.9-15a . If all project decisions are independent, the firm should accept allprojects whose returns exceed their risk-adjusted costsThe appropriate costs of capital are summarized below:of capital.Required Rate of Cost ofProject Investment Return CapitalA$4 m
374、illion14.0%12%B$5 million11.512C$3 million9.58D$2 million9.010E$6 million12.512F$5 million12.510G$6 million7.08H$3 million11.58Therefore, Ziege should accept projects A, C, E, F, and H .b . With only $13 million to invest in its capital budget, Ziege mustchoose the best combination of Projects A, C,
375、 E, F, and H.Collectively, the projects would account for an investment of $21million, so naturally not all these projects may be accepted. Lookingat the excess return created by the projects (rate of return minus thecost of capital), we see that the excess returns for Projects A, C, E,F, and H are
376、2%, 1.5%, 0.5%, 2.5%, and 3.5%. The firm should acceptthe projects which provide the greatest excess returns. By thatrationale, the first project to be eliminated from consideration isProject E . This brings the total investment required down to $15million, therefore one more project must be elimina
377、ted. The nextlowest excess return is Project C . Therefore, Ziege1s optimal capitalbudget consists of Projects A, F, and H, and it amounts to $12 millionc. Since Projects A, Fr and H are already accepted projects, we mustadjust the costs of capital for the other two value producing projects(C and E)
378、.Required Rate of Cost ofProject Investment Return CapitalC$3 million9.5%8% + 1% =9%E$6 million12.512% + 1% = 13%If new capital mustbeissued,Project Eceases tobe anacceptable projectOn the other hand, Project C * s expected rate of return still exceedsthe risk-adjusted cost of capital even after rai
379、sing additionalcapital. Hence, Zieges new capital budget should consist of ProjectsAnswers and Solutions: 9 - 869-16A, C, F, and H and requires $15 million of capital.D $? 14. ks = + g = : + 7% = 9.3% + 7% = 16.3%.P o $23 ks = kRF + (kM - kRF) b= 9% + (13% - 9%)1.6 = 9% + (4%)1.6 = 9% + 6.4% = 15.4%
380、. ks = Bond rate + Risk premium = 12% + 4% = 16%. The bond-yield-plus-risk-premium approach and the CAPM method bothresulted in lower cost of common stock estimates than the DCF method.Since financial analysts tend to give the most weight to the DCFmethod, the firms cost of common equity should be e
381、stimated to beabout 16.3 percent.9-17. With a financial calculator, input N = 5, PV = -4.42, PMT = 0, FV =6.50, and then solve for I = 8.02% 8%. Di = D0(l + g) = $2.60 (1.08) = $2.81., ks = DX/PQ + g = $2.81/$36.00 + 8% = 15.81%.9-18D】Po+ g0.09 =$3.60-+ g$60.000.09 = 0.06 + gg = 3%.Current EPSLess:
382、Dividends per shareRetained earnings per shareRate of returnIncrease in EPSPlus: Current EPSNext years EPSAlternatively, EPSj = EPSQ(1$5.4003.600$1.800x 0.090$0.1625.400$5.562+ g) = $5.40 (1.03) = $5.5629-19After-tax cost of new debt: kd(1 - T) = 0.09(1 - 0.4) = 5.4%.Cost of common equity:Calculate
383、g as follows:With a financial calculator, input N = 9, PV = -3.90, PMT = 0, FV =7.80, and then solve for I = 8.01% x 8%.Answers and Solutions: 9-87Chapter 7The Basics of Capital BudgetingLEARNING OBJECTIVESks = + g =R(0.55) ($7.80)c cc $4.290.08 =-$65.00+ 0.08 = 0.146 = 14.6%$65. 00b . WACC calculat
384、ion:After-taxWeightedComponentWeightx Cost =CostDebt0.09(l - T)0.405.4%2.16%Common equity(RE)0.6014.6%8.76%WACC = 10.92%9-20 a.kd(l - T) = 0.1 0 ( 1 - 0 .3) = 7%kp = $5/$49 = 10.2%.ks = $3.50/$36 + 6% = 15.72%.b . WACC:After-taxWeightedComponentWeightx Cost= CostDebt0.10(1 - T)0.157.00%1.05%Preferre
385、d stock0.1010.20%1.02%Common stock0.7515.72%11.79%WACC = 13.86%c. Projects 1 and 2 will be accepted since their rates of return exceedthe WACC.After reading this chapter, students should be able to: Define capital budgeting, explain why it is importantf and state howproject proposals are generally c
386、lassified. List the steps involved in evaluating a capital budgeting project. Calculate payback period, discounted payback period, Net Present Value(NPV), and Internal Rate of Return (IRR) for a given project and evaluateeach method. Define NPV profiles, and explain the rationale behind the NPV and
387、IRRmethodsz their reinvestment rate assumptions, and which method is betterwhen evaluating independent versus mutually exclusive projects. Briefly explain the problem of multiple IRRs and when this situationAnswers and Solutions: 9 - 88could occur.Calculate the Modified Internal Rate of Return （ M工R
388、R） for a given projectand evaluate this method.Identify at least one relevant piece of information provided to decisionmakers for each capital budgeting decision method discussed in thechapter.Identify and explain the purposes of the post-audit in the capitalbudgeting process.Identify a number of di
389、fferent types of decisions that use the capitalbudgeting techniques developed in this chapter.Learning Objectives: 10-89LECTURE SUGGESTIONSThis is a relatively straight-forward chapter, and, for the most part, it is adirect application of the time value concepts first discussed in Chapter 6. Wepoint
390、 out that capital budgeting is to a company what buying stocks or bonds isto an individual- an investment decision, when the company wants to know if theexpected value of the cash flows is greater than the cost of the project, andwhether or not the expected rate of return on the project exceeds the
391、cost ofthe funds required to take on the project. We cover the standard capitalbudgeting procedures payback, discounted payback, NPV, 工RR, and MIRR.At this point, students who have not yet mastered time value concepts andhow to use their calculator efficiently get another chance to catch on.Students
392、 who have mastered those tools and concepts have fun, because they cansee what is happening and the usefulness of what they are learning.The details of what we cover, and the way we cover it, can be seen byscanning Blueprints, Chapter 10. For other suggestions about the lecture,please see the Lectur
393、e Suggestions in Chapter 2, where we describe how weconduct our classes.DAYS ON CHAPTER: 3 OF 58 DAYS (50-minute periods)Lecture Suggestions: 10-90ANSWERS TO END-OF-CHAPTER QUESTIONS10-1 Project classification schemes can be used to indicate how much analysisis required to evaluate a given project,
394、the level of the executivewho must approve the project, and the cost of capital that should beused to calculate the projectz s NPV. Thus, classification schemes canincrease the efficiency of the capital budgeting process.10-2 The NPV is obtained by discounting future cash flows, and the discountingp
395、rocess actually compounds the interest rate over time. Thus, anincrease in the discount rate has a much greater impact on a cash flow inYear 5 than on a cash flow in Year 1.10-3 This question is related to Question 10-2 and the same rationale applies.With regard to the second part of the question, t
396、he answer is no; the IRRrankings are constant and independent of the firms cost of capital.10-4 The NPV and IRR methods both involve compound interest, and themathematics of discounting requires an assumption about reinvestmentrates. The NPV method assumes reinvestment at the cost of capital, whilet
397、he I RR method assumes reinvestment at the I RR. MIRR is a modifiedversion of IRR that assumes reinvestment at the cost of capital.10-5 The statement is true. The NPV and I RR methods result in conflicts onlyif mutually exclusive projects are being considered since the NPV ispositive if and only if
398、the I RR is greater than the cost of capital. Ifthe assumptions were changed so that the firm had mutually exclusiveprojects, then the 工RR and NPV methods could lead to differentconclusions. A change in the cost of capital or in the cash flow streamswould not lead to conflicts if the projects were i
399、ndependent. Therefore,the I RR method can be used in lieu of the NPV if the projects beingconsidered are independent.10-6 Yes, if the cash position of the firm is poor and if it has limitedaccess to additional outside financing it might be better off to choose amachine with a rapid payback. But even
400、 here, the relationship betweenpresent value and cost would be a better decision tool.10-7 a. In general, the answer is no. The objective of management should beto maximize value, and as we point out in subsequent chapters, stockvalues are determined by both earnings and growth. The NPVcalculation a
401、utomatically takes this into account, and if the NPV of along-term project exceeds that of a short-term project, the higherfuture growth from the long-term project must be more than enough tocompensate for the lower earnings in early years.Answers and Solutions: 10-91b. If the same $100 million had
402、been spent on a short-term project- onewith a faster payback- reported profits would have been higher for aperiod of years. This is, of course, another reason why firmssometimes use the payback method.10-8 Mutually exclusive projects are a set of projects in which only one ofthe projects can be acce
403、pted. For example, the installation of aconveyor-belt system in a warehouse and the purchase of a fleet offorklifts for the same warehouse would be mutually exclusive projects-accepting one implies rejection of the other. When choosing betweenmutually exclusive projects, managers should rank the pro
404、jects based onthe NPV decision rule. The mutually exclusive project with the highestpositive NPV should be chosen. The NPV decision rule properly ranks theprojects because it assumes the appropriate reinvestment rate is the costof capital.10-9 Project X should be chosen over Project Y. Since the two
405、 projects aremutually exclusive, only one project can be accepted. The decision rulethat should be used is NPV. Since Project X has the higher NPV, itshould be chosen. The cost of capital used in the NPV analysisappropriately includes risk.Answers and Solutions: 10-92SOLUTIONS TO END-OF-CHAPTER PROB
406、LEMS10-1 $52,125/$12,000 = 4.3438, so the payback is about 4 years.10-2 Financial Calculator Solution: Input CF0 = -52125, CFI-8 = 12000, I = 12,and then solve for NPV = $7,486.68.10-3 Financial Calculator Solution:then solve for IRR = 16%.Input CF0 = -52125, CF = 12000, and10-4 Project Ks discounte
407、d payback period is calculated as follows:AnnualDiscounted 012%PeriodCash FlowsCash FlowsCumulative0($52,125)($52,125.00)($52,125.00)112,00010,714.29(41,410.71)212z0009,566.33(31,844.38)312,0008,541.36(23,303.02)412,0007,626.22(15,676.80)512,0006,809.12(8,867.68)612,0006,079.57(2,788.11)712,0005,428
408、.192,640.08812,0004,846.607,486.68The discounted payback period, $2,788.11is 6 + - years,$5,428.19or 6.51 years.Alternatively, since the annual cash flows are the same, one can divide$12,000 by 1.12 (the discount rate = 12%) to arrive at CFX and thencontinue to divide by 1.12 seven more times to obt
409、ain the discounted cashflows (Column 3 values). The remainder of the analysis would be the same10-5 M工RR: PV Costs = $52,125.FV Inflows:PV0 12FV3 4 56 7 8X (1.12)x (1.12)x (1.12)x (1.12)I _ 12%_ I _ L12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000I440 * * * * x a * 1 - 15,053x1 2 - - 16,8591
410、8,88221,14823,68626,528Answers and Solutions: 10-9352,125- MI RR = 13.89% - 347,596Financial Calculator Solution: Obtain the FVA by inputting N = 8, I = 12,PV = 0, PMT = 12000, and then solve for FV = $147,596. The MIRR can beobtained by inputting N = 8, PV = -52125, PMT =0, FV = 147596, and thensol
411、ving for I = 13.89%.0123FFFFcccc10-6 Project A:Using a financial calculator, enter the following:=-15000000= 5000000=10000000=20000000I = 10; NPV = $12,836,213.Change I = 10 to I = 5; NPV = $16,108,952.Change I = 5 to I = 15; NPV = $10,059,587.Project B:Using a financial calculator, enter the follow
412、ing:CF0 = -15000000CFi = 20000000CF2 = 10000000CF3 = 6000000I = 10; NPV = $15,954,170.Change I = 10 to I = 5; NPV = $18,300,939.Change I = 5 to I = 15; NPV = $13,897,838.10-7 Truck:Financial Calculator Solution: Input CF0 = -17100, CFI-5 = 5100, I = 14,and then solve for NPV = $408.71 % $409 and IRR
413、 = 1499% 15%.MIRR: PV Costs = $17,100.FV Inflows:PV0 14带FV524135,1005,1005,1005,100|X 1.145,1005,8146,6287,5568, 614X (1.14)2X (1.14)3X (1.14)Answers and Solutions: 10-9417,100 -MIRR = 14.54% (Accept) -33,712Financial Calculator Solution: Obtain the FVA by inputting N = 5, I = 14, PV = 0, PMT = 5100
414、, and thensolve for FV = $33,712. The M1RR can be obtained by inputting N = 5, PV = -17100, PMT = 0, FV = 33712,and then solving fbr I = MIRR = 14.54%.Pulley:Financial Calculator Solution: Input CF0 = -22430, CF = 7500, I = 14,and then solve for NPV = $3,318.11 $3,318 and IRR = 20%.MIRR: PV Costs =
415、$22,430.FV Inflows:PV0 14123 4FV5_1 _17 50017,5001 17,500 7,500|X 1.1417,500 a R RHx (1.14)3I x (1.14)2 u, 0 o u 9,747X (1.14)41 1 z 11 z22,430 N P V s ,工RRs 工RRL, and MIRRS MIRRL. The scale differencebetween Projects S and L results in I RR and MIRR selecting S over L.However, NPV favors Project L,
416、 and hence Project L should be chosen.10-9 a . The IRRs of the two alternatives are undefined. To calculate an 工RR,the cash flow stream must include both cash inflows and outflows.Answers and Solutions: 10-95b . The PV of costs for the conveyor system is -$556, 717, while the PV ofcosts for the fork
417、lift system is -$493,407. Thus, the forklift systemis expected to be -$493,407 - (-$556, 717) = $63,310 less costly thanthe conveyor system, and hence the forklifts should be used.Thus, since MIRRX MIRRYz Project X should be chosen.10-10 Project X:0121% 123 4I-1,00011001300IX (1.12)21 1400 700.00. I
418、 ， % 448.00x (1 .1 2 )3_h . 14n A Q1,000- 13. 59% = MIRRX- -664.81$1,000=$1, 664.81/ (1 + MIRRX)4.ProjectY:0112% .23 41-1,000i1, 000X (1.12尸11001 I X 2(1.12)21 l50 50.00|x 1-12 56.00- 125.44_ J ,404 931,000- 13. 10% = M 工 RRY_Jq . f 0二 0a 0A . 0q 7/$1,000=$1,636.37/(1+ MIRRY)4.Alternate step: You co
419、uld calculate NPVs, see that Project X has thehigher NPV, and just calculate MIRRX.NPVX = $58.02 and NPVY = $39.94.10-11 Input the appropriate cash flows into the cash flow register, and thencalculate NPV at 10 percent and the IRR of each of the projects:Project S: NPVS = $39.14; IRRS = 13.49%.Proje
420、ct L: NPVL = $53.55; IRRL = 11.74%.Since Project L has the higher NPV, it is the better project.IRRL = 11.74%.10-12 Step 1: Determine the PMT:-1,000 PMT PMTWith a financial calculator, input N = 10, I = 12, PV = -1000,and FV = 0 to obtain PMT = $176.98.Answers and Solutions: 10-96Step 2: Calculate t
421、he projects MIRR：0 10% 1 2 9 10-lz 000 176 .98 17698 176.98 176.98lx 1.10 194.68X (1.10)8 ,- 379.37X (1.10)- 417.311,000 - 10.93% = MIRR - TV = 2，&20.6工FV of inflows: With a financial calculator, input N = 10z I =10, PV = 0, and PMT = -176.98 to obtain FV = $2, 820.61. TheninputN = 10, PV = -1000, P
422、MT = 0, and FV = 2820.61 to obtainI = MIRR = 10.93%.10-13 a. Purchase price $ 900,000Installation 165,000Initial outlay $1,065,000CF0 = -1065000; CFi,s = 350000; I = 14; NPV = ?NPV = $136,578; IRR = 19.22%.b . Ignoring environmental concerns, the project should be undertakenbecause its NPV is positi
423、ve and its I RR is greater than the firmscost of capital.c. Environmental effects could be added by estimating penalties or anyother cash outflows that might be imposed on the firm to help returnthe land to its previous state (if possible). These outflows could beso large as to cause the project to
424、have a negative NPV, in which casethe project should not be undertaken.10-14 a. YearSalesRoyaltiesMarketingNet0($20,000)($20,000)175z 000($5,000)($10,000)60,000252,500(3,500)(10,000)39,000322,500(1,500)21,000Payback period = $20,000/$60z000 = 0.33 year.NPV = $60,000/(l.ll)1 + $39,000/(1.11)2 + $21,0
425、00/(1.11)3 - $20,000= $81,062.35.Using a financial calculatorf input CF0 = -20000; CF = 60000, CF2 =39000, CF3 = 21000, and then solve for IRR = 261.90%.Answers and Solutions: 10-97b Finance theory dictates that this investment should be accepted.However, ask your students Does this service encourag
426、e cheating?” Ifyes, does a businessperson have a social responsibility not to makethis service available?10-15Facts: 5 years remaining on lease; rent = $2r 000/month; 60 payments left,payment at end of month.New lease terms: $0/month for 9 months; $2Z 600/month for 51 months.Cost of capital = 12% an
427、nual (1% per month).-$94,611.45.a 0I _1%121 一N = 60;5960_ i _IPV cost-$89,1-2,000I-2,000lease:1-2,0001 = 1; PMTi-2,000PV = ? PVof910old.08.=-2000 ; FV =0;01%19105960I10101-2,6001-2,6001-2,600PV cost of new lease:CF0 = 0,CFI-9 = 0 fCF10-60 =-2600;I=1. NPV =Sharon should not accept the new lease becau
428、se the present value ofits cost is $94 r 611.45 - $89r 910.08 = $4,701.37 greater than the oldlease.b. 0 1 % 1 2 9 10 59 60I - - ! - 1 - -1 - 1 - -1 -2,000 -2,000 -2,000 PMT PMT PMTFV of first 9 months rent under old lease:N = 9; I = 1; PV = 0; PMT = -2000; FV = ? FV = $18,737.05.The FV of the first
429、 9 monthsz rent is equivalent to the PV of the 51-period annuity whose payments represent the incremental rent duringmonths 10-60. To find this value:N = 51; I = 1; PV = -18737.05; FV = 0; PMT = ? PMT = $470.80.Thus, the new lease payment that will make her indifferent is $2,000 +$470.80 = $2,470.80
430、.Check:9 10 59 600 -2,470.80 -2,470.80 -2,470.80PV cost of new lease: CF0 = 0; CF1.9 = 0; CFio-eo = -2470.80; 1 = 1.NPV = -$89,909.99.Answers and Solutions: 10-98Except for rounding; the PV cost of this lease equals the PV cost of theold lease.c . Period Old Lease New Lease Lease o- 66- 01-9 -2,000
431、0 -2,00010-60 -2,000 -2,600 600CF0 = 0; CF9 = -2000; CF10-60 = 600; I RR = ? I RR = 1.9113%. This isthe periodic rate. To obtain the nominal cost of capital, multiply by12: 12 (0.019113) = 22.94%.Check: Old lease terms:N = 60; I = 1.9113; PMT = -2000; FV = 0; PV = ? PV = -$71,039.17.New lease terms:
432、CF0 = 0; CFi.g = 0; CF1O-6O = -2600; I = 1.9113; NPV = ? NPV =-$71,038.98.Except for rounding differences; the costs are the same.10-16 a . The payback periods for Projects A and B are calculated as follows:preferred to Project A.Project AProject BPeriodCash flowsCumulative (A)Cash flows Cumulative(
433、B)0($400)($400)($600)($600)155(345)300(300)255(290)3000355(235)50504225(10)50100522521550150ProjectAs paybackis 4 + $10/$225=4 .04 years,while ProjectBfspaybackis 2 years.According to the payback rule,Project B would beb . The discounted paybackperiods for Projects A andB are calculated asfollows:Di
434、sc. 10%Disc. 10%Project AProjectBPeriodCash flowsCumulative (A)Cash flowsCumulative (B)0($400.00)($400.00)($600. 00)($600.00)150.00(350.00)272. 73(327.27)245.45(304.55)247. 93(79.34)341.32(263.22)37. 57(41.77)Answers and Solutions: 10-994 153.685 139.71Project As payback is 4 -Project Bs payback is
435、4 +the discounted payback rule,(109.55) 34.15 (7.62)30.16 31.05 23.42+ $109.55/$139.71 = 4.78 years, meanwhile$7.62/$31.05 = 4.245 years. According torProject B would be preferred to Project A.Answers and Solutions: 10-100By the NPV criterion, Project A is preferred to Project B.c . Finding net pres
436、entfollowing data:values, use a financial calculator and enter theProject ACF0 = -400CFj = 55CF2 = 55CF3 = 55CF4 = 225CF5 = 225Project BCF0 = -600CFi = 300CF2 = 300CF3 = 50CF4 = 50CF5 = 50I = 10NPV = $30.16I = 10NPV = $23.42d. Finding the 工RR, use a financial calculator and enter the following:Proje
437、ct A Project BCF0 = -400CFQ = -600CFi =55CFx = 300CF2 =55CF2 = 300CF3 =55CF3 = 50CF4 =225CF4 = 50CF5 =225CF5 = 50I RR =12.21%IRR = 12.28%According to the IRR criterion, Project B is preferred to Project A.e . Project A*0 10%1 23 4 5_1 _11 1 1 1 1 1-400 55 55 55 225 225lx 1, 247.50- - 66.55X (1.10)3-
438、 73.21x ( 1 . 10)4_on c 00 u 0 0692.78$400 = $692.78/(1+ MIRRA )5MIRRA = 11.61%.Project B:0 10%L 23 4 51 1 1 1 1 1-600 300 300 50 50 501* L 55.00x 小1。 /- 60.50X (1 .1 0 )3- 399.30x ( 1 . 10)4_OQO J 乙 31,004.03$600 = $1,004.03/(1 + MIRRA )MIRRA = 10.85%.Answers and Solutions: 10 -101According to the
439、MIRR criterion/ Project A is the superior project.10-17 Since the IRR is the cost of capital at which the NPV of a project equalszero, the projects inflows can be evaluated at the I RR and the presentvalue of these inflows must equal the initial investment.Using a financial calculator enter the foll
440、owing:CF0 = 0CFi = 7500Nj = 10CFx = 10000Nj = 10I = 10.98; NPV = $65,002.11.Therefore, the initial investment for this project is $65,002.11. Usinga calculator, the project * s NPV can now be solved.CF0 = -65002.11CFx = 7500Nj = 10CFi = 10000Nj = 101 = 9 ; NPV = $10,239.20.10-18 The MI RR can be sol
441、ved with a financial calculator by finding theterminal future value of the cash inflows and the initial presentvalue of cash outflows, and solving for the discount rate that equatesthese two values. In this instance, the MIRR is given, but a cashoutflow is missing and must be solved for. Therefore,
442、if the terminalfuture value of the cash inflows is found, it can be entered into afinancial calculator, along with the number of years the project lastsand the MIRR, to solve for the initial present value of the cashoutflows. One of these cash outflows occurs in Year 0 and theremaining value must be
443、 the present value of the missing cash outflowin Year 2.Cash inflows Compounding Rate FV in Year 5 0 10%CFi = 202 x (1.10)4 295.75CF3 = 196 x (1.10)2 237.16CF4 = 350 x 1.10 385.00CF5 = 451 x 1.00 451.QQ1368.91Using the financial calculator to solve for the present value of cashoutflows:N = 5Answers
444、and Solutions: 10-102I = 14.14PV = ?PMT = 0FV = 1368.91The total present value of cash outflows is $706.62, and since the outflowfor Year 0 is $500, the present value of the Year 2 cash outflow is $206.62Therefore, the missing cash outflow for Year 2 is $206.62 x(1.1)2 = $250.0110-19 a . At k = 12%,
445、 Project A has the greater NPV, specifically $200.41 ascompared to Project Bs NPV of $145.93. Thus, Project A would beselected. At k = 18%, Project B has an NPV of $63.68 which is higherthan Project As NPV of $2.66. Thus, choose Project B if k = 18%.kNPVANPVB0.0%$890$39910.028317912.020014618.106220
446、.0(49)4124.0(138)030.0 (238) (51)c. IR RA = 18.1%; IR RB = 24.0%.d.To find the crossover rate,difference in the two projectsconstruct acash flows:Project which is theYearProject ACF- - CFB0$ 1051(521)2(327)3(234)4466Answers and Solutions: 10-1035 4666 7167 (180)IRRA = Crossover rate = 14.53%.Project
447、s A and B are mutually exclusive, thus, only one of theprojects can be chosen. As long as the cost of capital is greaterthan the crossover rate, both the NPV and IRR methods will lead to thesame project selection. Howeverz if the cost of capital is less thanthe crossover rate the two methods lead to
448、 different projectselections一一a conflict exists. When a conflict exists the NPV methodmust be used.Because of the sign changes and the size of the cash flows. Project Ahas multiple IRRs. Thus, a calculators I RR function will not work.One could use the trial and error method of entering different di
449、scountrates until NPV = $0. However, an HP can be tricked into giving theroots. After you have keyed Project Deltas cash flows into the cashflow registers of an HP-10B, you will see an Error-Solnz , message. Nowenter 10 | STO | | 工 RR/丫 甘 and the 14.53 percent I RR is found. Thenenter 100 P STO | iR
450、R/YR | to obtain IRR = 456.22%. Similarly, Excelcan also be used.e . Here is the MIRR for Project A when k = 12%:PV costs = $300 + $387/(1.12) 1 + $193/ (1.12)2+ $100/ (1.12)3 + $180/ (1.12)7 = $952.00.TV inflows = $600(1.12尸 + $600(1.12)2 + $850(1.12)1 = $2,547.60.Now, MIRR is that discount rate wh
451、ich forces the TV of $2,547.60 in7 years to equal $952.00.Using a financial calculator enter the following inputs: N = 7, PV =-952, PMT = 0, and FV = 2547.60. Then solve for I = MIRRA = 15.10%.Similarly, MIRRB = 17.03%.At k = 18%,M 工 RRA = 18.05%.MIRRB = 20.49%.10-20 a.NPVAnswers and Solutions: 10-1
452、04IRRB= 16.7%The crossover rate is approximately 16 percent. If the cost ofcapital is less than the crossover rate, then Plan B should beaccepted; if the cost of capital is greater than the crossover rate,then Plan A is preferred. At the crossover rate, the two projects/NPVs are equal. Thus, other c
453、riteria such as the I RR must be used toevaluate the projects. The exact crossover rate is calculated as16.07 percent f the I RR of Project A, the difference between the cashflow streams of the two projects.b. Yes. Assuming (1) equal risk among projects, and (2) that the cost ofcapital is a constant
454、 and does not vary with the amount of capitalraised, the firm would take on all available projects with returnsgreater than its 12 percent cost of capital. If the firm had investedin all available projects with returns greater than 12 percent, thenits best alternative would be to repay capital. Thus
455、, the cost ofcapital is the correct reinvestment rate for evaluating a projectz scash flows.10-21 a. Using a financial calculator, we get:NPVA = $14,486,808. NPVB = $11,156,893.IRRA = 15.03%. IRRB = 22.26%.b- NPVThe crossover rate is somewhere between 11 percent and 12 percent. Theexact crossover ra
456、te is calculated as 11.7 percent, the IRR of Project, which represents the differences between the cash flow streams ofthe two projects.c. The NPV method implicitly assumes that the opportunity exists toreinvest the cash flows generated by a project at the cost of capital.Answers and Solutions: 10-1
457、05while use of the IRR methodI RR. The firm will invest$0. As cash flows come inpay them out to investors,implies the opportunity to reinvest at thein all independent projects with an NPV from these projects, the firm will eitheror use them as a substitute for outsidecapital which, in this case.cost
458、s 10 percent.Thus, since these cashflows are expected to save the firm 10 percent z this is theiropportunity cost reinvestment rate.The IRR method assumes reinvestment at the internal rate of returnitselfr whichfuture cost ofis an incorrect assumption, given a constantcapital, and ready access to ca
459、pital markets.expected10-22 a . The project7 sdollars):expected cashflows are as follows (in millions ofTime012Net Cash Flow($ 2.0)13.0(12.0)We can construct the following NPV profile:NPVk0%105080100200300400410420430450NPV($1,000,000)(99,174)1,333,3331,518,5191,500,0001,000,000500,000120,00087,6595
460、6,21325,632(33,058)Answers and Solutions: 10-106b. If k = 10%, reject the project since NPV $0.Its NPV at k = 20% is $500,000.c. Other possible projects with multiple rates of return could be nuclearpower plants where disposal of radioactive wastes is required at theend of the projects life.d. MIRR
461、k = 10%:PV costs = $2,000,000 + $12,000,000/ (1.10)2 = $11, 917,355.FV inflows = $13,000,000 x 1.10 = $14,300,000.MIRR = 9.54%. (Reject the project since M工RR k.)Looking at the results, this projects MIRR calculations lead to thesame decisions as the NPV calculations. However, the MIRR method willno
462、t always lead to the same accept/reject decision as the NPV method.Decisions in which two mutually exclusive projects are involved anddiffer in scale (size), MIRR can conflict with NPV. In thosesituations, the NPV method should be used.10-23 a. Payback A (cash flows in thousands):PeriodAnnualCash Fl
463、owsCumulative0($25,000)($25,000)15,000(20,000)210,000(10,000)315,0005,000420,00025,000PaybackA = 2 + $10,000/$15,000 =2.67 years.Payback B (cash flows in thousands):PeriodAnnualCash FlowsCumulative0($25,000)($25,000)120,000(5,000)210z0005,00038,00013,00046,00019,000PaybackB = 1 + $5r000/$10z000 = 1.
464、50 years.b . Discounted payback A (cash flowsin thousands):Annual Discounted 010%PeriodCash FlowsCash FlowsCumulative0($25, 000)($25,000.00)($25,000.00)15,0004,545.45(20,454.55)210,0008,264.46(12,190.09)315,00011,269.72(920.37)420,00013,660.2712,739.90Discounted PaybackA = 3 + $92037/$13, 660 27 = 3
465、 .07 years.Discounted payback B (cash flows in thousands):AnnualDiscounted 010%PeriodCash FlowsCash FlowsCumulative0($25,000)($25,000.00)($25,000.00)120,00018,181.82(6,818.18)210,0008,264.461,446.2838,0006,010.527,456.8046, 0004,098.0811,554.88DiscountedPaybackB = 1 + $6, 818.18/$8,264.46 = 1.,825 y
466、ears.Answers and Solutions: 10-108c. NPVA = $12,739, 908; IRRA = 27.27%.NPVB = $11,554,880; IRRB = 36.15%.Both projects have positive NPVs, so both projects should be undertaken.d. At a discount rate of 5 percent, NPVA = $18,243,813.At a discount rate of 5 percent, NPVB = $14,964,829.At a discount r
467、ate of 5 percent z Project A has the higher NPV;consequently, it should be accepted.e . At a discount rate of 15 percent, NPVA = $8,207,071.At a discount rate of 15 percent, NPVB = $8,643,390.At a discount rate of 15 percent. Project B has the higher NPV;consequently, it should be accepted.f.Project
468、 A =YearCE - CFB0$ 01(15)2037414IRRA =Crossover rate = 13.5254% 13.53%.g Use 3 steps to calculate MIRRA k = 10%:Step 1: Calculate the NPV of the uneven cash flow stream, so its FVcan then be calculated. With a financial calculator, enterthe cash flow stream into the cash flow registers, then enterI
469、= 10z and solve for NPV = $37,739,908.Step 2 : Calculate the FV of the cash flow stream as follows:Enter N = 4, I = 10, PV = -37739908, and PMT = 0 to solve forFV = $55,255,000.Step 3: Calculate MIRRA as follows:Enter N = 4, PV = -25000000, PMT = 0, and FV = 55255000 tosolve for I = 21.93%.Use 3 ste
470、ps to calculate MIRRB k = 10%:Step 1: Calculate the NPV of the uneven cash flow stream, so its FVcan then be calculated. With a financial calculator, enterthe cash flow stream into the cash flow registers, then enterI = 10z and solve for NPV = $36,554,880.Step 2 : Calculate the FV of the cash flow s
471、tream as follows:Enter N = 4, I = 10, PV = -36554880, and PMT = 0 to solve forFV = $53,520,000.Answers and Solutions: 10-109Step 3: Calculate MIRRB as follows:Enter N = 4, PV = -25000000, PMT = 0, and FV = 53520000 tosolve for I = 20.96%.According to the MIRR approach, if the 2 projects were mutuall
472、yexclusive, Project A would be chosen because it has the higher MIRR.This is consistent with the NPV approach. Note: Because these twoprojects are equal in size, we dont need to worry about a conflictbetween the MIRR and NPV decisions.NPVAnswers and Solutions: 10-110uasn i-low tsumaiion ana KISK Ana
473、lysisLEARNING OBJECTIVESChapter 8After reading this chapter, students should be able to:Discussflows,difficulties and relevant considerations in estimating net cashand explain the fourmajor ways that project cash flow differsfrom accounting income.Define the following terms:sunk cost, opportunity co
474、stfrelevant cash flow, incremental cash flow,externalitiesz and cannibalization.Identify the three categories toclassified.which incremental cash flows can beAnalyze an expansionshould be accepted onproject andthe basis ofmake a decision whetherstandard capital budgetingthe projecttechniques.Explain
475、 three reasonsstockholders are wellwhy corporate risk is important evendiversified.if a firmsIdentify two reasons why stand-alone risk is important.Demonstratesimulation.sensitivityand scenario analyses and explainMonte CarloDiscuss thedecisions.two methodsused to incorporate risk into capital budge
476、tingLearning Objectives: 11 -111LECTURE SUGGESTIONSThis chapter covers some important but relatively technical topics. Note toothat this chapter is more modular than most, i.e., the major sections arediscrete, hence they can be omitted without loss of continuity. Therefore, ifyou are experiencing a
477、time crunch, you could skip sections of the chapter.Assuming you are going to cover the entire chapter, the details of whatwe coverA and the way we cover it, can be seen by scanning Blueprints, Chapter11. For other suggestions about the lecture, please see the LectureSuggestions in Chapter 2, where
478、we describe how we conduct our classes.DAYS ON CHAPTER: 3 OF 58 DAYS (50-minute periods)Lecture Suggestions: 11 -112A R bV V tM b I U tlM U -U f-U I-IA H I tM U U tb I lOIMb11-1 Only cash can be spent or reinvested, and since accounting profits do notrepresent cash, they are of less fundamental impo
479、rtance than cashflows for investment analysis. Recall that in the stock valuationchapter we focused on dividends, which represent cash flows, ratherthan on earnings per share.11-2 Capital budgeting analysis should only include those cash flows that willbe affected by the decision. Sunk costs are unr
480、ecoverable and cannot bechanged, so they have no bearing on the capital budgeting decision.Opportunity costs represent the cash flows the firm gives up by investingin this project rather than its next best alternative, and externalitiesare the cash flows (both positive and negative) to other project
481、s thatresult from the firm taking on this project. These cash flows occur onlybecause the firm took on the capital budgeting project; therefore, theymust be included in the analysis.11-3 When a firm takes on a new capital budgeting project, it typically mustincrease its investment in receivables and
482、 inventories, over and abovethe increase in payables and accruals, thus increasing its net operatingworking capital (NOWC). Since this increase must be financed, it isincluded as an outflow in Year 0 of the analysis. At the end of theprojects life, inventories are depleted and receivables are collec
483、ted.Thus, there is a decrease in NOWC, which is treated as an inflow in thefinal year of the projects life.11-4 Simulation analysis involves working with continuous probabilitydistributions, and the output of a simulation analysis is a distributionof net present values or rates of return. Scenario a
484、nalysis involvespicking several points on the various probability distributions anddetermining cash flows or rates of return for these points. Sensitivityanalysis involves determining the extent to which cash flows change,given a change in one particular input variable. Simulation analysis isexpensi
485、ve. Therefore, it would more than likely be employed in thedecision for the $200 million investment in a satellite system than inthe decision for the $12,000 truck.Answers and Solutions: 11 -113O ULU “ UNO I U tR U -U r-U H A M I t r t M K U D L tM 11-1Equipment$ 9,000,000NOWC Investment3,000,000Ini
486、tial investment outlay$12,000,00011-2Operating Cash Flows: t = 1Sales revenues$10,000,000Operating costs7,000,000Depreciation2,000,000Operating income before taxes$ 1,000,000Taxes (40%)400,000Operating income after taxes$ 600,000Add back depreciation2,000,000Operating cash flow$ 2,600,00011-3Equipme
487、ntz s original cost$20,000,000Depreciation (80%)16,000,000Book value$ 4,000,000Gain on sale = $5,000,000 - $4,000,000 = $1,000,000.Tax on gain = $1,000, 000 (0.4) = $400,000.AT net salvage value = $5,000,000 - $400,000 = $4,600,000.11-4E(NPV)=0.05(-$70) + 0.20 (-$25) + 0.50 ($12) + 0.20 ($20) + 0.05
488、 ($30)= -$3.5 + -$5.0 + $6.0 + $4.0 + $1.5= $ 3 .0 million.ONPV =0.05 (-$70 - $3)2 + 0.20 (-$250.20($20 - $3)2 + 0.05($30 - $3)2$3)2 + 0.50 ($12$3)2 += $23,622 million.$23,622 CV = - = 7.874.$3.0Answers and Solutions: 11 -11411-5a.012345Initial investment ($250,000)Net oper. WC (25,000)Cost savings$
489、 90,000$ 90,000$ 90,000$ 90,000$ 90,000Depreciation82,500112,50037,50017,5000Oper. inc. before taxes$ 7,500($ 22,500)$ 52,500$ 72,500$ 90,000Taxes (40%)3,000(9,000)21,00029,00036,000Oper. Inc. (AT)$ 4,500($ 13,500)$ 31,500$ 43,500$ 54,000Add: Depreciation82,500112,50037,50017,5000Oper. CF$ 87,000$ 9
490、9,000$ 69,000$ 61,000$ 54,000Return of NOWC$25,000Sale of Machine23,000Tax on sale (40%)(9,200)Net cash flow ($275,000) $ 87,000$ 99,000$ 69,000$ 66,000$ 92,800NPV = $37,035.13Notes:Depreciation Schedule, Basis$250z000Year Beg. Bk. ValueMACRS Rate0.330.450.150.07MACRS Ratex Basis =Depreciation$ 82,5
491、00112,50037z50017,500$250,000Ending BV$167,50055,00017,50001 $250,000234167,50055,00017,500b . If savings=$108,000.increaseby20 percent,thensavings will be(1.2) ($90,000)If savings=$72,000.decreaseby20 percent,thensavings will be(0.8) ($90, 000)(1) Savings increase by 20%:012345Initial investment($2
492、50,000)Net oper. WC(25,000)Cost savings$108,000$108,000$108,000$108,000$108,000Depreciation82,500112,50037,50017,5000Oper. inc. beforetaxes$ 25,500($ 4,500)$ 70,500$ 90,500$108,000Taxes (40%)10,200(1,800)28,20036,20043,200Oper. Inc. (AT)$ 15,300($ 2,700)$ 42,300$ 54,300$ 64,800Add: Depreciation82,50
493、0112,50037,50017,5000Oper. CF$ 97,800$109,800$ 79,800$ 71,800$ 64,800Answers and Solutions: 11 -115Return of NOWCSale of MachineTax on sale (40%)Net cash flow($275,000) $ 97,800$109,800 $ 79,800$ 71,800$25,00023,000(9,200)， 103, 600NPV = $77,975.63Answers and Solutions: 11 -116c.(2)Savings decrease
494、by 20%:012345Initial investment($250,000)Net oper. WC(25,000)Cost savings$ 72,000$ 72,000$ 72,000$ 72,000$ 72,000Depreciation82,500112,50037,50017,5000Oper. inc. before taxes($ 10,500) ($ 40,500)$ 34,500$ 54,500$ 72,000Taxes (40%)(4,200)(16,200)13,80021,80028,8。0Oper. Inc. (AT)($ 6,300) ($ 24,300)$
495、20,700$ 32,700$ 43,200Add: Depreciation82,500工12,50037,50017,500_0Oper. CF$ 76,200$ 88,200$ 58,200$ 50,200$ 43,200Return of NOWC$25,000Sale of Machine23,000Tax on sale (40%)(9,200)Net cash flow($275,000) $ 76,200$ 88,200$ 58,200$ 50,200$ 82,000NPV = -$3,905.37Worst-case scenario:012345Initial invest
496、ment($250,000)Net oper. WC(30,000)Cost savings$ 72,000$ 72,000$ 72,000$ 72,000$ 72,000Depreciation82,500112,50037,50017,500_0Oper. inc. before taxes($ 10,500) ($ 40, 500)$ 34,500$ 54,500$ 72,000Taxes (40%)(4,200)(16,200)13,80022,80028,880Oper. Inc. (AT)($ 6,300) ($ 24,300)$ 20,700$ 32,700$ 43,200Add
497、: Depreciation82,500112,50037,50017,5000Oper. CF$ 76,200$ 88,200$ 58,200$ 50,200$ 43,200Return of NOWC$30,000Sale of Machine18,000Tax on sale (40%)(7,200)Net cash flow(280,090)$ 76,200$ 88,200$ 58,200$ 53,20：$ 84, C ；。NPV = -$7,663.52Base-case scenario:This was worked out in part a . NPV$37,035.13.B
498、est-case scenario:0 12 34 5Initial investment ($250,000)Net oper. WC ( 20,000)Answers and Solutions: 11 -117CV = $35,967.84/$34,800.21 = 1.03.Cost savingsDepreciationOper. inc. before taxesTaxes (40%)Oper. Inc. (AT)Add: DepreciationOper. CF$108,00082,500$ 25,50010,200$ 15,30082,500$ 97,800$108,00011
499、2,500($ 4,500)(1,800)($ 2,700)112,500$109,800$108,00037,500$ 70,50028,200$ 42,30037,500$ 79,800$108,00017,500$ 90,50036,200$ 54,30017,500$ 71,800$108,000_ 0$108,00043,200$ 64,8000$ 64,800Return of NOWC$20,000Sale of Machine28,000Tax on sale (40%)(11,200)Net cash flow ($270,000) $ 97,800$109,800$ 79,
500、800$ 71,800$LC11A6Q0NPV = $81,733.79Prob.NPVProb . x NPVWorst-case 0.35($ 1, 663.52)($ 2,682.23)Base-case 0.35 37,035.1312,962.30Best-case 0.30 81,733.7924,520.14E (NPV)$34,800.21GNPV= (0.35) (-$7,663.52 -$34,800.21)2+ (0.35) ($37,035.13 -$34,800.21)2 + (o.3o)($81,733. 79 - $34, 800.21)2户GNPV=$631,1
501、08,927.93 + $1,748,203. 59 + $660,828,279.49”ONPV= $35,967.84.11-6 a .The applicable depreciation values are as follows for the two scenarios:Year1234Scenario 1 (straight-line)Scenario 2 (MACRS)$200,000200,000200,000200,000$264,000360,000120,00056,000b . To findthe difference in net presentvalues un
502、der these two methods,we mustdetermine the difference in incremental cash flows each methodprovides. The depreciation expenses can not simply be subtracted fromeach other, as there are tax ramifications due to depreciation expenseThe full depreciation expense is subtracted from Revenues to getoperat
503、ing income, and then taxes due are computed Then, depreciationis added to after-tax operating income to get the project7 s operatingcash flow. Therefore, if the tax rate is 40%, only 60% of thedepreciation expense is actually subtracted out during the after-taxoperating income calculation and the fu
504、ll depreciation expense isadded back to get operating income. So, there is a tax benefitassociated with the depreciation expense that amounts to 40% of thedepreciation expense. Therefore, the differences between depreciationexpenses under each scenario should be computed and multiplied by 0.4Answers
505、 and Solutions: 11 -118to determine the benefit provided by the depreciation expense.YearDepr. Exp. Difference (2 - 1)Depr. Exp.Diff, x 0.4 (MACRS)1$64,000$25,6002160,00064,0003-80,000-32,0004-144,000一57,600Now to find the difference in NPV to be generated under thesescenarios, just enter the cash f
506、lows that represent the benefit fromdepreciation expense and solve for net present value based upon a WACCof 10%.Answers and Solutions: 11 -11911-7CF0 = 0CFi = 25600CF2 = 64000CF3 = -32000CF4 = -57600I = 10NPV = $12,781.64So, all else equal the use of the accelerated depreciation method willresult i
507、n a higher NPV (by $12,781.64) than would the use of astraight-line depreciation method. The net cost is $178,000:Cost of investment at t = 0 :Base priceModificationIncrease in NOWCCash outlay for new machine($140,000)(30,000)(8,000)($178,000) The operating cash flows follow:Year 1 Year 2After-tax s
508、avings $30z 000 $30,000Depreciation tax savings 22,440 30,600Net operating cash flow $52,440 $60,600Year 3$30,00010,200$40,200Notes:The after-tax cost savingsis $50,000 (1 - T) = $50,000 (0.6) = $30,000. The depreciation expense in each year is the depreciable basis,$170,000, times the MACRS allowan
509、ce percentages of 0 .33z 0.45, and0 .15 for Years 1, 2, and 3, respectively. Depreciation expense inYears 1, 2, and 3 is $56,100, $76,500, and $25,500. The depreciationtax savings is calculated as the tax rate (40 percent) times thedepreciation expense in each year. The terminal cash flow is $48,760
510、:Salvage value $60,000Tax on SV* (19,240)Return of NOWC 8,000$48,760Remaining BV in Year 4 = $170,000 (0.07) = $11, 900.*Tax on SV = ($60,000 - $11,900) (0.4)=$19,240.Answers and Solutions: 11 -120d. The project has an NPV of ($19, 549). Thus, it should not be accepted.YearNet Cash FlowPV 12%0($178,
511、000)($178,000)152,44046,821260,60048,310388,96063,320NPV =($ 19, 549)Alternatively, place the cash flows on a time line:0 12 3 _ 12_ _ _H-178,000 52,440 60,600 40,20048,76088,960With a financial calculator, input the appropriate cash flows into thecash flow register, input I = 12, and then solve for
512、 NPV = -$19,548.65 一$19,549.11-8 a . The net cost is $126,000:Price ($108,000)Modification (12,500)Increase in NOWC (5,500)Cash outlay for new machine (3126,OOP)b . The operating cash flows follow:Year 1 Year 2 Year 31. After-tax savings $28,600 $28,600 $28,6002 . Depreciation tax savings 13,918 18,
513、979 6,326Net cash flow $42,518 $47,579 $34,926Notes:1. The after-tax cost savings is $44z 000 (1 - T) =$44,000(0.65)=$28,600.2 . The depreciation expense in each year is the depreciable basis,$120,500, times the MACRS allowance percentages of 0.33, 0.45, and0.15 for Years 1, 2, and 3, respectively.
514、Depreciation expense inYears 1, 2, and 3 is $39,765, $54,225, and $18, 075. Thedepreciation tax savings is calculated as the tax rate (35 percent)times the depreciation expense in each year.Answers and Solutions: 11 -121c . The terminal cash flow is $50z 702:Salvage valueTax on SV*Return of NOWC$65,
515、000(19,798)5,500$50302BV in Year 4 = $120,500 (0.07) = $8,435.火Tax on SV = ($65, 000 - $8, 435) (0.35) = $19,798.d. The project has an NPV of $10,841; thus, it should be accepted.YearNet Cash FlowPV 12%0($126,000)($126,000)142,51837,963247,57937,930385,62860,948NPV$ 10,841Alternatively, place the ca
516、sh flows on a time line:0 1I - 1 -126,000 42,5182347,57934,92650,70285,628With a financial calculator, input the appropriate cash flows into thecash flow register, input I = 12, and then solve for NPV = $10,840.51= $10,841.11-9 a . Expected annual cash flows:Expected annual cash flow = $6,750Project
517、 A:ProbabilityXCash FlowProbable= Cash Flow0.2$6,000$1,2000.66,7504,0500.27z5001,500Expected annual cash flow = $7,650Project B:ProbableProbabilityx CashFlow = = Cash Flow0.2$0$ 00.66,7504,0500.218,0003,600Answers and Solutions: 11 -122Coefficient of variation：u v _ Standard deviation _ oNPVExpected
518、 value Expected NPVProject A:oA = )(-$750)2(0.2) + ($0)2(0.6) + ($750)2(0.2) = $474.34.Project B:oB = ) (一 $7, 650)2(0.2) + (-$900)2(0.6) + ($10,350)2(0.2) = $5, 797.84.CVA = $474.34/$6,750 = 0.0703.CVB = $5,797.84/$7,650 = 0.7579.b . Project B is the riskier project because it has the greatervariab
519、ility in its probable cash flows, whether measured by thestandard deviation or the coefficient of variation. Hence, Project Bis evaluated at the 12 percent cost of capital, while Project Arequires only a 10 percent cost of capital.Using a financial calculator, input the appropriate expected annualca
520、sh flows for Project A into the cash flow register, input I = 10,and then solve for NPVA = $10,036.25.Using a financial calculator, input the appropriate expected annualcash flows for Project B into the cash flow register, input I = 12rand then solve for NPVB = $11,624.01.Project B has the higher NP
521、V; therefore, the firm should acceptProject B.c. The portfolio effects from Project B would tend to make it less riskythan otherwise. This would tend to reinforce the decision to acceptProject B. Again, if Project B were negatively correlated with theGDP (Project B is profitable when the economy is
522、down) , then it isless risky and Project Bs acceptance is reinforced.Answers and Solutions: 11 -12311-10 If actual life is 5 years:Using a time line approach:0 10% 1234511Investment outlay (36,000)1111Operating cash flowsexcl. deprec. (AT) 7Z 2007,2007z2007z2007,200Depreciation savings 2,8802,8802,8
523、802,8802,880Net cash flow (36,000) 10,08010,08010,08。10,080工 。 ，080NPV10% = $2,211.13.If actual life is 4 years:Using a time line approach:0 10% 123411Investment outlay (36,000)111Operating cash flowsexcl. deprec. (AT) 7,2007,2007,2007,200Depreciation savings 2,8802, 8802,8802,880Tax savings on loss
524、2, 880Net cash flow (36,000) 10,08010,08010,08012,960NPV10% = -$2,080.68.If actual life is 8 years:Using a time line approach:0 156781 1 1111Investment outlay (36,000)Operating cash flowsexcl. deprec. (AT) 1r2007,2007,2007,2007,200Depreciation savings _2,8802, 880Net cash flow (36,000) 10,08010,0807
525、,2007,2007,200NPV10% = $13,328.93.If the life is as low as 4 years (an unlikely event), the investment willnot be desirable. But, if the investment life is longer than 4 years,the investment will be a good one. Therefore, the decision will dependon the directors1 confidence in the life of the tracto
526、r. Given the lowproba-bility of the tractor1s life being only 4 years, it is likely thatthe directors will decide to purchase the tractor.Answers and Solutions: 11 -124ChaptersCapital Structure and LeverageLEARNING OBJECTIVESAfter reading this chapter, students should be able to: Explain why capital
527、 structure policy involves a trade-off between riskand return, and list the four primary factors that influence capitalstructure decisions. Distinguish between a firms business risk and its financial risk. Explain how operating leverage contributes to a firms business risk andconduct a breakeven ana
528、lysis, complete with a breakeven chart. Define financial leverage and explain its effect on expected ROE,expected EPS, and the risk borne by stockholders. Briefly explain what is meant by a firms optimal capital structure. Specify the effect of financial leverage on beta using the Hamadaequation, an
529、d transform this equation to calculate a firms unleveredbeta, bu. Illustrate through a graph the premiums for financial risk and businessrisk at different debt levels. List the assumptions under which Modigliani and Miller proved that afirms value is unaffected by its capital structure, then explain
530、 tradeoff theory, signaling theory, and the effect of taxes and bankruptcycosts on capital structure. List a number of factors or practical considerations firms generallyconsider when making capital structure decisions. Briefly explain the extent that capital structure varies acrossindustries, indiv
531、idual firms in each industry, and different countries.Learning Objectives: 13-125LECTURE SUGGESTIONSThis chapter is rather long, but it is also modular, hence sections can beomitted without loss of continuity. Therefore, if you are experiencing a timecrunch/ you could skip selected sections.Assuming
532、 you are going to cover the entire chapter, the details of whatwe cover, and the way we cover it, can be seen by scanning Blueprints, Chapter13. For other suggestions about the lecture, please see the LectureSuggestions in Chapter 2, where we describe how we conduct our classes.DAYS ON CHAPTER: 3 OF
533、 58 DAYS (50-minute periods)Lecture Suggestions: 13-126ANSWERS TO END-OF-CHAPTER QUESTIONS13-1 If sales tend to fluctuate widely, then cash flows and the ability toservice fixed charges will also vary. Consequently, there is arelatively large risk that the firm will be unable to meet its fixedcharge
534、s. As a result, firms in unstable industries tend to use less debtthan those whose sales are subject to only moderate fluctuations.13-2 Current liabilities. Retail firms place more emphasis on currentliabilities because they have greater inventories and receivables.Long-term debt. Public utilities p
535、lace greater emphasis on long-termdebt because they have more stable sales and profits as well as morefixed assets.Retained earnings. Retail firms also use retained earnings to a greaterextent, probably because they are generally smaller and, hence have lessaccess to capital markets. Public utilitie
536、s have lower retained earningsbecause they have high dividend payout ratios and a set of stockholderswho want dividends. This is discussed further in Chapter 14.13-3 EBIT depends on sales and operating costs that generally are not affectedby the firms use of financial leverage, since interest is ded
537、ucted fromEBIT. At high debt levels, however, firms lose business, employeesworry, and operations are not continuous because of financingdifficulties. Thus, financial leverage can influence sales and cost,hence EBIT, if excessive leverage causes investors, customers, andemployees to be concerned abo
538、ut the firms future.13-4 The tax benefits from debt increase linearly, which causes a continuousincrease in the firms value and stock price. However, bankruptcy-related costs begin to be felt after some amount of debt has beenemployed, and these costs offset the benefits of debt. See Figure 13-8in t
539、he textbook.13-5 Expected EPS is generally measured as EPS for the coming years, and wetypically do not reflect in this calculation any bankruptcy-related costsAlso, EPS does not reflect (in a major way) the increase in risk and ksthat accompanies an increase in the debt rati。 ， whereas Po does refl
540、ectthese factors. Thus, the stock price will be maximized at a debt levelthat is lower than the EPS-maximizing debt level.13-6 With increased competition after the breakup of AT&T, the new AT&T and theseven Bell operating companies business risk increased. With thiscomponent of total company risk in
541、creasing, the new companies probablydecided to reduce their financial risk, and use less debt, to compensate.With increased competition the chance of bankruptcy increases and loweringAnswers and Solutions: 13-127debt usage makes this less of a possibility. If we consider the tax issuealone, interest
542、 on debt is tax deductible; thus, the higher the firms taxrate the more beneficial the deductibility of interest is. However,competition and business risk have tended to outweigh the tax aspect as wecan see from the actual debt ratios of the Bell companies. The Bellcompanies and AT&T have been lower
543、ing their debt ratios, for reasons alongthese lines.13-7 The firm may want to assess the asset investment and financing decisionsjointly. For instance, the highly automated process would require fancy,new equipment (capital intensive) so fixed costs would be high. A lessautomated production process,
544、 on the other hand, would be labor intensive,with high variable costs. If sales fell, the process that demands morefixed costs might be detrimental to the firm if it has much debtfinancing. The less automated process, however, would allow the firm tolay off workers and reduce variable costs if sales
545、 dropped; thus, debtfinancing would be more attractive. Operating leverage and financialleverage are interrelated. The highly automated process would increasethe firms operating leverage; thus, its optimal capital structure wouldcall for less debt. On the other hand, the less automated process would
546、call for less operating leverage; thus, the firms optimal capitalstructure would call for more debt.13-8 Several possibilities exist for the firm, but trying to match the lengthof the project with the maturity of the financing plan seems to be thebest approach. The firm may want to finance the R&D w
547、ith short-term debtand then, if the projects results are successfulA to raise the neededcapital for production through long-term debt or equity. Anotherpossibility would be to issue convertible bonds, which can be convertedto common stock- a lower interest rate would be paid now, and in thefuture (p
548、resumably the stock price will increase with the new process)investors would trade in the bonds for stock. One should also keep inmind that this project, and R&D in generalA is extremely risky and debtfinancing may not be available except at extremely high rates. For thisreason, many R&D companies h
549、ave low debt ratios, instead paying lowdividends and using retained earnings for financing projects.13-9 Operating leverage is the presence of fixed costs in the operation of afirm. Profits fluctuate when sales increase or decrease, because onlythe variable costs change with volume changes. The prof
550、its of a firmwith a high percentage of fixed costs are magnified when sales increase,since costs increase only by the low percentage of variable costs.13-10 The selling price per unit, the variable cost per unit, and total fixedcosts are necessary to construct a breakeven analysis. The procedure can
551、also be accomplished by using total sales dollars, total fixed costs, andtotal cost per unit.13-11 a. The breakeven point will be lowered.Answers and Solutions: 13-128b. The breakeven point will be increased because fixed costs haveincreased.c. The breakeven point will be lowered.13-12 An increase i
552、n the personal tax rate makes both stocks and bonds lessattractive to investors because it raises the tax paid on dividend andinterest income. Changes in personal tax rates will have differingeffects, depending on what portion of an investment7 s total return isexpected in the form of interest or di
553、vidends versus capital gains. Forexample, a high personal tax rate has a greater impact on bondholdersbecause more of their return will be taxed at the new higher rate. Anincrease in the personal tax rate will cause some investors to shift frombonds to stocks. This raises the cost of debt relative t
554、o equity. Inaddition, a lower corporate tax rate reduces the advantage of debt byreducing the benefit of a corporations interest deduction thatdiscourages the use of debt. Consequently, the net result would be forfirms to use more equity and less debt in their capital structures.13-13 a. An increase
555、 in the corporate tax rate would encourage a firm toincrease the amount of debt in its capital structure because a highertax rate increases the interest deductibility feature of debt.b. An increase in the personal tax rate would cause investors to shiftfrom bonds to stocks. This would raise the cost
556、 of debt relative toequity; thus, firms would be encouraged to use less debt in theircapital structures.c. Firms whose assets are illiquid and would have to be sold at firesale prices should limit their use of debt financing. Consequently,this would discourage the firm from increasing the amount of
557、debt inits capital structure.d. If changes to the bankruptcy code made bankruptcy less costly, thenfirms would tend to increase the amount of debt in their capitalstructures.e. Firms whose earnings are more volatile, all else equal, face a greaterchance of bankruptcy and, therefore, should use less
558、debt than morestable firms.Answers and Solutions: 13-129SOLUTIONS TO END-OF-CHAPTER PROBLEMSF13-1P - V八 $500,000QBF =-$4.00 - $3.00QB E = 500,000 units.13-2 The optimal capital structure is that capital structure where WACC isminimized and stock price is maximized. Since Jacksons stock price ismaxim
559、ized at a 30 percent debt ratio, the firms optimal capitalstructure is 30 percent debt and 70 percent equity. This is also thedebt level where the firms WACC is minimized.13-3 From the Hamada Equation, b = bv1 + (1 - T) (D/E), we can calculate ba as% = b/l + (1 - T)(D/E).bu = 1.2/1 + (1 - 0.4)($2r00
560、0z000/$8f000,000)氏 =1.2/1 + 0.15bu = 1.0435.13-4 a.8,000 units18,000 unitsSales$200,000$450,000Fixed costs140,000140,000Variable costs120,000270,000Total costs$260,000$410,000Gain (loss)($ 60,000)$ 40,000b .Q _ F _-$-1-4-0-,-0-0-0= 14,00c0c cu nit,s4.$103 B EP - VSBE = QB E( P)=(14,000) ($25) = $350
561、,000.Answers and Solutions: 13-130SalesCostsFixed CostsUnits of Output(Thousands)c. If the sellingprice rises to $31z while the variable cost per unitremains fixed, PV rises to $16.The end result is that thebreakeven point is lowered.QBE$140,000$16= 8,750 units.FP - VSBE = QBE(P )= (8,750) ($31) = $
562、271,250.SalesCostsFixed CostsUnits of Output(Thousands)The breakeven point drops to 8Z 750each unit sold has been increased;profit stream has been increased,profits has also been increased.units. The contribution margin perthus the variability in the firmsbut the opportunity for magnifiedd. If the s
563、elling price rises$23, P - V falls to $8.to $31 and the variable cost per unit rises toThe end result is that the breakeven pointincreases.QBE$140,000$8= 17,500 units.FP - VAnswers and Solutions: 13 -131SBE = QBE(P) = (17,500) ($31) = $542,500.The breakeven point increases to 17,500 units because th
564、e contributionmargin per each unit sold has decreased.13-5SalesCostsFixed CostsUnits of Output(Thousands)The current$2.00 (1.05)= $25.00.dividend per share,= $2.10. Therefore,Do, = $400,000/200,000 = $2.00.Po = Dl/(ks - g) = $2.10/(0.134 -Di =0.05), Step 1: Calculate EBIT before the recapitalization
565、:EBIT = $1,000,000/(1 - T) = $1,000,000/0.6 = $1,666,667.Note: The firm is 100% equity financed, so there is nointerest expense.Step 2 : Calculate net income after the recapitalization:$1,666,667 - 000,000)0.6 = $934,000.Step 3: Calculate the number of shares outstanding after the recapitalization :
566、200, 000 - ($l, 000, 000/$25) = 160z 000 shares.Step 4: Calculate Dx after the recapitalization:Do = 0.4($934,000/160,000) = $2,335.Di = $2.335(1.05) = $2.4518.Step 5: Calculate Po after the recapitalization:Po = D(k$ - g) = $2.4518/ (0.145 - 0.05) = $25.8079 $25.81.13-6LL: D/TA = 30%.EBITInterest (
567、$6,000,000 xEBTTax (40%)Net income$4,000,0000.10) 600,000$3,400,0001,360,000$2,040,00。Answers and Solutions: 13-132Return on equity = $2r040,000/$14f000,000 = 14.6%.Answers and Solutions: 13-133HL: D/TA = 50%.EBIT $4,000,000Interest ($10,000,000 x 0.12) 1,200,000EBT $2,800,000Tax (40%) 1,120,000Net
568、income $1,680,000Return on equity = $1,680,000/$10,000,000 = 16.8%.b LL: D/TA = 60%.EBIT $4,000,000Interest ($12,000,000 x 0.15) 1,800,000EBT $2,200,000Tax (40%) 880,00。Net income $1,320,000Return on equity = $1,320,000/$8,000,000 = 16.5%.Although LLZ s return on equity is higher than it was at the
569、30 percentleverage ratio, it is lower than the 16.8 percent return of HL.Initially, as leverage is increased, the return on equity alsoincreases. But, the interest rate rises when leverage is increased.Therefore, the return on equity will reach a maximum and then decline.13-7 No leverage: D = 0 (deb
570、t); E = $14,000,000.State Ps EBIT (EBIT - kdD) (1-T) ROES Ps (ROE) Ps (ROES-ROE)21 0.2 $4,200,000$2,520,0000.180.0360.001132 0.5 2,800,0001,680,0000.120.0600.000113 0.3 700,000420,0000.030.0090.00169ROE =0.105Variance =0.00293Standard deviation =0.054ROE = 10.5%.o2 = 0.00293.Q = 5.4%.CV = c/ROE = 5.
571、4%/10.5% = 0.514.Leverage ratio = 10%: D =$1,400,000;E = $12,600,000; kd =9%.ROE = 11.1%.a2 = 0.00363.c = 6%.CV = 6%/ll.l% = 0.541.StatePSEBIT(EBIT - kdD)(1-T)ROESPs(ROE)Ps(ROES-ROE)210.2$4,200,000$2,444,4000.1940.0390.0013820.52,800,0001,604,4000.1270.0640.0001330.3700z 000344,4000.0270.0080.00212R
572、OE = =0.111Variance= 0.00363Standarddeviation= 0.060Answers and Solutions: 13-134Leverage ra tio = 50%: D = $7, 000,000; E = $7, 000,000; kd = 11%.S ta tePs EBIT(EBIT - kdD)(1-T)ROESPS(ROE)Ps (ROES-ROE)210.2 $4,200,000$2,058,0000.2940.0590.0045020.5 2,800,0001,218,0000.1740.0870.0004530.3 700z 000(4
573、2,000)(0.006)(0.002)0.00675ROE =0.144V ariance= 0.01170Standardd ev iatio n= 0.108ROE = 14.4%.C T2 = 0 .01170.a = 10 .8%.CV = 10.8%/14.4% = 0.750.Leverage ra tio = 60%: D = $8,400,000; E$5,600,000; kd = 14%.S ta tePsEBIT(EBIT - kdD)(1-T)ROE$Ps(ROE)p .(ROES-R( 5E)210.2$4,200,000$1,814,4000.3240.0650.
574、0069920.52,800,000974,4000.1740.0870.0006830.3700,000(285,600)(0.051)(0.015)0.01060ROE = 0.137V ariance= 0.01827Standardd ev iatio n= 0 .1 3 5ROE = 13.7%.or2 = 0.01827.a = 13.5%.CV = 13.5%/13.7% = 0.985 0.99.As leverage in c re a se s, the expected re tu rn on eq u ity ris e s up to a p o in t.But a
575、s the ris k in cre ases w ith in creased leverage, the co st of debt ris e sSo a f te r the re tu rn on eq u ity peaks, i t then begins to f a l l . As leveragein c re a se s, the m easures of ris k (both the standard d ev iatio n and thec o e ffic ie n t of v a ria tio n of the re tu rn on equity)
576、ris e w ith each in creasein le v e ra g e.13-8F acts as g iv en : C urrent c a p ita l s tru c tu re : 25%D, 75%E; kRF = 5%; kM - kRF= 6%; T = 40%; ks = 14%.Step 1 : Determ ine the firm s c u rre n t b e ta .ks = kRF + (kM kRF) b14% = 5% + (6%)b9% = 6%b1.5 = b.Step 2 : Determ ine the firmz s unleve
577、red b eta, bu.bn = bL/ l + (1- T )(D /E )bu = 1 .5 /1 + (1 - 0 .4 )(0 .2 5 /0 .7 5 )bu = 1 .5 /1 .2 0bu = 1.25.Answers and Solutions: 13-135Step 3: Determine the firms beta under the new capital structure.bL = b0(l + (1 - T ) (D/E )bL = 1.25 1 + (1 - 0.4)(0.5/0.5)bL = 1.25(1.6)= 2 .S te p 4 : De te
578、rmi ne th e f i rms ne w c ost of e qui ty und e r th e c h a nge dc a pi ta l struc ture .k s = k R F + (kM - kR F) bks = 5% + (6%)2ks = 17%.13-9 a . U si ng th e sta nd a rd f ormul a f or th e we i gh te d a ve ra ge c ost of c a pi ta l ,we f i nd :WACC = wdkd(l - T ) + wcksWACC = (0.2) (8%) (1
579、- 0.4) + (0.8) (12.5%)WACC = 10.9 6%.b . T h e f i rms c urre nt l e ve re d b e ta a t 20% d e b t c a n b e f ound usi ng th eCAP M f ormul a .k $ = kR F + (kM - kR F)b12.5% = 5% + (6%)bb = 1.25.c . T o unl e ve r“ th e f i rms b e ta , th e H a ma d a E qua ti on i s use d .bL = b0 l + (1 - T ) (
580、D/E )1.25 = b0 l + (1 - 0.4) (0.2/0.8)1.25 = b u(l .15)6 = 1.0869 57.d . T o d e te rmi ne th e f i rms ne w c ost of c ommon e qui ty, one must f i nd th ef i rms ne w b e ta und e r i ts ne w c a pi ta l struc ture . Conse que ntl y, youmust re l e ve r,z th e f i rm* s b e ta usi ng th e H a ma d
581、 a E qua ti on:bLz4o% = b ul l + (1 - T ) (D/E )bLz4o% = 1.0869 57 1 + (1 - 0.4) (0.4/0.6)- 0 % = 1.0869 57 (1.4)氏 =1.521739 .T h e f i rm* s c ost of e qui ty, a s sta te d i n th e prob l e m, i s d e ri ve d usi ngth e CAP M e qua ti on.k s = + (kM - kR F) bks = 5% + (6%)1.521739ks = 14.13%.e . A
582、ga i n, th e sta nd a rd f ormul a f or th e we i gh te d a ve ra ge c ost of c a pi ta lAnswers and Solutions: 13-136is used. Remember, the WACC is a marginal, after-tax cost of capitaland hence the relevant before-tax cost of debt is now 9.5% and thecost of equity is 14.13%.WACC = wdkd(l - T) + wc
583、ksWACC = (0.4) (9.5%) (1 - 0.4) + (0.6) (14.13%)WACC = 10.76%.f. The firm should be advised to proceed with the recapitalization asit causes the WACC to decrease from 10.96% to 10.76%. As a result,the recapitalization would lead to an increase in firm value.13-10 a. Expected EPS for Firm C:E(EPSc) =
584、 0.1(-$2.40) + 0.2($1.35) + 0.4($5.10) + 0.2($8.85) +0.1 ($12.60)=-$0.24 + $0.27 + $2.04 + $1.77 + $1.26 = $5.10.(Note that the table values and probabilities are dispersed in asymmetric manner such that the answer to this problem could have beenobtained by simple inspection.)b . According to the st
585、andard deviations of EPS, Firm B is the least risky,while C is the riskiest. However, this analysis does not take accountof portfolio effects if Cs earnings go up when most other companieszdecline (that is, its beta is low), its apparent riskiness would bereduced. Also, standard deviation is related
586、 to size, or scale, andto correct for scale we could calculate a coefficient of variation(a/mean):E(EPS) b CV = o/E(EPS)A $5.10 $3.61 0.71B 4.20 2.96 0.70C 5.10 4.11 0.81By this criterion, C is still the most risky.13-11 a. Without new investmentSalesVCFC$12,960,00010,200,0001,560,000EBIT$ 1,200,000
587、Interest384,000EBT$ 816,000Tax (40%)326,400Net income $ 489,600Answers and Solutions: 13-137* In te re s t = 0 . 08 ($4, 800, 000) = $384, 000.Answers and Solutions: 13-1381. E P S oi d = $489 , 600/240, 000 = $2.04.Wi th ne w i nve stme ntDe b tS toc kS a l e s $12,9 60,000$12,9 60,000VC (0.8) ($10
588、,200, 000)8,160,0008,160,000F C1,800,0001,800,000E BI T $3,000,000$ 3,000,000I nte re st1,104,000*384,000E BT $1,89 6,000$ 2,616,000T a x (40%)758,4001,046,400Ne t i nc ome 1,137,600$ 1,569 ,600*I nte re st = 0.08 ($4,800,000) + 0.10 ($7,200, 000) = $1,104,2. EPSD = $1,137,600/240,000 = $4.74.3. E P
589、 Ss = $1,569 ,600/480,000 = $3.27.EPS should improve, but expected EPS is significantly higher if financial leverage is used.000.b . E P S(S a l e s - VC - F -工)(1 - T )N=(P Q - VQ - F - 工)(1 - T )NE P S De b t =EPSstock($28.8Q - $ 1 8 . 1 3 3 Q - $1,800,000 - $ 1 ,1 04,000) (0 . 6)240,000($10.667 Q
590、 - $2, 9 04,000) (0.6)240,000($10.667 Q - $2, 184,000) (0.6)480,000T h e re f ore ,($10.667Q - $2,184,000) (0.6) = (10.667 Q - $2,9 04,000) (0,6)480,000 240,000$10.667Q = $3,624,000Q = 339 ,750 u n i t s .T h i s i s th e i nd i f f e re nc e sa l e s l e ve l , wh e re E P Sd eb t = E P SstoCkc . E
591、 P S oi d = -(-$-2-8-.-8-Q- - -$-2-2-.-6-6-7-Q- - -$-1-,-5-6-0-,-0-0-0- - -$-3-8-4-,-0-0-0-)- -(-0-.-6-) = 0n240,000$6.133Q = $1,Q =uni ts .T h i s i s th e QBE c onsi d e ri ng i nte re st c h a r g e s .9 44,000316,9 57Answers and Solutions: 13-139_o _ ($28.8Q - $18.133Q - $2,9 04,000)(0.6)E P S N
592、ew, Debt = i240,0000$10.667Q = $2,9 04,000Q = 272,250 uni ts._ ($10.667Q - $2,184,000)(0.6)EP$New, Stock = 480,000$10.667QQ0=$2,184,000=204,750 uni ts.d . At th e e xpe c te d sa l e s l e ve l , 450,000 uni ts, we h a ve th e se E P S va l ue s:E P S oi d se tup = $2.04. E P SNe W/Debt = $4.74. E P
593、 S ze w,stoc k = $3.27.We a re gi ve n th a t ope ra ti ng l e ve ra ge i s l owe r und e r th e ne w se tup.Ac c ord i ngl y, th i s sugge sts th a t th e ne w prod uc ti on se tup i s l e ss ri sk yth a n th e ol d one一 一va ri a b l e c osts d rop ve ry sh a rpl y, wh i l e f i xe d c ostsri se l
594、e ss, so th e f i rm h a s l owe r c osts a t re a sona b l e sa l e s l e ve l s.I n vi e w of b oth ri sk a nd prof i t c onsi d e ra ti onsz th e ne w prod uc ti onse tup se e ms b e tte r. T h e re f ore , th e que sti on th a t re ma i ns i s h ow tof i na nc e th e i nve stme nt.T h e i nd i f
595、 f e re nc e sa l e s l e ve l , wh e re E P Sd e b tE P S ssc k ， i s 339 ,750uni ts. T h i s i s we l l b e l ow th e 450,000 e xpe c te d sa l e s l e ve l . I f sa l e sf a l l a s l ow a s 250,000 uni ts, th e se E P S f i gure s woul d re sul t:l c c $28.8 (250, 000) - $18.133(250, 000) - $2,
596、9 04,000 (0.6) E P SDe b t = - = -50.59 .240,000 $28.8(250, 000) - $18.133(250, 000) - $2z184z 000 (0.6) E P S stoc k = - “ c - = $0.60.480,000T h e se c a l c ul a ti ons a ssume th a t P a nd V re ma i n c onsta nt, a nd th a t th ec ompa ny c a n ob ta i n ta x c re d i ts on l osse s. Of c ourse
597、 , i f sa l e s rosea b ove th e e xpe c te d 450,000 l e ve l , E P S woul d soa r i f th e f i rm use d d e b tf i na nc i ng.I n th e re a l worl d we woul d h a ve more i nf orma ti on on wh i c h to b a seth e d e c i si on-c ove ra ge ra ti os of oth e r c ompa ni e s i n th e i nd ustry a ndb
598、 e tte r e sti ma te s of th e l i k e l y ra nge of uni t sa l e s. On th e b a si s ofth e i nf orma ti on a t h a nd , we woul d prob a b l y use e qui ty f i na nc i ng, b utth e d e c i si on i s re a l l y not ob vi ous.Answers and Solutions: 13 -14013-12 U se of d e b t (mi l l i ons of d ol
599、l a rs):P rob a b i l i ty0.30.40.3S a l e s$2,250.0$2,700.0$3,150.0E BI T (10%)225.0270.0315.0I nte re st*77.477.477.4E BT$ 147.6$ 19 2.6$ 237.6T a xe s (40%)59 .077.09 5.0Ne t i nc ome$ 88,6$ 115.6$ 142.6E a rni ngs pe r sh a re (20 mi l l i on sh a re s)$ 4,43$ 5.78$ 7.13*I nte re st on d e b t =
600、 ($270 x 0.12) + Curre nt i nte re st e xpe nse=$32.4 + $45 = $77.4.E xpe c te d E P S = (0.30) ($4.43) + (0.40) ($5.78) + (0.30) ($7.13)=$5.78 i f d e b t i s use d .C T2De b t = (0.30) ($4.43 - $5.78)2 + (0.40) ($5.78 - $5.78)2+ (0.30)($7.13 - $5.78)2 = 1.09 4.G c e b t = V1.09 4 = $1.05= S ta nd
601、a rd d e vi a ti on of E P S i f d e b t f i na nc i ng i s use d .CV =$1.05$5.78= 0.18.E (T I EDe b t)E (E BI T )I= 3.49 x.$77.4De b t/Asse ts = ($652.50 + $300 + $270)/ ($1,350 + $270) = 75.5%.U se of stoc k (mi l l i ons of d ol l a rs):P rob a b i l i ty0.30.40.3S a l e s$2,250.0$2,700.0$3,150.0
602、E BI T225.0270.0315.0I nte re st45.045.045.0E BT$ 180.0$ 225.0$ 270.0T a xe s (40%)72.09 0.0108.0Ne t i nc ome$ 108.0$ 135.0$ 162.0E a rni ngs pe r sh a re(24.5 mi l l i on sh a re s)*$ 4.41$ 5.51$ 6.61*Numb e r of sh a re s = ($270 mi l l i on/$60) + 20 mi l l i on= 4.5 mi l l i on + 20 mi l l i on
603、 = 24.5 mi l l i on.E P SE qui ty = (0.30) ($4.41) + (0.40) ($5.51) + (0.30) ($6.61) = $5.51.(E qui ty = (0.30) ($4.41 - $5.51产 + (o.4O) ($5.51 - $5.51)2+ (0.30) ($6.61 - $5.51)2 = 0.7260.E qui ty = J。 . 72 60 = $0.85.Answers and Solutions: 13 -141cv$0.85$5.510.15.$270E(TIE)= - = 6.00x.$45Debt $652.
604、50 + $300 co 收- =- =58.8%.Assets $1,350 + $270Under debt financing the expected EPS is $5.78, the standard deviation is$1.05, the CV is 0.18, and the debt ratio increases to 75.5 percent.(The debt ratio had been 70.6 percent.) Under equity financing theexpected EPS is $5.51, the standard deviation i
605、s $0.85, the CV is 0.15,and the debt ratio decreases to 58.8 percent. At this interest rate,debt financing provides a higher expected EPS than equity financing;however, the debt ratio is significantly higher under the debt financingsituation as compared with the equity financing situation. Because E
606、PSis not significantly greater under debt financing, while the risk isnoticeably greater, equity financing should be recommended.13-13 a. Firm A1. Fixed costs = $80,000.2. Variable cost/unit =Breakeven sales - Fixed costBreakeven units$200,000 - $80,00025,000$120,00025,000= $ 4 80/unit. . Breakeven
607、sales $200z 000 /3. Selling price/umt = - = - = $8.00/unit.Breakeven units 25,000Firm B1. Fixed costs = $120,000.2.Variable cost/unit =Breakeven sales - Fixed costsBreakeven units$240,000 - $120,000 .- = $4.00/unit.3. Selling price/unit = Breakeven sales = $240,000 = $ 8 0 0 / u n i t.Breakeven unit
608、s 30,000b. Firm B has the higher operating leverage due to its larger amount offixed costs.c . Operating profit = (Selling price)(Units sold) - Fixed costsAnswers and Solutions: 13 -142-(Variable costs/unit) (Units sold).Firm As operating profit = $8X - $80,000 - $4.80X.Firm Bs operating profit = $8
609、X - $120,000 - $4.00X.Set the two equations equal to each other:$8X - $80,000 - $4.80X = $8X - $120,000 - $4.00X-$0.8X = -$40,000X = $40,000/$0.80 = 50,000 units.Sales level = (Selling price)(Units) = $8(50,000) = $400,000.At this sales level.both firms earn $80,000:ProfitA = $8 (50, 000)= $400,000
610、-$80,000 - $4.80 (50,000)$80,000 - $240,000 = $80,000.ProfitB = $8(50,000) - $120,000 - $4.00(50,000)= $400,000 - $120,000 - $200,000 = $80,000.13-14 Tax rate = 40% kRF = 5 .0%bu = 1.2 - = 6.0%From data given in the problem and table we can develop the followingtable:LeveragedD/AE/AD/Ekdkd(l - T)bet
611、aaWACCc0.001.000.00007.00%4.20%1.2012.20%12.20%0.200.800.25008.004.801.3813.2811.58I 0.400.600.666710.006.001.6815.0811.45 |0.600.401.500012.007.202.2818.6811.790.800.204.000015.009.004.0829.4813.10Notes: These beta estimates were calculated using the Hamada equation, bL =bvl + (1 - T) (D/E) .b Thes
612、e ks estimates were calculated using the CAPM, ks = kRF + (kM -JRF) b .c These WACC estimates were calculated with the following equation:WACC = wd(kd) (1 - T) + (wc) (ks).The firms optimal capital structure is that capital structure whichminimizes the firms WACC. Elliottz s WACC is minimized at a c
613、apitalstructure consisting of 40% debt and 60% equity. At that capitalstructure, the firms WACC is 11.45%.Chapter 10Answers and Solutions: 13 -143Distributions to Shareholders:Dividends and Share RepurchasesLEARNING OBJECTIVESAfter reading this chapter, students should be able to: Define target payo
614、ut ratio and optimal dividend policy. Discuss the three theories of investors dividend preference: (1) thedividend irrelevance theory, (2) the bird-in-the-hand, / theory, and(3) the tax preference theory; and whether empirical evidence hasdetermined which theory is best. Explain the information cont
615、ent, or signaling, hypothesis and theclientele effect. Identify the two components of dividend stability, and briefly explainwhat a stable dividend policy“ means. Explain the logic of the residual dividend policy, and state why firms aremore likely to use this policy in setting a long-run target tha
616、n as astrict determination of dividends in a given year. Explain the use of dividend reinvestment plans, distinguish between the twotypes of plans, and discuss why the plans are popular with certaininvestors. List a number of factors that influence dividend policy in practice. Discuss why the divide
617、nd decision is made jointly with capital structureand capital budgeting decisions. Specify why a firm might split its stock or pay a stock dividend.Discuss stock repurchasesf including advantages and disadvantages, andeffects on EPS, stock price, and the firms capital structure.LECTURE SUGGESTIONSWe
618、 like this chapter and generally cover it in its entirety, but it could beomitted in the introductory course without loss of continuity. Or, sections suchas stock dividends or stock repurchases could be omitted.Assuming you are going to cover the entire chapter, the details of what wecover, and the
619、way we cover it, can be seen by scanning Blueprints, Chapter 14.For other suggestions about the lecture, please see the Lecture Suggestions inChapter 2Z where we describe how we conduct our classes.DAYS ON CHAPTER: 2 OF 58 DAYS (50-minute periods)Learning Objectives: 14-145ANSWERS TO END-OF-CHAPTER
620、QUESTIONS14-1 a. From the stockholders7 point of view, an increase in the personalincome tax rate would make it more desirable for a firm to retain andreinvest earnings. Consequently, an increase in personal tax ratesshould lower the aggregate payout ratio.b. If the depreciation allowances were rais
621、ed, cash flows would increase.With higher cash flows, payout ratios would tend to increase. On theother hand, the change in tax-allowed depreciation charges wouldincrease rates of return on investment, other things being equal, andthis might stimulate investment, and consequently reduce payout ratio
622、s.On balance, it is likely that aggregate payout ratios would rise, andthis has in fact been the case.c. If interest rates were to increase, the increase would make retainedearnings a relatively attractive way of financing new investment.Consequently, the payout ratio might be expected to decline. O
623、n theother hand, higher interest rates would cause kdz k .sz and firms MCCs torise- that would mean that fewer projects would qualify for capitalbudgeting and the residual would increase (other things constant),hence the payout ratio might increase.d. A permanent increase in profits would probably l
624、ead to an increase individends, but not necessarily to an increase in the payout ratio. Ifthe aggregate profit increase were a cyclical increase that could beexpected to be followed by a decline, then the payout ratio might fallzbecause firms do not generally raise dividends in response to a short-r
625、un profit increase.e. If investment opportunities for firms declined while cash inflowsremained relatively constant, an increase would be expected in thepayout ratio.f. Dividends are currently paid out of after-tax dollars, and interestcharges from before-tax dollars. Permission for firms to deductd
626、ividends as they do interest charges would make dividends less costlyto pay than before and would thus tend to increase the payout ratio.g. This change would make capital gains less attractive and would lead toan increase in the payout ratio.14-2 The biggest advantage of having an announced dividend
627、 policy is that itwould reduce investor uncertainty, and reductions in uncertainty aregenerally associated with lower capital costs and higher stock prices,other things being equal. The disadvantage is that such a policy might decrease corporate flexibility. However, the announced policy would possi
628、blyAnswers and Solutions: 14 -146include elements of flexibility. On balance, it would appear desirable fordirectors to announce their policies.14-3 It is sometimes argued that there is an optimum price for a stock; that is,a price at which k will be minimized, giving rise to a maximum price forany
629、given earnings. If a firm can use stock dividends or stock splits tokeep its shares selling at this price (or in this price range), then stockdividends and/or splits will have helped maintain a high P/E ratio.Others argue that stockholders simply like stock dividends and/or splitsfor psychological o
630、r some other reasons. If stockholders do like stockdividends, using them would have the effect of keeping P/E ratios high.Finally, it has been argued that increases in the number of shareholdersaccompany stock dividends and stock splits. One could, of course, arguethat no causality is contained in t
631、his relationship. In other words, itcould be that growth in ownership and stock splits is a function of yetanother variable.14-4 The difference is largely one of accounting. In the case of a split, thefirm simply increases the number of shares and simultaneously reduces thepar or stated value per sh
632、are. In the case of a stock dividend, there mustbe a transfer from retained earnings to capital stock. For most firmsr a100 percent stock dividend and a 2-for-l stock split accomplish exactly thesame thing; hence, investors may choose either one.14-5 While it is true that the cost of outside equity
633、is higher than that ofretained earnings, it is not necessarily irrational for a firm to paydividends and sell stock in the same year. The reason is that if the firmhas been paying a regular dividend, and then cuts it in order to obtainequity capital from retained earnings, there might be an unfavora
634、ble effecton the firmz s stock price. If investors lived in the world of certaintyand rationality postulated by Miller and Modigliani, then the statementwould be true, but it is not necessarily true in an uncertain world.14-6 Logic suggests that stockholders like stable dividends many of them depend
635、on dividend income, and if dividends were cut, this might cause serioushardship. If a firms earnings are temporarily depressed or if it needs asubstantial amount of funds for investment, then it might well maintain itsregular dividend using borrowed funds to tide it over until things returnedto norm
636、al. Of coursef this could not be done on a sustained basis -itwould be appropriate only on relatively rare occasions.14-7 It is true that executives7 salaries are more highly correlated with thesize of the firm than with profitability. This being the case, it might bein management7 s own best intere
637、st (assuming that management does not have asubstantial ownership position in the firm) to see the size of the firmincrease whether or not this is optimal from stockholdersz point of view.The larger the investment during any given year, the larger the firm willbecome. Accordingly, a firm whose manag
638、ement is interested in maximizingfirm size rather than the value of the existing common stock might pushinvestments down below the cost of capital. In other words, managementmight invest to a point where the marginal return on new investment is lessAnswers and Solutions: 14 -147than the cost of capi
639、tal.If the firm does invest to a point where the return on investment isless than the cost of capital, the stock price must fall below what itotherwise would have been. Stockholders would be given additional benefitsfrom the higher retained earnings (due to firm being larger), and thismight well pus
640、h up the stock price, but the increase in stock price wouldbe less than the value of dividends received if the company had paid out alarger percentage of its earnings.14-8 a. MM argue that dividend policy has no effect on ksz thus no effect onfirm value and cost of capital. On the other hand, GL arg
641、ue thatinvestors view current dividends as being less risky than potentialfuture capital gains. Thus, GL claim that ks is inversely related todividend payout.b. The tax preference theory supports the view that since long-termcapital gains are deferred and are effectively taxed at lower rates (ata ra
642、te of 20 percent) than dividend income, investors value capitalgains more highly than dividends. Thusz the tax preference theorystates that ks is directly related to dividend payout.c. Unfortunately, empirical tests have failed to offer overwhelmingsupport for any of the dividend theories.d. MM coul
643、d claim that tests which show that increased dividends lead toincreased stock prices demonstrate that dividend increases are causinginvestors to revise earnings forecasts upward, rather than causeinvestors to lower ks. MMs claim could be countered by invoking theefficient market hypothesis. That is,
644、 dividend increases are builtinto expectations and dividend announcements could lower stock price,as well as raise it, depending on how well the dividend increasematches expectations. Thus, a bias towards price increases withdividend increases supports GL.e. Since there are clients who prefer differ
645、ent dividend policies, MMcould argue that one policy is as good as another. But, if theclienteles are of differing sizes or economic means, the clientelesmight not be equal, and one dividend policy could be preferential toanother.14-9 The stock market was strong and stock prices rose significantly i
646、n 1983;thus many firmsz stock prices rose above the optimal $20-$80 range. Firmswere then inclined to use stock splits or dividends to return stock priceto the range where firm value was maximized.There is widespread belief that there is an optimal price range forstocks. By optimalz it means that if
647、 the stock price is within this range,the P/E ratio, and hence the value of the firm, will be maximized. Stocksplits and stock dividends can be used for this purpose.Answers and Solutions: 14 -14814-10 a. The residual dividend policy is based on the premise that, since newcommon stock is more costly
648、 than retained earnings, a firm should useall the retained earnings it can to satisfy its common equityrequirement. Thus, the dividend payout under this policy is a functionof the firmz s investment opportunities. See Table 14-2 in the text foran illustration.b . Yes. A more shallow plot implies tha
649、t changes from the optimal capitalstructure have little effect on the firms cost of capital, hence valueIn this situation, dividend policy is less critical than if the plotwere V-shaped.14-11 a. True. When investors sell their stock they are subject to capitalgains taxes.b . True. If a companys stoc
650、k splits 2 for 1, and you own 100 shares,then after the split you will own 200 shares.c. True. Dividend reinvestment plans that involve newly issued stock willincrease the amount of equity capital available to the firm.d. False. The Tax Code, through the tax deductibility of interest,encourages firm
651、s to use debt and thus pay interest to investors ratherthan dividendsf which are not tax deductible. In addition, due to alower capital gains tax rate than the highest personal tax rate, thetax code encourages investors in high tax brackets to prefer firms whoretain earnings rather than those that p
652、ay large dividends.e. True. If a companys clientele prefers large dividends, the firm isunlikely to adopt a residual dividend policy. A residual dividendpolicy could mean low or zero dividends in some yearsz which wouldupset the companys developed clientele.f. False. If a firm follows a residual div
653、idend policy, all else constant, its dividend payout will tend to decline whenever the firmsinvestment opportunities improve.Answers and Solutions: 14 -149SOLUTIONS TO END-OF-CHAPTER PROBLEMS14-170% Debt; 30% E quity; C apital Budget = $3,000,000; NI,000,000; PO = ?Equity re ta in e d = 0 . 3 ($3, 0
654、00z 000) = $900,000.NI-A dditions to REEarnings Remaining门 4 $1,100,000Payout = - -$2,000,000$2,000,000900,000$i,ioo,oo655%.14-2 Po = $90; S p lit = 3 fo r 2; New Po = ?鬻= $6。 .14-3 NI = $2,000,000; Shares = 1,000,000; Po = $32; RepurchaseRepurchase = 0 .2 x 1,000,000 = 200,000 sh a re s.Repurchase
655、amount = 200z 000 x $32 = $6,400, 000.20%; New Po = ?EPSoid =NIShares$2,000,0001,000,000$2.00.$32P/E = = 16x.$2EPSew一$ 2, 0 0 0 ,0 0 0 _ = $2 ,000, 000 = $ 2 5 0.1,000,000 - 200,000 800,000P riceNew = EPSnew x P/E = $2.50 (16) = $40.14-4 R etained earnings = Net income (1 - Payout ra tio )= $5,000,0
656、00(0.55) = $2,750,000.E xternal eq uity needed:T otal eq uity required = (New in v estm en t)(1 - Debt ra tio )= $10,000,000(0.60) = $6,000,000.Answers and Solutions: 14 -150New external equity needed = $6,000,000 - $2,750,000 = $3,250,000.14-5 DPS after split = $0.75.Equivalent pre-split dividend =
657、 $0.75(5) = $3.75.New equivalent dividend = Last years dividend(1.09)$3.75 = Last years dividend(1.09)Last years dividend = $3.75/1.09 = $3.44.14-6 Step 1: Determine the capital budget by selecting those projects whosereturns are greater than the projects risk-adjusted cost ofcapital.Projects H and
658、L should be chosen because I RR k, so thefirms capital budget = $10 million.Step 2 : Determine how much of the capital budget will be financed withequity.Capital Budget x Equity % = Equity Required.$10,000,000 x 0.5 = $5,000,000.Step 3: Determine dividends through residual model.$7,287,500 - $5,000,
659、000 = $2,287,500.Step 4: Calculate payout ratio.$2,287,500/$7,287,500 = 0.3139 = 31.39%.14-7 a. Before finding the long-run growth rate, the dividend payout ratiomust be determined.Dividend payout ratio = DPS/EPS = $0.75/$2.25 = 0.3333.The firms long-run growth rate can be found by multiplying the p
660、ortionof a firm* s earnings that are retained times the firm* s return onequity.g = ROE x Retention ratio=(Net Income/Equity Capital) x (1 - Dividend payout ratio)= 18% x (1 - 0.3333) = 12%.b . The required return can be calculated using the DCF approach.ks = Di/Po + gks = $0.75/$15.00 + 0.12ks = 0.
661、17 or 17%.Answers and Solutions: 14 -151c. The new payout ratio can be calculated as:$1.50/$2.25 = 0.6667.The new long-run growth rate can now be calculated as:g = ROE x (1 - Dividend payout ratio)g = 18% x (1 - 0.6667) = 6%.The firms required return would be:ks = Di/Po + gks = $1.50/$15.00 + 0.06ks
662、 = 0.16 or 16%.d. The firm1 s original plan was to issue a dividend equal to $0.75 pershare, which equates to a total dividend of $0.75 times the number ofshares outstanding. So, first the number of shares outstanding mustbe determined from the EPS.Amount of equity capital = Total assets x Equity ra
663、tio=$10 million x 0.6 = $6 million.Net income = Equity capital x ROE = $6 million x 0.18 = $1.08 million.EPS = Net income/Number of shares$2.25 = $1.08 million/Number of sharesNumber of shares = 480,000.With 480,000 shares outstanding, the total dividend that would be paidwould be $0.75 x 480,000 sh
664、ares = $360, 000. The firms current marketcapitalization is $7.2 million, determined by 480,000 shares at $15per share. If the stock dividend is implemented, it shall account for5% of the firm1s current market capitalization($360z000/$7z200,000 = 0.05).e. If the total amount of value to be distribut
665、ed to shareholders is$360,000, at a price of $15 per share, then the number of new sharesissued would be:Number of new shares = Dividend value/Price per shareNumber of new shares = $360z 000/$15Number of new shares = 24,000 shares.The stock dividend will leave the firm* s net income unchanged,theref
666、ore the firm* s new EPS is its net income divided by the newtotal number of shares outstanding.New EPS = Net income/(Old shares outstanding + New shares outstanding)New EPS = $lz 080,000/(480, 000 + 24,000)New EPS = $2.1429.The dilution of earnings per share is the difference between old EPSand new
667、EPS.Answers and Solutions: 14 -152Dilution of EPS = 01d EPS - New EPSDilution of EPS = $2.25 - $2.1429Dilution of EPS = $0.1071 * $0.11 per share.14-8 a. Total dividends。 ？ = Net income x Payout ratio= $1,800,000 x 0.40=$720,000.DPS03 = Dividendsoa/Shares outstanding=$720,000/500,000=$1.44.b. Divide
668、nd yield = DPS/P0= $1.44/$48.00= 3%.c. Total dividends02 = Net income02 x Payout ratio= $1,500,000 x 0.4=$600,000.DPS02 = Dividends02/Shares outstanding= $600,000/500,000=$1.20.d. Payout ratio = Dividends/Net income= $600,000/$l,800,000=0.3333 = 33i/S%.e. Since the company would like to avoid transa
669、ctions costs involved inissuing new equity, it would be best for the firm to maintain the sameper-share dividend. This will provide a stable dividend to investors, yetallow the firm to expand operations without significantly affecting thedividend. A constant dividend payout ratio would cause serious
670、fluctuations to the dividend depending on the level of earnings. Ifearnings were high, then dividends would be high. However, if earningswere low, then dividends would be low. This would cause great uncertaintyfor investors regarding dividends and would cause the firms stock priceto decline (because
671、 investors prefer a more stable dividend policy).14-9 a . 1. 2003 Dividends = (1.10) (2002 Dividends)=(1.10) ($3, 600,000) = $3, 960,000.2. 2002 Payout = $3, 600,000/$10, 800, 000 = 0.3333 = 3373%.2003 Dividends = (0.3333) (2003 Net income)=(0.3333) ($14,400,000) = $4,800,000.(Note: If the payout ra
672、tio is rounded off to 33 percent, 2003dividends are then calculated as $4,752,000.)3. Equity financing = $8f 400, 000 (0.60) = $5, 040,000.2003 Dividends = Net income - Equity financing=$14,400,000 - $5,040,000 = $9,360,000.Answers and Solutions: 14-153All of the equity financing is done with retain
673、ed earnings as longas they are available.4. The regular dividends would be 10 percent above the 2002 dividends:Regular dividends = (1.10) ($3, 600,000) = $3, 960,000.The residual policy calls for dividends of $9,360,000. Therefore,the extra dividend, which would be stated as such, would beExtra divi
674、dend = $9,360,000 - $3,960,000 = $5,400,000.An even better use of the surplus funds might be a stock repurchase.b. Policy 4, based on the regular dividend with an extra, seems mostlogical. Implemented properly, it would lead to the correct capitalbudget and the correct financing of that budget, and
675、it would givecorrect signals to investors.c. ks =d. g = Retention rate(ROE)0.10 = 1 - ($3,600z000/$10z800z000)(ROE)ROE = 0.10/0.6667 = 0.15 = 15%.e. A 2003 dividend of $9,000,000 may be a little low. The cost of equity is15 percent, and the average return on equity is 15 percent. Howeverz withan ave
676、rage return on equity of 15 percent, the marginal return is loweryet. That suggests that the capital budget is too large, and that moredividends should be paid out. Of course, we really cannot be sure ofthis- the company could be earning low returns (say 10 percent) onexisting assets yet have extrem
677、ely profitable investment opportunitiesthis year (say averaging 30 percent) for an expected overall average ROEof 15 percent. Still, if this years projects are like those of pastyearsf then the payout appears to be slightly low.14-10 a. Capital budget = $10,000,000; Capital structure = 60% equity, 4
678、0% debt;Common shares outstanding = 1,000,000.Retained earnings needed = $10,000,000(0.6) = $6,000,000.b. According to the residual dividend model, only $2 million is availablefor dividends.NI - Retained earnings needed for capital projects = Residual dividend$8,000,000 - $6,000,000 = $2,000,000.DPS
679、 = $2,000,000/1,000,000 = $2.00.Payout ratio = $2,000,000/$8,000,000 = 25%.c. Retained earnings available = $8,000,000 - $3.00(1,000,000)Retained earnings available = $5,000,000.d. No. If the company maintains its $3.00 DPS, only $5 million of retainedAnswers and Solutions: 14 -154earnings will be a
680、vailable for capital projects. However, if the firm isto maintain its current capital structure $6 million of equity isrequired. This would necessitate the company having to issue $1 millionof new common stock.e. Capital budget = $10 million; Dividends = $3 million; NI = $8 million;Capital structure
681、 = ?RE available = $8,000,000 - $3,000,000=$5,000,000.Percentage of cap. budget financed with RE =50%.$10,000,000Percentage of cap. budget financed with debt = - = 50%.$10,000,000f. Dividends = $3 million; Capital budget = $10 million; 60% equity, 40%debt; NI = $8 million.Equity needed = $10,000,000
682、(0.6) = $6,000.000.RE available = $8,000,000 - $3.00(1,000,000)= $5,000,000.External (New) equity needed = $6,000,000 - $5,000,000=$1,000,000.g.Dividends = $3 million; NI = $8 million; Capital structure = 60% equity,40% debt.RE available = $8,000,000 - $3,000,000=5,000,000.Were forcing the RE availa
683、ble = Required equity to fund the newcapital budget.Required equity = Capital budget (Target equity ratio)$5,000,000 = Capital budget(0.6)Capital budget = $8,333,333.Therefore, if Buena Terra cuts its capital budget from $10 million to $8.33million, it can maintain its 33.00 DPS, its current capital
684、 structure,and still follow the residual dividend policy.h. The firm can do one of four things:(1) Cut dividends.(2) Change capital structure, that is, use more debt.(3) Cut its capital budget.(4) Issue new common stock.Realize that each of these actions is not without consequences to thecompanyz s
685、cost of capital, stock price, or both.Answers and Solutions: 14-155unapier 11Managing Current AssetsLEARNING OBJECTIVESAfter reading this chapter, students should be able to: Define basic working capital terminology. Calculate the inventory conversion period, the receivables collectionperiod, and th
686、e payables deferral period to determine the cash conversioncycle. Briefly explain the basic idea of zero working capital. Briefly explain how a negative cash conversion cycle works. Distinguish among relaxed, restricted, and moderate current assetinvestment policies, and explain the effect of each o
687、n risk and expectedreturn. Explain how EVA methodology provides a useful way of thinking aboutworking capital. List the reasons for holding cash. Construct a cash budget, and explain its purpose. Briefly explain useful tools and procedures for effectively managing cashinflows and outflows. Explain w
688、hy firms are likely to hold marketable securities. State the goal of inventory management and identify the three categoriesof inventory costs. Identify and briefly explain the use of several inventory control systems. Monitor a firm,s receivables position by calculating its DSO andreviewing aging sc
689、hedules. List and explain the four elements of a firm7 s credit policy, andidentify other factors influencing credit policy.Integrated Case: 15-156Harcourt, Inc.LECTURE SUGGESTIONSWe have never found working capital an interesting topic to students, hence itis, to us, a somewhat more difficult subje
690、ct to teach than most. Perhapsthats because it comes near the end of the course, when everyone is tired.More likely, though, the problem is that working capital management is reallymore a matter of operating efficiently than thinking conceptually correctly一 一i.e， it is more practice than theory-and
691、theory lends itself better toclassroom teaching than practice. Still, working capital management isimportant, and it is something that students are likely to be involved withafter they graduate.Since we have only one chapter on current asset management, we try to goall the way through it. However, t
692、he chapter is modular, so it is easy to omitsections if time pressures require.Assuming you are going to cover the entire chapter, the details of whatwe cover, and the way we cover it, can be seen by scanning Blueprints, Chapter15. For other suggestions about the lecture, please see the LectureSugge
693、stions7 in Chapter 2, where we describe how we conduct our classes.DAYS ON CHAPTER: 3 OF 58 DAYS (50-minute periods)Learning Objectives: 15-157ANSWERS TO END-OF-CHAPTER QUESTIONS15-1 When money is tight, interest rates are generally high. This means thatnear-cash assets have high returns; hence, it
694、is expensive to holdidle cash balances. Firms tend to economize on their cash balanceholdings during tight-money periods.15-2 The two principal reasons for holding cash are for transactions andcompensating balances. The target cash balance is not equal to the sumof the holdings for each reason becau
695、se the same money can oftenpartially satisfy both motives.15-3 a. Better synchronization of cash inflows and outflows would allow thefirm to keep its transactions balance at a minimum, and wouldtherefore lower the target cash balance.b. Improved sales forecasts would tend to lower the target cash ba
696、lance.c. A reduction in the portfolio of U. S. Treasury bills (marketablesecurities) would cause the firms cash balance to rise if theTreasury bills had been held in lieu of cash balances.d. An overdraft system will enable the firm to hold less cash.e. If the amount borrowed equals the increase in c
697、heck-writing, thetarget cash balance will not change. Otherwise, the target cashbalance may rise or fall, depending on the relationship between theamount borrowed and the number of checks written.f. The firm will tend to hold more Treasury bills, and the target cashbalance will tend to decline.15-4
698、A lockbox would probably make more sense for a firm that operatednationwide. Lockboxes reduce the time required for a firm to receiveincoming checks, to deposit them, and to get them cleared through thebanking system so that the funds are available for use. However, even alocal firm with enough volu
699、me may want its bank to receive and processchecks before the firm adjusts its accounts receivable ledgers.15-5 False. Both accounts will record the same transaction amount.15-6 The four elements in a firms credit policy are (1) credit standards,(2) credit period, (3) discount policy, and (4) collect
700、ion policy. Thefirm is not required to accept the credit policies employed by itscompetition, but the optimal credit policy cannot be determined withoutAnswers and Solutions: 15-158considering competitors credit policies. A firms credit policy has animportant influence on its volume of sales, and th
701、us on its profitability15-7 The latest date for paying and taking discounts is May 10. The date bywhich the payment must be made is June 9. L c Days sales Accounts receivable $312,00015-8 a. J 4 ,. = -= -outstanding Sales/365 $2,920,000/365$312,000 ” ，= -= 39 days.$8,000/dayb . False. While it appea
702、rs that most customers pay on time (because 39days is less than the 40 days stipulated in the credit terms) , thisdoes not mean that all customers are paying on time. In fact, it isvery likely that some are not, since some customers are paying on thetenth day and are taking the discount.15-9 False.
703、An aging schedule will give more detail, especially as to whatpercentage of accounts are past due and what percentage of accountsare taking discounts.15-10 No. Although B sustains slightly more losses due to uncollectibleaccounts, its credit manager may have a wise policy that is generatingmore sale
704、s revenues (and thus profits) than would be the case if he had apolicy which cut those losses to zero.Explanations:15-11A/RSalesProfita. The firm tightens its creditstandards.-0b. The terms of trade arechanged from 2/10, net 30zto 3/10, net 30.0+0c. The terms are changed from2/10 net 30, to 3/10, ne
705、t 40.0+0d. The credit manager gets toughwith past-due accounts.-0a. When a firm tightens“ its credit standardsf it sells on credit moreselectively. It will likely sell less and certainly will make fewercredit sales. Profit may be affected in either direction.b The larger cash discount will probably
706、induce more sales, but theywill likely be from customers who pay bills quickly. Further, some ofthe current customers who do not take the 2 percent discount may beinduced to start paying earlier. The effect of this would be toreduce accounts receivable, so accounts receivable and profits couldgo eit
707、her way.Answers and Solutions: 15-159c. A less stringent credit policy in terms of the credit period shouldstimulate sales. The accounts receivable could go up or downdepending upon whether customers take the new higher discount or delaypayments for the 10 additional days, and depending upon the amo
708、unt ofnew sales generated.d. If the credit manager gets tough with past due accounts, sales willdecline, as will accounts receivable.15-12The firm could have its suppliers ship by air freight, reducing lead time,or on consignment, reducing the firms purchasing costs. The firm canreduce its finished
709、goods inventory by manufacturing to meet orders, orby shipping goods to customers at the firms discretion, or by usingseasonal dating in its accounts receivable policy.Unless the firm is in a strong bargaining position, or offers somefinancial incentive, shifting inventory burdens to suppliers andcu
710、stomers may result in higher costs and fewer sales. If a supplier hasto carry larger raw material inventory, it may charge a higher price tothe firm to cover its increased inventory costs. Shifting inventoryburdens to customers may result in lost sales if customers can obtainbetter service from othe
711、r firms.Answers and Solutions: 15-160SOLUTIONS TO END-OF-CHAPTER PROBLEMS15-1 Net Float = Disbursement float - Collections float=(4 x $10,000) - (3 x $10,000)=$10,000.15-2 Sales = $10,000,000; S/I = 2x.Inventory = S/2$10,000,000= - - - - =$5, 000, 000.2If S/I = 5x, how much cash is freed up?Inventor
712、y = S/5=$10,00-0,000u = $2,000,000.Cash freed = $5,000,000 - $2,000,000 = $3,000,000.15-3 DSO = 17; Credit sales/Day = $3,500; A/R = ?A/RS/365A/R$3,50017 x $3,500 = $59,500.DSO =17 =A/R =15-4 a . Cost = (Number of locations) (Number of transfers) (Cost per transfer)+ (Monthly cost)(12)=(10) (260) ($
713、9.75) + ($6, 500)(12) = $25,350 + $78,000=$103,350.b . Reduction in days of float = 3 days.Ranafit = (Reduction in) ( Daily ) (Opportunity)(days of floatj (collections) ( cost )=(3) ($325,000) (0.10) = $97,500.c. Net gain (loss) = $97,500 - $103,350 = -$5,850.Answers and Solutions: 15 -161Malitz sho
714、uld not initiate the lockbox system since it will cost thefirm $5,850 more than it will earn on the freed funds.15-5 a. 0.4 (10) + 0.6 (40) = 28 days.b . $912z 500/365 = $2Z 500 sales per day.$2,500(28) = $70,000 = Average receivables.c. 0.4 (10) + 0.6 (30) = 22 days. $912,500/365 = $2,500 sales per
715、 day.$2Z 500 (22) = $55, 000 = Average receivables.Sales may also decline as a result of the tighter credit. This wouldfurther reduce receivables. Also, some customers may now takediscounts further reducing receivables.a Acct. Rec.CCC = -Avg. Daily Sales16.79 = ($47z 000/ADS) +16.79 = ($47z 000/ADS)
716、 +15-6 a . Setting up the formula for the cash conversion cycle, sales can becalculated.+ Inv. Acct. Pay.Avg. Daily Sales Avg. Daily COGS($66/000/ADS) - ($72,000/0.8ADS)($66,000/ADS) - ($90,000/ADS)16.79 = $23,000/ADS16.79ADS = $23,000ADS = $1,369.863.Therefore, annual sales equal $500,000 ($1,369.8
717、63 x 365 = $500,000).b. Based upon the given information, the firms current assets equal $148,750 ($35,750 + $47,000 +$66,000). Therefore, for its current ratio to increase to 2.0, it must reduce accounts payable to a level suchthat current liabilities total $74,375 ($148,750/2). If accrued liabilit
718、ies on the balance sheet equal $13,000,accounts payable must be reduced to $61,375 ($74,375 - $13,000). The firms new average daily cost ofgoods sold would equal S 1,369.863 x 0.70 = $958.90. Combined with the original information, the new CCCcan be determined as follows:CCC = (AR/Avg. Daily Sales)
719、+ (Inv/Avg. Daily Sales) - (AP/Avg. Daily COGS)CCC = ($47,000/$l,369.863) + ($66,000/$l,369.863) - ($61,375/$958.90)CCC = 34.31 + 48.18 - 64.01CCC = 18.48 days.15-7 a . Cash conversion cycle = 22 + 40 - 30 = 32 days.b . Working capital financing = 1,500 x 32 x $6 = $288,000.c. If the payables deferr
720、al period was increased by 5 days, then its cash conversion cycle woulddecrease by 5 days, so its working capital financing needs would decrease byDecrease in working capital financing = 1,50。x 5 x $6 = $45,000.d. Cash conversion cycle = 20 + 40 - 30 = 30 days.Answers and Solutions: 15-162Working ca
721、pital financing = 1,800 x 30 x $7 = $378,000.Inventory Receivables Payables15-8 a. CCC = conversion + collection - deferralperiod period period= 7 5 + 38 - 30 = 83 days.b . Average sales per day = $3,421,875/365 = $9,375.Investment in receivables = $9Z 375 x 38 = $356,250.c. Inventory turnover = 365
722、/75 = 4.87x.15-9 a. Inventory conversion period = 365/Inventory turnover ratio=365/6 = 60.83 days.Receivables collection period = DSO = 36.5 days.Inventory Receivables PayablesCCC = conversion + collection - deferralperiod period period= 60.83 + 36.5 - 40 = 57.33 days.b Total assets = Inventory + Re
723、ceivables + Fixed assets= $150,000/6 + ($150,000/365) x 36.5 + $35,000=$25,000 + $15,000 + $35,000 = $75,000.Total assets turnover = Sales/Total assets= $150,000/$75,000 = 2x.ROA = Profit margin x Total assets turnover=0.06 x 2 = 0.12 = 12%.c . Inventory conversion period = 365/7.3 = 50 days.Cash co
724、nversion cycle = 50 + 36.5 - 40 = 46.5 days.Total assets = Inventory + Receivables + Fixed assets=$150,000/7.3 + $15,000 + $35,000= $20,548 + $15,000 + $35,000 = $70,548.Total assets turnover = $150,000/$70,548 = 2 .1262x.ROA = $9,000/$70,548 = 12.76%.Answers and Solutions: 15-16315-10 a . R eturn o
725、n eq u ity may be computed as fo llo w s:T ightM oderateRelaxedC urrent a sse ts(% of sa le s x Sales)$ 900,000$1,000,000$1,200,000Fixed a sse ts1,000,0001,000,0001,000,000T otal a sse ts$1,900,000$2,000,000$2,200,000Debt (60% of asse ts)$1,140,000$1,200,000$1,320,000E quity760,000800z 000880,000T o
726、tal lia b . /e q u ity$1,900,000$2,000,000$2,200,000EBIT (12% x $2 m illion)$ 240,000$ 240,000$ 240,000In te re s t (8%)91,20096,000105,600Earnings before taxes$ 148,800$ 144,000$ 134,400Taxes (40%)59,52057,60053,760Net income$ 89,280$ 86z 400$ 80,640R eturn on eq u ity11.75%10.80%9.16%b . No, th is
727、 assum ption would probably not be v a lid in a re a l worlds itu a tio n . A firmz s c u rren t a sse t p o lic ie s , p a rtic u la rly w ith regardto accounts re c e iv a b le , such as d isco u n ts, c o lle c tio n p erio d , andc o lle c tio n p o licy , may have a s ig n ific a n t e ffe c t
728、on s a le s . The exactn atu re of th is fu n ctio n may be d if f ic u lt to q u an tify , howeverz anddeterm ining an o p tim a lc u r r e n t a sse t le v e l may not be p o ssib le ina c tu a lity .c. As the answers to Part a indicate, the tighter policy leads to a higher expected return. Howeve
729、r, asthe current asset level is decreased, presumably some of this reduction comes from accounts receivable. Thiscan be accomplished only through higher discounts, a shorter collection period, and/or tougher collectionpolicies. As outlined above, this would in turn have some effect on sales, possibl
730、y lowering profits. Morerestrictive receivable policies might involve some additional costs (collection, and so forth) but would alsoprobably reduce bad debt expenses. Lower current assets would also imply lower liquid assets; thus, thefirms ability to handle contingencies would be impaired. Higher
731、risk of inadequate liquidity would increasethe firms risk of insolvency and thus increase its chance of failing to meet fixed charges. Also, lowerinventories might mean lost sales and/or expensive production stoppages. Attempting to attach numericalvalues to these potential losses and probabilities
732、would be extremely difficult.Answers and Solutions: 15-16415-11 a.Firmz scheckbookBanksrecordsDay1 Deposit $1,200,000;write check for$1,600,000.-$ 400,000$1,200,000Day2 Write checkfor $1,600,000.-$2,000,000$1,200,000Day3 Write checkfor $1,600,000.-$3,600,000$1,200,000Day4 Write checkfor $1,600,000.-
733、$5,200,000$1,200,000Day5 Write check for$1,600,000; deposit$1,600,000.-$5,200,000$1,200,000After the firm has reached aeach day to cover the checkssteady state, it must deposit $1,600,000written four days earlier.b . Thefirm has four days of float.c . The firm should try to maintain$1,200,000. On it
734、s own books$5,200,000.a balance on theit will have abanks records ofbalance of minusd. For any level of sales, the finn will probably have a higher rate of return on assets and equity if it canreduce its total assets. By using float, SSC can reduce its cash account, by (4 x $1,600,000)-$ 1,200,000 =
735、 $5,200,000. However, they actually can reduce equity and debt by $6,000,000 as the firm hasgross float of $6,400,000 - S400,000 (increase in the amount deposited in the bank) = $6,000,000, so earningsper share will be higher. In ternis of the Du Pont equation, the rate of return on equity will be h
736、igher becauseof the reduction in total assets.15-12Presently, HGC has 5 dayssystem, this would drop toof collection float; underdays.the lockboxa .2$1,400,000$1,400,000x 5 daysx 2 days=$7,000,000=2,800,000$4,200,006HGC can reducenegative float.its cash balances by the $4,200, 000reduction inb. 0.10
737、($4,200, 000)annual basis.$420, 000 = the value of the lockbox system on anc . $420,000/12 = $35, 000 = maximum monthly charge HGC can pay for thelockbox system.15-13 a . Helens Fashion DesignsAnswers and Solutions: 15-165Cash Budget, July-December 2003I. Collections and Payments:May JuneJuly$360,00
738、0August$540,000September$720,000October$360,000November$360,000December JanuarySales $180,000 $180,000$ 90,000 $180,000Collections:1st month 18,000 18,00036,00054,00072,00036,00036,0009,0002nd month 0 135,000135,000270,000405,000540,000270,000270,0003rd month 0 027,00027,00054,00081,000108,00054,000
739、Total collections$198,000$351,000$531,000$657,000$414,000$333,000Purchases 90,000 90,000126,000882,000306,000234,000162,00090,000Payments(1-mo. lag) 90,00090,000126,000882,000306,000234,000162,000II.Gain or Loss for Month:JulyReceipts:Collections $198,000August$351,000September$531,000October$657,00
740、0November$414,000December$333,000Payments:Labor and raw materials90,000126,000882,000306,000234,000162,000Administrative salaries27,00027z00027,00027,00027,00027,000Lease payment9,0009,0009,0009,0009,0009,000Mise, expenses2,7002,7002,7002,7002,7002,700Income tax0063,0000063,000Progress payment000180
741、,00000Total payments$128,700$164,700$983,700$524,700$272,700$263,700Net cash gain (loss)$ 69,300$186,300($452,700)$132,300$141,300$ 69,300III. Cash Surplus or Loan Requirements:July August SeptemberCash at start of month w/o loans $132,000 $201,300 $387,600October($ 65,100)November$ 67,200December$2
742、08,500Cumulative cash201,300387,600(65,100)67,200208,500277,800Less: Target cash balance90,00090,00090,00090,00090,00090,000Cumulative surplus cash or totalloans outstanding to maintaintarget balance($155,1Q0) ” 22,800) 2 8 , 5 0。$187“&0Qb. The cash budget indicates that Helen will have surplus fund
743、s availableduring July, August, November, and December. During September thecompany will need to borrow $155,100. The cash surplus that accruesduring October will enable Helen to reduce the loan balanceoutstanding to $22,800 by the end of October.c. In a situation such as this, where inflows and out
744、flows are notsynchronized during the month, it may not be possible to use a cashbudget centered on the end of the month. The cash budget should beset up to show the cash positions of the firm on the 5th of each monthIn this way the company could establish its maximum cash requirementand use these ma
745、ximum figures to estimate its required line of credit.The table below shows the status of the cash account on selecteddates within the month of July. It shows how the inflows accumulatesteadily throughout the month and how the requirement of paying allthe outflows on the 5th of the month requires th
746、at the firm obtainexternal financing. By July 14, however, the firm reaches the pointwhere the inflows have offset the outflows, and by July 30 we see thatthe monthly totals agree with the cash budget developed earlier inPart a.Answers and Solutions: 15-1667/2/03 7/4/03 7/5/03 7/6/03 7 - (n 7/30/03O
747、pening balance $132,000$132,000$132, 000$132,000$132,000$132,000Cumulative inflows(1/30 x receiptsx no. of days)13,20026,40033,00039,60092,400198,000Total cash available$145,200$158,400$165,000$171,600$224,400$330,000Outflow_ 0_ 0128,700128,700128,700128,700Net cash position$145,200$158,400$ 36,300$
748、 42,900$ 95,700$201,300Target cash balance90,00090,00090,00090,00090,00090,000Cash above minimum needs(borrowing needs) $ 55,200$ 68,400($ 53,700)($ 47,100) $ 5,700$Sll,300d The months preceding peak sales would show a decreased current ratioand an increased debt ratio due to additional short-term bank loans.In the following months as receipts are collected from sales, thecurrent ratio would increase and the debt ratio would decline.Abnormal changes in these ratios would affect the firms ability toobtain bank credit.Answers and Solutions: 15-167
